Uruguay : Sources of Growth, Policies for the Development of Human Capital, Integration, Competition and Innovation
2005
World Bank
Uruguay, with a prosperity built on beef and other meat exports, was among the fastest-growing economies in the world at the turn of the twentieth century. In parallel with economic successes driven by exports under a liberal trade regime, early in the 20th century, Uruguay had already initiated a strong and efficient welfare state. By contrast, the slowdown in per capita GDP growth has been more severe in the past 40 years (over 1961-99 per capita GDP growth averaged 1.1 percent, which is two-thirds of the rate achieved by Latin America) - except in the nineties when Uruguay (temporarily) grew at a faster rate than the region. In the 1961-1999 period, the rate of growth was less than half that of industrial countries, and less than one-fourth of that of East Asia. Uruguay must consolidate its incipient economic recovery following a prolonged, and deep recession: the economy shrank 17 percent, and household incomes dropped over 20 percent in real terms over 1999-2003. Notwithstanding, the economy bounced back strongly since mid-2003, and GDP growth in 2004 is estimated at 12.3 percent; the level of unemployment fell from almost 20 percent at the end of 2002, to 12.1 percent at the end of 2004. However, there is a qualitative difference between economic recovery and sustained growth. The country's relatively poor growth performance over the last half century can be traced to several key structural weaknesses, i.e., a pro-cyclical fiscal policy, intrinsically associated with lack of flexibility in social spending; a high and growing dependency ratio (between retirees and the working age population) - worsened by emigration by young people - and increased levels of informal employment; and, lack of effective competition in infrastructure sectors, dominated by the public sector and - in a related manner - the setting of tariffs with a fiscal criterion that limits incentives to increase efficiency, among several other structural factors. The objective of this study is to help develop a "shared" vision of growth with equity in Uruguay, but, unless shared, the policies and reforms discussed are unlikely to be implemented, maintained, or to be credible. The first pillar of this framework involves policies leading to fiscal and financial stability, the efficient operation of factor markets (capital and labor), and, the strengthening of social protection. The second pillar of policies and reforms aims at the creation of an investment climate, favorable to the accumulation of physical and human capital; it includes trade and integration policies, the development of a competitive framework - particularly in infrastructure sectors; and, policies on education and health for the development of human capital. The third pillar is formed by the policies and reforms that promote growth driven through innovation; it will require a thorough transformation of institutional capabilities, entrepreneurial culture, and the system of innovation.
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