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Uruguay Restructuring under the Military Regime, 1973-85
The military government was at first able to redirect
and
revitalize the economy. During the first phase of
stabilization
and structural adjustment, from 1973 to 1978, government
policies
had two central goals: to reestablish an export-oriented
growth
policy and to eliminate inflation. In pursuit of the
latter, the
government tightened the money supply, sharply cut the
public
budget, and held real wages down. The effort was partially
successful. Inflation declined from over 100 percent per
year
during the 1960s to about 50 percent per year in the
1973-78
period. To reorient the productive sectors of the economy,
the
government eliminated most price controls, lowered tariff
barriers from a maximum of 346 percent in 1974 to 180
percent in
1977, and subsidized exports. Foreign-exchange and
financial
markets were also made more liberal, increasing Uruguay's
integration with world markets. The immediate results were
dramatic: from 1974 to 1978, GDP increased by an average
of 3.9
percent per year, after two decades of stagnation. Real
exports
grew by 14 percent annually during the same period, and
productive investment increased by 16 percent per year.
Dissatisfied with some aspects of the economy's
performance,
however, the government again adopted several measures
between
1978 and 1982. These included passing a foreign investment
act
(designed to attract foreign investment), reducing
government
spending, and selling off a few state enterprises.
Inflation, which had dropped below 40 percent in 1976
but had
since increased again, remained the primary target of the
new
stabilization policies. Authorities believed that two
factors
were fueling inflation: the influx of external funds
(allowed
under liberalized financial regulations) and the
continuing price
increases by local firms, still protected from foreign
competition because tariffs had only been reduced
partially. The
government, then, saw continued inflation as a problem
caused by
incomplete economic liberalization and moved to accelerate
reforms. Banks were largely deregulated as reserve
requirements
were eliminated and foreign currency deposits allowed.
Import
tariffs for most products were reduced, allowing increased
foreign competition. Export subsidies were reduced or
eliminated.
In addition, the government began announcing moderate
exchangerate devaluations several months in advance in an attempt
to slow
inflation and discourage currency speculation.
These measures reduced inflation somewhat, but instead
of
stabilizing the economy, they disrupted the gradual
process of
economic recovery that had been under way for several
years.
Uruguayan firms, many of which had reoriented production
toward
exports after 1974, faced rising internal costs when
subsidies
were removed. At the same time, they became less
competitive
abroad because devaluations did not keep pace with
inflation.
Banks responded to deregulation by making risky loans,
many of
which became nonperforming as the expansion slowed. The
public
deficit increased, especially when the government stepped
in to
rescue several major banks. External debt increased when
the
government was forced to borrow abroad. A second oil shock
in
1979 (the first was in 1973-74) and an Argentine
devaluation in
1981 both hurt Uruguay's trade balance. As the
restructuring
process broke down, capital flight became rampant.
The military government's attempt to regain economic
stability during its last two years in office resulted in
a
severe recession. After increasing over several years to a
high
of 6.2 percent in 1979, GDP growth slowed to 1.9 percent
in 1981
and plunged to -9.4 percent in 1982. Real GDP declined by
onesixth from 1982 to 1984. Unemployment increased to 13
percent,
further increasing the burden on the nation's welfare
system.
During its last three years in office, the government's
most
significant accomplishment was far more modest than its
earlier
reforms: it reduced the public deficit from 18.4 percent
of GDP
in 1982 to 9.2 percent at the end of 1984.
As the military government prepared to leave power
after a
turbulent twelve years, five major issues confronted
economic
planners. First, the government had succeeded in
reorienting
production toward exports, but by the mid-1980s
traditional
export markets were growing less hospitable. For example,
world
beef prices had fallen, partly because of subsidized
competition
from the European Community. Second, the public sector,
which
played a large role in Uruguay's economy, faced a growing
internal and external debt burden. This reduced savings
available
to finance private investment and made it difficult for
the
government to meet its social security obligations. Third,
many
firms and banks were financially weak, the former because
of
debts incurred before the recession and the latter because
of
nonperforming loans. Fourth, unemployment remained high.
Finally,
inflation, a primary target of the attempted reforms, had
increased from 50 percent in 1983 to 72 percent in 1985.
The
first and second issues were concerned with enduring
themes: the
importance of livestock exports and the government's role
in the
economy. The third, fourth, and fifth issues were products
of the
reforms that had brought Uruguay out of stagnation without
completely restructuring the economy.
Data as of December 1990
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