Uruguay's industries, including construction, mining, and energy, generated 33 percent of GDP in 1988. These industries underwent most of their development behind high tariff barriers in the 1950s. As a consequence, the industrial sector was geared mostly to the domestic market. The small size of the internal market limited the growth of manufacturing and prevented many industries from achieving economies of scale. In addition, the substantial level of protection meant that Uruguayan consumers paid high prices for domestically produced goods, which faced no international competition. During the 1970s and 1980s, Uruguay's protectionist apparatus was partially dismantled, and industry began adjusting to the world market.
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. 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.
The performance of the autonomous entities ( autonomous agencies or state enterprises), which played a central role in Uruguay's economic development, was an even greater issue. Most of the autonomous entities were industrial or utility companies; others were service related. The two largest autonomous entities were also the two largest companies in Uruguay: the National Administration of Fuels, Alcohol, and Portland Cement (Administración Nacional de Combustibles, Alcohol, y Portland--ANCAP) and the National Administration for the Generation and Transmission of Electricity (Administración Nacional de Usinas y Transmisiones Eléctricas-- UTE). In 1988 ANCAP, whose primary activity was refining and distributing imported crude oil, grossed US$470 million, had profits of US$12 million, and employed 6,700 workers; UTE grossed US$285 million, had profits of US$12 million, and employed almost 12,000 workers. (Based on their 1988 gross earnings, ANCAP and UTE were the 113th and 242d largest companies in Latin America, respectively.) Other important autonomous entities (and monopolies) included the National Administration of Ports (Administración Nacional de Puertos--ANP; another name for the Montevideo Port Authority), the National Telecommunications Administration (Administración Nacional de Telecomunicaciones-- ANTEL), and the State Railways Administration (Administración de los Ferrocarriles del Estado--AFE).
The Sanguinetti government's policy toward the state enterprises had two aspects. First, the government planned to invest US$1 billion in public-sector projects during the 1987-89 period, raising government investment from 2.9 percent of GDP in 1986 to 5 percent of GDP in 1987-89. This target was not met, however. Public investment in 1987 and 1988 increased only to 3.1 percent and 3.4 percent of GDP, respectively, because of the need to restrain spending. Second, the government planned to improve the fiscal health of the state enterprises, many of which were running deficits. A combination of utility rate increases and spending cuts (but no significant cuts in employment) made most state enterprises profitable by the late 1980s, easing the public-sector deficit slightly.
The two largest subsectors within manufacturing, both by output and by employment, depended on agricultural inputs. Food and beverage companies, which accounted for about 30 percent of the value of industrial output in 1987, included meat packers, soft drink companies, and wineries. These companies exported about one-third of their output. A new entry into the food-processing industry was the Azucitrus citrus plant in Paysandú, which opened in mid-1988. The textile and apparel industry, accounting for about 20 percent of manufacturing output, depended on supplies of both wool and leather for jackets and footwear. The capacity to export was an important asset, allowing firms to withstand fluctuations in domestic demand. For example, the textile industry's sales to the domestic market decreased 23 percent in 1988, compared with 1987, but its exports increased 36 percent during the same period. Other important manufactured goods included chemicals, most of which were exported; transportation goods, including a few thousand automobiles and trucks that were assembled each year; and metal products.
Activity in the construction industry fluctuated dramatically during the 1980s, appearing to be markedly affected by trends in GDP growth or contraction, but with a one- or two-year lag. One index of such activity, the quantity of private structures built, went from about 2.1 million square meters per year in 1980-81 (when the recession was beginning) to 500,000 square meters per year in 1985-86 (after the recession had ended). In the late 1980s, construction partially recovered. The industry achieved a 4 percent growth in 1988 because of a construction boom in Maldonado and Punta del Este, and it grew 11.7 percent in 1989. Continued moderate growth was expected because of infrastructure projects such as the modernization of ports and highways, to be financed by international organizations. An offsetting factor, however, was the government's need to reduce expenditures.
Mining has never played an important role in Uruguay's economy. However, Uruguay has exported granite and marble. In addition, semiprecious stones have been found in quantity. Investment in mining activities was expected to reach at least US$200 million during the first half of the 1990s. After Uruguay's General Assembly passed legislation allowing foreign investment in mining, two companies, Canada's Bond International Gold and Brazil's Mineração e Participação (Mining Copartnership), announced plans to search for gold, silver, and other metals. Bond International Gold was given exclusive rights to develop the Mahoma gold mine, expected to produce more than 900 kilograms per year. Part of the project was to be financed through a debt-for-equity conversion program. The National Mining and Geology Institute indicated that at least fourteen other areas in the country might contain deposits of precious or base metals.
Hydroelectricity and imported petroleum were the primary sources of energy in Uruguay. During the 1980s, the nation reduced its dependence on imported crude oil and increased its hydroelectric capacity. At the beginning of the decade, threefourths of Uruguay's energy came from imported oil; by 1987 less than half did. This trend toward hydroelectric power was interrupted during 1988 and 1989 because of a severe drought. Oil-burning power stations had to be brought on-line temporarily, increasing energy costs. In addition, rotating power outages were instituted in Montevideo and other cities. Partly because of such conservation measures, total consumption of energy actually decreased during the late 1980s. Real growth in the utilities sector declined by 12.2 percent in 1989.
The single largest source of hydroelectricity was the Salto Grande Dam on the Río Uruguay, built and operated in cooperation with Argentina. The US$1 billion dam was completed in 1982 and supplied 1.8 million megawatt-hours of energy to Uruguay in 1987 (before the drought), or 40 percent of Uruguay's electricity. In 1989 the huge project was reported to be facing serious financial difficulties. The Uruguayan and Argentine state-owned power companies were US$45 million and US$250 million behind in payments, respectively, to banks and foreign creditors, and absorption of the debts by the two nations' central banks was expected.
Three other hydroelectric power sources were located on the Río Negro. Of these, the El Palmar Dam (located at Palmar), built and operated jointly with Brazil, was the largest and newest (in full operation since 1983); in 1988 it supplied 330 megawatts to Uruguay. The Baygorria Dam and the Gabriel Terra Dam (the latter in operation since 1948) supplied 108 megawatts and 128 megawatts, respectively, in 1988.
The Sanguinetti administration's policy was to improve the existing hydroelectric facilities rather than embark on new projects. Emphasis was placed on extending the electrical distribution network in rural areas. In 1988 the rural electrical network spanned 1,400 kilometers, more than double the 630 kilometers in 1984. The government approved a total of US$139 million in investments in 1988-89 by UTE, mostly in the distribution program.
Uruguay had no domestic oil resources, despite several exploration efforts. The nation imported mostly crude oil, which was then refined by ANCAP and a few small plants. In 1985 ANCAP had a refining capacity of 40,000 barrels per day; its facilities were upgraded during the late 1980s.
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