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Working paper no.?: The Political Economy of (Re)distribution with Low Growth: Uruguay 1900 to 1973 Javier Rodriguez Weber and Rosemary Thorp This paper aims to analyse the political economy setting of modern Uruguay in historical terms, as an input into the Leverhulme-funded project on ‘The sustainability of recent improvements in equity in Latin America’. The project has as one of its main contentions that current work on this recent phenomenon has neglected the political economy of this process, crucial for evaluating political and economic sustainability. In general, to understand the political economy of a country we believe in the importance of history: in the case of Uruguay, we find it particularly important that today’s policy and business attitudes, the shape of many institutions and many structural characteristics of the economy can only be understood in terms of Uruguay’s rather unusual past, and exploring that is the central goal of this paper. In seeking to understand the widespread phenomenon of improvement in the distribution of income in the last decade or so in Latin America, Uruguay has a special and challenging place, given its long history of relatively good distribution in Latin American terms and a remarkably long period building and sustaining an exceptional welfare state and strong union structure. But its growth record was also tragically slow through several decades, and the favourable trend in equity was eventually reversed. Today, however, the country has joined the ranks of the fast growers of the first decade of the twenty-first century – and, if belatedly, is also showing a return to its old pattern of improving equity. It therefore raises particularly interesting issues for the project. Why the stagnation, and was it causally related to the policy efforts to improve distribution? How come such a steady progress in distribution and welfare terms was possible? Backed by what kind of political economy? What does this analysis teach us about the likelihood that today’s improvement can be sustained and do the lessons suggest questions for our other case studies? Or do our other studies suggest aspects that contain lessons for Uruguay? In this paper we take the story up to the civil-military dictatorship which took power in 1973 and produced a severe rupture in the political economy of the country as well as in all social and political relations. A second working paper will take the analysis up to the present day. We hypothesize that in order to understand today, we need to start by building a clear historical political economy. We find that some defining characteristics of the export sector and its relation to the rest of the economy were already laid down by the path of the nineteenth century, and important characteristics were already in place affecting the potential for growth or lack of it. Given the characteristics we explore below, the initial distribution of income in the years following Independence was probably less unequal than was typical of Latin American countries at this date, but the distribution worsened as the production structure shifted in response to the world market. But the early history of the Republic also fostered a ‘social propensity to value relative equity’ which has marked out Uruguay (and continues to do so despite the rupture of 1973, which created more inequality). The support for a welfare state and a degree of progression in the income 1 distribution has accounted over time for less inequality than in most other Latin American countries. The challenge is to understand the political economy both of growth, or its absence, and redistribution. We show in this paper that in Uruguay the economy and society endured a long period of stagnation, which finally resulted in a huge political shift and a radical change of model, ending for a period of several decades the tendency to an improving distribution, the latter driven, we will argue, largely by policy choices and against the productive structure. We shall explore how various elements interacted: the resource endowment, the international market, the political strategies and choices of the traditional export oligarchy, and the policy choices of the urban-based actors who opposed them. All these combined to shape a pernicious dynamic pushing the economy towards stagnation. The first and second sections provide the necessary background for this analysis. Section I discusses the ‘exceptionality’ of Uruguay in terms of the post-Independence structure of the economy and its twentieth century evolution. Section II takes up a different and crucial aspect of exceptionality: the ‘propensity for relative equity’. The roots of aspects of the political economy go far back: we show briefly how the nineteenth century already shaped actors and possibilities, taking 1850 as our starting point, then trace more fully the twentieth century story. Section III explores the political economy of the traditional export sector and its relations with the rest of the economy. Section IV explores the political economy of the post-1930 period, with significant efforts at industrialisation, and Section V explains the crisis which erupted at the end of the period. Section VI concludes with a summary in comparative perspective and a reflection on the challenges posed. Section I. The evolution of growth and distribution over the century. In this section we map out the evolution of the economic structure, documenting the important elements we need in place for the rest of the paper. We begin with the economy and with demography. We can identify at least seven elements of the productive and demographic structure where Uruguay is an outlier in Latin American terms. First, while GDP growth was rapid and well on trend for Latin America between 1850 and 1930, the stagnation of the economy was pronounced from the mid-50s up to the Dictadura, and to the mid-80s. As many countries struggled with the debt crisis and structural problems, Uruguay ceased to be unusual. In GDP per capita terms the stagnation was complete after the mid-50s (table 2), with a negative per capita growth of 0,2% 1955-73. 1870-1913 (*) 1913-1955 1955-1973 1973-2002 Table 1 GDP rates of growth, dollars of 1990 Argentina Brazil Chile Colombia Mexico 5,8% 2,3% 3,3% 2,3% 3,4% 3,0% 4,5% 2,2% 4,8% 3,0% 3,8% 7,0 3,6% 5,1% 6,8% 1,0% 3,3 4,2% 3,5% 3,4% 2 Peru 5,0% 4,1% 5,1% 2,0% Uruguay 3,9% 2,8% 0,8% 1,7% Venezuela 2,9% 7,1% 6,0% 1,7% (*) Peru 1896-1919 Source: calculated from Bértola & Ocampo 2010 Table AE1 pp. 306-7 (Bértola & Ocampo have corrected Maddison’s data). Table 2 GDP per capita rates of growth, dollars of 1990 Argentina Brazil Chile Colombia Mexico Peru Uruguay Venezuela 1870-1913 (*) 2,3% 0,2% 2,0% 0,5% 2,2% 3,7% 1,0% 1,5% 1913-1955 0,8% 2,1% 0,6% 2,5% 1,1% 2,4% 1,2% 5,2% 1955-1973 2,1% 4,1% 1,3% 2,2% 3,4% 2,2% -0,2% 2,2% 1973-2002 -0,4% 1,3% 2,6% 1,4% 1,3% -0,1% 1,1% -0,9% (*) Peru 1896-1919 Source: calculated from Bértola & Ocampo2010 Table AE2 pp. 308-9. A second distinguishing characteristic of Uruguay is its relative wealth, particularly unusual given its small size (a population of 132,000 in 1850 while its neighbour Argentina had eight times as many people – Sanchez-Albornoz 1986). GDP per capita in 1990 dollars (with all the problems of comparability this involves) puts Uruguay at the level of Argentina at the end of the nineteenth century, after which Argentina moved ahead, but even by 1973 Uruguayan per capita income was greater than that of five out of the seven largest economies of the region (table 3). This reflects its high degree of urbanisation at the beginning of the twentieth century, its third element of exceptionality – already more than half the population lived in towns. By the middle of the twentieth century, Uruguay was the most urbanised country in Latin America – 78% urban in 1950 compared with 65% in Argentina, 58% in Chile and 36% in Brazil (Merrick 1994). From an early date the country was strongly centred on its port and capital city, Montevideo, with many immigrants – in 1860 48% of the population were foreign (Pellegrino 2010 table 2). The first figure for the urban population is 1908, by which time the most conservative estimate available (cities over 2,000) is 46% of the total, with Montevideo alone having 24% of the total population of the country.1 At the turn of the century a figure for cities over 20,000 gives Argentina as 24% urban, a figure matched just by Montevideo in the case of Uruguay. By 1930 when comparable figures are available, the urban population is 35% (cities over 20.000), only exceeded by Argentina at 38% (Merrick 1994 p31). Table 3 Argentina Brazil 1870 1 1.468 694 GDP per capita in dollars of 1990 Chile Colombia Mexico Peru 1.320 676 651 Rial and Klazco (1981). 3 553 (a) Uruguay 2.106 Venezuela 406 1913 3.962 758 3.058 1929 1945 4.557 4.546 1.051 1.284 3.536 3.552 1955 5.460 1.834 1973 7.966 1985 2002 845 1672 1.024 3.197 786 1.589 1.696 2.060 1.894 1.892 1.948 3.716 3.635 2.438 3.631 3.929 2.416 2.633 2.720 5.199 6.593 3.758 4.957 3.546 4.831 4.001 5.034 9.788 7.020 4.929 5.034 4.261 6.123 3.695 5.601 8.334 7.120 5.471 10.514 5.360 7.127 3.892 7.000 7.543 2008 10.977 6.423 12.979 6.737 8.038 (a) 1896 Bértola & Ocampo 2010 Table AE2 pp. 308-309. 5.454 10.619 10.278 Urbanisation and small size together meant a small rural population in absolute numbers. Although the majority of rural workers were extremely poor, their low absolute number meant a structure of production and income where classic rural poverty did not weigh heavily. This combined with the food and labour market characteristics described in section 2 to shape a relatively equal income distribution in Latin American terms at the start of our analysis: the fourth exceptional characteristic. Distribution worsened as the production structure shifted in the second half of the nineteenth century, as we discuss in section 2 below. Uruguay was however still some 10 points of the Gini coefficient below Argentina, Brazil and Chile by 1890 (table 4). Table 4 Income distribution: Gini coefficient (a). Selected years Argentina Brazil Chile Uruguay 1890 0,574 0,514 0,521 0,424 1900 0,459 0,457 1910 0,521 0,472 1920 0,574 0,597 0,577 0,464 1930 0,482 0,591 0,638 0,465 1940 0,508 0,584 (b) 0,455 1950 0,400 0,578 (b) 0,438 1960 0,419 0,572 0,462 0,380 1970 0,361 0,628 0,460 0,363 1980 0,411 0,584 0,532 0,406 1990 0,437 0,605 0,551 0,416 2000 0,504 0,612 0,552 0,433 FUENTE: Bértola et. al 2011 and information supplied by the authors. 4 (a) As is well known, comparison of income distribution between countries and over time present enormous difficulties. These figures should only be taken as suggestive. (b) Preliminary work by Rodriguez Weber indicates that in Chile inequality declined between 1935 and1945 and was stable in the following years, except for a fluctuation associated with an inflationary period 1952-1960. With urbanisation and the tiny indigenous and rural populations went early progress in education and health: the fifth element of exceptionality. Table 5 shows Uruguay with an education Gini already higher in 1870 than Chile. Measures of life expectancy do not go back to that date in Latin America, but by 1950 Uruguay has the most favourable data (table 5) . These aspects lead to a sixth element: the size of the early slow down in population growth. Between 1850 and 1900 population grew at 4% a year, a combination of immigration and a high natural rate of growth, exceeding even Argentina. Between 1900 and 1930 the rate of growth of population fell to 1.9% - the biggest fall recorded. In the Southern Cone only Chile was now lower, at 1.3% (Merrick 1994 p122). Table 5a Distribution of years of education: Gini coefficient (a) Argentina Brazil Chile Uruguay 1870 0,455 0,443 0,382 0,428 1880 0,460 0,447 0,407 0,425 1890 0,465 0,449 0,432 0,418 1900 0,478 0,452 0,457 0,412 1910 0,480 0,454 0,473 0,405 1920 0,460 0,455 0,475 0,391 1930 0,422 0,453 0,437 0,364 1940 0,382 0,455 0,389 0,347 1950 0,335 0,454 0,365 0,334 1960 0,308 0,447 0,336 0,317 1970 0,285 0,425 0,277 0,292 1980 0,271 0,406 0,249 0,267 1990 0,249 0,316 0,232 0,245 2000 0,235 0,274 0,220 0,225 Table 5b (a) Distribution of Life Expectancy: Gini coefficient Argentina Brazil Chile Uruguay 1920 0,512 0,321 1930 0,434 0,287 5 1940 0,419 0,252 1950 0,197 0,326 0,287 0,187 1960 0,173 0,284 0,268 0,169 1970 0,155 0,248 0,217 0,167 1980 0,130 0,196 0,134 0,147 1990 0,116 0,170 0,108 0,125 2000 0,101 0,145 0,091 0,118 Source: Bértola et. al 2012, and information supplied by the authors. (a) Such data may be used for comparisons with more confidence than the previous table The seventh in our list of exceptions concerns the trade structure and the vulnerability it brought. A trade structure which had worked well in the nineteenth century (Uruguay’s meat could arrive in the British market before New Zealand’s) became less favourable with transport improvements, and by the 1930s Uruguay was already marginal to the UK’s trade in meat. The Ottawa treaty of 1932 gave a strong preference to the British Dominions. Such marginality was not exceptional; indeed it was common to many, particularly the smaller countries of the region: what was exceptional was Uruguay’s marginality in relation to her close competitor, Argentina. II. The propensity to value equity. The exceptionally favourable outcomes we have here described in welfare and distribution all helped to reinforce the Uruguayan sense of pride in difference in regard to equality, which brings us to our final element of exception: the propensity to value equity. Uruguay has been extremely unusual in Latin America in the twentieth century in this regard. Only Costa Rica has had anything approaching the unusual set of values and political choices observable in Uruguay. This characteristic has been much reflected upon and analysed. Summarising a rich literature,2 we can say that Uruguay’s colonial experience was distinctive, the territory being of little interest to the colonisers, with no mineral resources, and having a small indigenous population.3 At Independence the country was left thinly populated and the population was unusually white and relatively free, given the almost non-existent reach of the state and the lack of feudal labour relations. It had a poor and relatively weak colonial aristocracy, who suffered severely in the Independence Wars and became early on the basis for the professional and political elite we highlight in the next section, without the base in land which elsewhere characterised the early post-Independence political elites.4 Land was distributed rather freely following Independence, and every primary school child in Uruguay today learns that in1815 Artigas signed a Reglamento Provisorio providing for a land distribution in which ‘los más infelices fueran los más 2 Real de Azúa, 1961, 1984; Reyes Abadie, et al. 1966; Rama 1987, Barrán & Nahúm 1979/1987; Filgueira 1994, Chasquetti & Bouquet 2004; Caetano 2011, and many others. 3 The Guarani presence is still strong even today in the north of the country, and there the classic exploitation was observable, and gave rise in due course to the Tupamaros guerrilla group. 4 José Batlle y Ordoñez is an emblematic example of this, nephew of a important aristocrat of the Colonial period ruined by the wars of Independence. 6 privilegiados …..5 The relative absence of an indigenous population sharply distinguished by racial and ethnic characteristics was significant: in the embedding of inequality in much of Latin America the overlap between class, wealth and skin colour cemented the rigidity of the exclusions even after the early colonial view of race no longer prevailed. The result was on the one hand a relatively independent rural population, unusually homogenous, with food, some access to land and free of the authority of ‘patrones’ typical of the Mancha India. On the other hand, the dispossessed rural elite now found its way in urban professions – journalists, writers, lawyers, politicians – and was relatively independent of the traditional export interests. Come the 1870s, the military took control of government and the state, to enforce a state presence that took authority over the population – and in that degree aided the land-owning elite that still remained – but also took its distance from such groups. From the 1880s the civilian governments that took over had their roots in the urban-intellectual groups that had significant autonomy from traditional rural oligarchies. At the same time immigration multiplied by eight the population of Uruguay and represented the highest rate of European immigration in Latin America in the second half of the nineteenth century. The weight of immigrants in the population was significant, as immigrants tended to be less bound by traditional values than the native-born population, and to be more in favour of merit and equality of opportunity.6 This was the seedbed – the fertile terrain – for a set of values unique in Latin America, which in due course allowed the emergence of the remarkable leader, José Batlle y Ordoñez, with his subsequent domination of the Uruguayan political scene. His first government took office in 1903, and even today, some consider that the government of the Frente Amplio is rightly considered ‘the third Batllismo’ (see table 1 of the Appendix for an account of the governments and policy regimes over the twentieth century). Batlle was without doubt ‘exceptional’ in his own right, and his individual role is widely recognised, but structural features allowed the emergence of Batllismo and facilitated it having a role far beyond the person. What Batlle did was to push the specifics of a social justice agenda in a competent and compelling fashion: early legislation followed on education, universal suffrage, the defence of women, children and the elderly, and Batllista governments even struggled with the imposition of taxes on inherited wealth and property. The latter point is telling: the Batllista value was for equality of opportunity, so Batlle did not wish to tax earned income, but unearned and inherited wealth. The egalitarianism thereby fostered saw equality as deeply rooted in democracy. Social legislation was always aimed at creating responsible and informed ‘The most unhappy became the most privileged….’ From the Criterio para el reparto de tierras según el Reglamento Provisorio de la Provincia Oriental para el Fomento de la Campaña y Seguridad de sus Hacendados, signed by Artigas in September 1815. It continues: “en consecuencia, los negros libres, los zambos de esta clase, los indios y los criollos pobres, todos podrán ser agraciados con suertes de estancia, si con su trabajo y hombría de bien propenden a su felicidad, y a la de la provincia”. Subsequent political events meant this Regalamento was never implemented as such, but the point is the unusual criteria it used and promulgated. 6 In Argentina a similar phenomenon occurred and provided an important part of the political base of Peronism, but the domination of immigrants was not as strong as in the case of Uruguay. Argentina’s Cuyo region had a significant population with a strong Colonial inheritance, a phenomenon absent in Uruguay. 5 7 citizens – for example legislation on the eight-hour day was motivated by the desire to leave time to allow people to inform themselves as citizens and participate in civil affairs. A significant event for Batllismo was the defeat at the polls in 1916. This taught the Batllistas a lesson about the need to negotiate towards consensus. The 1919 constitution encapsulates the heart of the Batllista agenda though it did not accept all Batlle’s programme;7 it was a result of negotiation and agreement between parties, but still embodying the tight connection in Batllismo between fairness and democratic values. It is argued today that over time there was a negative dimension to the propensity for equity: a society relatively uninterested in change and innovation. To innovate to stand out, to be different; this is not ‘a good thing’. Whether this today is a key ‘exceptionality of Uruguay’ in the Latin American scene is a matter for a different research. We only argue here that this last exceptionality has been of huge significance for the political economy of the country over time. We begin to demonstrate this in the next section with an account of the political economy of the rural sector, and in section IV the urban economy and society. III. The political economy of agriculture and the principal traditional exports 1850-1950. In this section we explore the role of the agrarian sector and Uruguay’s main primary exports in the forces leading to eventual stagnation, the political economy behind such forces and the consequences for income distribution. Income distribution may be thought of as ‘primary’ and ‘secondary’, where secondary reflects policy actions, though the distinction becomes blurred in a dynamic setting, since past policy in part shapes the present so-called ‘primary’ distribution of income. However, if we adopt the normal convention of a somewhat arbitrary ‘starting point’8, both initial primary distribution and growth can be said to be shaped as of the start of our period by resource endowment, the international market and the historical legacy of factors such as land holding and labour relations coming out of the colony. The mid-nineteenth century found Uruguay with an economy and society hardly egalitarian but more equal than, say, Mexico or Brazil or any of the Andean countries. The possibility of relative equality was driven by the fact of virtually free food in the rural sector, and by the prevalence of violence: meat was a by-product of the production of hides and virtually a free good, and problems of security meant that many hands were useful as guardians if not producers. Between 1850 and 1905, however, a transformation occurred in the sector. In this transformation, three aspects were intertwined and interacting. First, there was a sharp increase in the productivity of natural pasture, for 7 Batlle wanted a Collegial arrangement: the constitution introduced not this but a two-headed system called the Consejo Nacional de Administracion (CAN) with the Consejo controlling non-traditional areas of the state, above all the economy, and the president retaining control over the ministries of the Interior, Defence and International Relations. 8 reasons we explore below. This allowed the traditional pattern of Uruguayan development to become firmly entrenched. Second, with this went an increase in the social divisions characterising the country. And third, these two changes together had political consequences. We now explore these three themes together. We conclude that at this period increasing inequality was being driven by shifts in the primary distribution, but such shifts were aided by aspects of policy – the use of force and the building of infrastructure. The process of transformation began with the civil war of 1838-51, known as the Guerra Grande. An important aspect of the war was that it led to the ruin and thus displacement of significant numbers of oligarchic families from their traditional livestock activities into careers in law and politics, so promoting a division between the distinct elements of the ruling classes based in the economy and in the professions. Once peace was established, immigrants from Europe settled in the South-West, the most fertile region of the country. They facilitated a major change: the introduction of sheep alongside cattle. With sheep, production per unit of land became more intensive in both capital and labour, the latter in particular requiring skills which only the immigrants could supply, leading to a group of better-paid workers and thereby for a few a means of social mobility. From this period dates a significant division of the rural economy – between the relatively modern ranches of the south-west, with many immigrants, and the traditional North where hombres sueltos roamed free and threatened security.9 Despite the constant threat from insecurity, this transformation now contributed to the social base of the military government (1875-1890), which moved to install property rights both by law and in reality, using new institutional resources, such as the codigo rural, and techniques such as enclosures, and beginning also to introduce measures to discipline rural workers and eliminate the hombres sueltos. The next step was selective breeding to improve the quality of livestock: this had been impossible before enclosure, and now led to the production of better quality animals, for exports of refrigerated and frozen meat. The process was stimulated by the arrival of the first meat-packing plants in Argentina in 1880.10 The transformation reached its peak by 1910, at which point new technology was allowing the maximum exploitation of the potential of natural pasture. The institutional changes outlined here were promoted by the Asociación Rural de Uruguay – ARU – formed in 1871, originating with entrepreneurs of the progressive south-west, the shores of the river Uruguay. The Association’s agenda was centred on At this point ‘the state’ was fragile and indeed almost non-existent so the notion of ‘the initial primary distribution ‘ can be regarded as an acceptable simplification 9 Literally ‘free men’, these were men displaced from their livelihoods, and/or ex-combatants, living on the edge and typically by banditry, though they supplied seasonal labour as ‘gauchos’. They owed allegiance to no one – not landlord, church or state. 10 The first plant would not be set up in Uruguay until 1905 – it could only be profitable once the supply of meat had grown. 8 9 property rights, the need for increased security, and increased productivity through cross-breeding programmes and fencing. In conclusion, as a result of technological change and the international market on the one hand, and state action on the other, the rural economy and society in 1900 was more unequal than in 1850, not only in income terms but also in terms of capabilities, in the phrase of Sen. However, the state was not only stronger vis-à-vis the bandits and rural labour force, but also vis-à-vis the rural upper class. The latter aspect was not obvious during the military and civilian governments of the later years of the century, when the ranchers had significant influence, but circumstances changed with the arrival in power of a political faction interested in changing some of the characteristics of the rural sector. A critical moment During the decade of the 1910s the political economy of the rural sector in Uruguay lived a critical period which would condition developments for a number of decades. First, by 1910 livestock production had reaped the maximum possible benefit out of the new technology and institutional arrangements. The results were remarkable. At the same time that the country exceeded New Zealand in the productivity of the soil, selective breeding had also significantly diminished the difference in productivity per unit of stock (Moraes 2008). Second, the consolidation of property rights in the countryside and the adoption of selective breeding represented the triumph of the programme of the ARU. The Association now became centred on conserving these victories rather than seeking further change: indeed, in response to proposals for change it adopted a defensive position (Barrán & Nahúm, 1967/1978, vol. 2 pp. 209 and ff). This defensive position was understandable, given the increasingly frequent attacks on the ARU position since 1890. In that year, an economic crisis precipitated a controversy over the central place of the livestock sector in the future of the country. Various actors, an outstanding one being the popular Colorado leader, José Batlle & Ordóñez, were intent on pointing out the vulnerability of the sector to the fluctuations of the international economy. The same critics questioned the labour market consequences of the model, with its resulting growth in rural poverty. In addition, the Batllistas thought that the private holding of land was illegitimate, although it had to be accepted as a matter of fact. Thus, at the beginning of the twentieth century, as José Batlle acceded to the Presidency, the control of the state passed to a political group critical of the livestock model. As a result, both the first presidency of Batlle and that of his successor Williman – much more conservative in other respects such as labour policy – tried to modify the rural model in favour of crop production rather than livestock. To this end the Batllistas proposed taxes to raise livestock production costs to the point where it 10 would become profitable to subdivide property and dedicate a growing part to crops, thus combatting both the ills they saw as central to the livestock model: livestock and large estates (Barrán & Nahúm, 1979/87, vol 2 pp. 77ff). However, neither the defensive anxieties of the ARU nor the views of the Batllistas actually focused on what were in reality already the central problems: that of pasture, and the unsuitability of Uruguay soils for crop production rather than grazing. A few were beginning to see that pasture was indeed a relevant bottleneck, and the first efforts were made to confront the problem with the creation of new Faculties of Agronomy and Vetinarian Sciences at the UDELAR, the Universidad de la Republica (and the only one in Uruguay at that date). New research institutes also came into being, created by the state and directed by foreign scientists contracted for this purpose11. This might have been the nucleus of a National Innovation System, with as its central figure the economist and historian Eduardo Acevedo, minister in Batlle’s second government (1911-1915) (Moraes 2008 pp. 152ff). However, this was the context in which the Great War of 1914 struck the second government of Batlle a huge blow, with various consequences. In the first place, the fiscal crisis provoked by the War, arising from the impact on customs revenues, destroyed the plans of the Minister Acevedo for creating a series of research institutes to analyse among other things the issue of pasture. Faced with the fall in income, the government cut expenditure, and 66% of the cuts affected the development projects of Acevedo (Barrán & Nahúm 1985, vol 6 p158). So ended extremely prematurely the first national attempt at analysing the agronomic and geological characteristics of the country in an effort to derive long-term solutions. In the second place, the crisis provoked by the War reinforced the government’s conviction of the necessity for structural change to reduce the vulnerability to international fluctuations. This consideration led the government to renew its offensive over a land tax, which would provide a fiscal base independent of external shocks and in addition was legitimised by Georgist ideology on the social character of land. The measure was thus aimed at nothing less than the transformation of the rural model. The ranchers’ reply was not slow in coming. In a context in which high prices were disguising the extent of the problems posed by pasture and the oligopoly of the meat packing plants (which we explore below), the ranchers turned their guns on a reformism which questioned the rural order. Angry at the lack of aggressiveness of the ARU, always disinclined to active political participation, a spur was given to new efforts at sectoral politics. The result was the birth in December 1915 of the Rural 11 Finch (1992) points out that between 1905 and 1913 at least 55 foreign scientists, mainly German and North American, worked in the country (cited by Álvarez & Bortagaray 2007, 11 Federation of Uruguay, with the express objective of fighting the Batllista ‘inquietismo’ 12. The Federation lost no time in becoming active in the electoral campaign for a Constituent Assembly to be elected in 1916. The specific proposal from the Batllistas was the creation of an electoral college with executive powers, but the election – the first with secret vote - became effectively a plebiscite on the reform proposal. Acting as if it were a political party, the Federation challenged the population, above all rural workers and land owners, to vote for the candidates opposed to the College, arguing that property rights were at stake. Together with the opposition and an element within the Colorados opposed to the reform, they won a majority. Batllismo and its socialist allies had been defeated. Batlle’s succesor, Feliciano Viera, called a halt to the reforms. The Federation and other conservative elements praised his wisdom, and Viera progressively distanced himself from Batllismo. The following decades were to demonstrate that a solution to the problem of pasture was extremely difficult. We cannot therefore conclude that a different political situation would have prevented the stagnation of the livestock sector. But we can conclude that the conjuncture of the 1910s definitely complicated the situation. The reduced financing of efforts to find a technical solution, the illusion of prosperity created by booming prices during the war, and the tensions between the principal actors, ranchers and government, slowed down efforts to solve the stagnation of the sector for half a century. The lengthy search for a solution to the supply of pasture. Between 1917, when the Executive commissioned the Agronomy Faculty to make a study of indigenous plants, and 1935 when the National Commission for the Study of the Problem of Pasture was created, there was no systematic effort towards a solution. There were individual efforts, such as that in the mid-1930s when the firm Estancias y Cabañas Alejandro Gallinal funded research by the national university (UDELAR). This led to a diagnosis suggesting that the best route available was to make better use of natural pastures. This approach reached the peak of its influence in the 1950s, when Esteban Campal, one of the agronomy students participating in the original work, was an under-secretary in the Ministry of Agriculture. To this end, technical aid was sought from the World Bank and FAO, and trips made to the USA, Australia nd New Zealand. However, the proposal for better use of natural pasture rapidly lost weight before the alternative presented by the New Zealand assessors, who favoured the introduction of the artificial pastures which had given their country such good results (Campal 1969: 43). . 258). 12 Anxiety - the expression used by the first president of the Federation, José Irureta Goyena, to refer to the reform initiative. 12 However, the New Zealand techniques were not to give the same results. The New Zealand solution had been developed in response to specific challenges, different from those of Uruguay, and over a long period of research and experimentation – a concrete solution to a specific problem and not necessarily capable of being extrapolated to other circumstances. Thus we see a classic Hirschmanite situation: the overwhelming authority of foreign advisers plus their ignorance of local conditions produced a perverse result13. By the 1960s, with a countryside already depopulated, artificial pasture, even with the help available, was giving a lower return than that of natural pasture. People rationally chose to rent more land rather than adopt the New Zealand solution and improve productivity. Uruguay needed to learn from New Zealand, not the specific techniques, but the manner in which to search for a solution: through the construction of a system of innovation for the sector. Another negative factor was the nature of demand. Before 1930, the meat-packing industry was heavily concentrated. Two U.S. frigorificos – Swift and Armour – controlled some 80% of the processing. This situation of oligopoly now became stronger, aided by the transport arrangements for meat. It must be remembered that the refrigerator ship was the key technological innovation necessary to export frozen and chilled meat from the Rio de la Plata: a specialised boat was needed. Competition between the meat packing plants was limited by the fact that the transport companies had an agreement by which they assigned quotas to different enterprises (Finch 2005). The response to the problem of low prices in the 1920s appears to have pushed the ranchers into accepting – or ignoring – the Batllista characteristics of the answer found. The solution, for once agreed between government and ranchers, consisted in the creation of a National meat packing plant – the Frigorifico Nacional, state-owned and with ranchers represented in its directorate, which was to raise the price of livestock through competition with the North American firms. Thus the ranchers agreed to a Batllista solution, accepting the statism of which they had been so critical, perhaps because in this case the institution was designed to defend their interests, which were, in their opinion, those of the nation (Finch 2005: 147). However, the scope for the Nacional to have an impact on the price was limited since their market was restricted to the domestic market where they had the advantage of the monopoly on the supply of Montevideo. The possibilities of export were limited by the shipping quotas. However, an even more important limiting factor, from the side of demand, came with the 1929 world depression and the fall in prices. The resulting changes in the international scene resulted in the Ottawa Treaty, in which Britain gave preference to its dominions and colonies. From then on, the possibilities of export were limited to a percentage of the sales between July 1931 and July 1932 - a particularly unfavourable A tendency repeated often in Latin American historical political economy – and noted in the popular song ‘Maldicion de Malinche’. 13 13 base year. As a result, Uruguay’s market share in the world meat market fell from 13% in 1924-1928 to 7,3% in 1934-1938 (Moraes 2008: 121). In summary, whether because of transport restrictions, or, much more important, the institutional changes in the international meat market, the fact is that demand did not provide any incentive to resolve the forrage problem. This came on top of the institutional problems already described. When the Second World War had an impact on demand conditions, the problem of the shortage of pasture became overwhelmingly evident. But, as we have seen, the technological solution adopted did not resolve the problem. This, combined with rising labour costs coming from the introduction of collective bargaining at the start of the 1940s, and the scarcity and fluctuating nature of the supply of livestock, produced a serious crisis in the industry in the decade of the 1950s (Finch 2005). Once the Korean War was over, the fall in wool prices and the crisis which this provoked in Uruguayan exports worsened the situation. With so many elements, it is difficult if not impossible to decide how much weight to give to political and technical aspects in the country’s incapacity to solve the pasture problem through so many decades. Certainly the resolution of the problem had to await the invention of ‘direct sowing’ – an innovation in sowing technique developed in the US which did not break up the soil and so minimised the problem of erosion. At the same time it is clear that the political situation did not help. In particular, the relevant producer associations, especially the Federación Rural, and the Batllistas, the most influential political force in the first half of the twentieth century, utterly failed to collaborate. Both theories of technological change and historical examples teach us the importance, may be even the necessity, of synergies between the private and public sectors to reach an original technical solution such as that required by the problem of pastures. Such collaboration did not occur in Uruguay, or only in tiny instances. The most active professional association of the period, the Federación, saw its mission only as defensive opposition to Batllista reformism. The Batllistas, for their part, were more interested in promoting crop production than in finding a solution to central problem of the livestock sector. This stand reinforced the position of the livestock sector. Meanwhile, in the bitter tone and the constant lack of confidence evidenced for example in the writings of Campal, Batllista technician and public servant, at the beginning of the 1950s, we see how the hostility continued up to mid-century (Campal 1969). IV. The urban economy and society 1930-1955: industry, labour and welfare. In this paper we are seeking to understand the historical political economy which shapes today’s political economy of distribution and growth. The previous section has focused on a key element: the role of the primary sector in stagnation. We now turn to the urban sector, and above all the emerging industrial sector. In this section we take first the period of growth, up to the mid-50s. First we give an overview of policy from 14 the 1930s through to the 1950s, as it affected the urban sector in our areas of interest – growth and distribution. We next look at outcomes: the growth of industry to the point where it became the motor of growth for over two decades. We explore the results of wage policy in the growth of wages, and the intangible but crucial side of the spread and entrenching of practices of clientelism. In the following section we document the subsequent slow-down of industrial expansion and analyse the growing chaos leading to the coup of 1973. Stimulus to the urban economy and increased protection for industry and for labour. Uruguay’s early growth of industry pre-1930 was already high for such a tiny economy, stimulated by the early Batllista policies of development of infrastructure, the immigrant demand for manufactures, and revenue tariffs which adjusted relative prices (Finch 1981, p162). By the time of the Depression of the early 1930s, conservative elements had taken over the reins of government with the electoral victory of President Terra in 1931 and his coup of 1933.14 But it is all part of the paradox of Uruguay that even a government soon strongly opposed by Batllista elements, still accepted an ample role for the government, in infrastructure, public works and even an empresarial role.15 The emblematic case of the latter was the creation of ANCAP in 1931, a state enterprise for the commercialization of fuels, and production of alcohol and cement (Jacob 1983). This sense of an underlying consensus, even though formal opposition could be vocal, led a later analyst to describe ‘Terrismo’, as it became known, as ‘Batllismo para tiempos de crisis’ Batllismo for crisis times (Filgueira 1994, p38). ‘Terrista’ policies favoured traditional export interests; however, as elsewhere in Latin America at this time, policies also aided the incipient industrial sector, even if without deliberate intent. The first measures aimed at survival faced with severe crisis in the balance of payments were those common throughout the continent: devaluation, cessation of debt service, control on capital flows and restriction of imports. All this indirectly helped the urban economy. Less orthodox was the raising of taxes, the expansion of public works, and the creation of ANCAP as early as 1931. In 1934 the unemployed were aided with food handouts in order ‘to pass a winter with out hunger’ (Jacob 1983 p105). Public spending on social aspects as a proportion of GDP was kept at the increased level of the 1920s. The most significant measure of Terrismo from our perspective was probably its enlargement of the social security system, incorporating workers in industry and commerce into the pensions system. Social security as a proportion of public social spending rose from some 40% in the 1920s to 60% a decade later (Azar et. al. 2009, Table VI). Real wages fell, however, as a consequence of the combination of the crisis, the measures taken in response, and political realities. Unemployment weakened the ability of the workers to resist wage cuts both in the private and public sectors, while In fact the process of ‘acercamiento’ and incipient search for consensus began as early as 1916, with the defeat of the first Batlle government. Batllismo had to learn to negotiate with conservative elements of the Colorado Party in order to sustain its role and influence in the all-important Consejo Nacional de Administracion (CNA, formed in 1919 through negotiation in the Constituent Assembly and designed to create a double-headed Executive Power, with the Consejo controlling non-traditional areas of the state, above all the economy, and the president retaining control over the ministries of the Interior, Defence and International Relations). 15 Terra had himself been a member of the Batllista group and was elected as such in 1931. 14 15 the new political orientation led to repression of a union movement already weakened by ideological divisions (Jacob 1983, Porrini 2005, pp. 132-135). With the return to democracy with the new constitution of 1942 and the election in 1943 of a Batllista President, Juan Amézaga, and with the recovery in international prices of Uruguay’s leading exports with the war, the new government took further the protection of industry, using differential exchange rates and import quotas, as was the common practice in Latin America in the early post-war period. It also opened a new period of preoccupation with the quality of life of workers – already the subject of a special study in 1939 by a parliamentary commission at the insistence of the communist deputy Eugenio Gómez.16 The vision was that the state was a necessary agent to bring into equilibrium the asymmetry in power between employers and workers. The key symbol and instrument of this vision was the law for the creation of Councils to negotiate wages and salaries and also ‘asignaciones familiares’ or child benefits, a curious conjunction but one reflecting the need to bring together the agendas of social democracy on the one hand and the Catholic Church on the other. The law was approved in the same year with little opposition (Finch 1989, Bertola 2004). The law created tripartite councils for each sector covered,17 with representatives of the state, the employers and the workers. The councils began work in 1944 after elections to choose the worker representatives. The first task was the definition of sectoral minimum wages. The outcomes. We look at outcomes in terms of growth, distribution and the evolution of a particularly important informal institution, that of clientelism. The share of the industrial sector in GDP is shown in table 6. Before 1930 the sector was already unusually significant. An authoritative estimate puts the share for 1913 at 11% of GDP in a market of some 1,7 million people, many of whom were far too poor and distant to participate (Bértola 1991 Table IV.3). But the undoubted motor of the economy was the primary sector (Bértola 2000). Uruguay despite its small size was now to join the larger economies of Latin America in that the industrial sector would take a leading role (Bértola 1991, Bertino et al. 2003). Between 1930 and 1959 the manufacturing sector grew at 4,4% a year, while GDP grew at 2,2%. In more detail, between 1930 and 1943 industry grew at 3,1% while GDP virtually stagnated at 0,1%. Between 1943 and 1954 industry grew at 8,4%, and GDP at 5,7% (Bértola 1991: table iv.4). In the first period growth was a response to the diversion of demand and the policy stimulus with the various measures responding to the crisis which we outlined above. In the second period manufactured foods in particular benefited from the rise in external demand, further assisted by the state with the use of differential exchange rates and exemptions. The strength of Uruguayan democracy was evident in its acceptance of the communist party – illegal in most countries in Latin America in the 1940s. 17 As yet important sectors were not included: the public sector, rural and domestic workers. 16 16 Table 6 Percentage share of value added in manufacturing in the GDP (a) 1935 1940 1945 1950 1955 1960 Argentina 22 24 26 24 25 27 Brazil 14 16 17 20 21 25 Chile 17 17 22 22 23 24 Perú 14 15 14 15 16 17 Uruguay 21(b) 17 18 20 23 24 Venezuela 15 15 12 13 14 Fuente: MOxLAD.(http://moxlad.fcs.edu.uy/index.php), constant prices of 1970 (a) We have not given here the earlier data for Uruguay cited in the text, as we wished to present only strictly comparable figures. (b) Exaggerated by the fall in GDP of this year Turning to wages and distribution, it seems clear that the Councils played a significant role in the marked increase in real wages up to 1955 shown in table 7 (Bértola 2004, Notaro 2011), and that government representatives played an important part in this, especially during the Presidency of Luis Batlle Berres18 (Lanzaro 1986). Social policy in broad terms was also strengthened, with a strong increment in social spending as a proportion of the total, as we see in table 8 (social security rose at the expense of health and education) and food subsidies were increased. Table 9 puts Uruguayan social spending in a comparative perspective, and shows its very high level by the 1950s. Table 7 Real Wages. Five-year average. Index 1930=100 Period Index 1930=100 1920-1924 81 1925-1929 93 1930-1934 105 1935-1939 99 1940-1944 95 1945-1949 107 1950-1954 132 1955-1959 134 1960-1964 138 1965-1969 130 1970-1975 119 Source FCS-UDELAR Banco de Datos de Historia Económica http://www.fcs.edu.uy/categoria.php?CatId=111 Nephew of José Batlle y Ordóñez, and central protagonist of the period known as ‘neo-Batllismo’. The conclusion on the role of government representatives is based on the fierce criticism coming from business of the outcome of the councils’ deliberations, which was systematically an increase in real wages. 18 17 Source: Social Social spending/ spending/ total gross Year public domestic spending product (%) (%) 1910 21,00 2,40 1920 32,60 2,80 1928 46,70 4,50 1938 47,70 7,20 1942 43,80 6,80 1947 45,30 5,80 1955 61,80 10,00 1968 63,60 14,00 Based on Azar et. al. 2009 Cuadro VI Social security/Gross Domestic Product (%) Education/ GDP (%) Health/ GDP (%) 1,00 1,06 1,89 4,54 4,55 3,83 6,50 8,55 1,04 0,91 1,28 1,56 1,32 1,22 1,66 3,08 0,34 0,73 1,28 0,86 0,93 0,75 1,16 1,25 The result was an improvement in income distribution. The Gini coefficient fell from 0.46 in 1930 to 0.38 in 1960 (Table 4 above). The wage councils not only pushed up the wage level, but they reduced differentials between employees, and diminished the gender gap, introducing a maximum permitted gap between the wages of men and women in the same category – measures which it appears were effective (Bértola 2004, 2005; Maubrigades & Camou 2009, Camou 2010).19 Table 9 Public social sector spending as per cent of GDP 1950-1959 Argentina Education and Social Health security 1,9 0,9 Brazil E+ SS H 0,8 2,2 Chile E+ SS H 3,5 9,7 Colombia Uruguay Venezuela E+H SS E+H SS E+H SS 0,9 0,6 3,6 7,3 2,2 0,6 8,4 4,1 1,1 1960-1969 3,1 2,3 1,0 3,1 4,6 11,9 1,7 2,0 5,0 1970-1979 3,7 4,6 2,3 6,4 6,7 7,1 3,6 2,1 4,9 9,2 5,3 1,1 1980-1989 5,6 6,4 3,0 6,9 6,1 8,1 4,8 2,2 4,6 10,5 5,9 1,6 1990-1999 6,6 9,1 5,9 7,8 5,5 7,4 5,5 3,6 5,3 12,2 5,0 2,3 2000-2006 7,1 9,8 6,5 9,9 6,7 6,9 5,2 5,8 6,9 13,0 6,7 2,4 Source: Data base built by Azar, P. y Fleitas, S. (2012) with data from the UN Yearbook, Government Financial Statistics (IMF), World Development indicators (World Bank), local sources. While at least in the short term the growth and distribution outcomes were positive (we come in the next section to the period of renewed stagnation), there was another side to the story which was not healthy: the evolution of the institution of clientelism. What began in the Batllista thinking and desires as the righting of an asymmetry between labour and capital, and recognition of rights of marginalised categories, became all too easily in practice, without proper accountability, a source of ‘booty’ – diverse privileges for sale for political allegiance. At bottom lay a naiveté as to the state which characterised the whole of Latin America at this period (for example it runs through the early thinking of the Cepalistas). Even had the need for 19 The evidence on the gender gap is based only on two large firms, but each was dominant in its sector (Swift in meat-packing and Campomar in textiles). (Maubrigades & Camou 2009, Camou 2010). 18 accountability to control a system of benefits, licences and subsidies been recognised, would the state have had the competences and institutional quality to manage it? It would have required huge leadership and vision, as well as investment in the tools of accountability. Without this, both the expanding industrial sector and the growing social security system became rife with clientelism. The seeds were there in the 1931 creation of ANCAP. The agreement reached between the Batllistas and the independent Blancos specified that for every five functionaries appointed, the Batllistas would name three and the Blancos two. A graphic picture of how the pension system was affected comes from an article written in 1965, which explains how each form requesting, say, an early pension20 had to be passed by some six sections of the ‘Caja’ responsible for the sector, and each time the paper would only navigate to the top of the pile as a ‘favour’. One favour was only sufficient for one hurdle. The functionaries treated their offices as political clubs, and the director of a caja would typically have at least ten secretaries to deal with all this work. The article cites the former director of the Caja de Industrias, Juan Carlos Fures, as having had no less than 44.21 By such means the notion of the state as protector was being extended. In the first epoch of Batllismo the state was seen as ‘the shield of the weak’. Gradually now the state became the protector of all who sought it, but as part of the political game. For example the policy of ‘anticipated pensions’, payable before their due date, put in place in the 1930s to assist the unemployed, now continued in a context of full employment (Filgueira 1994). Every need, from a telephone to a pension, was easier to obtain with the support of an influential politician of the ‘correct’ party. By the 1950s, clientelism had simply become the ‘normal’ method of obtaining benefits from the Batllista system. (Rama 1971, Panizza 1990. Clearly, such a situation benefits those best placed to articulate their demands, and in the ‘correct’ manner. And rapidly, subsidies were being given in accordance with the level of costs – any idea of encouraging improvements in productivity seems to have been completely absent. There were technical people pointing this out, who went unheard.22 It became completely normal for laws and decrees to be passed favouring individual enterprises. Rama documents that between 1925 and 1978, 71 foreign trade regulations were approved to benefit a single textile firm, and 39 to benefit one firm in the rubber 20 For example, someone who had never worked could apply for a pension if he or she could produce an acceptable letter showing that he or she was a person with a profession – eg tailor. Or a woman with children could apply after ten years of work. 21 Marcha no.1260, 25-5-65. Marcha was the principal current affairs journal of the time. 22 Zurbriggen (2006 p. 109-110) contains the testimony of a former functionary who had the task of determining the exchange rate for the various manufacturing export industries: “The Banco de la Republlica had no explicit criterion for defining the exchange to be used by firms exporting national products. The legislation was typically modified to suit particular situations or the national interest. The mechanism for fixing the rate for wool or meat lacked any discrimination, whereas for manufacturers the arrangement was personal…..We would visit the exporting firm and analyse its costs of production … we would add 10% and that was the basis for the exchange rate allocated….one of my first tasks when I joined at the end of the 1940s, was to analyse the costs of three firms producing leather handbags…. The least efficient gained the most, since the margin for all was 10%….the employees saw very well the absurdity of the situation and people often sent memos to management…I sent a memo and got no reply, and that was not the first time that happened.” 19 products sector (2003 p. 96). Many of the regulations were designed explicitly to benefit just one firm.23 The financing of all this was possible because of the buoyancy of international prices for Uruguay’s products. Specifically, the fund created to manage exchange scarcity in the 1930s – the ‘Fondo de Diferencias Cambiarias’ now became awash with money, its resources growing at an annual rate of 34% between 1945 and 1951. The expenditure from the Fund rose in the same period from 6% of all public expenditure to 22%, and was used for a wide range of subsidies and benefits. In the process the state became every day more a prisoner of particular interests – business, unionists, politicians, bureaucrats (Rama 1990, Oddone 2010, Zurbriggen 2006, Panizza 1986). It will be obvious that such a situation was not sustainable, and it is to the unravelling of the whole story that we now turn. V. Crisis at the end of the period. Foreign Exchange Crisis, Stagnation and Inflation As so often in the history of the entire continent, the exhaustion of a particular development ‘line’ happened abruptly via the external sector. Table 10 shows how the terms of trade turned around in the second half of the fifties with the fall in export prices, and continued unfavourable for the next two decades. The immediate crisis led to political change, with the election of 1958 which saw the Partido Colorado lose to the Partido Nacional and a new grouping, the Movimiento Nacional de Acción Ruralista. A major change of policy followed. The key step was the Law of 1959, enacting devaluation, the elimination of multiple exchange rates, and to compensate, rises in import tariffs. The latter was intended to be temporary, since the package was intended as a move towards more market friendly policies. However, there was no response to the new policies. The depth of the supply-side problem has been indicated above. The fall in international prices was now aggravated by these structural issues, with the failure to resolve the crisis in pasture and rising labour costs. The processing of exports also fell; for a time import-substituting industry sustained the rate of growth of the industrial sector but by the sixties the stagnation of incomes and the reduced capacity of the country to use export revenues to subsidize industry, both directly and through protection, led to a recession here too. And a continuation of import substituting industry to the point of international competition would in any case have required technical capacities and scales of production which did not exist. Rama cites the following paragraph from a resolution approved in 1937: “With respect to the papers relating to the application for a new valuation for Saccman ceramics, and taking into account that Sr. Horacio Acosta y Lara, owner of the national firm making the product, has requested an increase in the valuation, and considering that the low price on the basis of which the tariff was fixed affects adversely his interst and puts him at a disadvantage with respect to the foreign competition…..” 23 20 Table 10 .GDP Industry, average Change in .Terms of average annual consumer trade annual growth rate price index (1913=100) growth rate by period (%) (%) (%) 1920-1924 60 2,32 6,00 -0,48 1925-1929 81 3,13 5,97 0,03 1930-1934 66 -2,42 -0,11 -1,34 1935-1939 101 3,32 7,14 2,07 1940-1944 91 -0,15 1,79 3,25 1945-1949 87 4,85 8,01 8,95 1950-1954 105 5,63 9,49 8,57 1955-1959 71 -1,53 -0,12 17,44 1960-1964 84 0,43 1,41 27,17 1965-1969 71 0,18 0,38 73,11 1970-1975 75 1,27 1,35 58,20 Fuente: Banco de Datos de Historia Económcia. Facultad de Ciencias Sociales – UDELAR http://www.fcs.edu.uy/seccNUA.php?tipoSecc=11 The consequence of stagnation was a sharp distributive battle. Exporters were strengthened in their bargaining position by the scarcity of foreign exchange and used strategies such as withholding stocks, or the forbidden practice of exporting cattle on the hoof to Brazil, to press for devaluation. When devaluation came in 1962 it spurred inflation. The unions were still increasing their power, culminating in 1966 with the formation of the Central Nacional de Trabajadores (CNT). The result was that inflation became the prime distributive mechanism, with a high fiscal deficit as part of the circularities, while lack of investment opportunities and unstable relative prices led to capital flight and increased speculative activities. Banks diverted funds to consumer finance, which helped sustain the spiral (Cancela & Melgar 1986; Astori 2001). The lack of employment opportunities served to increase clientelism around public posts – to the point where in 1960 the poet Mario Benedetti described the country in a famous phrase as ‘una gran oficina pública’. “It doesn’t matter that there are also a few waiters, farm workers, port workers, a few timid smugglers. What really counts is the mental framework of Uruguayans, and this is that of the public sector office worker.”24 Even with ample allowance for poetic license, this is graphic. The total number of people dependent on the state for their livelihood rose from 16% of the population in 1955 to 25% in 1969 (Rama 1990, table 5.3). “Si mi intención fuera dar a este capítulo un color satírico, tendría que empezar diciendo que el Uruguay es la única oficina del mundo que ha alcanzado la categoría de república…. El Uruguay es un país de oficinistas. No importa que haya también algunos mozos de café, algunos peones de estancia, algunos changadores del puerto, algunos tímidos contrabandistas. Lo que verdaderamente importa es el estilo mental del Uruguayo, y ese estilo es de oficinistas.” Mario Benedetti, en El País de la Cola de Paja (1960). (“ If my intention were to give a satirical flavour to this chapter, I would have to begin by saying that Uruguay is the only office in the world which has reached the status of a Republic…..Uruguay is a country of bureaucrats. It doesn’t matter that there are also a few waiters, farm workers, port workers, a few timid smugglers. What really counts is the mental framework of Uruguayans, and this is that of the bureaucrat.” 24 21 Seeking a New Solution: contested alternatives and the victory of authoritarianism There was of course some sensitivity to the need for deeper solutions. It was now that the New Zealand solution to the pasture problem was attempted – unfortunately, as we have argued above, a misdirected effort at attacking a structural problem. A more well-founded effort was the creation of CIDE, the Comision de Inversiones y Desarrollo Economico – a public policy initiative, formed in 1960 as a Planning Institute and hugely influential in its search for consensus around a progressive agenda of planning, land reform, tax reform and education reform, all directed at securing funds under the Alliance for Progress (CIDE 1963, 1966, Iglesias 1966, Garcé 2002). CIDE was the peak moment of ‘developmentalism’ in Uruguay, with the creation of a National Plan. But the Plan, while formally accepted by the government, led to little real implementation (Garcé 2002). The common perception was that the plan failed in part because of the growing polarization of the country, which led eventually to the emergence of the guerilla movement, the Tupamaros, and savage repression. Strikes and social disorder were growing, leading to two major events coinciding with the election of 1966. First was a reform of the constitution giving more power to the president, and second the victory of the Partido Colorado, this time with a retired military, Oscar Gestido, who died after one year in office, leading to the assumption of power by Jorge Pacheco Areco and a distinct shift to authoritarianism. This began with the shutting down of various newspapers and journals, and in 1968 to the suspension of basic rights under a state of emergency. Reinforced by this, two weeks later a drastic freeze of wages and prices was announced (Cancela and Melgar 1986, 40-41), opening a period of serious social polarization and political violence, as guerrilla activity increased and the use of torture became a regular occurrence. Meanwhile, between one extreme and the other, the traditional parties of the left negotiated alliances with elements of both the two main parties, initiatives which would in 1971 result in the formation of the Frente Amplio. However, in that same year, and following a massive escape of Tupamaros from gaol, Pacheco ordered the Armed Forces to confront the guerrillas. This it did, with notable and terrible success, but the continuing unrest led to the Coup of 1973 and the dissolution of parliament. Much has been written on the period covered in these two sections. As will be clear from our own analysis, we have found particularly fruitful the stress by both Martin Rama and Gabriel Oddone on the quality of institutions and the way the state was coopted by particular interests. However, placing the analysis in its long-run context leads us to balance such a neo-institutionalist analysis with an emphasis on the underlying structural problems originating in Uruguay’s severe dependence on the international market, the obstacles constraining both supply responses within the sector and diversification, and the political economy emerging from the export structure and demographic and social features, as well as specific historical events, a political economy which led to an export sector with very limited penetration into policy-making. What we also perceive is another negative point – what did not happen, which was the kind of prioritization of capabilities and technological development which could have opened up possibilities outside the rural sector. This was unlikely in the wider Latin 22 American context of the time – but Uruguay actually reduced its spending on R and D in this period, and its numbers of graduates. Government spending on R and D as a percentage of total public spending was 0.2% at the end of the 1950s, lower than in the 1920s. The number of university graduates in engineering was 6% of the total number of graduates in the 1950s and around 8% in the 1920s (Hernandez and Rey 2009 tables 16 and 17). VI. Summary and conclusion on the challenges of this political economy We have told two intertwining stories of the ‘shaping’ of the political economy of growth and redistribution in Uruguay before 1970. The first concerns the society’s ‘propensity for redistribution’. This had its structural roots in the colony and the underlying characteristics of geography and demography. Although the history of the country was hugely influenced by the political and social vision and leadership of one man – José Batlle y Ordoñez - the strength of impact of his mission and drive was made possible by structural characteristics, by the demographics of a small highly urban population and the impact of this on the cohesion of the labour force. Urban wage earners constituted a very high proportion of the population, an overlapping of interest which persisted even once some growth of informality and underemployment began. The urban political and technical elite lacked a base in land holding, while the important livestock sector shared a growing sense of alienation from government, adopting a defensive role rather than seeking constructive change. Space was thus created for Batlle to lead a party – the Colorados – without heavy political ties to the economic elite. And Uruguay’s immigrants, though not the most educated of their home countries, were typically more skilled and better educated than the local population, so lifting education levels. These factors together provided a political base quite unlike that of Argentina, where despite some similarities to Uruguay (relatively high income, education, levels of urbanisation and immigration, early power of unions) fragmented elites in conflict over relative prices asserted their political leverage and led to divisiveness. Once Perón assumed power, the divisiveness was taken to a high level. The second concerns the export economy and the kind of interests it generated. The interface with the evolving state and policy making was, in most LA countries, crucial for the political economy of policy making. The countries most effective in industrialising at an early date and moderating the typical perversities of importsubstituting industrialisation – Brazil, Chile, Colombia – had export elites that played contrasting but largely positive roles in constructing a political economy to support diversification and the move to a new and more complex model of growth. In Brazil and Colombia the coffee sector was domestically owned, and coffee merchants sought domestic opportunities for the investment of surplus: this gave them from an early date an interest in industrialisation and in controlling and moderating the policy biases in protectionist policy via the exchange rate and tariffs and resulting inefficient industrial production. In Chile, the very exclusion of business elites from the principal sector, copper, gave them an interest in diversification and the rationalisation of protectionist policies which was able to build on relatively efficient institutions dating from the nineteenth century. None of that happened in Uruguay, where the export elite made little effort to penetrate the policy making process, for reasons we have explored above. Meanwhile tiny size made the contradictions of excessive protection ‘bite’ all the harder. 23 Thus once the external market produced crisis in the export sector by the mid-1950s, the options were very constrained and the policy competences were limited. The propensity for equity however had allowed collective bargaining and strength to unions. But redistribution without adequate re-shaping of underlying structures proved unsustainable. The economic and political chaos led to a change of government but no effective new direction, and in 1973 to a military coup and a sharp swing to neo-liberal policies. With the coup, the Batllista project of a ‘model country’ came to a tragic end – the result of the failure of the country and its elite to transform the structural characteristics which made Uruguay extremely vulnerable to changes in international conditions over which the country had no control. When conditions had been favourable, the country proved incapable of taking advantage. The problem was institutional weaknesses making the state a prisoner of particularistic interests both corporate and political. Moreover the leadership lacked the information, technical capacities and rigour necessary for the creation of ‘high quality’ public policies. These lacks were due at least in part to the characteristics of a distributive model which favoured benefits and the whole system of lavish ‘early pensions’ – often unjustified – over education and complex investment in technological capacity. It was a distributive model that favoured today without recognition of the fact that tomorrow does indeed come. It is critical to get right the attribution of credit and blame in the period where redistribution is boldly attempted and the effort collapses in inflation, stagnation and social disorder and terrible repression. Today a bold progressive government is reviving the redistributive agenda and it is crucial to learn the lessons from this previous attempt. We conclude with a strong statement: the ship came to shipwreck for many interacting reasons. Fundamental to the disaster was the structural vulnerability to international prices, unresolved over many decades, where supply side obstacles prevented both expansion of the traditional exports and diversification into other options. Then, the problem was not redistribution per se, but redistributive policies practised in a context of institutional weakness, lack of transparency and monitoring, and at a time when clientelism was rife, generally in Latin America. Unthinkable at the time were the policies which might have rescued the model and allowed space for redistribution with growth: investments in technology and capabilities, and in an energetic search for ‘niche’ markets. Instead the country saw the crazy policies to ‘help’ industry which have been documented, policies which were not part of redistribution, but meant that the industrial sector could only aggravate stagnation, once the scope for subsidy came to an end, so deepening the distributive conflict, ‘resolved’ by inflation and leading to understandable social disorder. In all this the absence of export elites with an interest in and capacity for overseeing and constructively reshaping policies was notable – another ‘structural’ element that contrasted with experiences such as Brazil or Colombia. 24 APPENDIX Principal political periods, 1903-1973 1903-1916 1916-1933 1933-1942 1942-1958 1958-1967 End of the phase of civil wars. Batllismo, led by its founder (José Batlle y Ordóñez), is the dominant political actor and launches a reform project with the object of constructing a ‘model country’. The viability of the project is threatened by the effects of the 1914-18 war, and Batllismo launches an offensive seeking new forms of financing. In 1916 the party is defeated in an election for the Constituent Assembly. Following this there is a halt in the reforms, but they are not dismantled. Birth of political democracy with the Constitution of 1919. Batllismo finds that it has to negotiate with more conservative sectors of its own party (the ‘Colorados’) in order to prevent the victory of its traditional opponent: the Partido Nacional or ‘Blancos’. No major reforms are carried through (except the efforts of the ‘second Batllismo’ 19311932); however, social spending rose. The Terrista period: President Terra, chosen by the Batllistas, leads a coup against them in 1933, backed by conservative sectors of his party (the Colorados) and the Partido Nacional. A new constitution is adopted (1934) with corporatist influences coming from Italian fascism. The system of social security is expanded to include workers in industry and trade. Terra is succeeded in 1938 by his brother-in-law Baldomir, who in 1942 effects a further coup in order to reform the terrista constitution of 1934, opening the way to a restoration of democracy. NeoBatllista period. Luis Batlle is its principal figure. During these years the economic and social role of the state grows in a marked way. A deliberate policy of industrialisation is followed and the ‘Consejos de Salarios’ are created in 1943. During the presidency of Batlle Beres (1947-1951) real wages grow and inequality falls. In 1952 a new constitution is adopted, creating a ‘Colegial Executive’, the original project of José Batlle y Ordóñez, defeated in 1916. Disenchantment with the final years of the neoBatllista government – marked by stagflation – lead to the Partido Nacional gaining office in 1958 (in alliance with a new political force, ‘ruralismo’) the first time in almost 100 years. Two periods of government by the Blancos now follow, with different orientations in terms of the economy. The first is liberal (1958-1962), the second ‘desarrollista’ (1962-1966). Neither succeeds in controlling inflation or recovering growth. Stagflation plus the international context feed distributive conflicts. The formation of the ‘Central única del trabajadores’ (CNT) en 1966 strengthens the unions. Armed movements of the extreme left start to appear, as yet not in significant strength (the Tupamaros). 25 1967-1973 Constitutional change. The colegial form of the Executive is abolished and Presidentialism adopted. Social polarization grows. The president dies in 1967 and the Vice-President, Jorge Pacheco Areco, assumes office. Within a short space of time he closes down the left-wing press. Six months into his office, he names a cabinet of entrepreneurs and in June 1968 he takes emergency powers and shortly after, freezes prices and wages. The wage councils no longer meet. 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