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Uruguayan economy: long, medium and short term challenges
Montevideo UNDP Office
August 26, 2009
Uruguay is a middle income country1 internationally ranked among the high human
development nations. According to the last Human Development Index (HDI) update2,
Uruguay ranks 47 among 75 countries with high HDI. With a life expectancy at birth of
76.1, an adult literacy rate of 97.8%, a combined gross enrolment ratio for education of
90.9% and a per-capita gross domestic product (GDP) of 10,445 purchasing power
parity US dollars (PPP US$), the Uruguayan society is one of the most developed in the
continent. Additionally, it has a well established democracy and an ongoing welfare
state as it is reflected by the high value of its “democratic support index” and the
importance of public expenditure in social policies.
Nevertheless, in spite of its relevant achievements in health and education, Uruguay has
severe problems to ensure that its population has access to resources, the third
dimension of the HDI. As the next chart shows, Uruguay is one of the leading countries
according to the index rankings of health and education, compared to the top nine
regional middle income countries with high HDI3, but it falls back to the bottom of the
list with Panama, Costa Rica and Cuba when ranking per-capita income. Thus, the
improvement on the per-capita GDP is a critical issue for the Uruguayan economy in
order to climb up in the world HDI ranking.
HDI dimensions of the top nine Latin American and the Caribean middle income
countries with high HDI in 2006 (displayed in HDI ranking order form left to right)
HDI dimensions index
1
Health
Educatio n
Inco me
0,8
0,6
0,4
0,2
0
Chile
A rgentina
Uruguay
Cuba
Co sta Rica
Source: Human Development Index Update (december 2008), UNDP
M exico
Trinidad
and
To bago
P anama
A ntigua
and
B arbuda
The poor performance of the Uruguayan economy is a long-standing phenomenon as
the country has not been able to sustain a stable rate of per-capita GDP growth in the
long term. The subsequent chart shows that Uruguay’s per-capita GDP level with
respect to the average of four of the most developed economies, dramatically
deteriorated in the XXth century, and since the fifties the decline accelerated. That long
standing trend is composed by short periods of high growth rates which are not
1
In terms of the per capita Gross National Income (GNI).
Launched in December 2008 and reporting figures from year 2006.
3
The list of the middle income countries was derived from the Development Assistance Committee of the OECD list of aid
recipients (OECD, 2006). The list of countries with high HDI was derived from the latest update launched on December 2008.
The chart omits four regional middle income countries (Venezuela, St. Lucia, Ecuador and Brazil) with lower HDI.
2
1
maintained in the medium term: the expansive phases often end up in profound crises
(the most recent occurred in 1982 and 2002).
Uruguayan per capita GDP level respect to the average of France, Germany, United Kingdom
and United States: 1870-2007
(1990 International Geary-Khamis dollars)
110,0
100,0
90,0
80,0
70,0
60,0
50,0
40,0
30,0
20,0
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
1910
1905
1900
1895
1890
1885
1880
1875
1870
Sources:
-1870-1950: Maddison, A. (2003) The World Economy: Historical Statistics. OECD
-1950-2006: The Conference Board and Groningen Growth and Development Centre, Total Economy
Database, January 2009
Those extreme economic fluctuations are now part of Uruguayans’ way of life and
impose a severe negative conditioning in the population’s economic expectations, which,
in turn, have great repercussions in investments and technological innovation, two main
factors that directly stimulate long term sustainable growth. This growth issue is
Uruguay’s strongest structural economic vulnerability, which repeatedly instigates
inequalities in the society.
As already mentioned the last crisis in Uruguay was in 2002 (but GDP growth was
decelerating since 1999). The economy entered to a financial crisis that added pressure
to other previous macroeconomic imbalances and to the bad external commercial
performance since 1999. Those factors led to the flight of capital abroad, the
abandonment of fixed exchange rate and a deep recession. Public finance was badly
damaged and credit sources –such as the IMF- had to be used. GDP fell, in real terms,
3.8% in 2001 and 7.7% in 2002; unemployment reached 19.2% in October 2002, while
real wages fell more than 20%. As a consequence in 2004 poverty and extreme poverty
reached 31.9% and 3.9% respectively. Public debt grew during the crisis as the deficit
widened, and external debt greatly increased: in 2004 it still was 87.2% of the GDP.
The 2002 crisis recovery phase was considered to be over on 2006 as the per-capita
GDP in current US$ attained the pre-crisis levels (in 2001 it reached 6254 US$ and
dropped to 3987 US$ in 2002). As shown in the next table, between years 2005 and
2008 annual real GDP growth rates were high (around 7%), well above historical
average. Renewed market access, the return of capital flows and a strong foreign direct
investment allowed the increase of international reserves and the reactivation of the
economy. Financial confidence was improved through key reforms, including bank
restructuring and improved supervision. Since 2005, the new government implemented
structural reforms that spurred economic growth (an important tax reform was
implemented in 2007 which introduced progressive taxes on personal income); while
debt management operations improved the structure of the external debt (the ratio
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gross external debt to GDP dropped from 65.7% to 37.4%) and fiscal results were
improved.
Uruguayan Economic Indicators (2005-2009)
GDP (million US dollars)
GDP per-capita (PPP dollars)
GDP per-capita (US Dollars)
Population
Inflation (%)
Real GDP growth rate (%)
US dollar depreciation (%)
Real wages variation (%)
Unemployment rate (%, Av.)
Current account balance (% of GDP)
Consolidated fiscal results (% of GDP)
Gross external debt (% of GDP)
2005
17.381
9.695
5.462
3.305.723
4,9
6,6
-8,6%
4,5
12,2
0,2
-0,2
65,7
2006
20.044
10.445
6.250
3.314.466
6,4
4,6
1,2%
3,7
10,9
-2,0
-0,3
52,7
2007
24.280
11.506
7.635
3.323.906
8,5
7,6
-11,9%
4,1
9,2
-0,3
0,0
50,3
2008
32.186
12.757
10.082
3.334.052
9,2
8,9
13,1%
4,3
7,6
-3,5
-1,2
37,4
2009*
29.641
12.767
3.344.938
6,0
-0,2
3,2%
8,6
-1,5
-2,4
32,4
Sources: IMF-International Finance Statistics; Instituto Nacional de Estadistica (INE), Banco Central del Uruguay. *Projections: Economist Intelligence Unit
The main drivers of this last expansion of growth were exports, investment and
domestic consumption. Foreign Direct Investment averaged a yearly US$ 1200 million
between 2005 and 2008, in contrast with US$ 280 million between 1999 and 2004. An
important part of this increase was achieved through the approval of the new
Investment Law in 2006. Domestic consumption grew considerably above the historical
average, while exports of goods and services grew 22.8% in real terms between years
2005 and 2008.
Concerning the labor issues, unemployment rates declined considerably –from 12.2% in
2005 to 7.6% in 2008- remaining among the lowest historically. Some sectors even
confronted bottlenecks to further production as lacked white collar and qualified
workers. As for wages, in real terms growth was vigorous -4.2% per year on average-,
leading to a partial recovery of the purchase power lost during the crisis. The
reinstallation of trilateral salary collective negotiations was important in some
productive sectors to achieve the recovery of real wages.
As shown in the next chart, despite the fact that economic performance was very good
until 2008, the country was not able to recover to the pre 2002 crisis poverty rates (18,
8% of the population of poor people and 1,3% of extremely poor people 4). Yet, between
2004 and 2008, extreme poverty was reduced to a half and poverty descended from
31.9% to 20.5% of the population5. These social achievements resulted together from
GDP growth, the focalized social policies undertaken by the Ministry of Social
Development (created in 2005) and the reform of the Health Care System 6.
4
The poverty line was calculated with the methodology created by the Instituto Nacional de Estadísticas (INE) in year 2002.
Although, poverty concentration among children and young people persists.
The law-reforming healthcare was implemented at January 2008. It set up a Sistema Nacional Integrado de Salud (SNIS,
Integrated National Health System) which incorporated near half million children and teenagers from poor households. This is
funded by the FONASA with contributions from the state, private firms, pensioners and workers.
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6
3
Poverty (% of population)
35
4,5
31,9
poverty (left)
4,0
extreme poverty (right)
30
3,5
3,9
25
3,0
20,5
18,8
20
2,5
2,0
1,5
15
1,3
10
1,5
1,0
1996
Source: INE
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Additionally, the Gini Coefficient7 fell from 0.441 in 2005 to 0.424 in 20088. Although, it
still indicates high inequality with respect to the world ranking. Thus, the achievement
of a pro poor economic growth –involving changes in the distribution of incomes which
benefit poor households- is still a major challenge that the country faces in the next
years.
In conclusion, the economic expansion that allowed the recovery from the 2002 crisis
and beyond it can be explained as a by-product of the favorable external context, but
also because there have been significant improvements in macroeconomic institutions
and policies and the real economy has responded well to this stable framework. The
combination of vigorous growth, structural reforms and social programs allowed the
improvement of the social indicators, although some important vulnerabilities persist.
Still, the impact of the ongoing global recession shows that this recent boom may not
represent a break from the past.
Analysts agree that the country has been hit by the world crisis, but disagreement
prevails regarding the depth of the impact. The currently ongoing world crisis is
affecting Uruguay through the three drivers of growth already mentioned. As a result,
GDP contracted 2.9% in the first quarter of 2009 relative to the last quarter of 2008, as
Central Bank figures show. The Government recently adjusted GDP growth projections
for 2009 from 2% to 0.7%, while local private consultancy firms expect an annual
growth rate between 0.7% and -1.4% (The Economist Intelligence Unit, as shown
before in the Economic Indicators table, is projecting a growth rate of -0.2% for
Uruguay).
Local experts do agree on the fact that Uruguay is better prepared than before to face a
crisis: short term external debt and foreign currency nominated external debt have
fallen; external debt to GDP ratio is lower, the Central Bank has enough reserves9 to
cope with difficulties, and the financial system is sound, unexposed to “toxic assets” and
weakly linked with international markets.10
Exports are the most affected channel: figures from the Instituto Uruguay XXI show
that exports of goods in the first half of 2009 were 13.3% lower than in the same period
7
The Gini Coefficient is the most common measure of income inequality. A Gini Coefficient of 0.4 and above is taken as an
indicator of high inequality.
8
Calculated by the INE.
9
Around US$ 7.400 million by July 2009
10
The financial sector is still recovering from the 2002 crisis. This lack of development of capital markets has proven to be a
strength in the recent international context, however, some experts point to this as one of the factors that has restricted
growth.
4
of last year and indicators show that the fall could continue in the third trimester.
Nonetheless, the exports fall is not even for all the categories of goods. A product
taxonomy by its technological content shows that manufactures with high technological
content (as pharmaceuticals) were the only exports that rose in 2009 with respect to
2008 (0.8%), while the world contraction strongly affected middle (-3.7%) and low
(6.5%) technological goods, primary goods (-7.9%) and manufactures based in natural
resources (-2.5%). These include goods as meat, furs and leathers, milk and dairy
products, wool and wool fabrics and car parts and accessories. Primary exports are also
suffering the reduction of international prices after the burst of the price bubble of the
last years. These results show that the export specialization, still mainly composed of
primary-based products (with a low degree of transformation or differentiation) is a
structural vulnerability that greatly exposes the economy to negative external impacts.
Although there are important levels of exposure to developed countries, links with the
region involve even much more productive complementarities and interdependence. For
instance, Argentineans represent about half of the total tourists that Uruguay receives,
while Brazil is the traditional destination of most milk and rice exports. In 2007, Brazil
alone received 16% of total Uruguayan exports, while MERCOSUR accounted for a
27.5%. Additionally, figures from the transit of goods in the Montevideo’s seaport –
where the activity is highly concentrated on the regional exchange- are showing less
containers mobilized in 2009 compared to the same months of last year. For all these
reasons analysts agree on the fact that the direct impact of the crisis will be followed by
an indirect impact caused by the effects it will have in the neighbor countries.
As for the other channels of growth, the government announced that public investment
would not fall, and private investment has slowed down. Central Bank’s figures show
that Gross Fixe Capital Formation grew 4.9% in real terms in the first trimester of 2009
compared to 2008, principally due to the building construction sector and public
investment. While Foreign Direct Investment felt 34.3%, a deep fall that reflects the
impact of the crisis. Nonetheless, another indicator of investment –the number of
investment projects promoted by the Comisión de Aplicación de la Ley de Inversiones
(COMAP)- show that the firms are willing to invest in the next months as, to July 2009,
the total projects are 1,1% more important compared to the same period of 2008.
Additionally, imports fell in the first semester of 2009. It affected mainly industrial
inputs and intermediate goods in the first months of 2009 -which preceded the actual
reduction in industrial activity levels-, but then recently spread to consumer goods also.
Some indicators showed a slight retraction of consumption of durable goods in the first
trimester, which persisted and was followed by a slowdown in consumption of consumer
goods in recent months. Further falls are feared, as the government and private
analysts project a rise in unemployment. Industrial production has been falling since
February, and the economic slowdown took unemployment to 8% in the second
trimester of the year, while real wages slightly fell (-1.0%) in June.
The contraction of activity levels is due not only to the impact of the crisis, but also to
another exogenous shock: a new drought started to affect the country by the end of last
November, receding just a month ago. This affected almost every agricultural activity
and damaged exports, and also had a negative impact in the generation of electricity.
The government reacted late; in January announced thirty four measures, attending the
situation of the dairy industry and other affected groups, including tax breaks, subsidies
and credit to buy supplies.
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The government has taken other measures to counter the slowdown, promoting
investment and employment with focus on specially affected sectors. Some fiscal
measures include tax devolutions and the creation of a National Guarantee System to
facilitate credit to SMEs.11 But an important policy, recently approved, is the adjustment
of unemployment benefits for four affected sectors: automotive, textile, wood, and
metalworking industry. Government will cover part of the salaries of workers in these
sectors, a measure that is expected to benefit around 5,200 workers. Some of these
workers will be asked to attend courses at a recently created public entity dedicated to
technical and professional training and re-training of working force. Government is still
discussing the reduction of working hours in affected sectors; other minor actions
focused on the effects of the drought were also implemented.
The economic slowdown has generated concerns about a worsening in social indicators,
but the government announced that social expense would remain untouched and that
additional poverty-aimed measures will be taken. For example, the government
negotiated with the private sector to avoid excessive price increases in strategic goods
(as meat) and may extend the coverage of some programs, as income transference for
children in poor households.
The combination of measures to counter the economic slowdown and prevent social
worsening, added to the extraordinary energy imports and the fiscal measures taken to
reduce inflationary pressures will result in a fiscal deficit: government expects a rise to
2.6% of the GDP (the Economist Intelligence Unit projects a deficit of 2,4%). Although
this deficit -which will be covered with internal debt emissions12- it is still a low value
compared to historical trends, it represents a small threat. In this context, future fiscal
expansion to stimulate demand could clash with the lack of resources. Last but not
least, 2009 will also be a complicated year for Uruguay as it is an election year; public
attention and government activity will surely be distracted by the election process.
In summary, Uruguay has a relatively sound fiscal position until now and may manage
without compromising its external debt position, but vulnerability to the world recession
arises mainly because of the high integration of the Uruguayan economy with Argentina
and Brazil: the crisis will have a stronger impact as a result of the regional slowdown.
Looking at the medium term picture, sound policies and favorable external conditions
have led to a strong economic recovery from the 2002 crisis while renewed market
access and strong foreign direct investment have allowed for the increase in
international reserves. Growth has averaged outstanding rates, inflation has remained
moderate until 2008, and the unemployment rate has declined considerably, reaching
an historical minimum. Primary fiscal surpluses and debt management operations have
reduced the debt and improved its structure. Key reforms have been implemented since
the 2002 crisis, including a comprehensive tax reform, a health sector reform, salary
collective negotiations, bank restructuring and improved supervision. Many international
organisms and private parties consider Uruguay as one of the best prepared countries in
the region to face the crisis; that will almost for sure avoid a prolonged recession.
Still, four intertwined endogenous structural vulnerabilities are threatening the
possibilities of Uruguay to find a long term sustainable social and economic
development path: the low levels of investments and technological innovations (key to
solving the long term problem of a sustainable growth path); the still high external debt
burden with respect to GDP; the commodity specialization of the export structure; and
11
Other measures included a temporary reduction of VAT for gasoil used in some industrial activities, and a rise in a small tax
charged to sensitive imports –as clothing and footwear.
12
This required the modification of the law that sets the limits of public indebtment.
6
the difficulties to achieve a pro-poor economic growth. These, added to the exogenous
vulnerabilities resulting from current turbulence in international markets, set a real
challenge for Uruguay’s economy in the near future.
7