URUGUAY: FREE MARKET ECONOMICS TAKE ROOT
Document Type:
Collection:
Document Number (FOIA) /ESDN (CREST):
CIA-RDP04T00990R000100710001-2
Release Decision:
RIPPUB
Original Classification:
C
Document Page Count:
6
Document Creation Date:
December 27, 2016
Document Release Date:
January 15, 2013
Sequence Number:
1
Case Number:
Publication Date:
July 22, 1988
Content Type:
REPORT
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Central Intelligence Agency
,
v?fashington. D.C. 20505
DIRECTORATE OF INTELLIGENCE
22 July 1988
Uruguay: Free Market Economics Take Root
Summary
President Sanguinetti, following up on efforts
begun by the previous military government, has made
steady progress in liberalizing trade and in opening up
Uruguay's historically statist economy. Despite a
severe recession in the early 1980's caused by external
shocks, Sanguinetti's team has led the economy to
recovery without abandoning free market policies.
Based on increased investment and exports, Uruguay
recorded 4.9 percent growth in 1987. Unemployment fell
below 10 percent, and fiscal discipline has kept
inflation near target levels. While formidable
structural problems remain, the governing Colorado
Party's economic success has helped solidify civilian
rule in Uruguay, and gives the.party the upper hand as
the country looks toward presidential elections in
1989. '
This typescript was
Carribean Division,
Analysis. Comments
to the Chief, South
prepared by
Office of African and Latin
and queries are welcome and
America-Carribean Division,
South America-
American
may be directed
ALA,
ALA M 88-20058
PTflN
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The liberal policies pursued by Uruguay's military rulers in
the 1970's and, since 1985, by the civilian administration of
President Sanguinetti stand in marked contrast to the previous
six decades, which were characterized by state direction of
virtually all economic activity. Early in the 1900's Uruguayans
built a huge welfare state, formed a network of pervasive state
enterprises, and in the process spawned a vast, overstaffed
bureaucracy and unmanageable budget. These problems were
compounded early in the post-World War II era by the heavy
regulation of trade that resulted from a growth strategy based on
import substitution. Public dissatisfaction with the
inefficiency of the system grew in the late 1960's; which saw a
period of economic decline, and eventually contributed to social
unrest and leftist terrorism, which led to a military takeover in
1973.
The Military Changes Direction
Convinced that statist, inward-looking policy approaches had
produced the stagnation of earlier decades, the military moved to
open the economy and foster growth by:
aggressively promoting key exports such as wool and meat.
revitalizing agriculture by reducing price controls and
the role of regulatory agencies.
-- lifting interest rate ceilings and legalizing foreign
currency deposits.
These measures were followed by a decision to float the exchange
rate in 1982, which had re effect of further integrating Uruguay
into the world economy.
The drop in world commodity prices in the late 1970's
critically reduced foreign exchange earnings and demand for
Uruguay's exports, demonstrating its acute vulnerability to
external economic conditions. At the same time, the country's
oil bill skyrocketed and it borrowed heavily in the international
market to finance deficits and investment. The world recession
of the early 1980's caused a further decline in export earnings
and growth. In 1982, the economy contracted by 10 percent; in
1983 by another 5 percent. Burdensome debt payments consumed
about-40 percent of meager. export revenues because of high world
interest rates. Many businesses were also saddled with
unmanageable debt, and government bailouts of failed firms
contributed to a massive fiscal deficit that totalled 18.3
percent of GDP in 1982. Public discontent mounted as the economy
eroded--unemployment as high as 16 percent and a 50 percent loss
in real wages spurred increased labor restiveness.
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Civilians Follow Suit
Nonetheless, even the grim experience of the early 1980's
failed to dim enthusiasm for the free market when President
Sanguinetti ushered in the return to civilian government in March
1985. Although his ruling Colorado party had long been
associated with Uruguay's statist tradition, Sanguinetti and his
economic team moved to strengthen private enterprise, boost
export-led growth, and further integrate Uruguay into the world
economy. Shortly after taking office, Sanguinetti negotiated an
agreement with the IMF that called for austerity measures in
return for new loans and favorable rescheduling terms for
existing debt. The administration recognized the need to
modernize agriculture and continued the military's efforts, under
World Bank auspices, to ease import regulations and lower
tariffs. Then-Foreign Minister Iglesias, an economist by
training, set out specifically to garner new markets for
Uruguayan goods--especially non-traditional products--in an
attempt to diversify exports and reduce the risk of damage caused
by price fluctuations in any one commodity. Sanguinetti also
signed key bilateral commercial agreements with neighboring
Brazil and Argentina, Uruguay's two largest trade partners, and
pressed for further regional integration.
Within a year these measures had begun to pay off. Driven
by a resurgence of exports, a competitive, floating exchange
rate, improved commodity prices, and new investment that
modernized and brought back on line idle production capacity in
key industries such as textiles, the economy grew by 6.3 percent
in 1986--the first significant expansion recorded since 1981.
Sanguinetti took a tough stance against violent labor tactics,
reducing disruptive and costly strike activity, and unemployment
began to fall, dropping below 10 percent in 1987, while real
wages crept up. The government's decision to utilize quarterly
wage councils to negotiate salaries with labor and business to
compensate for inflation complicated Sanguinetti's battle to
control rising prices, but increased tax revenue and fiscal
restraint helped bring annual inflation down from 83 percent in
1985 to 57.3 percent last year. Capital flight was reversed by
1987, helping to alleviate a chronic lack of investment. Private
sector investment increased 27.2 percent last year, according to
the Embassy--a significant figure in capital-starved Latin
America.
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We believe the visible economic improvement under
Sanguinetti's administration is a key factor in further
consolidating civilian rule in Uruguay. Since 1985 the ruling
Colorados have had to contend with an opposition majority in
Congress--but policymaking in the economic realm has been
relatively free of the kind of unbridled debate that has often
paralyzed decisionmaking in other Latin American countries that
have returned to civilian rule in the 1980's. We believe this
reflects both a long history of highly developed parties and
civilian institutions, and Sanguinetti's skill in appealing to
the opposition on the basis of the overriding need to achieve
economic and political stability. Sanguinetti's efforts have
largely been focused on near-term issues, however, 'and much
remains to be done with regard to building a consensus in favor
of needed long-term reforms, particularly in the public sector.
Unresolved Problems
Despite demonstrable progress, Uruguay's economy still
suffers from major structural weaknesses, and the approach of
next year's presidential elections will probably sharply limit
Sanguinetti's ability to undertake further, major initiatives.
Inefficient state operations continue to hamper the private
sector by providing expensive, often inferior services, while
perpetuating high inflation. The World Bank is helping to
sponsor financial reforms to revive the troubled banking sector--
the failure of the last private bank in 1987 has left only the
huge state-owned Bank of the Republic and some foreign-based
institutions. Radical factions have become increasingly active
within several unions, causing a wave of textile and
transportation work stoppages and creating pressure on
Sanguinetti to raise salaries. Further cuts in fiscal spending
are proving especially difficult as the government tries to trim
the sacrosanct social security program.
Externally, trade diversification efforts still have not
reduced heavy reliance on earnings from a handful of traditional
key commodities--primarily wool, meat, and hides--although
exports of new products such as citrus fruits and rice have shown
some success. Moreover, new investment is being concentrated on
updating Uruguay's aging plant and equipment base in traditional
industries such as textiles and food processing, pushing the
start-up time for new export-oriented projects farther into the
future.
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Looking Ahead
In our judgment, the success of the Sanguinetti team's
economic policies gives the Colovados the edge as the 1989
election campaign gets underway.I Growth in jobs and greater
cost of living stability have largely taken the wind out of the
sails of the left, and the country's overall economic health
leaves the centrist opposition only a handful of credible issues
on which to confront the Colorado candidate, according to the
Embassy. Moreover, the economic outlook continues to be largely
favorable. We believe the economy will continue to grow at 2 to
4 percent annually into the 1990's, given IMF estimates that
commodity prices will remain stable through 1992. ,Even though
inflation will probably still be hovering about 5 to 10 percent
higher than the government's 50 percent target at the end of
Sanguinetti's term, the administration's overall progress
inflation is probably sufficient to avoid public outcry.
on
Nonetheless, serious economic challenges remain for
Sanguinetti, and the next administration will be faced with the
need to continue reform measures. Real wages and per capita
income have not yet recovered to 1981 levels, and lag far behind
the prosperous conditions of the 1950's. Plans for streamlined
public sector investment to improve Uruguay's aging utilities and
transportation infrastructure and the current trend toward
increased private sector investment bode well for future growth,
but diversification into manufacturing will probably take several
years, and the agriculture sector requires further modernization.
Uruguay's lingering dependence on a few primary product exports
means that a worldwide recession could still jeopardize
Montevideo's hard-won gains. The $5 billion debt remains a
potential hazard in the event of a resurgence of high interest
rates, and although Uruguay's oil import bill has benefitted from
low world prices, the country remains totally dependent on
external fuel sources. Finally, Uruguay's extremely low birth
rate may propel social security system funding into the forefront
of debate within the next ten years--the ratio of workers to
pensioners is currently 1:1, and will only worsen--which will
complicate fiscal reform and inflation control efforts.
1 Sanguinetti cannot be reelected, according to the
Uruguayan constitution. The most likely Colorado candidates are
Vice President Enrique Tango and Senator Jorge Bathe, while the
center-left Blanco Party will probably forward Senator Alberto
Zumaran and Senator Luis Alberto Lacalle.
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SUBJECT: Uruguay: Free Market Economics Take Root
22 July 1988
Distribution:
External:
Original - Robert S. Gelbard, Deputy Assistant Secretary of
State for South America Affairs, Department of
State
1 - Richard Howard, Director, Office of Southern Cone
Affairs, Department of State
1 - Robert Pastorino, Senior Director for Latin American
Affairs, National Security Council
1 - James Buchanan, Chief, South America Division,
Office of Analysis for Inter-American Republics,
Bureau of Intelligence and Research, Department of
State
1 - Peter Field, Director, Office of South America,
International Trade Administration Western
Hemisphere, Department of Commerce
1 - Arnold Isaacs, Director, Office of Analysis for
Inter-American Affairs, Department of State
1 - Jim Fall, Director, Office of Developing Nations
Finance, Department of Treasury
1 - Carlos Montoulieu, Director, Brazil-Southern Cone
Division, Office of South America, Department of
Commerce
1 - Michelle Powers, Export-Import Bank of the United
States
1 - Roberta Jacobsen, Bureau of Intelligence and
Research Department of State
Internal:
1
1
1
1
1
1
1
1
2
1
5
1
1
- DDI,
- 0/DDI,
- NIO/LA
- NIC/AG
- PDB Staff
- C/PES
- DDI/CPAS/ILS
- D/ALA
- ALA/PS
- ALA Research Director
- CPAS/IMC/CB
- C/ALA/SCD
- DC/ALA/SCD
1 - C/ALA/SCD/EB
2 - ALA/SCD/EB
1 ALA/SCD/Files
DI/ALA/SCD/EB
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