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Uruguay Background of Industrial Development
In the early twentieth century, Montevideo was home to
many
small artisanal workshops. These cottage industries were
already
protected by tariff rates of about 30 percent on most
products.
Rapid industrial growth did not occur until the 1930s,
when the
economic crisis caused by the Great Depression forced
Uruguay,
like other nations, to become more self-sufficient.
Industry
accounted for only 12 percent of GDP in 1930 but increased
to 22
percent by 1955. The most dynamic growth occurred after
World War
II. During the presidency of "industrial populist" Luis
Batlle
Berres (1947-51), the government encouraged the
development of
industry through several policies: multiple exchange rates
were
introduced to allow manufacturers to import essential
machinery
at subsidized rates; import tariffs on competing goods
were
raised to prohibitive levels; and urban wage increases
stimulated
domestic demand
(see Neo-Batllism, 1947-51
, ch. 1).
Industrial
output doubled during the decade following World War II.
The
timing of the expansion was favorable. For part of the
period,
wool exporters earned record profits because cold-weather
uniforms were needed for the Korean War. A share of those
profits
financed the industrial sector's imports of capital
equipment.
The industrial boom was short-lived, however.
Manufacturing
output increased by only 14 percent between the mid-1950s
and
1970. For the industries geared to the internal market,
the main
problem was the small size of that market. The
food-processing
and textile companies, however, produced goods for export
as well
as for internal consumption. For these enterprises, the
stagnation of the agricultural sector was a serious blow.
As
M.H.J. Finch argues in his landmark study, A Political
Economy
of Uruguay since 1870, the lagging supply of
agricultural
inputs limited manufacturing output. The process of
economic
decline was circular: the decrease in exports meant lower
domestic income and hence lower domestic demand for other
manufactured products. Additional factors also contributed
to the
slowdown, such as the bias against exports, which was the
result
of an overvalued currency. In sum, import-substitution
industrialization allowed manufacturing to increase, but
only to
a limited extent. More important, the policy insulated the
economy and eroded much of Uruguay's capacity to export.
The military government that assumed power in 1973
attempted
to revitalize the economy by reemphasizing exports. The
government dismantled part of the protectionist structure
surrounding industry, lowered trade taxes, and created
incentives
for nontraditional exports. The results were at first
dramatic.
Industry grew at a rate of about 6 percent per year from
1974 to
1980. The most dynamic manufacturing growth involved
relatively
sophisticated goods: electrical appliances, transport
equipment,
textiles, paper, and nonmetallic minerals. Manufacturers
invested
in new technology, and labor productivity increased
rapidly.
Argentina and Brazil became important export markets for
manufactures, proving that Uruguayan industry could
compete
outside of its own borders.
The expansion came to an abrupt halt in 1981, largely
because
of factors beyond industry's control. Macroeconomic
instability--
in part related to developments in the export markets of
Argentina and Brazil--pitched the entire Uruguayan economy
into
recession. The reversal was particularly painful in the
industrial sector because manufacturers had borrowed
heavily for
investments and were overindebted as the recession began.
Financial costs actually exceeded labor costs for many
manufacturing firms. Thus, lower real wages brought on by
the
recession were not enough to restore the firms'
competitiveness.
In 1983-84 the central government stepped in and took over
part
of the industrial sector's debt. This probably prevented
widespread bankruptcies but also increased the public
sector's
financial burden. The lingering indebtedness of private
firms was
a major issue for the Sanguinetti government.
Data as of December 1990
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