URUGUAY'S CONTINUING ECONOMIC IMPASSE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010083-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 31
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 83
• Publication Date: October 1, 1968
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Uruguay's Continuing Economic Impasse-
Secret
ER IM 68-133
October 1968
Copy No. 69
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP 1
Eaduded from outomatic
downgrading and
dednccif cation
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
October 1968
INTELLIGENCE MEMORANDUM
Uruguay's Continuing Economic Impasse
Summary
During the past 12 years, Uruguay has slipped
from first to third place in Latin America in per
capita output and has been the only reasonably
well-developed country in the world to suffer a
pronounced decline in per capita output. Gross
national pro'luct and private consumption are botch
about 15 percent lower on a per capita basis than
in 1955, and investment has dropped to the point
that it no longer covers replacement needs in'some
areas. One out of every five persons in the labor
force is without work. Inflation has grown worse
each year, reaching an annual rate of 169 percent
during the first half of 1968. Partly as a conse-
quence of the prolonged economic decay, Uruguay
increasingly has experienced civil disorders.
The root of Uruguay's inflationary problem has
been the attempt by the highly organized urban
labor force and the businesj community to protect
their economic positions in the face of a decline
in the per capita supply of goods. Wages and
prices have chased each other with increasing
speed, the race being fueled mainly by an unrestrict-
ed expansion of credit to the private sector.
Especially in recent years, the government has
added to the inflation by enlarging public payrolls
and financing the resulting budget deficits with
bank credits. Inflation and the necessity to
periodically devalue the currency have provoked a
Note: This memorandum was produced s oZeZy by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of National
Estimates and the Office of Current Intelligence.
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flight of capital, some of which appears to be
lost permanently. The loss of capital, the reduc-
tion in imports, the diversion of public funds to
current expenditures, and growing uncertainty re-
garding future prices and costs are mainly respon-
sible for the decline in investment. Uruguay's
inflation differs greatly from that in Brazil,
Chile, and most other Latin American countries,
where the government finances much of investment
and its budget deficit is the principal source of
monetary expansion.
The administration of President Pacheco Areco,
who assumed office on the death of President Gestido
in 1967, has begun to grapple with economic prob-
lems much more forthrightly than any administration
in the last decade. Recent economic policy has
been guided by the financial stabilization plan
that the Gestido government introduced simultaneous-
ly with a 50-percent devaluation of the peso in
November 1967. The plan called for a reduction in
the rate of inflation and a $30 million rise in
foreign exchange reserves. These goals were to be
reached by drastically reducing the budget deficit,
stringently controlling private credit, maintaining
a more realistic exchange rate, and directly regulat-
ing increases in most wages and o ices.
Through mid-1963, foreign exchange reserves
rose modestly, owing to a rollover of debts to
foreign banks and a severe reduction in. imports.
on the-other hand, the inflationary effects of
devaluation, unfavorable crop condit.ons, and
strike pressure from labor led to higher than planned
wage settlements in the public sector and an accele-
ration of price increases during the first six
months of 1968.
Threatened financial chaos, near-paralysis of
basic economic and social services, and increased
agitation by the Communist-led students and labor
unions and by terrorist groups caused. President
Pacheco Areco to impose a limited state of siege in
early June. Later in the month the administration
took unprecedentedly strong actions in an effort to
curtail labor and student agitation. The admin-
istration also decreed a price and wage. freeze,
which stabilized prices in July and August.
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In the coming months the government will be
walking a tightrope. It will have to maintain
tight controls to begin laying the foundations for
economic recovery but in so doing will also be
risking a serious disruption of output. Disruption
could result from too much anti-inflationary medi-
cine or from widespread public disorders in reac-
tion to stabilization policies. The alternative to
tight controls could be even worse, however. If
public discontent forces the government to relax
its controls, runaway inflation and a consequent
breakdown of normal market activities might develop.
Under the best circumstances, constraints on
imports, a degree of austerity in government expendi-
ture, and the expected decline in livestock output
probably will hold total output in the next year
at the depressed level of 1967-68.
For progress over the longer term, the Uruguayan
government must introduce basic reforms conducive
to an expansion of exports and investment. Para-
moun?. in such reforms would be a shift in economic
policy from support of urban consumption to an
emphasis on agricultural investment (both public
,and private) and a continuing firm effort to subdue
inflation. Such a program would be vigorously
opposed by the well-organized labor movement and
business interests. Even the population at large
would be difficult to convince that, after 12 years
of eroding living standards, an extended period of
government-fostered austerity was in their interest.
Thus thoroughgoing reform and rejuvenation of the
economy probably can be accomplished only by a
government that is willing and able to thwart the
popular will.
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Introduction
1. Almost daily since the spring of 1968,
Uruguay has experienced unusually severe civil dis??
orders. The agitation has included frequent general
strikes and street rioting and the kidnaping of a
personal adviser to President Pacheco Areco, who
assumed office in December 1967 upon the death of
President Gestido. While this disarray partly re-
flects the growing organizational competence of
Uruguay's leftists, it indicates more fundamentally
the social and political consequences of longstand-
ing economic decay. The disorder raises anew the
questions, among others, of what is wrong with the
Uruguayan economy and where it is heading.
A Case of Arrested Economic Development
2. Uruguay is the only relatively developed,
modern country that has failed to advance econom-
ically over the past dozen years. Following a
half-century of progressive leadership, the Uruguay-
ans by the mid-1950's had erected an efficient
economic system based on exploitation of rich live-
stock resources. Recent estimates indicate that
Uruguayan gross national product (GPLP) per capita
in 1955 was the highest in Latin America and com-
pared favorably with that in many European countries,
being one-fourth higher, for example, than that in
Italy.* Moreover, Uruguay had a reasonably equitable
distribution of income.
3. Since 1955, however, the Uruguayan econoir.y
hug been in a torpor matched in Latin America only
by that of Haiti. The total output of the economy,
as measured by GNP in c-)nstant prices, has not
grown significantly since 1955. Per capita GNP in
* The estimates consist of purchasing power parity
calculations by staff members of the UN Economic
Commission for Latin America, as published in
Stanley N. Braithwaite, "Real Income Levels in Latin
America," Review of Income and Wealth, June 1968,
pp. 113-182. For the present purpose, the geometric
means of results obtained with US and Latin American
quantity weights are used. These estimates are for
gross domestic product, which in Uruguay normally
varies only slightly from GNP.
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1967 thus was about 15 percent less than that of
1955. Activity in all sectors except crops picked
up during 1964-66. But in 1967, unfavorable
weather caused a decline of one-sixth in agricul-
tural output; production in manufacturing., construc-
tion, and basic services fell about 4 percent in
the aggregate; and GNP fell by an estimated 5 per-
cent. No sector has made substantial progress
during the past 12 years (see Table 1) .
Uruguay. Indexes of Production, by Sector of Origin
Selocted Years,
1955-67
1955
1960
1963
1966
1967
2/
Gross national
product
100
100
99
107
102
Agriculture
100
87
102
104
86
Crops
100
45
82
82
N.A.
Stock farming
100
108
111
115
N.A.
Manufacturing
100
105
101
110
N.A.
Construction
100
101
69
82
N.A.
Basic services b/
100
106
103
116
N.A.
Wholesale and
retail trade
100
92
89
101
N.A.
Other services c/
100
106
107
112
N.A.
a. Provisional.
b. Electric power, transportation, and communications.
c. Public administration, personal services, banking,
and real estate.
4. Investment has been hit especially hard over
the last dozen years as Uruguayan governments suc-
ceeded in boosting public consumption (that is, cur-
rent government expenditures excluding subsidies and
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transfer payments) while generally maintaining the
level of private consumption (see Figure 1). Al-
though GNP in 1967 is estimated to have been slightly
larger than in 1955, gross fixed investment in 1967
is estimated to have been only about 55 percent of
the 1955 level. The share of fixed investment in
GNP was only about 12 percent in 1965 and 10 per-
cent in 1966 and 1967. Uruguay's overall stock of
fixed capital probably has increased a little in
the last three years,* but there may have been net
disinvestment in machinery and equipment. The
volume of construction declined consistently from
1955 through 1963, when it was less than one-fourth
of total investment. During 1964-67, construction
activity partly recovered because of a diversion of
funds from industry to tourist facilities and other
commercial construction by investors hedging against
inflation. At the same time, investment in machin-
ery and equipment dropped from about 10 percent of
GNP to 5 percent.
5. The impact of economic troubles on the
private consumption expenditure of Uruguay's 3 mil-
lion people has been less severe than that on
investment. The Uruguayans have managed to maintain
total private consumption at about three-fourths of
GNP each year since 1955. This accomplishment
nevertheless implies a 15-percent reduction in per
capita consumption during 1956-67.** Rural inhabi-
tants (who presently account for less than one-fifth
of the population) and the young entrants into the
labor force generally have borne the brunt of the
squeeze on private consumption. Farm incomes have
been held down by low world market prices for
Uruguay's agricultural exports, by discriminatory
tax policy, and by lags in the adjustment of exchange
rates to reflect increases in farm costs. Unemploy-
ment, which has increased steadily since the mid-
* are no recent data on depreciation of capi-
tal, but figures for the Zate 1950's and early 1960'a
range around 7 percent of GNP.
** The data on eonsu, ption should be understood only
as rough estimates. Although collectors of Uruguayan
statistics impute values for contraband trade with
Brazil and Argentina, their national accounts estimates
may somewhat understate these flows, particularly of
the consumer goods illegally imported into Uruguay.
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19501s, is estimated to have exceeded 20 percent
of the labor force in 1967. The young make up a
large share of the unemployed, in part because the
labor force is highly organized and union leader-
ship has been concerned primarily with insuring job
security and wage increases for its membership, not
with bringing new wage earners into its ranks.
Although urban families with regular wage earners
have been better able to protect their standard of
living, they also have suffered a decline in consump-
tion levels.
6. Despite the decline in output per capita
and consumption per capita since 1955, Uruguayans
continue to fare better than most Latin Americans.
The per capita G14P (on a purchasing power parity
basis) of about $750 in 1967 was roughly two-thirds
higher than the average for Latin America and ranked
Uruguay behind only Argentina and Venezuela in the
region; private consumption per capita in Uruguay
of some $575 was second only to that of Argentina.
Partly because the major economic activity is ranch-
ing, average per capita food consumption amounts to
3,000 calories daily, approximating that in the
United States. Moreover, in contrast to almost
every other Latin American country, the food intake
in Uruguay includes a large component of animal pro-
tein. Such indicators of general welfare as rates
of literacy and mortality and the incidence of
disease also continue to rank Uruguayans among the
most favored people in the region. In some of these
respects, Uruguay matches the high standards in the
United States.
Impact of Reduced Export Prices
7. The economic stagnation that began in the
mid-1950's was precipitated by a factor beyond Uru-
guay's control: a substantial drop in world prices
for its main exports. Export prices for wool, meat,
and hides, which in 1954 were 35 percent above those
of 1948, fell by almost 40 percent from 1954 to 1959
(see Figure 2). These export prices largely re-
covered in the early 1960's, rising to within 5 per-
cent of the 1948-54 average by 1964, but then fell
again in 1965-67, when they averaged 20 percent less
than in 1948-54.
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URUGUAY: Trends in Gross National Product, rigors i
Consumption, and Investment, 1955-67
DISTRIBUTION OF
GROSS NATIONAL PRODUCT
BY SELECTED END USES*
INDEX:
1955=100
19%
13%
17%
10%
10%
11%
11%
13%
76%
74%
77%
77%
-------------------100%
GROSS FIXED INVESTMENT
'In addition to the end uses shown, gross national product includes
Investment In inventories and net foreign Investment, both of which
may have a positive or a negative value.
1955 1956 1957 1958 1959 1960 1961
1962 1963. 1964 1965 1966 1967
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Figure 2
URUGUAY: Trends in Gross National Product, Foreign Trade,'
FOREIGN TRADE
(Billion 1961 Pesos) (Million US $)
194 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967
and Export Prices, 1954-67
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8. Because of reduced prices, the output of
stock farming and associated export industries and
services -- which accounted for about one-sixth of
GNP in the mid-1950's -- fell steadily through 1959.
By that time, GNP had been depressed to the level
of 1954. Although some output was diverted from
domestic consumption to export markets, the volume
of major exports tended to fall. This decline in
volume and the drop in export prices slashed the
value of exports by 60 percent from 1954 to 1959.
Although export prices improved subsequently, Uru-
guay has limped along since 1960 with annual export
earnings 25 to 50 percent smaller than those of
1954.
9. The depressive impact of falling world
prices on the production and export of livestock
products was aggravated by government policies
initiated earlier with the aim of achieving self-
sufficiency in agriculture. Under the protective
umbrella of high export prices, the government had
fostered the diversion of pasturage to field crops
through the use of price supports in the early
19501s.* Termination' of these price supports in
1957 and the acquisition in 1959 of a loan from the
International Bank for Reconstruction and Develop-
ment to modernize the livestock industry contributed
to an upsurge in output of livestock products (par-
ticularly meat) , but output has leveled off since
1964. Price supports for crops were reinstituted
in 1962, and the stimulus to investment in the live-
stock industry arising from improved export prices
has been blunted by taxes on export earnings.
10. Although the level of imports fell dras-
tically from 1954 to 1958, Uruguay was able through
large-scale borrowing to restore them to more nearly
normal levels in the early 19601s, thereby maintain-
ing consumption and investment close to the levels
of the mid-1950's. Continued low export levels
and growing repayment obligations on foreign
* Uruguay's occasional attempts to foster self-
sufficiency in crops had been generated mainly by
strained diplomatic relations with Argentina, the
traditional source of wheat imports. The effort in
the early 1950's reflected prolonged differences
with the Peron regime.
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loans, however, have forced cutbacks in imports
since 1962. Most affected by the cutbacks have
been imports of capital goods and consumer durables,
which provide the bulk of Uruguay's supply of such
goods. Imports of industrial materials and compon-
ents also have declined or leveled off, thereby
preventing expansion of output in the industries
dependent on such imports.
Obstacles to Economic Readjustment
11. Like Uruguay, various other Latin American
countries have suffered a prolonged reduction of
export earnings because of weakened prices for their
principal exports. And like Uruguay, they have had
difficulty adjusting to the situation and have
experienced rapid inflation. But none have combined
stagnation of output with growing inflation for so
long a period. The obstacles to economic readjust-
ment and renovation in Uruguay since 1955 arose
mostly from attitudes and institutions developed
over many decades, which created rigidities in the
structure of production and employment and in the
financial system.
Structural Distortions
12. Since the beginning of this century, the
Uruguayans have fostered the development of the most
urban, egalitarian society in Latin America. Partic-
ularly since the 1930's, Uruguayan governments have
promoted industrialization and urbanization by
emphasizing the development of consumer goods pro-
duction as a substitute for imports, using high
tariffs and tax and credit incentives to this end.
Almost all of the enterprises developed by this means
have been unable to compete internationally but have
at the same time generated new demands for imports of
capital goods and raw materials. This is a normal
problem of import substitution. But in Uruguay, the
resources base is too narrow and the domestic market
too small to give producers much opportunity to re-
duce their reliance on imports. Roughly one-third
of Uruguay's manufacturing establishments depend
wholly or predominantly on imports for their major
raw material input, while the others process mainly
domestic agricultural products.
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13. The country's commitment to liberal ideas
is manifested most clearly in its extensive social
security system, which resembles. the systems in,
advanced Western European countries rather than that
of the United States. Uruguay's system, which.covers
nearly everyone and offers generous benefits;,; pro-
vides about 10 percent of the incomes of households,
compared with 3 percent in the United States , and, ;10
to 16 percent in Western European countries.., -. Govern-
ment payments for education and. a small consumer
subsidy program (which was largely terminated in mid-
1967) usually have provided another 3 to 5 . percent
of the incomes of Uruguayan households.. While the
system has been able to cover these payments from
employer and employee contributions during most of
its 60-year history, it has needed support from the
government and the banking system in the 1960's.
14. Until recently, at least, the social security
system clearly has acted as a major disi,.^,=!ntive to
work. The fact that Uruguayan men are ab le , tor
example, to retire at full pay at age 50 after 30
years of work does much to explain why the propor-
tion of men 45 to 64 years old who are in the labor
force is one of the lowest in the world. In recent
years the purchasing, power of retirement benefits
has been eroded by Inflation, but the lack of employ-
ment opportunities probably has ensured the continued
prevalence of early retirement.
15. The strong influence of organized labor,
which is not seriously countervailed by that of a
"big business" element, has been a further constraint
on changes in economic policy. Most of the manufac-
turing work force and a considerable share of workers
in basic services are members of unions. Most unions,
in turn, are members of the National Workers' Conven-
tion (Convencion Nacional de Trabajadores -- CNT),
which on bread-and-butter issues is one of the most
militant labor movements in the hemisphere. The CNT
leadership, which is dominated by Communists, general-
ly has not been able to politicize the rank and file.
But labor nevertheless maintains an unusually strong
influence on national economic policy, partly because
of the diffused nature of Uruguayan politics. In con-
trast, the political influence of agricultural interests
is very weak, considering the importance of agricul-
ture in the economy.
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16. Although some of the weaknesses inherent
in the promotion of "hothouse" industries and the
extensive social welfare system were apparent in
the 1940 's and early 1950's, their seriousness was
masked by the generally strong world prices for
Uruguay's exports that prevailed during those years.
Even when the weaknesses were fully exposed by the
drop in export prices, successive Uruguayan
governments did little to alter the established
policies or popular attitudes underlying them.
Rather, they consistently turned to two exped-
ients -- increased government spending and foreign
borrowing -- that countries commonly use in efforts
to live beyond their means, and exercised singularly
weak control over the expansion of credit to the
private sector.
Financial Distortions
17. Inflation at a steadily accelerating rate is
the clearest reflection of Uruguay's failure to ad-
just to a lower real income. In recent years, in-
flation has itself become an important cause of
distortions in the economy. The annual percentage
increase in the cost of living averaged 18 percent
during 1956-62 -- not an unusually high figure by
Latin American standards. The increase has since
grown each year, however, reaching 83 percent in
1967 if average annual cost-of-living levels are
compared (see Table 4) . The recent acceleration in
inflation is shown even more clearly by the price
rise of 136 percent from 1 January to 31 December
1967 and the further spurt in prices during the first
half of 1968 at an annual rate of 169 percent -- by
far the most rapid rates in Latin America in the last
decade.
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Uruguay: Annual Cost-of-Living Increases a/
1956-67
1956-62 average
18
1963
21
1964
43
1965
56
1966
74
1967
83
a. Increases are between annual averages of
monthly price levels.
18. Surprisingly, the inflation has not yet
grown into the runaway variety, under which normal
market activities break down. During 1963-66 the
increase in prices was roughly proportional to the
increase in the money supply (although the supply
of quasi-money. such as savings deposits, grew much
more slowly). This relationship indicates that the
velocity of money did not increase significantly.
But for the 12 months ending in September 1967 (the
latest period for which data are available). there
are indications of an increased velocity of circula-
tion -- a trend that could lead to a severe disrup-
tion of economic activity if it continued.
19. Uruguay, unlike most other Latin American
countries, has fueled its inflation mainly with an
increase in credit to private business. The absence
of a central institution possessing the usual powers
of a central bank and the apparent unwillingness of
the government to app. y what monetary controls it
had probably are mainly responsible for this exces-
sive credit creation. Uruguay had no central bank
as such before 1964 and since that time has vested
certain central banking functions in a department
of the government-owned Bank of the Republic. These
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functions -- which include credit regulation through
the fixing of banks' reserve requirements and maximum
interest rates as well as the issue of currency have been subordinated to the credit expansion
activities of the Bank's commercial banking department.
The laxity of Uruguayan monetary and credit control
is exemplified by the failure of five private banks
(including the country's second largest one) in April
1965, which led to heavy withdrawals of foreign
exchange from the Bank of the Republic and its default
the next month on its foreign exchange obligations.
Although the new constitution of 1966 provided for
the establishment of a central bank, the bank still
was in the process of being organized in early 1968,
and central banking functions were divided between it
and the Bank of the Republic's department of issue.
20. During 1955-61, virtually all of the net
expansion of credit by the banking system was for
the private sector. Since 1961, government budget
deficits also have been an important source of in-
flation, inasmuch as government borrowing from the
banks has accounted for about one-sixth of the net
credit created. But the private sector obviously
has remained the dominant factor in credit expansion.
In most other Latin American countries, in contrast,
the government budget deficits have been the prime
sources of credit expansion. Private credit has
been more severely rationed in these countries than
in Uruguay, and its expansion has been more a conse-
quence than a cause of price increases. Moreover,
inflation in these countries was partly a result of
glowing governr.ont expenditures on investment, while
in Uruguay such expenditures have been declining.
21. The most important causal factor appears to
be the upward push of wages as organized labor tried
to protect its standard of living. Wages and prices
have chased each other with increasing speed, and
private credit ha:; been expanded mainly to finance a
stagnant level of production at rising cost and price
levels. Private investment has been declining and
consequently could not have been an important cause
of inflation. Until. 1963, exchange rates were kept
stable for two or threc years at a time while domes-
tic inflation was continuing, but each periodic re-
adizstment of the exchange rate further boosted
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inflationary pressures. Since 1963, however, de-
valuations have been frequent, and it has become
increasingly difficult to distinguish among the
various causes and effects of inflation.
Expediency an Public Finance
22. Uruguayan fiscal policies have fed infla-
tion and diverted funds from productive to nonpro-
ductive uses . The government has made heavy use of
the public payroll in an attempt to sustain urban
standards of living in spite of a declining per
capita output. The share of the country's wage
bill paid by the central government and the public
agencies and enterprises has risen from 30 percent
in the mid-1950's to about 40 percent in recent
years. Presently, about 20 percent of employment
is in the public sector.* About 90 percent of
public employees are civilians; the military estab-
lishment is small, numbering less than 15,000 per-
sons. Some government employees draw pay for only
an hour or two of work each day -- an obvious case
of disguised unemployment compensation.
23. Within the central. government, the padding
of payrolls appears to have been most severe since
1961. Spending for wages rose from 45 percent of
current expenditures in 1.961 to an average of more
than 60 percent in 1964-65 (see Table 3) . A con-
stitutional provision prohibiting wage increases in
the public sector during the 1966 election year
enabled the central government to restrain such pay-
ments in that year and to hold the rate of growth
of its total current expenditures below that of
GNP. But to regain parity with private wage scales
(which were not restrained in 1966) , the government
advanced wages in the public sector by an average
A Time veri e on t?l. rtmt;