NS4540 Winter Term 2018 Uruguay Economy

1. NS4540 Winter Term 2018Uruguay Economy

2. Uruguay WEF I

3. Uruguay WEF II

4. Uruguay WEF III

5. Overview I • Uruguay has a number of features that set it apart • Average annual population growth of 0.1% was the lowest in Latin America • Proportion of people living in urban areas in 2013 – 92% was the highest in the region • In 2014 Uruguay had one of the highest GDP per capita incomes at US$20,597 ppp • However due principally to the 2001-02 economic crisis in Argentina poverty grew dramatically in 2002-04 affecting almost 40% of the population in 2003 • declined to 9.7% by 2014 • In region characterized by very high levels of inequality, Uruguay the most equal society in Latin America

6. Overview II • Country developed a modern economy with a strong social security system on an almost exclusively agricultural base • From the late 19th century Uruguay developed as an agricultural export economy – wool, beef hides mainly to European countries • With favorable natural conditions and a low population density, and export values high • Uruguay was transformed into a stable democratic welfare state under President Ordonez (1903-1907)

7. Overview III • Government policy encouraged domestic manufacturing and protection was intensified in 1930s and after WWII • Strategy of import substitution was exhausted in mid 1950s • Rate of growth of exports was low and • Small size of domestic market limited economies of scale • A period of economic stagnation followed and continued into the early 1970s • Social unrest led to the army assuming power • Economic policies of the military regime after 1973 based on a reduction of public sector and • Incentives to non traditional exports, helped stimulate GDP growth but with high inflation

8. Overview IV • Economy always linked closely to economies of Argentina and Brazil • Formation in 1995 of the Southern Common Market MERCOSUR accentuated this influence • GDP growth resumed in the 1990s but economy entered a decline towards the end of the decade due to • Devaluation of the Brazilian currency • Recession in Argentina and • Persistently low prices for agricultural exports • In 2001 production drastically affected by an outbreak of foot-and-mouth disease • In 2002 country experienced major economic crisis caused by Argentina’s default

9. Overview V • In 2002-03 economy • contracted by 11.2% • Unemployment reached almost 20% and • Gross public sector debt to GDP increased to over 100% • External debt restructuring and international financial assistance led to a swift recovery with growth of 2.4% in 2003 • In common with other countries in region Uruguay benefitted from high commodity prices and in Uruguay’s case compounded by • High levels of foreign direct investment FDI • Economic Diversification, and • Productivity gains

10. Overview VI • For next decade Uruguay economy growth at annual average of 5.4% compared to LAC average of 3.4% • Per capita income has risen by 75% since 2002 while poverty and inequality have declined to an historic low • While not immune to the impact of the 2008-09 global financial crisis, Uruguayan economy was remarkably resilient • 2.9% in 2009 • 8.9% in 2010 and • 5.7% in 2011 • Growth slowed to 3.9% in 2012 – mainly reflecting sharp fall in economic growth in Brazil and Argentina • Jumped to 5.1% in 2013 before slowing down due to poor economies in Argentina and especially Brazil

11. Overview VII

12. Assessment I • Although 2005 international financial markets concerned with inauguration of a new left-wing government led by Tabare Vazquez regime initiated • fiscal orthodoxy and structural reforms • Prudent fiscal policies and proactive management of external debt led to significant reduction in the debt-to-GDP ratio • Improvements in bank regulation and high international reserves all contributed to economic confidence. • Government of Present Jose Mujica (2010-15) largely continued orthodox economic policies of previous administration • President Vazquez back in office in 2015 but growth slowing down due to decline in commodity prices

13. Assessment II • Economy remains vulnerable to conditions in Argentina and Brazil • Domestically a number of concerns • High inflation and elevated fiscal deficit indicated need for a fiscal adjustment and lower wage settlements • High levels of industrial conflict and rigid wage settlements have negatively affected business climate • Low unemployment levels were resulting in shortages of skilled labor • Country’s infrastructure remained in urgent need of investment

14. Assessment III • Although Presidents Vazquez and Mujica significantly increased investment in education • Indicators that this input has not improved quality • Uruguay’s traditionally high educational standards are starting to lag behind those of other Latin American countries • To ensure attainment of a more sustainable path, government must • restrict increases in public spending and wage settlements • improve infrastructure and address failings in the education and training of the workforce • If these issues are dealt with successfully, Uruguay should be able to sustain a turnaround in economic performance over the medium term.