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Uruguay Stagnation
The precarious nature of Uruguay's primary-product
export
economy, so successful during the early decades of the
1900s, was
gradually made clear for two distinct reasons. First, the
sharp
contraction of world demand for Uruguay's exports during
the
Great Depression showed the hazards of being at the mercy
of
external markets and foreign prices. Uruguay's export
earnings
fell by 40 percent between 1930 and 1932 as world demand
contracted and importing nations adopted protectionist
measures.
Such a drastic decrease in earnings was only temporary,
however.
During World War II, prices recovered, making the export
model
appear viable again, if vulnerable. Still later, Uruguayan
exporters were occasionally able to gain handsomely from
world
price increases. The most dramatic example of this
phenomenon
occurred during the Korean War (1950-53). Wool prices
tripled
temporarily as demand for cold-weather uniforms surged.
The volatility of export prices, which was itself
troubling,
also delayed recognition of the second, underlying
limitation on
Uruguay's export-based economy: the limited supply of
livestock
products. Production of beef stagnated by the mid-1930s,
wool by
the mid-1950s. With only minor modifications, ranchers
continued
to rely on the extensive production techniques used since
the
colonial period. Livestock production was therefore
limited by
the carrying capacity of the land. For many years,
successful
livestock producers had been able to expand their
operations by
simply purchasing or renting additional land, but after
the
tremendous expansion of both cattle ranching and sheep
ranching
during the early decades of the 1900s, this option was no
longer
available. Producers rejected the obvious alternative of
increasing production levels by using more intensive
techniques,
such as fertilized pastures. According to a study
published by
the Economic Institute (Instituto de Economía) at the
University
of the Republic (also known as the University of
Montevideo) in
1969, ranchers chose not to invest their profits in
improved
pastures because many more lucrative investments were
available.
Preferred investments included manufacturing (after World
War
II), urban real estate (during the 1950s), and overseas
opportunities (leading to substantial capital flight
during the
1960s).
The stagnation of livestock production undercut the
export
model that had brought Uruguay its prosperity. At first
the
nation was able to avoid complete economic paralysis by
turning
from livestock production to industrial development, from
the
dormant countryside to the dynamic city of Montevideo.
Like most
other Latin American nations, Uruguay responded to the
Great
Depression by implementing a policy intended to encourage
diversification away from primary products, reduce
imports, and
increase employment.
The so-called
import-substitution industrialization (see Glossary)
strategy raised tariff barriers to discourage
imports and protect new manufacturing enterprises. In addition to
increased protectionism, several other conditions in
Uruguay
favored the industrialization that accelerated beginning
in the
mid-1930s. Labor was plentiful in Montevideo; 100,000
immigrants
had arrived from Europe during the 1920s. Equitable income
distribution also meant that there was a sizable
middle-class
market for manufactured products. Finally, wealthy
livestock
producers were ready to invest in new enterprises.
Industry developed rapidly under these conditions. The
number
of firms, most of them employing ten or fewer workers,
tripled
from 7,000 in 1930 to 21,000 in 1955. Apart from the
growth of
traditional types of enterprises (food, beverages,
textiles, and
leather), there was also substantial progress in heavier
industries (chemicals, oil refining, metallurgy,
machinery, and
electrical equipment). Workers earned good wages, and
production
increased more rapidly than employment, meaning that labor
productivity was on the rise. During the 1940s, industrial
output
overtook livestock raising as a share of GDP.
But the industrial boom was short-lived. One sign of
trouble
was the fact that 90 percent of manufactured goods were
consumed
within Uruguay. Because domestic industries had grown up
behind
high tariff barriers, they were not competitive on world
markets.
This common shortcoming of the import-substitution
industrialization strategy was particularly serious, given
Uruguay's small internal market. Although income
distribution was
equitable, the potential for home-industry expansion was
limited
because consumption was limited. Most industries reached
their
full potential just two decades after the beginning of the
industrialization process. During the mid-1950s, imports
of
machinery and industrial equipment that were essential for
the
further development of heavy industry leveled off and then
declined. Industrial growth ceased. With the stagnation of
both
industrial production and livestock production in the
mid-1950s,
Uruguay's economy entered what would be a twenty-year
crisis.
Real per capita income, which had grown rapidly during the
early
1900s, increased at an average of only 0.5 percent per
year from
the mid-1950s to the mid-1970s. The period was
characterized by
declining exports, a negative balance of payments,
decreasing
reserves, and growing inflation.
The prolonged nature of the crisis, i.e., the
two-decade lack
of fundamental economic restructuring, had much do to with
the
government policies that were set in motion during the
Batllist
period. As two of the three pillars of Uruguay's economy
(livestock and industry) crumbled, the third (the public
sector)
bore an increasing burden. State enterprises expanded
until, by
the 1960s, they generated 30 percent of GDP and paid 40
percent
of all salaries. Once-dynamic state enterprises became
expensive
public works projects. Elaborate formulas were devised to
allow
Uruguay's two principal political parties--the Colorado
Party and
the National Party (Partido Nacional, usually referred to
as the
Blancos)--to dispense public-sector jobs in proportion to
votes
received. Economically, a change of the ruling party meant
very
little. Both parties were allied in upholding the social
welfare
model, which amounted to keeping the state enterprises and
the
bureaucracy afloat. To do so, they incurred a large
foreign debt
and penalized the livestock sector through domestic price
controls. The economy turned inward through continued
protectionism and artificially high exchange rates. As a
result,
the once-vital export sector could not develop the
momentum
required to pull the economy out of the doldrums.
The protracted economic crisis became a political
crisis in
the late 1960s. Within Uruguay the welfare state
government could
provide no answers to the twin challenges of urban
terrorism and
growing inflation. Outside Uruguay military regimes in
both of
its larger neighbors (Argentina and Brazil) cast long
shadows,
and international economic conditions made the insulation
of
Uruguay's economy more difficult. As the military regime
took
power in 1973, two international economic factors were
particularly relevant: the quadrupling of oil prices
(Uruguay
imported all of its petroleum) and the closure of European
Community markets to imported beef. These factors helped
convince
the military government that a major restructuring of the
economy
was needed.
Data as of December 1990
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