Uruguay - Economy
Uruguay's economy was based on the production and processing of agricultural commodities until the services sector, especially tourism and financial services, took over. In 2001 the services sector accounted for over 65% of GDP and employed about 70% of the labor force. Agriculture, however, is still important, particularly livestock production, which produces products for export and consumption as well as for inputs for other sectors of the economy. Agriculture accounts for 6% of GDP but employs 14% of the labor force. Industry (agro-industry, chemicals, and consumer goods for local consumption) has declined in recent years as the service sector has expanded, particularly in terms of employment. Industry employs 16% of the work force, but accounts for 29% of GDP. There is a mixture of private and state enterprises with the economy generally open to foreign trade and investment.
Owing partly to the need for industrial products generated by World War II and the Korean War and also to government efforts to attain a fair degree of economic self-sufficiency and to improve foreign trade, the value of Uruguay's industrial output doubled between 1936 and 1960. Between 1960 and 1970, the industrial growth rate leveled off, as the limitations of an import-substitution strategy became apparent. Encouragement of nontraditional manufactured exports led to industrial production increases averaging 6% annually during 1973–79. The lack of natural resources obliges Uruguay to import most raw materials needed by its industries.
In the early 1980s, in the wake of the second oil shock, the economic situation was characterized by an uninterrupted fall in real output, low levels of investment, high unemployment, mounting inflation, a severe imbalance in public finance, and a massive accumulation of arrears in private-sector debt to the domestic banking system, which in turn caused a potentially critical situation in the country's financial institutions. In mid-1985, the government negotiated agreements with the IMF and creditor banks that produced a standby credit from the Fund, a renegotiation of debt with foreign banks, and an economic-financial program with the IMF intended to reduce the public-sector deficit, inflation, and the money supply and to remedy the balance-of-payments disequilibrium.
Since 1990, the government has pursued a program of economic liberalization, which has included lowering tariffs, Southern Common Market (Mercosur) integration, reducing deficit spending, controlling inflation, and downsizing government. Growth in GDP averaged 3.7% between 1988 and 1998, with an average 4.75% (1997–98). However, from 1999 to 2003 the economy experienced an uninterrupted series of contractions worse than the early 1980s. Real GDP contracted 3.2% mainly due to the Brazilian currency devaluation of January 1999, which hurt both Urugauay's exports and its tourist receipts. The government entered into a precautionary standby arrangement with the IMF, but in 2000, the recession eased to 1% of GDP as the government pursued neo-liberal reforms supported by one-year standby agreements with the IMF. In 2001, however, a local out break of hoof-and-mouth disease, which hurt meat exports, and the Argentine financial crisis combined with the global economic slowdown and the aftereffects of the terrorist attacks on 11 September 2001 to produce a contraction of 2.5%. In 2002, the real decline in GDP reached 10.8%. Attempts were made to prevent the spread of the Argentinian melt-down to Uruguay through extended and enhanced standby agreements. These set a target of 1.7% contraction for 2002, one-tenth of what actually took place. In August 2002, the US government announced it was providing $1.5 billion in short-term loans to Uruguay. Contraction was expected to continue in 2003, projected at about 2%.
Uruguay's inflation rate fell from 15.2% in 1997 to 8.6% 1998 and then to a low of 4.2% in 1999. The inflation rate increased to 5.1% in 2000, but then fell back to 4.7% in 2001. In 2002, however, inflation soared to an estimated 40%, four times the target set by the IMF. By 2001, unemployment had reached 16%, up from 10.3% in 1997.