In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Inclusive Growth: The Tale of Uruguay1

Uruguay has a long history of high living standards comparable to many developed countries, and has made further progress in improving social conditions since 2005 on the back of strong economic growth and active social policies. Looking ahead, preserving macroeconomic stability is essential to sustain these gains. For the longer run, improving access to quality education will be key to enhance social mobility.

A. Introduction

1. Inclusive growth has long been a key policy objective in Uruguay, which ranks high in human development, and low in inequality and poverty within the region and among emerging markets more broadly. Although the economic recession of 1999–2002 took a heavy toll on Uruguay’s social indicators, with a renewed focus on inclusive growth since 2005, the Uruguayan society has made steady progress in improving social conditions and social inclusion.

2. This chapter reviews Uruguay’s experience with inclusive growth over the last two decades, and identifies challenges and policy options to promote greater equality going forward. It focuses on Uruguay’s comparative position with respect to the region and advanced countries in poverty and income inequality, labor market equity, and equality of opportunity, including in access to quality education and health care services. 2 It reviews the implemented social policies and discusses the remaining challenges and social policy options.

B. Poverty and Income Inequality

Trends in Poverty

3. Poverty indicators fluctuated significantly in Uruguay over the last two decades. Three episodes of economic growth marked different trends in poverty: i) the high growth episode in the early 1990s, ii) the economic crisis of 1999–2002 and the recovery through 2004, iii) the economic expansion after 2005. High economic growth in the early 1990s accompanied a significant reduction in poverty. While per capita GDP in purchasing power terms increased by about 40 percent between 1989 and 1999, the share of urban population living below the national poverty line fell from 26 to 20 percent, and extreme poverty fell from 3.3 to 1.5 percent. However, a severe recession in 1999–2002 and the ensuing financial crisis led to a marked deterioration in poverty and extreme poverty rates—to 40 and 5 percent by 2004, respectively.3 Starting in 2005, a period of strong economic growth and important social policy reforms (discussed in Section C) helped gradually reduce poverty to historical lows (Table 1).

uA01fig01

Uruguay: Poverty and Income Inequality /1

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: Socioeconomic Database of Latin America and Caribbean (CEDLAS).1/ Solid series represent data for urban areas (with more than 5000 inhabitants). Dotted series, which begin in 2006, cover urban areas as well as rural areas.
Table 1.

Uruguay: Poverty Headcount Ratios 1989–2012

(Percentage of Population Below Poverty Lines /1)

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Source: Socio-Economic Database for Latin America and the Caribbean (CEDLAS), and National Statistics Institute (INE).

Note a change in methodology after 2006. Until 2005 includes only urban areas (more than 5000 inhabitants).

In January 2012, extreme and moderate poverty lines were around $100 and $400 per month per person in Uruguay, respectively.

4. Despite the fluctuations, poverty rates remained among the lowest in the region, and income levels among the highest. Uruguay’s per capita GDP almost doubled between 1989 and 2012 in purchasing power terms, and currently stands among the highest within Latin America (LA). Poverty at national lines declined from 26 percent to 12 percent, and extreme poverty has almost been eradicated with a drop from 3.3 percent to 0.5 percent over the same period (Table 1).3 Nonetheless, the poverty rate in Uruguay remains above the OECD average. Relative poverty, measured as the share of population living below 50 percent of the median income, was around 19 percent in Uruguay in 2010, as compared to 11 percent on average among the 20 advanced country members of the OECD.

uA01fig02

GDP per Capita in PPP Terms

(In thousands of constant 2005 U.S. Dollars)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: World Bank, World Development Indicators.
uA01fig03

Poverty Headcount Ratio

(In percentage of population)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: World Bank, PovcalNet database, and Fund staff calculations.

5. Most of the reduction in poverty since the 2002 crisis has been due to the increase in mean income, though the improved income distribution has also played a significant role in recent years. Calculations based on the Datt-Ravallion (1992) methodology suggest that over the 2003–2011 period, growth in the mean household income explains about 85 percent of the 25 percentage points decline in the poverty rate, with the rest being explained by the change in the income distribution.4 This finding is qualitatively similar to those for most other countries in the region during the same period. However, in the 2006–2011 period, the share of the decline in poverty in Uruguay attributable to an improved income distribution rose to 37 percent (see paragraph 7).5

uA01fig04

LA: Contribution of Growth to Poverty Reduction /1

(Poverty in percentage points, contribution in percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: Lustig et al. 2013.1/ Datt-Ravallion decomposition using the $4 PPP poverty line.
uA01fig05

Uruguay: Decomposition of the Reduction in Poverty /1

(In percentage points)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: Castelan et al. 2013.1/ Datt-Ravallion decomposition using official moderate poverty lines. Urban areas only. Before 2006, urban areas with more than 5000 inhabitants only.

6. Like in the rest of the region, the highest poverty incidence is among young children and the lowest one is among the elderly. Despite recent improvements, children remain at the highest risk of poverty in Uruguay, and were the most vulnerable to fall into poverty following the 2002 crisis. Although child poverty is the lowest within the region, it remains high compared with the levels in the OECD countries.6 As for the elderly, the low incidence of poverty is in part due to the high coverage of contributory and noncontributory pensions in Uruguay, with the tradition dating back to 1919. With the indexation of contributory pensions to wages following a constitutional change in 1989, and strong real wage growth in the last decade, the elderly have moved to higher income deciles and their poverty rates have declined (Amarante et al. 2011).

uA01fig06

Poverty Incidence by Age Group - Uruguay /1

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: Ministry of Social Development, Social Observatory.1/ 1998 and 2004 include only urban areas (more than 5000 inhabitants).
uA01fig07

Poverty Incidence by Age Group - LA, 2012 /1

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: Economic Comission for Latin America and the Caribbean (CEPAL).1/ Poverty rates are based on CEPAL’s own estimates of poverty lines in each country. Therefore, they differ from the official figures.2/ Includes population weighted average of 18 Latin American countries including the LA6, for 2012 or latest data available.

Trends in income inequality

Table 2.

Uruguay: Income Inequality 1989–2012 /1

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Source: Socio-Economic Database for Latin America and the Caribbean (CEDLAS).

Until 2005 includes only urban areas (more than 5000 inhabitants).

7. Income inequality has been low by regional standards but was on an upward trend from the early 1990s until 2007. According to CEDLAS data, after being relatively flat in the early 1990s, Uruguay’s Gini index increased steadily from 42 percent in 1995 to 48 percent in 2007.7 Inequality started to decrease from 2008 onwards in the context of active social policies (Section C) and declined to 41 percent in 2012, a level close to Uruguay’s historical low (Table 2).8 Other metrics of inequality (quintile, decile and percentile ratios) also followed a similar path, gradually increasing until the late 2000s and declining quite rapidly afterwards. Though Uruguay has one the lowest income inequality rates within the region, its Gini index remains 10 percentage points above the OECD average.

uA01fig08

Change in Gini Index /1

(In Gini points)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: World Bank, World Development Indicators.1/ Changes are between 1992–2000 and 2000–2010, respectively.
uA01fig09

Income Inequality, 2012 /1

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: Socioeconomic Database of Latin America and Caribbean (CEDLAS).1/ 2011 for Chile.

8. Top income shares are high by international standards and the relative size of the middle class has decreased over the last decade, though it remains high compared with the region. While the Gini index decreased gradually between 2008–2012, and income shares of the top quintile and decile declined (Table 2), the income share of the top 1 percent of the population remained high around 14 percent between 2009–2011 (Burdin et al. 2014), compared with an average of 10 percent within the advanced OECD.9 Moreover, unlike in most other countries in the region, the size of the middle class, defined as the share of the population living on $10–$50 a day in purchasing power terms (Ferreira et al. 2013), declined in the last decade, from 52 percent in 2000 to 48 percent in 2010. By contrast, the size of the vulnerable class, living on $4–$10 a day in purchasing power terms and at risk of falling into poverty, has increased in the same period. Looking ahead, reducing the size of the vulnerable population remains an important goal.

uA01fig10

Pre-tax Income Share of the Richest 1-Percent

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: World Top Income Database.
uA01fig11

Population Share of Income Classes, 1990–2010

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: World Bank PovCal Database and Fund staff calculations

9. Increases in labor income and employment were the main drivers of the recent fall in income inequality, coupled by a rise in public transfers. A decomposition of the change in inequality between 2003 and 2011 into contributions by the components of income suggests that rising labor income was the single most important driver of the decline in inequality, accounting for 137 percent of the observed decline in the household income Gini. This was followed by a rise in public transfers, which accounted for 13 percent of the decline in the household income Gini, and a rise in the proportion of employed household members, which accounted for 10 percent. By contrast, increases in the number of adults in the household, i.e., demographic change, and increases in pension, capital, and other non-labor income such as private transfers, contributed to a rise in household income inequality.10

uA01fig12

Uruguay: Factors Contributing to Lower Income Inequality /1

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: Castetan et al. 2013.1/ Based on the methodology introduced by Azevedo et al. 2013.

10. As the majority of labor income comes from wages, unsurprisingly, wage inequality has been an important determinant of income inequality. Labor income accounts for about 60 percent of household income in Uruguay, of which 70 percent comes from wage income, and 30 percent from non-wage entrepreneurial and self-employed income. The wage distribution became more skewed between the 1990s through the mid-2000s, and has been improving since then amidst an upward trend in real and minimum wages in a context of reforms in labor market institutions, including the reinstallation of collective wage bargaining in 2005 (Table 3).

Table 3.

Uruguay: Inequality in Wage Distribution and Skill Premium in Wages 1989–2012

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Sources: Socio-Economic Database for Latin America and the Caribbean (CEDLAS).

Ratio of wages for those with a tertiary education (high skilled), secondary education (medium skilled) and primary education (low skilled).

uA01fig13

Share of Low, Medium, and High Skilled Workers in Employment

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: Socieconomic Database for Latin America and the Caribbean (CEDLAS).
uA01fig14

Wage Inequality and Skill Premiums, 2012 /1

(In Gini points)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: Socio-Economic Database for Latin America and the Caribbean (CEDLAS) and OECD.1/ 2011 for Chile and OECD. Skill premiums reflect relative hourly labor earnings of adult males with different levels of education.

11. Wage inequality has been closely linked to the skill premium. From the 1990s through the mid-2000s, for males aged 25–55, wages for those with tertiary education relative to those with secondary education have increased steadily, partly reflecting the increased demand for high-skilled workers during a period of skill-biased technological progress, and the compression of the manufacturing sector following trade liberalization (Casacuberta and Vaillant, 2002). Since 2005, however, an increase in the supply of high skilled workers, due mostly to better access to higher education, and an increase in the demand for lower skilled workers during strong growth in the agricultural and construction sectors, have helped reduce the skill premiums, wage gaps, and income inequality (OECD, 2014). While the share of high-skilled workers in employment increased significantly between the 1990s and the mid-2000s, the share of medium-skilled workers (those with a secondary education) has risen more than that of high-skilled workers since the mid-2000s. The skill premium in Uruguay is among the lowest within the region and is close to the OECD average.

12. Though scope for improvement remains, Uruguay is a frontrunner in several aspects of labor market equity across genders, both within the region and compared with the OECD. Female labor force participation rose from 53 percent in 1989 to 67 percent in 2012, around 5 percentage points above the OECD and Latin American averages. This increase was mainly driven by higher participation among females above the age of 25, while participation among younger females fell over the same period (Table 4). Coupled with a fall in the participation of young males, this increase resulted in a rise in the share of women in the labor force from 39 percent in 1989 to 44 percent in 2012 and in the share of women in employment from 40 to 45 percent. The gender wage gap, defined as the ratio of the male-wages to female-wages, declined from 1.4 to 1.2 in the early 1990s, and stood around 1.1 since then, one of the lowest levels within the region and lower than the OECD average. Nevertheless, there is room for further improvement in gender equality in labor markets, as large differences still prevail in labor market participation rates, and female employment and wages still lag those of males.

Table 4.

Uruguay: Female Labor Force Participation, Employment, and Gender Wage Gap 1989–2012

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Sources: Socio-Economic Database for Latin America and the Caribbean (CEDLAS), and World Bank, World Development Indicators.

Ratio of wages for males to those for females.

uA01fig15

Female Labor Force Participation Rate

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: World Bank, World Development Indicators and OECD.
uA01fig16

Gender Inequality in Labor Markets, 2012 /1

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: Socioeconomic Database for Latin America and Caribbean (CEDLAS) and OECD.1/ 2011 for Chile.

13. Despite having halved over the last decade, youth unemployment remains high compared with the region, especially among women. As in most other countries in the region, the unemployment rate declined steadily since the mid-2000s in Uruguay, and currently stands close to historical lows. However, youth unemployment remains elevated at around 23 percent for females aged 15–24 and 14 percent for males in the same age group. These figures compare with averages of 17 and 12 percent for the rest of the LA6, respectively. The unfavorable performance in youth employment reflects a divergence of skills acquired in schools from those required in the job market, creating a barrier to move from study to work (OECD, 2014).

uA01fig17

Youth Unemployment for Ages 15–24, 2012 /1

(In percent of the labor force for the corresponding age and gender groups)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: Socio-Economic Database for Latin America and the Caribbean (CEDLAS).1/ 2011 for Chile.

C. Social Policy

14. Uruguay has seen a significant increase in public social spending in the last two decades, especially since the mid-2000s on the back of strong economic growth and a deliberate social policy effort. Public social spending as a share of GDP increased from 15 percent in 1989 to 25 percent in 2012, albeit falling temporarily during the financial crisis of 2002 (Table 5). Once the recovery was firmly established, the government carried out a package of comprehensive social reforms to improve socioeconomic conditions, including the expansion in the coverage and amount of social assistance transfers, and the implementation of tax, health care, and labor market reforms, as well as reforms to promote financial inclusion and social housing. Currently, public social spending is among the highest in the region, including on health and education. Nonetheless, public spending on education remains lower than in the OECD. It was 4.6 percent of GDP in Uruguay in 2012, as compared to around 5.4 percent in 2010 in OECD on average.

uA01fig18

LA6: Social Public Expenditure, 2005 and 2010

(In percent of GDP)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: Economic Commission for Latin America and the Caribbean (CEDLAS).1/ For Brazil and Uruguay, the latestsocial expenditure data are for 2009.
Table 5.

Uruguay: Public Social Spending as a Percentage of GDP, 1989–2012

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Sources: Ministry of Social Development Social Observatory, and Banco de Prevision Social (BPS).

Includes contributory pensions, health care, family, and unemployment transfers.

15. The National Assistance Plan of Social Emergency (Plan de Atencion Nacional a la Emergencia Social—PANES), implemented between 2005 and 2007, was the first initiative aimed at reducing extreme poverty and exclusion after the financial crisis. In 2005, the government created the Ministry of Social Development (MIDES) to serve as a coordinating body for all social policies and to implement the newly created social programs, starting with PANES. PANES was a temporary emergency plan targeted to the bottom 20 percent of all households living below the poverty line (accounting for 8 percent of the total population while the official poverty rate was 36.5 percent in 2005), and comprised a set of transfer programs and social support (Amarante and Vigorito, 2012). These included cash transfers such as Citizen’s Income (Ingreso Ciudadano)11 and Food Cards (Tarjeta Alimentaria), housing subsidies, and programs to promote social inclusion, such as Exit Doors (Rutas de Salida) on education, and Work for Uruguay (Trabajo por Uruguay) on employment, aimed at providing better skills to help beneficiaries enter the labor market. Households had also access to the existing contributory and non-contributory Family Allowances (Asignaciones Familiares) and old age pensions in this period.

16. The Equity Plan adopted in 2007 (Plan de Equidad), aimed at reducing poverty and social inequality in a more comprehensive and permanent way. The Equity Plan included far-reaching tax and health care reforms, and restructured and expanded the prevailing Family Allowances. In addition to maintaining the Food Cards from PANES, the coverage in early childhood services was expanded through new Infant and Family Care Centers (Centros de Atencion a la Infancia y la Familia). Furthermore, in 2009 unemployment benefits and non-contributory old age pensions were expanded, and the qualifying age for the latter was lowered. Later in 2012, the government introduced a 22 percent VAT refund on purchases made with Food and Family Allowance Cards benefitting up to 200.000 low income households. The Equity Plan also included several new social programs with limited coverage, aimed at improving the educational and labor market outcomes of eligible beneficiaries.

17. Food and Family Allowances of the Equity Plan benefited a larger share of the population and had a greater impact on poverty and inequality than PANES. Whereas the cost of PANES was 0.4 percent of GDP per year between 2005–2007, and it benefited 83,000 households (5 percent of total households) by the end of 2007, Equity Plan transfers amounted to 0.9 percent of GDP in 2010 and benefited over 400,000 households (16 percent of total households). A counterfactual exercise conducted by Amarante and Vigorito (2012) show that, all else equal, Family Allowances in the Equity Plan helped reduce extreme poverty by 40 percent in 2010, while the reduction was 30 percent for Citizen’s Income under PANES in 2006. Family Allowances also had a larger impact on poverty and inequality than Citizen’s Income, albeit not as large as their impact on extreme poverty. Amarante et al. (2011) estimate that removing Food and Family Allowances would add 1.1 percentage points to the Gini index in 2010, which was 44.3 percent at that time, while removing the personal income tax (and the tax on pensions) would add 1.3 percentage points.

uA01fig19

Coverage of Cash Transfers by Income Decile

(In percent of total households in urban areas)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: Amarante and Vigorito 2012.1/ Includes Food and Family Allowances component only.

18. The government implemented a major tax reform in 2007 to improve the progressivity and efficiency of the tax system. Among other changes, the reform introduced a dual personal income tax (Impuesto a la Renta de las Personas Fisicas, IRPF), which combines a progressive tax schedule for labor income (10 to 30 percent depending on the tax bracket) with a flat tax rate on capital income (3 to 12 percent depending on the income source). Later in 2008, pensions were excluded from the labor income tax base, and a Social Security Assistance Tax was introduced (Impuesto de Asistencia a la Seguridad Social, IASS) (10 to 20 percent depending on the tax bracket). The reform also reduced the VAT and corporate tax rates, streamlined and eliminated a number of low-yielding taxes, and broadened the VAT base. As a result, the reform reduced the reliance on indirect taxation and improved the progressivity of the tax system. Nevertheless, the share of indirect taxes in GDP is still significantly high compared with the region.

uA01fig20

LA6: Central Government Tax Revenue, 2005 and 2012

(In percent of GDP)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: Economic Commission for Latin America and the Caribbean (CEDLAS).1/ Latest tax revenue data for Brazil is 2011.

19. The Uruguayan tax-transfer system is overall effective in improving the income distribution and reducing poverty. Taxes and transfers decrease the Gini index by about 10 percentage points (by one fifth) in Uruguay. The majority of this decline comes from in-kind transfers, such as free or subsidized services related to health, education and housing (Lustig et al. 2014). Direct income taxes and transfers also help reduce income inequality, albeit to a smaller extent than in-kind transfers, due to their lower size as a share of GDP. Direct cash transfers, on the other hand, are among the most effective in reducing extreme poverty in the region. Overall, the Uruguayan tax-transfer system works quite progressively, with its redistributive power surpassing those of several other economies in the region.12

uA01fig21

Gini Index after Taxes and Transfers, 2009 /1

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: Lustig, Pessino and Scott, 2014.1/ 2010 for Mexico.2/ Market income data is not available for Argentina and Bolivia.
uA01fig22

Extreme Poverty after Direct Cash Transfers, 2009 /1

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: Lustig, Pessino and Scott, 2014.1/ 2010 for Mexico.2/ Extreme poverty measured at the $2.5 PPP a day poverty line.

20. Uruguay launched a comprehensive health sector reform in 2007 that aimed at increasing the efficiency and equity of healthcare provision. As part of the health care reform, an integrated health care model was adopted to create a common set of rules for health insurance coverage, including the unification of previously-fragmented insurance rates across sub-systems. The government launched the National Health Insurance System (SNS) in 2007, which provides health care benefits to previously uncovered formal workers, their children under 18 years old, and economically inactive citizens, through public or subsidized private services. In 2010, SNS coverage was extended to workers’ spouses, independent workers, and pensioners. Thus, the public health system coverage increased from 24 percent of the population in 2007 to 47 percent in 2010 and 66 percent in 2013, while total health insurance coverage reached 97 percent of the population. The share of public funding increased from 51 percent of total health care spending in 2005 to 68 percent in 2012, as public health care spending increased from 3.3 percent of GDP to 5.4 percent of GDP during the same period (MEF, 2013).

uA01fig23

Uruguay: Public Health Insurance Coverage, 2007–2013

(In percent of population)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: Ministry of Public Health.

21. Enrollment in education increased at all levels but remains segregated among income groups. Uruguay has public and private education systems at all levels of education, and the enrollment rates at the national level were almost universal (99 percent) for primary school, which is mandatory, 80 percent for secondary school, and 21 percent for tertiary education in 2011 (Table 6). Despite progress in increasing school enrollment rates, post secondary and tertiary education enrollment remains among the lowest in the region, due partly to high repetition rates in lower secondary and drop-out rates in upper secondary levels (OECD, 2014). Public school enrollment, on the other hand, has fallen over the last decade at all levels of education and for all income groups, especially for the top income quintiles (Table 6). In 2011, while most (over 90 percent) of the students from the lowest income quintile still attended public schools at each level of education, public school enrollment rates for students from the highest income quintile were lower (20, 40, and 70 percent at the primary, secondary, and tertiary levels, respectively). The divergence in the quality of education between the public and private school systems, and the differences in financing thereof create inequity in access to quality education.

uA01fig24

Enrollment Rates by Level of Education, 2011 /1

(In percent)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: Socio-Economic Database for Latin America and the Caribbean. (CEDLAS)1/ 2010 for Mexico.
Table 6:

Uruguay: Enrollment in (Public) Education 1992-2011

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Source: Socio-Economic Database for Latin America and the Caribbean (CEDLAS).

Share of children/youth in primary/secondary/tertiary school age attending primary/secondary/tertiary education.

22. The quality of education is a growing concern in Uruguay, as it is for the Latin America region as a whole. According to the OECD’s PISA survey, which assesses 15-year-olds in mathematics, reading, and science, Uruguayan students’ absolute scores declined between 2003 and 2012 in all three subjects, and Uruguay lost its top ranking among Latin American countries (in 2012 it ranked third behind Chile and Mexico in both math and reading). As a whole, Latin America remains the lowest-ranking region in the survey, with all eight countries included in the assessment placed well below the PISA average. Moreover, in the latest PISA survey, together with Peru and Chile, Uruguay ranked among the countries with the lowest equity in education, with a large part of variation in performance explained by socio-economic factors, including parents’ educational and occupational attainment, and living standards. Educational mobility is somewhat lower in Uruguay compared with the region, and has notched down recently, whereas it has increased slightly in other LA6 countries.

uA01fig25

PISA Results, 2009 vs 2012

(In absolute value (lhs), in percentage (rhs))

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Source: OECD.1/ Percentage of variation in student performance explained by socio-economic background.
uA01fig26

Educational Mobility Index for Teenagers of Ages 13 to 19 /1

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: Socio-Economic Database for Latin America and the Caribbean (CEDLAS).1/ The Educational Mobility Index is defined as 1 minus the proportion of the variance of the schooling gap (defined as the difference between (i) years of education that a child would have completed had he entered school at normal age and advanced one grade each year, and (ii) the actual years of education) that is explained by family background. In an economy with very low mobility, family background would be important and thus the index would be near zero.

23. There is scope to improve financial inclusion in Uruguay and the recently approved Financial Inclusion Law is welcome in this regard. Access to financial services is crucial for households’ ability to save in order to insure against economic vulnerabilities and build wealth, and borrow in order to smooth consumption. In Uruguay, only a quarter of adults have an account at a formal financial institution, as compared to one third of adults on average in other LA6 countries. Around half of these accounts are used to receive wages. While credit card ownership is among the highest within the LA6, debit card ownership is among the lowest. In parallel, obtaining loans from a financial institution is more common in Uruguay than in the rest of the region, whereas saving in financial institutions is less common. The Financial Inclusion Law approved in April 2014 requires all wages, pensions, and work benefits to be paid into formal bank accounts or debit cards, and mandates that workers be able to access affordable credit that is repaid directly from these accounts. In addition, the law provides temporary tax cuts on credit and debit card purchases to reduce the use of cash as a payment instrument. These measures are expected to bring about a substantial increase in the access to, and the use of, formal financial services, at an annual fiscal cost of 0.1 percent of GDP until end-2015.

uA01fig27

Selected Indicators of Financial Inclusion, 2011

(In percent of population aged 15+)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: World Bank, Global Financial Inclusion Database.
uA01fig28

Change in Poverty during Crises: LA vs Uruguay 2002 1/

(Poverty rate normalized to 100 in period t-1)

Citation: IMF Staff Country Reports 2015, 082; 10.5089/9781484304310.002.A001

Sources: PovCalNet, Laeven and Valencia (IMF, 2013) and Fund staff estimates.1/ The poverty rate is calculated using the US$4 PPP poverty line, and normalized to 100 in period “t-1". Period “t” indicates the year in which a banking, currency or debt crisis (or a combination of those) occurred based on the dataset compiled by Laeven and Valencia (IMF, 2013). Periods “t-1” to “t+7” denote the years spanning 1 year before and 7 years after the crisis year. The chart covers 26 crisis episodes that occurred in Latin America between 1980 and 2009 for which data on poverty rate for the next 7 years exists.

D. Taking Stock and Looking Ahead

24. Preserving strong and stable growth is essential for cementing and further enhancing the impressive social gains achieved by Uruguay in the last decade. Evidence confirms that poverty increases significantly after economic crises and Uruguay’s experience in the early 2000s was no exception to this pattern. In fact, Uruguay experienced a bigger post-crisis jump in poverty than most other countries in the region. Nevertheless, the expansion of opportunities, and the remarkable reduction in poverty and inequality achieved by Uruguay since the mid-2000s present a success story of an economic and social recovery. The poverty reduction since the 2002 crisis in large part owes to strong economic growth, which raised employment and incomes while also enabling higher spending on social policies. Thus, maintaining strong and stable economic growth going forward and ensuring that social spending policies remain fiscally sustainable over time will be crucial for safeguarding and deepening the social gains achieved over the last decade.

25. Strong skill formation is paramount to securing further gains in poverty reduction. Uruguayan cash transfer policies were successful in reducing poverty rates over the last decade, but a sizable share of the population remains at risk of falling back into poverty. Strengthening job training opportunities and job search assistance, especially for women and youth, would help transfer the poor and vulnerable population into the labor market and thus provide a more durable strategy for eliminating poverty and vulnerability. Recent government initiatives to capacitate young people through career guidance workshops and technical training programs are welcome steps.

26. Enhancing the quality of education is a key challenge for improving equity as well as raising Uruguay’s long term growth potential. Declining PISA scores and the high dependence of student performance on socioeconomic conditions raise concerns on the quality and equity of education. Uruguay currently spends about 4.6 percent of GDP on education, below the 5.4 percent average among OECD countries. While additional resources could be allocated to improve the quality of education, there is room to improve the efficiency of education spending as well. Evidence suggests that Uruguay could save 15 percent in education spending and achieve the same enrollment rates (Grigoli, 2014). At the same time, recent research shows that improved labor skills and education would increase per capita income projected for 2050 by 40 percent in Uruguay (IADB, 2014), creating a virtuous cycle of growth and equity.

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1

Prepared by Elif Türe (WHD).

2

Throughout the paper, regional comparisons are made among the group of LA6 countries, which includes Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. The sample of advanced economies includes the OECD members.

3

Due to methodological changes introduced in 2006 to the household survey (ECH), comparisons before and after the financial crisis should be made with caution. Until 2005 the ECH did not include rural areas and urban areas with less than 5000 inhabitants, but since 2006 it has become nationally representative. National Statistics Institute (INE) extrapolated this methodological change only back to 2002, making comparisons before and after 2002 unfit.

4

The Datt-Ravallion (1992) methodology decomposes poverty reduction into mean income growth and inequality components. The growth component reflects a shift in the income distribution maintaining its shape, while the inequality component reflects a change in the shape of the income distribution maintaining its mean.

5

Amarante et al. 2011 find that 94 percent of poverty reduction was due to mean income growth in 1990–2005, compared with 88 percent in 2005–2010. They find that the increase in poverty in 2000–2005 was completely due to lower growth in mean income.

6

The average child poverty rate (poverty among those under the age of 18) in the OECD was 13.3 percent in 2010, compared with around 24 percent in Uruguay (OECD Family Database).

7

See footnote 3 above for issues of comparability before and after 2002.

8

Note that the official Gini index from INE differs slightly from CEDLAS data: it was 46 percent in 2007, decreased gradually to 38 percent in 2012, and inched up to 38.5 percent in 2013.

9

Burdin et al. 2014 estimate that the income share of the top 1 percent of the population was 13.8 percent in 2009, increased to 14.3 percent in 2010, and slightly decreased to 14.1 percent in 2011.

10

Alves et al. 2010 also find that the fall in the Gini index after the mid-2000s was mostly due to falling labor income inequality coupled with a rise in contributory and non-contributory social transfers.

11

Payments of Citizen’s Income were conditional on the school enrollment of children aged 6 to 14 and health check-ups. In practice, monitoring of conditionalities presented challenges (Amarante and Vigorito, 2012).

12

Bucheli et al. 2013 show that while spending on upper secondary and especially tertiary education is less progressive, and indirect taxes are in fact regressive, the majority of the components of Uruguayan tax-transfer system show high progressivity.

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  • International Monetary Fund, 2014a, Regional Economic Outlook: Western Hemisphere (Washington, April).

  • International Monetary Fund, 2014b, World Economic Outlook (Washington, April).

  • International Monetary Fund, 2014c, Global Financial Stability Report (Washington, April).

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1

Prepared by Diva Singh and Yulia Ustyugova. The authors thank Keiko Honjo and Benjamin Hunt for providing the results from the IMF’s Flexible Suite of Global Models.

2

Much of the analysis in this paper focuses on the period from May 20 to September 5, 2013 for comparability with similar analysis done in the April 2014 Regional Economic Outlook, which focused on this period of maximum EM volatility following the Fed’s tapering announcement.

3

LA6 includes Brazil (BRA), Chile (CHL), Colombia (COL), Mexico (MEX), Peru (PER), and Uruguay (URY).

4

For more details on the empirical approach, see the 2014 IMF Spillover Report, Annex V.

5

See Chapter 3 of the IMF’s April 2014 Western Hemisphere Regional Economic Outlook.

Uruguay: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.