The Multinational Monitor



Uruguay's Economic Malaise

by William Steif

Montevideo, Uruguay--This Oklahoma-sized nation, squeezed between giant Brazil and Argentina, likes to refer to itself as "the Switzerland of South America."

Its three million people are largely literate; only 6 percent cannot read or write. Uruguay has an elaborate and progressive social welfare and pension system stemming from enlightened democratic regimes early in the 20th century. Its infant mortality rate in the first year after birth is extremely low by Third World standards: 27 per 1,000 live births. Uruguay's climate is temperate, resembling South Carolina's, and it is a pretty country, with rolling grassy plains, low hills and fine stretches of sandy beach that form the Atlantic Ocean into the estuary of the River Plate.

By Latin American standards, Uruguay has been quite democratic and prosperous since it became independent in 1825. Last year's per capita income was about $2,500.

Traditional Uruguayan exports have been wool and grass-fed beef. Specialized manufactures, such as garments, textiles and glazed roofing tiles, have recently done well in world markets.

Tourism from neighboring states has been another traditional earner of foreign exchange. The Argentines pour into Montevideo, Uruguay's only large city, and often proceed another 60 miles along the coast to Punta del Este, a Miami Beach-like resort.

Last winter, which was summer in South America, Punta del Este was packed with visiting Argentines, mostly portenos--residents of the port city of Buenos Aires--on vacation. There was not a room to be had, until February 7.

That was the date the Argentine Government devalued the austral, the Argentine currency, by almost 50 percent. Within days hotel occupancy at Punta del Este had fallen below 70 percent and Punta del Este hoteliers were offering steep discounts to try to hold their clientele.

The dependence of Uruguay on its neighbors, and especially on Argentina, is one of the major problems Uruguayan President Julio Maria Sanguinetti, 58, has been wrestling with since taking office on March 1, 1985.

He's had some success, according to one Western diplomat stationed here. "Argentina used to be Uruguay's second biggest export market, behind Brazil. Now it's fifth, behind Brazil first, the United States second, the People's Republic of China third and West Germany fourth."

The Chinese found Uruguay a good place to buy wool. The Germans bought meat. In all, Uruguayan exports in 1988 amounted to more than $1.3 billion, up 13 percent from the previous year.

Sanguinetti the diplomat says, saw the need "for a reorientation to the wider world market," even though Brazil remains the country's first source of imports with Argentina second.

Getting into the wider world market, however, has had some adverse effects. Opening the economy has hurt the country's production for domestic consumption. Uruguayan consumer products--toothpaste, soap, cooking oil--face brutal competition. "Uruguay's heavily protected industrial products are not competitive internationally," the diplomat says. For example, General Motors and Ford "used to assemble cars here to get inside tariff barriers. No longer. In fact, American investment has been pulling out" as tariffs have been lowered.

After gaining strength in Sanguinetti's first years in office, the Uruguayan economy currently faces serious problems. Inflation of the Uruguayan peso was about 70 percent last year. The country's 1988 gross national product, sum of the value of all goods and services produced, was almost identical to 1987's, $7.5 billion.

After taking a terrible beating in the early 1980s during the worldwide recession, the Uruguayan economy grew between 5 and 7 percent annually in 1985-87. But the economy stalled in 1988, showing virtually no growth, because idle productive capacity had been picked up in the preceding years and there was no new productive capacity as a result of slumping investment.

"Real wages are down," says a Uruguayan economist, "and the government deficit is increasing."

Unemployment remains steady, at approximately 9 percent of the labor force of 1.3 million. The swollen government payroll, which employs 260,000 people, prevents the unemployment rate from rising, but also drains money from infrastructure investment.

Sanguinetti, a lawyer who cannot succeed himself in the presidency, has promised to "privatize" the significant portion of Uruguay's economy in government hands--banking, insurance, aviation, oil refining, railroads and power plants. But so far there has been little change or reform in the parastatal corporations, with the government budget close to $1.4 billion and the deficit running over $100 million.

Sanguinetti chose not to tackle this issue in the run-up to the mid-November presidential election. Sanguinetti's avoidance of controversial topics in the election year, a universal political trait, failed to secure his successor's victory in the November 26 election.

In the long run, neither Sanguinetti nor any other Uruguayan President not committed to major reforms can do much about the country's two biggest problems, one economic, the other social.

The economic problem is a foreign debt which now amounts to $6.7 billion. Rescheduling of this debt has been negotiated with the World Bank, Inter-American Development Bank (IADB) and commercial lenders. For example, $1.8 billion was rescheduled with foreign banks in 1988 for repayment over a 20-year period (38 percent of the total was owed U.S. banks). Some institutions, such as the World Bank and IADB, are still sending new loans to the country to upgrade a deteriorating infrastructure.

But debt service is continuing to rise. It amounted to almost $400 million in 1987, 35 percent higher than in 1986.

The oddity here is that Uruguay, if it wished, could "buy back 25 percent of its debt," according to the Western diplomat. The country's gold reserves amount to about $1.5 billion, a significant supply that bolsters international confidence in Uruguay's financial system.

Because of the gold reserves and Uruguay's relatively stable currency, Uruguayan banks continue to attract foreign currency, mostly from Argentina. These currencies, whether dollars, yen, Swiss francs or pounds, are deposited in Uruguayan banks. And, Argentina's precipitous economic plummet has resulted in a depositing frenzy in Uruguay's banks.

The social problem really is "a legacy from the early part of the century," says the Uruguayan economist. "The government's main burden is the liberal pension system. So we have lots of older people here. This is called a 'mature' population, but it's really a population that doesn't work."

Uruguay's economic malaise has resulted in an exodus of the younger generation, which views the country as holding no economic opportunity. Some estimate that a half-million younger, working-age people have migrated in recent years. As a result, the population growth rate from 1979-1988 was 0.5 percent, or less than the replacement rate.

The disenchantment is obvious in the countries younger residents. In a jewelry shop two blocks off Montevideo's downtown Plaza de Victoria, a 28 year-old saleswoman complains to the shop's only customer. "I was trained as a nurse and I can't get a job in nursing, only this," she says. "I'm going to leave, and soon." A salesman who had been standing nearby joins her chorus saying, "Look at this place. It's dead." His statement was confirmed by the lack of activity in the plaza.

The salesman says he was trained as an accountant, "and now I have to try to sell an amethyst to the occasional tourist. I must leave the country, too. It's a backwater."

Living in an economically troubled country, the descendants of the Spaniards, Italians and Germans who settled here are finding South America's Switzerland more stagnant than tranquil.

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