Created: 10/1/1968

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Uruguay's Continuing Economic Impasse.



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CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence8


Uruguay's Continuing Economic Impasse


During the pastears, Uruguay has slipped from first to third place in Latin America in per capita output and has been the only reasonably well-developed country in the world toronounced decline in per capita output. Gross national product and private consumption are both aboutercent lowerer capita basis thannd investment has dropped to the point that it no longer covers replacement needs in some areas. One out of every five persons in the labor force is without work. Inflation has grown worse each year, reaching an annual rateercent during the first half Partly as aof the prolonged economic decay, Uruguay increasingly has experienced civil disorders.

The root of Uruguay's inflationary problem has been the attempt by the highly organized urban labor force and the business community to protect their economic positions in the faceecline in the per capita supply of goods. Wages and prices have chased each other with increasing speed, the race being fueled mainly by anexpansion of credit to the private sector. Especially in recent years, the government has added to the inflation by enlarging public payrolls and financing the resulting budget deficits with bank credits. Inflation and the necessity to periodically devalue the currency have provoked a

Note:This memorandum wae produced solely by CIA. It wae prepared by the Office of Economic Research and wae coordinated with the'Of'f'ice of National Estimates and the Office of Current Intelligence.


flight of capital, some of which appears to.be lost permanently -h The.loss of-capital, thein imports, the diversion of public funds to current expenditures, and growing uncertaintyfuture prices and costs are mainlyfor the decline in investment; Uruguay's4 inflation differs greatly from that in Brazil, Chile, and most other Latin American countries, where the government finances much of investment and its budget deficit is the principal source of monetary expansion.

The administration of President Pacheco Areco, who assumed office on the death of President Gestidoas begun to grapple with economicmuch more forthrightly than any administration in the last decade. Recent economic policy has been guided by the financial stabilization plan that the Gestido governmentpercent devaluation of the peso, in-'* The plan callededuction in the rate of inflationillion rise in foreign exchange reserves. These goals were to be reached by drastically reducing the budget deficit, stringently controlling private credit,ore realistic exchange rate, and directlyincreases in most wages and prices*

+ +

Throughoreign exchange reserves rose modestly, owingollover of debts to foreign banksevere reduction in imports. On the other hand, the inflationary effects of devaluation, unfavorable crop conditions, and strike pressure from labor led to higher than planned wage settlements in the public sector and anof price increases during the first six months

Threatened financial chaos, near-paralysis of basic economic and social services, and increased agitation by the Canmunist-led students and labor unions and by terrorist groups caused President Pacheco Areco toimited state of siege in early June. Later in the month the administration took unprecedentedly strong actions in an effort to curtail labor and student agitation. Thealsorice and wage freeze, which stabilized prices in July and August.


In the coming months the government will beightrope. It will have to maintain tight controls to begin laying the foundations for economic recovery but in so doing will also beerious disruption of output. Disruption could result from too much anti-inflationaryor fron widespread public disorders into stabilization policies. The alternative to tight controls could be even worse, however. If public discontent forces the government to relax its controls, runaway inflationonsequent breakdown of normal market activities might develop. Under the best circumstances, constraints onegree of austerity in governmentand the expected decline in livestock output probably will hold total output in the next year at the depressed level.

For progress over the longer term, the Uruguayan government must introduce basic reforms conducive to an expansion of exports and investment. in such reforms wouldhift in economic policy from support of urban consumption to an emphasis on agricultural investment (both public and privato)ontinuing firm effort to subdue inflation. rogram would be vigorously opposed by the well-organized labor movement and business interests. Even the population at large would be difficult to convince that, afterears of eroding living standards, an extended period of government-fostered austerity was in their interest. Thus thoroughgoing reform and rejuvenation of the economy probably can be accomplished onlyovernment that is willing and able to thwart the popular will.



daily since the spring ofhas experienced unusually severe civil The agitation has included frequentand street rioting and the kidnaping ofadviser to President Pacheco Areco,office in7 upon the deathGestido. While this disarray partlythe growing organizational competenceleftists, it indicates moresocial and political consequences ofeconomic decay. The disorder raises anewamong others, of what is wrong witheconomy and where it is heading.

A Case of Arrested Economic Development

is the only relativelycountry that has failed to advanceover the past dozen years. Followingof progressive leadership, theby thes had erected ansystem based on exploitation of richresources. Recent estimates indicategross national product (GNP) per capita

5 was the highest in Latin America andfavorably with that in many European countries, being one-fourth higher, for example, than that in Italy.* Moreover, Uruguayeasonably equitable distribution of income.

owever, the Uruguayanbeenorpor matched in Latin Americathat of Haiti. The total output of themeasured by GNP in constant prices, hassignificantly Per capita GNP in

1 The estimates oonsist of purohaeing power parity oaloulatione by etaff members of the I'll Saonomio Commission for Latin America, as published in Stanley U. Braithwaits, "Beat Inoome Levels in Latineview of Income and Wealth,p. . For the present purpose, the geometrio meant of results obtained with US and Latin American quantity weights are used. Thee* estimates are for gross domestic produott uhioh in Uruguay normally varies only slightly from GUP.


hus was about IS percent less than that Activity in all sectors except crops picked up. Butnfavorable weatherecline of one-sixth inoutput; production in manufacturing,and basic services fellercent in the aggregate; and GNP fell by an estimated 5 No sector has made substantial progress during the pastears (see

Table 1

Uruguay. Indexes of Production, by Sector of Origin Selected



national product


Stock farming






services b/


and retail trade

services c/


power, transportation, and aommuniaations .

administration, personal services, real estate.

4. Investment has been hit especially hard over the last dozen years as Uruguayan governmentsin boosting public consumption (that is,government expenditures excluding subsidies and


transfer payments) while generally maintaining the level of private consumption {see GNP7 is estimated to have been slightly larger thanross fixed investment7 is estimated to have been only aboutercent of5 level. The share of fixed investment in GNP was only aboutercent5 andent6 Uruguay's overall stock of fixed capital probably hasittle in' the last threeut there may have been net disinvestment in machinery and equipment. The volume of construction declined consistently5hen it was less than one-fourth of total investment. , construction activity partly recovered becauseiversion of funds from industry to tourist facilities and other commercial construction by investors hedging against inflation. At the same time, investment inand equipment dropped from aboutercent of GNPercent.

5. The impact of economic troubles on the private consumption expenditure of Uruguay's 3people has been less severe than that on investment. The Uruguayans have managed to maintain total private consumption at about three-fourths of GNP each year This accomplishment neverthelesspercent reduction in per capita consumption" Rural (who presently account for less than one-fifth of the population) and the young entrants into the labor force generally have borne the brunt of the squeeze on private consumption. Farm incomes have been held down by low world market prices for Uruguay's agricultural exports, by discriminatory tax policy, and by lags in the adjustment of exchange rates to reflect increases in farm costs. which has increased steadily since the mid-

There are no recent data on depredation ofbut figures for thes and0 'e rangeercent of GfJP.

** The data on consumption should be understood only as rough estimates. Although collectors of Uruguayan statistics impute values for contraband trade With Brazil and Argentina, their national accounts estimates may somewhat understate these flows, particularly of the consumer goods illegally imported into Uruguay.

s, is estimated to have exceededercent of the labor force The young makearge share of the unemployed, in part because the labor force is highly organized and unionhas been concerned primarily with insuring job security and wage increases for its membership, not with bringing new wage earners into its ranks. Although urban families with regular wage earners have been better able to protect their standard of living, they also haveecline inlevels.

the decline in output perconsumption per capitato fare better than most Latinper capita GNPurchasing powerof07 was roughlythan the average for Latin America andbehind only Argentina and Venezuela inprivate consumption per capita in Uruguay

of5 was second only to that of Argentina. Partly because the major economic activity isaverage per capita food consumption amountsalories daily, approximating that in the United States. Moreover, in contrast to almost every other Latin American country, the food intake in Uruguayarge component of animal Such indicators of general welfare as rates of literacy and mortality and the incidence of disease also continue to rank Uruguayans among the most favored people in the region. In some of these respects, Uruguay matches the high standards in the United States.

Impact of Reduced Export Prices

economic stagnation that began inwas precipitatedactor beyondcontrol: ubstantial drop in worldits main exports. Export prices for wool,hides, which4 wereercentall by almostercent4 These export prices largelyin thes, rising to within 5ofverageut, when they averaged.

Consumption, and





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tniHtlMffi In iavanlonin md nM loretfn IniraMntit. Wlh of Midi



Mi*DM*HftcMMi vaiut.


68 91 3 4 6



Trends in Gross National Product, ForeignExport okeign trade

S $)


5 6 7890 12 3 4 6 7




























G 8 0 ? 6

-SE6nCT -

* 8. Because of reduced prices, the output of stock farming and associated export industries and serviceswhich accounted for about one-sixth of GNP in thesfell steadilyy that time, GNP had been depressed to the level Although some output was diverted from domestic consumption to export markets, the volume of major exports tended to fall. This decline in volume and the drop in export prices slashed the value of exports byercent4lthough export prices improved subsequently,has limped along0 with annual export arningsoercent smaller than those

9. The depressive impact of falling world prices on the production and export of livestock products was aggravated by government policies initiated earlier with the aim of achieving self-sufficiency in agriculture. Under the protective umbrella of high export prices, the government had fostered the diversion of pasturage to field crops through the use of price supports in thes.* Termination of these price supports7 and the acquisition9oan from the International Bank for Reconstruction andto modernize the livestock industry contributed to an upsurge in output of livestock productsut output has leveled off Price supports for crops were reinstitutednd the stimulus to investment in theindustry arising from improved export prices has been blunted by taxes on export earnings.

* Uruguay's occasional attempts to foster self-SUffioienoy in crops had been generated mainly by strained diplomatic relations with Argentina, the traditional source of wheat imports. The effort in thes reflected prolonged differences with the Peron regime.

10. Although the level of imports4ruguay was able through large-scale borrowing to restore them to more nearly normal levels in thes, therebyconsumption and investment close to the levels of thes. Continued low export levels and growing repayment obligations on foreign


loans, however, have forced cutbacks in imports, Most affected by the cutbacks have been imports of capital goods and consumer durables, which provide the bulk of Uruguay's supply of such goods. Imports of industrial materials andalso have declined or leveled off, thereby preventing expansion of output in the industries dependent on such imports,

Obstacles to Economic Readjustment

Uruguay, various other Latinhaverolonged reductionearnings because of weakened prices forexports. And like Uruguay, they haveadjusting to the situation andrapid inflation. But none haveof output with growing inflation fora period. The obstacles to economicand renovation in Uruguayrom attitudes and institutionsmany decades, which created rigidities inof production and employment and insystem.

Structural Distortions

the beginning of this century,have fostered the development of theegalitarian society in Latin America. sinces, Uruguayan governmentsindustrialization and urbanizationthe development of consumerubstitute for imports, usingand tax and credit incentives to thisall of the enterprises developed by thisbeen unable to compete internationally butthe same time generated new demands for importsgoods and raw materials. This is aof import substitution. But in Uruguay,base is too narrow and the domesticsmall to give producers much opportunity totheir reliance on imports. Roughly one-third

of Uruguay's manufacturing establishments depend wholly or predominantly on imports for their major raw material input, while the others process mainly danestic agricultural products.

country's commitment to liberalmanifested most clearly in its extensivesystem, which resembles the.Western European-,cquntries rather'.-thanthe United States. Uruguay'severyone and offers, generous' benefi-ts,aboutercent of the incomes ofwithercent in the Unitedercent in Westernounpayments for educationmallprogram (which was largely.terminated in7) usually have provided anothero 5the incomes of Uruguayan households. has been able to cover these payments'and employee contributions during most of

year history, it has needed support from- the government and the banking system ins.'

recently, at least, thesystem clearly has actedajor disincentive The fact that Uruguayan men areor

.example, to retire at full pay at agefterears of work does much to explain why theof menoears old who are in the labor force is one of the lowest in the world. In recent years the purchasing power of retirement benefits has been eroded by inflation, but the lack ofopportunities probably has ensured the continued prevalence of early retirement.

strong influence of organizedis not seriously countervailed by that ofbusiness" element, hasurtherchanges in economic policy. Most of thework forceonsiderable share ofbasic services are members of unions. Mostturn, are members of the National Workers'(Convencion Nacional de Trabajadoreson bread-and-butter issues is one of thelabor movements in the hemisphere. Thewhich is dominated by Communists,has not been able to politicize the rank andlabor nevertheless maintains an unusuallyon national economic policy, partlythe diffused nature of Uruguayan politics. Inthe political influence of agriculturalvery weak, considering the importance ofin the economy.


some of the weaknessesthe promotion of "hothouse" industries andsocial welfare system weres ands, their seriousnessby the generally strong world pricesexports that prevailed during thosewhen the weaknesses were fully exposed byin export prices, successivedid little to alter theor popular attitudes underlyingthey consistently turned to twoincreased government spending andthat countries commonly use inlive beyond their means, and exercisedcontrol over the expansion of credit tosector.

Financial Distortions

teadily accelerating rateclearest reflection of Uruguay's failureower real income. In recent years,has itself become an important causein the economy. The annualin the cost of livingnot an unusually high figureAmerican standards. The increase haseach year, however, reachingercentif average annual cost-of-living levels{see Table The recent accelerationis shown even more clearly byercentanuarynd the further spurt in prices during8 at an annual rateercentthe most rapid rates in Latin America in the


Table 2

Uruguay: Annual Cost-of-Living Increases a/




Increases are between annual averages of monthly priae levels*

Surprisingly, the inflation has not yet grown into the runaway variety, under which normal market activities break down. he increase in prices was roughly proportional to the increase in the money supply (although the supply of quasi-money, such as savings deposits, grew much more slowly). This relationship indicates that the velocity of money did not increase significantly. But for theonths ending in7 (the latest period for which data arehere are indications of an increased velocity ofa trend that could leadevereof economic activity if it continued.

Uruguay, unlike most other Latin American countries, has fueled its inflation mainly with an increase in credit to private business. The absenceentral institution possessing the usual powersentral bank and the apparent unwillingness of the government to apply what monetary controls it had probably are mainly responsible for thiscredit creation. Uruguay had no central bank as such4 and since that time has vested certain central banking functionsepartment of the government-owned Bank of the Republic. These

functionswhich include credit regulation through the fixing of banks' reserve requirements and maximum interest rates as well as the issue of currencyhave been subordinated to the credit expansion activities of the Bank's commercial banking department. The laxity of Uruguayan monetary and credit control is exemplified by the failure of five private banks (including the country's second largest one) inhich led to heavy withdrawals of foreign exchange from the Bank of the Republic and its default the next month on its foreign exchange obligations. Although the new constitution6 provided for the establishmententral bank, the bank still was in the process of being organized innd central banking functions were divided between it and the Bank of the Republic's department of issue.

, virtually all of the net expansion of credit by the banking system was for the private sector. overnment budget deficits also have been an important source ofinasmuch as government borrowing from the banks has accounted for about one-sixth of the net credit created. But the private sector obviously has remained the dominant factor in credit expansion. In most other Latin American countries, in contrast, the government budget deficits have been the prime sources of credit expansion. Private credit has been more severely rationed in these countries than in Uruguay, and its expansion has been moreause of price increases. Moreover, inflation in these countries wasesult of growing government expenditures on investment, while in Uruguay such expenditures have been declining.

The most important causal factor appears to be the upward push of wages as organized labor tried to protect its standard of living. Wages and prices have chased each other with increasing speed, and private credit has been expanded mainly totagnant level of production at rising cost and price levels. Private investment has been declining and consequently could not have been an important cause of inflation. xchange rates were kept stable for two or three yearsime whileinflation was continuing, but each periodicof the exchange rate further boosted


inflationary pressures. owever,have been frequent, and it has become increasingly difficult to distinguish among the various causes and effects of inflation.

Expediency in Public Finance

Uruguayan fiscal policies have fedand diverted funds from productive touses. The government has made heavy use of the public payroll in an attempt to sustain urban standards of living in spiteeclining per capita output. The share of the country's wage bill paid by the central government and the public agencies and enterprises has risen fromercent in thes to aboutercent in recent years. Presently, aboutercent of employment is in the public sector.* Aboutercent of public employees are civilians; the militaryis small, numbering less0 Some government employees draw pay for only an hour or two of work each dayan obvious case of disguised unemployment compensation.

Within the central government, the padding of payrolls appears to have been most severe Spending for wages rose fromercent of current expenditures1 to an average of more thanercentsee Table Aprovision prohibiting wage increases in the public sector during6 election year enabled the central government to restrain such pay ments in that year and to hold the rate of growth of its total current expenditures below that of GNP. But to regain parity with private wage scales (which were not restrained, the government advanced wages in the public sector by an average

Time series on the number of publia employeesreakdown of publia employment are not available. Data on public finances and judgments by Uruguayan and foreign officials in Montevideo suggest, however, that most people hired by the publia sector during the past decade have served no real economic need. The railways, port authority, and governmentinstitutions frequently are aited as major sources of make-work employment.

Table 3

Uruguay: Central Government Finances a/

6 3


6 Estimated




ofercent at the beginnings awages7 again reachedf current expenditures.

Government transfer payments to households and subsidies to municipalities and publicalso rose in absolute terms but declinedhare of total expenditures. he enterprises failed each year to cover even their current operating expenses with sales revenues (see The State Railroad Administration, National Petroleum and Cement Corporation, State Waterworks, and State Airlines are the major sources of deficits among the enterprises. Large payrolls, low pricing for services, and (in the case of the railways) strong competition from road transport all contribute to the deficits. Contributions to the social security funds, which potentially are an important source of savingsountryeak capital market, failed to cover operating expenses and pension payments Data are not available for the financial performance of the public enterprises and social security fundsut the weaknesses of the preceding five years probably continued. The deficits of public enterprises and the social security funds have been financed mainly by subsidies from the central government and large credit extensions from the Bank of the Republic.

While swelling its payroll, the central government cut its investmentnd held themercent

of its total expenditures. The bulk of such investment normally has been in basicsuch as electric power, transportation, and communications. Depreciation of such facilities almost certainly has exceeded new investment in most years since the. The effects ofpublic investment have been severe inareas, where transportation and communications facilities frequently are reported to be in disrepair. Failure to invest in irrigation facilities aggravated the harmful effects of drought and floods in


of revenues in GNP has declined even more. evenues in real terms had fallen aboutercent

below1 level, mainly because of theeffects of inflationoor system of tax collection. Revenues recovered to almostercent of1 levol6esult of new taxes (some imposed as an emergency measure for only oneharp jump in receipts from export taxes (which were raised to capture windfall profitsfromnd increased tax receipts from imports. owever, real revenues again dropped, mainly because of Increased laxness in tax administration in the face of rapid inflation and because of the fall in exports and in export tax rates.

Resort to Foreign Borrowing and Exchange Control

an effort to maintain imports ofraw materials and capital goods in spite ofdrop in exports4drewarge share of itsreserves5 million. Reserves fell

to aboutmillion7 and have since ranged around that amount. About half of theseare committed as collateral against foreign loans and do notiquid foreign exchange source available to support deficits in international payments. Foreign lenders alsoajor prop to imports, supplying an averageillion yearly in net foreign exchange inflows. owever, Uruguay's credit standing abroad was very weak, and it subsequently was forced to bring its imports more into line with its reduced export capaci ty.

downward trend in imports, slowexport earnings, and growth of touristUruguay's current account into balancegenerated scne surpluses. But the overall balance of paymentsin deficitainly becauseflight of savings from the country.* Thenet errors and omissions in the balance of payments

7 Thi'e situation contracted sharply with thes ands, when Montevideoaven for flight capital from other Latin American

suggest that capital flight was particularly severe, when it may have equaled as much as half of gross fixed investment. The large payments deficitsere funded mostly through the accumulation of commercial arrears, which at the end5 amounted to more5 million. Payments surpluses achievedn turn were used mainly to reduce the commercial arrears to0 million at the end

Table 5

Uruguay: Balance of

Million US $


6 4

6 5


account balance


services (net)

receipt* of capital




errors and omissions


of payments



in net foreign



The long-term obligations abroad of the central government and public institutions amounted5 million at the close Servicing obligations on this sum amountillionr aboutercent of anticipated export earnings. This ratio is not high by Latin American standards because public investment in the last decade has been small. But payments for commercial arrears and other short-term obligations are expected to raise total debt payments8 toillion,ittle more than half of probable export earnings.

Uruguay's always pressing and sometimes critical international finances have prompted the development of an extensive system of exchange and trade controls, including multiple exchange rates, registration of foreign exchange transactions, and prior deposits for imports. During most of the lastears, the government has been slow tothe Uruguayan peso in response to rapidly rising domestic prices. This reluctance, together with weak administration of direct exchange controls to protect foreign reserves, has caused theto place particular reliance on import controls. Occasionally, it has temporarily embargoed almost all imports. Sinceowever, Uruguayan governments have adjusted the exchange rate more frequently to reflect inflation. From that time throughhere were six devaluations that changed the rate for most transactions fromoesos per US dollar. Further devaluation changed the principal rateesos per dollar

at the end of7 andesos per dollar in

Some Repercussions of Stagnation and Inflation

Uruguayans have been protectedextent from the effects of economicthe government's attempts to maintainliving, there has been an erosion ofthe future of the country- Investmentthe last two or three years has beenpattern commonly associated with rapidspeculative stockpiling and short-termflight in anticipation of devaluation, andinvestment in real estate. Even more


serious,izable share of the flight capitaldoes not return after devaluation. Uruguay also seems to beoss of technical and entrepreneurial talent. Loss of confidence likewise is reflected in the increasing (although still limited) politicization of labor along radical lines and in the dominance of student protest movements by leftists. Finally, concern over the country's future has been expressed by 3ome elements of thoapolitical Uruguayan military, which before Pacheco Aroco assumed office clearly were disturbed by the inability of the government to face up to its problems.

country's problems also have shakeninto accepting the need for somethe constitutional framework. executive was constituted as aCouncil of Government. This form ofproved utterly incapable of providingand the Uruguayans consequentlysingle executive by plebisciteewin The change was approvedknowledge of the electorate that suchprovide the institutional basis for aapplication of reform. Political powerlegislature, however, remains badlymakes it very difficult to obtain supportunpopular economic program.

Current Financial Stabilization Program

some years, Uruguayan leaders haveof most of the implications of theproblems, and since5 theysome attempts atfforts have slightly improvedbalance-of-payments position, they havewhole failed to ease domestic financialor lay the basis for sustained Stabilization programs have founderedgovernment's reluctance to clamp down onfor public employees and on itscontrol wages and credit in the privatewages almost doubled in thend in the public sector in

The latest stabilization effort wasinhen the currency wasfromesos per US dollar. The planharp reduction in the rate of price increaseoderate improvement in foreign reserves. The government judged that achievement of these goals would depend on its holding the budget deficit8 toer-oent of expenditures (compared withercentnd on applying more stringent controls over the growth of credit for the private sector. The budget deficit was to be reduced by holding wage increases to an average ofercent above7 level. Limitations on expansion of credit depended largely on the expectation that the recently formed central bank would be able tomore effective control over bank lending by means of increased reserve requirements andon credit. Improved domestic financialmore frequent adjustments of the exchange rate to reflect the continuing inflation, andincreased receipts of long-termassistance were supposed toainillion in foreign exchange reserves. This improvement was expected despite an anticipated second consecutive year of poor export performance.

The fragmentary evidence now available on Uruguay's financial performance under the new stabilization program indicates mixed results. The cost of living increased aboutercent in the first six monthsr more than during the same period This increase partly reflects the impact on domestic prices of the large devaluation in7 and the continuing impact on prices of the poor harvest The continuing rapid increase in prices also reflected the government's tenuous influence over wages. Major wage settlements in the public sector during the first months8 provided an averageof aboutercent, or considerably more than the targeted level.

The administration of President Pacheco Areco nevertheless has shown more resolve inaffairs than any of its predecessors in the last dozen years. Wage settlements in the public sector fell far short of those demanded by labor, and workers' dissatisfaction with those settlements and

the generally hard-nosed attitude ofajor cause of the current political unrest. The governmentimited state of siege in early June andrice and wage freeze in late June that apparently is being stringently enforced. It also hasill to the Congress that provides legislative sanction for government control over unionand price and wage increases in the private sector. Acting on its commitment toealistic exchange rate, the government further devalued the pesoer US dollar in April. This move, together with the renegotiation in Juneillion in debts to private foreign lenderspercent reduction in imports in the first six monthsontributedmallin foreign exchange reserves. Export earnings declined in the first six months, butlower rate than imports.


the next year, continuingand rapid inflation appear to be The situation could improve slightlyslightly, depending on threebeyond Uruguayan control: cropmarket conditions for exports ofand the generosity of foreign lenders.

It also could deteriorate greatly if the government puts the brakes on the economy too forcefully, if active popular resistance becomes widespread, or if the government is forced to abandon itsprogram,

thereew hopeful signseconomy in the nextonths, Uruguayrisoner of its past mistakes togains in soeriod. avorable turn in themidyear; devaluation has reducedon the balance ofnd theis at least trying to hold down wage and Other circumstances, however, doprogress in financial stabilization andof output. Political pressures forprice increases remain very strong. built up by recent large wage increases

in the public sector will be hanging over Added pressure on prices will arisegovernment pursues its policy ofthe currency as domestic pricesoutput probably will drop becauseto herds in the drought and an anticipated squeeze on importsmaterials probably will depressproduction. Private investment almostwill remain small because of thefinancial uncertainty, and the governmentboost public investment while trying

cut its deficit sharply.

The government alsoerious risk of inducing events that would disrupt output. If it abandoned its stabilization program for political reasons, disruption might be brought about byinflation. Rates of inflation much in excess of the increaseercent7 are likely to accelerate the rate of turnover of money, which {if unchecked) could lead to widespread use of barteriversion of labor from productive activity. On the other hand, the government is confronted with an intense popular discontent that could prompt further general strikes and even erupt into violence. Maintenance of the stabilization program would heighten tho risk of widespread civil disorder and consequent economic deterioration. The risk of public disorder would be still greater if the government initiated policies of the sort that might eventually solve the country'seconomic problems. And if the government took drastic deflationary measures, production probably would decline sharply and unemployment would rise.

Uruguay's economic prospects for the long term depend heavily on the political strength as well as the economic policies of the government and thus are highly uncertain. Although differing in some respects, Uruguay's economic problemsresemble those of Argentina,imilar long-term program of basic economic reform is called for. engthy period of inadequate investment expenditures in agriculture has caused some net disinvestment in the sector, ecrease in cattle numbers. Uruguay's rich pasturelandits major natural resourceonsequently is

rrcxt liT

underutilized at present. Host of the industrial capacity likewise is underutilized because ofinputs from agriculture and constraints on imports of industrial materials. Industry is capable of processing an increased volume ofproducts for export and domesticand of more adequately meeting demand for non-agricultural products. arge extent, this underemployment of resources constitutes asource of strength for growth over the long term. But realization of this potential depends on the restoration of financial stability and increased investment. ubstantial increase in total investment and greater concentration of it in agriculture eventually would permit renewed growth in exports and relaxation of importwould slow down the pace of inflation, and wouldise in productivity and real incccno.

ill Achievement of these goals faces enormous barriers, for the task of economic reform seems to be even more formidable in Uruguay than in Uruguay's small size and narrcw economic base are handicaps and result in high costs in most Uruguayan industries other than agricultural Exports of nonagricultural manufactures averaged only S8 million annually,ercent of total exports, other barriers are the long attunement of consumers and businessmen to rapid inflation, the weakness of governmentand the country's poor credit standing abroad.

42. The greatest obstacle of all, however,is the attitude of the people. ustained period of austerity that would have to be borne mainly by the urbanwhich makes up most of tho total. Havingecline in their living standards during the pastears, the Uruguayans will hardlythe news that an extended period of economic sacrifice is called for. Since urban labor is effectively organized, it can be expected to resist sacrifice. Financial and business leaders, some of whose operations are hopelessly inefficient and should be scrapped or allowed to wither, also are likely tohift in policy emphasis to

- 26

agriculture unpalatable. Under these circumstances, it is questionable whether Uruguay can move toward the solution of its fundamental economic problemsovernment that is willing and able to pursue policies opposedajority of the people.

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