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Figure 7. Employment by Sector, 1988

Government policy has greatly influenced the development, or lack of development, of Uruguay's economy during the twentieth century. The government first became an important regulator of economic activity whÍÍÍÍen it arranged for a portion of livestock export earnings to be transferred to the urban working class. As its interventionist role expanded during the early 1900s, the central government became the administrator of an elaborate social welfare system that was generous by Latin American standards. After the Great Depression, the government enacted tariff policies to promote domestic manufacturing and adopted the strategy known as import-substitution industrialization. The state also became an important participant in the economy. In a pattern repeated elsewhere in Latin America, the central government nationalized or established several of the largest service and manufacturing companies in the country (see Industry , this ch.). It became the single largest employer and producer in the nation.

The level of government involvement in the economy took on increasing significance after Uruguay entered a period of economic stagnation. When export earnings leveled off in the 1950s, the state's two roles in the economy became difficult to sustain yet vital to the population. Growing numbers of unemployed persons and retirees depended on the social welfare system, even as government revenues used to support that system declined. In addition, the overall economic slowdown made publicsector employment extremely attractive. Public employment, which was controlled by political parties rather than market forces, increased at 2.6 percent per year during 1955-61, while privatesector employment grew at only 0.9 percent. Government consumption expenditures for salaries and services remained high, but public investment was scaled back, penalizing future productivity. Despite this shift in the spending pattern, the state's income did not keep pace with its expenditures. By the 1960s, a public-sector deficit had developed, requiring borrowing from abroad and helping to fuel inflation.

The public-sector deficit was the hallmark of Uruguay's stagnated economy in the 1960s. Thereafter, efforts to reduce the deficit were a central feature of structural reforms. However, the web of government commitments within the economy--involving both administrative and productive activity--made this a difficult task. The military government (1973-85) partially succeeded at the larger task of reorienting the economy toward world markets but made only modest headway against the publicsector deficit. During the second half of the 1980s, the deficit was at first reduced but then increased again in the last two years of the Sanguinetti administration.

Data as of December 1990