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Montevideo, November 17th 2018 - 10:57 UTC

The Economist on Uruguay: some serious shortfalls

Monday, April 16th 2018 - 02:10 UTC
Full article
Economist Carlos Steneri, Economist Carlos Steneri,
The book on the Uruguayan financial crisis The book on the Uruguayan financial crisis
Danilo Astori, Uruguay's economy czar Danilo Astori, Uruguay's economy czar
Jorge Batlle and a good friend Jorge Batlle and a good friend
English speaking Central bank chair Mario Bergara English speaking Central bank chair Mario Bergara

The Economist recently published an extremely laudatory article on the performance of the Uruguayan economy in the last fifteen years, much of which can be supported but even more needs to be rectified, quite a surprise coming from a publication known for its research rigor. The piece was titled “Uruguay’s record-setting economic growth streak; How a small country outperforms its neighbors” and was published in the March 28th edition.

 To start with the article states that Uruguay avoided the default in the big 2002/03 financial crisis thanks to a bail out from the International Monetary Fund. Actually it was exactly the opposite: Uruguay avoided the default appealing directly to then president George Bush and the US Treasury, which extended a US$ 1.5bn bridge-loan.

The IMF at the time pushed Uruguay to default in similar terms to those of Argentina, but then president Jorge Batlle refused point blank for a very simple reason: Uruguay has a long tradition of honoring its debts and contracts, contrary to what Argentine and Brazilian history indicates.

President Batlle's strong attitude with the help of the US Treasury confirmed Uruguay's record of solid, responsible institutions, credibility and reliability. It must be mentioned that during the congressional debate the current coalition, then in the opposition openly favored following the IMF default solution and was against the US bridge loan.

All this is clearly detailed and chronicled in a book, “At the edge of the abyss: Uruguay and the great crisis of 2002/03”, written by economist Carlos Steneri, who was directly involved in the negotiations with the IMF and the US Treasury. Economist Steneri has spent most of his professional life in Washington, representing Uruguay at the IMF, World Bank and other multilateral financial organizations.

A second situation which needs to the pointed out: when the current coalition takes office in 2005, Uruguay's finances, despite the tumultuous previous years, were in order, with 4% of GDP primary surplus, the country had signed a trade agreement with Mexico, port reform was in effect, and China was ready to take off with its avidness for commodities.

In other words the launching pad for the fifteen years of uninterrupted growth had been laid in 2003/04. Furthermore it coincided with the beginning of the Kirchner years whose policy of taxing farmers led many Argentines to move across to Uruguay and revolutionize agriculture in the country taking advantage of no export taxes and insatiable China.

Likewise the foundations for the pulp industry (a Uruguay success story) were planted in the eighties with the forestry promotion bill, and similarly with the improved sanitary condition of Uruguay's herd and flock, which helped open world markets. Setting up a new industry is not done overnight and gaining access to overseas markets with beef is the result of decades of sanitary advance and diplomatic negotiations.

In this case it must also be mentioned that the current ruling coalition, while in the opposition voted against an Investment promotion and protection bill agreement with Finland, the country which built the first pulp mill in Uruguay. Furthermore when the mill was beginning to be built the Broad Front (then in opposition) asked Argentine president Nestor Kirchner to help prevent Uruguay from setting up the plant in the border river Uruguay which has a shared administration.

The alleged decoupling from Brazil and Argentina by becoming China dependent. This is also relative. Brazil is Uruguay's second trading partner. and the first when it comes to semi industrialized goods such as dairy produce. And Brazil is still recovering from its worst recession in a century. Argentina remains the main source of tourists for Uruguay, some 75% of the three million plus Uruguay received annually in the last two years came from the other side of the River Plate. Last but not least, Uruguay is virtually “trapped” in Mercosur by Brazil and Argentina: it is barred from reaching trade agreements with third countries and is a “natural” market for non world competitive industrialized goods from the two large neighbors. This can be better described as geographic determinism rather than decoupling.

On the social side, in effect, the current government has helped increase the Uruguayan middle class, boosted by the uninterrupted fifteen years growth and redistribution policies. However this has also meant inflating the government payroll with 70.000 new incorporations, (Uruguay's total population is 3.5 million), higher taxes and borrowing money overseas to pay for the outlays. Despite further direct tax increases and indirect through public utility rates, the budget deficit stands at 3.5% of GDP, with a tendency to advance rather than decrease. Annual borrowing to meet ends with the budget demands US$ 2.2bn, some US$ 6.5m per day.

This naturally means government capital investment is virtually nonexistent, while the private sector has seen profits diminish under heavy taxing and has not much incentive to invest. For export industries, the influx of dollars in the market has meant cheap greenbacks and a considerable increase in costs, which are paid in the local currency, and loss of international competitiveness.

The practical result of this is an increase in unemployment which now stands between 9% and 10%, while social disenchantment has emerged strongly. In Uruguay with a long standing tradition of participation in politics, the ruling coalition and the main opposition party hover just below 30% of support according to opinion polls, but the other large force, in the twenties, are those who anticipate a blank vote, simply won't reply or are furious with how the political system is (not) delivering.

In effect as The Economist points out not everything is rosy in Uruguay. Growth dropped in 2015 and has not bounced back to its old level. The economy still looks over-dependent on exports, which account for a fifth of GDP. Both inflation, at 7%, and the budget deficit excluding interest payments, at 3.5%, are too high. Uruguay has rigid labor markets. The education system needs reform. The population is ageing.

 

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