Uruguay - Overview of economy



Uruguay has a strong domestic economy which provides a high standard of living and moderately high GDP per capita of US$8,500. The country is small, with limited markets, and geographical and historical factors have made Uruguay dependent on trade with its larger neighbors, Argentina and Brazil. These trade linkages were formalized in 1991 through the creation of the MERCOSUR free-trade area that links Uruguay, Argentina, Brazil, and Paraguay (Chile and Bolivia are associate members). Montevideo is the administrative capital of MERCOSUR.

While MERCOSUR has lowered tariffs and increased trade, it has also furthered the dependence of Uruguay on its trade partners. Almost half of the nation's imports and exports are with other members of the group. Hence, when Argentina and Brazil underwent economic downturns in 1998 (including the devaluation of the Brazilian currency), the impact was significant in Uruguay. In 1999, after 8 years of positive growth, the Uruguayan economy declined by 3.4 percent. In 2000, the economy continued its stagnation with a decline in GDP of 0.5 percent. This decline is significant because it marked the end of the longest, sustained period of economic growth since the 1970s. In 1999, exports declined by 20 percent and imports dropped by 12 percent. The economic slowdown led to an increase in unemployment, from 10.1 percent in 1998 to 11.2 percent in 1999. In August of 2000, it reached its highest level in 15 years, a peak of 12.4 percent.

During the 1970s, the nation underwent a period of dramatic economic reform. In response to a deep recession and declining economic performance, the government began to restructure the economy by reducing inflation and decreasing government's role in business. However, after the peso declined in value against the U.S. dollar by 140 percent, the nation's GDP fell by 16 percent. This led to another recession in 1982-83. Although there was positive economic growth for the rest of the 1980s, inflation continued to be a problem. By lifting price controls and privatizing government-controlled companies, Uruguay was eventually able to reduce inflation from 130 percent in 1990 to 44.1 percent in 1995 and to 4 percent in 1999.

By 1995, the government had privatized numerous companies and sectors, including the national airline, the national gas company, all seaport services, the insurance industry, and home-mortgage services. At the same time, the size of the civil service was drastically reduced, as was government spending. Even so, the government still plays a major role in the economy and continues to operate the nation's telecommunications services, electric-power industry, and railway freight services.

Uruguay has a prosperous and developed economy that includes agriculture, industry, and a diversified service sector. While agriculture accounts for only 7 percent of the country's GDP, it continues to dominate the economy in several ways. Agriculture is responsible for more than half of exports, and many of the country's industries and services are related to or dependent on the agricultural sector. The main industries include meat processing, leather production (including footwear, accessories, and apparel), and textiles. Services are a growing part of the nation's economy, but efforts to improve the financial-services sector have yet to succeed since foreign investment remains low.

In an effort to attract more foreign companies and investment, successive governments have established a number of free-trade zones in the country. In these areas, foreign firms are offered tax incentives and reduced tariffs in exchange for locating new factories and businesses there and employing a workforce that is at least 75 percent Uruguayan. The nation benefits from foreign direct investments totaling US$5.4 billion. The United States is the single largest investor, contributing 32 percent (US$1.72 billion) of the total.

Despite recent economic problems, the Uruguayan economy is recognized as one of the most solid in Latin America. Uruguay is the only nation in MERCOSUR and one of only two countries in all of Latin America to have investment-grade status. This means that major international financial registries, such as Standard & Poor's or Moody's, recommend the country's government bonds to financiers. Following a slight decline in 2000, GDP growth is expected to resume in 2001.

Uruguay's economic stability is based in part on the high usage of the U.S. dollar in financial transactions. More than 90 percent of private savings in Uruguay is dollar-denominated, as is more than 81 percent of credit granted to the private sector . Many consumers use dollars for their purchases of expensive products.

Beginning in 1988, successive governments worked to lower the nation's debt as a percentage of GDP. The economic downturn in 1998 reversed this trend, and the debt-to-GDP ratio increased by 5 percent to 15 percent of GDP, or US$3.1 billion for the year. About 90 percent of the total debt ($8 billion in U.S. dollars) is owned by private investors. Uruguay receives no formal foreign aid, although the European Union (EU) and the United States do help underwrite specific economic projects. In 1996, the EU provided 6.68 million euros for vocational-training centers and 147,000 euros for the development of tourist programs. In 1997, the United States provided US$8 million in aid to train the military for peacekeeping missions and purchase equipment for such missions.

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