Selected Issues


Selected Issues

Dissecting Economic Growth in Uruguay1

Following the 2002 crisis, Uruguay had a remarkable economic recovery. The major growth acceleration in 2004–14 was explained by a combination of positive external factors, recovery from crisis, and emergence of new export sectors. With external factors no longer a support for growth, Uruguay needs to leverage its strengths to raise growth sustainably. Uruguay’s high level of institutional quality and social cohesion provides a stable container for growth. A comparison relative to its trading partners and high growth peers helps identify areas that Uruguay can further enhance to unleash its growth potential. These include, a strong, flexible, and equitable labor market, better education outcomes, higher private sector dynamism, and continued macro stability.

A. Introduction

1. Uruguay experienced a major economic boom during 2004–14. Following a severe financial crisis in the early 2000s that disrupted banking system, exchange rate and fiscal position, Uruguay enjoyed one of its most significant economic booms during the period of 2004–14. Over this 10-year span, the annual growth in real GDP per capita averaged 4.9 percent, much higher than the 2.3 percent of Latin America and the Caribbean (LAC).


GDP per Capita Growth: LAC vs Uruguay

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Source: WEO.

2. The boom facilitated income convergence with advanced economies. The significance of the boom can be seen by examining Uruguay’s convergence record with advanced countries. Prior to the boom, for 50 years Uruguay’s GDP per capita had been growing at an average annual rate of under 1 percent. Consequently, the GDP per capita relative to the US level had been on a consistent decline since the 1950s, until the trend was sharply reverted in 2004.


Real GDP per Capita

(In percent of the US level)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: Penn world table and IMF staff calculations.

3. Understanding the causes of this recent boom is valuable for designing a long-term growth strategy. Growth has slowed down significantly after 2014—the real GDP growth averaged 1.6 percent from 2015 to 2018. Why has growth dropped? Is the slowdown temporary, or is growth going back to its long-term trend after a brief spike? How to make growth more sustainable over the long run? To answer these questions, helpful insights can be gained by differentiating the short-term causes of the recent boom from the sustainable, longer-term causes, and studying the factors that can strengthen the latter.

4. Identifying the structural impediments to growth will also inform a sustainable growth strategy. What structural reforms does Uruguay need to make growth more sustainable? International comparisons can provide a valuable perspective for answering this question. This paper compares the various structural factors of the Uruguay economy with those of a group of countries that were once at a similar income level and have since converged fast with advanced economies, as well as those of Uruguay’s export competitors. The goal is to identify potential structural weaknesses where reforms may be necessary to improve the country’s international competitiveness and growth potential.

5. The paper is structured as follows. Section B analyses the contributing factors to the recent boom. Section C evaluates their relative importance in the boom. Section D assesses the sustainability of the growth factors. Section E compares Uruguay with the aforementioned peer groups and identifies the potential structural blockages for sustainable growth in Uruguay. Section F concludes.

B. Causes of the Recent Boom

6. The surge in growth during 2004–14 is due to a confluence of demand- and supply-side factors. These factors, which are explained in more details below, include: the bounce-back effect from the previous crisis, a commodity price boom, increases in demand from Argentina, and the emergence of new export sectors.

Recovery from the Crisis

7. Uruguay suffered one of its worst crises in the early 2000s. The crisis was intimately related to the collapse of the Argentine economy at the time, and the banking and debt crises associated with it. Over the period of 1998–2003, Uruguay’s GDP growth averaged -1.7 percent, the worst growth performance in Latin America over that period, except for Argentina and Venezuela.


Real GDP Growth

(5 year average, in percent)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: WEO and IMF staff calculations.

8. Uruguay’s growth has been mean-reverting. An augmented Dickey-Fuller test applied to the annual GDP growth series of Uruguay strongly rejects the null—i.e., the series contains a unit root—at 1 percent level. The stationarity of the growth series suggests that extraordinarily low values in the series tend to be followed by the opposite. The pattern can also be readily observed by visualizing the growth data in a chart. To put in another way, higher growth can be the result of an abnormally low base. The recovery from the severe recession before 2004 thus partly explains the strong growth for at least the initial years of the boom period.

Terms of Trade Shock and External Demand Boom

Commodity Price Boom

9. The commodity price boom during the 2000s stimulated growth. Around 50 percent of Uruguayan exports are agricultural commodities and their derivatives.2 In addition to the income effects, the commodity price boom starting in the early 2000s facilitated the growth of value-added and investment of the agricultural sector.


Commodity Price Index

(2012 = 100)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: WEO and IMF staff calculations.

10. The commodity price boom also had a large impact on Uruguay’s export structure. Soybean production and exports rose from nearly negligible in the early 2000s to account for 15 percent of total exports in 2014. The rising demand from China over the period was the main driver of the increase in soybean price. As the price boomed, exports to China also grew. By the end of the boom period, China had surpassed Brazil and Argentina to become the most important export destination of Uruguay, with soybeans accounting for over half of total exports to China.


Soybean Exports

(Share in percent, exports in mn USD)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: UN Comtrade and IMF staff calculations.

Exports to China

(As percent of total exports)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: UN Comtrade and IMF staff calculations.

Inflows from Argentina

11. Historically the Uruguayan economy is intimately connected with that of Argentina. The crisis in the late 1990s is significantly associated with the currency and financial crises in Argentina. After the crisis, the financial linkages with Argentina have been reduced, with nonresident deposit declining from about 40 percent of total deposits in 2001 to less than 10 percent in 2018. On the real economy side, while good exports to Argentina declined (from close to 15 percent of total goods exports in 2001 to less than 5 percent in 2018), the service exports to Argentina, tourism specifically, remains substantial. And as will be discussed in the next section, due to the close association between service exports and domestic nontradable sector, Argentinian tourism demand has an influence on Uruguay’s domestic price level.


Export Value of Tourism and Travel

(In billions of 2010 USD)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Source: Atlas of Economic Complexity.

12. Argentine inflows during the boom boosted aggregate demand. During the boom period, like many other Latin American countries, Argentina was a beneficiary of the benign external conditions, including rising commodity prices and world demand. Higher growth, combined with a policy environment that discouraged domestic investments, stimulated investment outflows from Argentina to Uruguay. From 2002 to 2012, annual foreign direct investment (FDI) from Argentina increased by 26 times. In addition, though Uruguay has increasingly diversified its destinations for goods exports throughout the 2000s, Argentina remains the largest client for service exports, notably travel and tourism, which constitutes over 15 percent of total exports. Tourism exports grew at an annual rate of 16 percent during the boom, largely aided by increasing demand from Argentina.


FDI Inflow From Top 3 Source Countries

(In billions of USD)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: BCU and IMF staff calculations.

Exchange Rate Appreciation

13. The nominal and real exchange rates appreciated during the boom in line with regional trends. During the 2000s, due to the positive terms of trade movement and growing commodity demand, currencies of the region almost universally appreciated. Uruguay is no exception, with nominal exchange rate vs. USD appreciating over 20 percent from 2004 to 2014. Real GDP in PPP terms almost doubled over the boom period, compared to 68 percent increase without PPP adjustment.

14. The income effect from the nominal exchange rate appreciation helped boost domestic demand in the short term. As a small open economy, Uruguay relies on imports to fulfill a large share of its needs in both consumption and investment goods. Thus at least in the short term, the appreciation supported aggregate demand and growth.3


Real GDP Index


Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sectoral Structural Change

15. The 2000s saw significant growth in some of the nontraditional export industries. One example is the information & communication technology (ICT) industry, which has, during the past decade or so, grown to become one of the largest export sectors in Uruguay, with its size growing from 2 percent of total exports at the beginning of the boom years to the current level of over 10 percent. Notably, the capital city Montevideo has become a leading software development/outsource center in the region, exporting primarily (over 50 percent) to the U.S. market, but with an increasingly diversified set of destinations. Meanwhile, after the large investment by UPM, a Finnish forest industry company, in the mid-2000s, cellulose pulp has emerged as another high-growth export industry. The introduction of this new industry has also had a significant impact on the land usage in Uruguay, with an increasing amount of agricultural land being replaced by forest area.


New Exports

(In percent of total exports)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: UN Comtrade and IMF staff calculations.

Land Usage Composition

(In percent of total land)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Source: World Bank.

16. The growth of new industries has been supported by government policies. During the boom Uruguay implemented specific government incentives to encourage the growth of new export industries. For example, exports of software and related services are 100 percent exempted from income tax (Decree 150/2007). The operation of UPM in Uruguay has also benefited from a variety of incentives.

Productivity Growth

17. Total factor productivity (TFP) growth seemed stronger during the boom years. The measured TFP4 saw an increase over the boom period. However, there is a very high correlation between output growth and estimated TFP growth in Uruguay, reflecting the positive terms-of-trade shock, which has reversed after 2014 (see IMF Country Report 18/24 for a detailed discussion). After 2014, the estimated TFP growth has declined substantially.


TFP Growth

(In percent, 5-year average)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: Penn world table and IMF staff calculations.

C. Relative Importance of Growth Factors

18. To get a broad sense of the importance of different growth factors during the boom years, a simple numerical exercise is run. Even though it is difficult to precisely decompose the cumulative increase in GDP during the boom into the various factors mentioned in the previous section, a numerical exercise was run to gauge their broad magnitudes. For the supply side factors, e.g., ICT, agriculture, tourism, their contribution is calculated as the magnitude of the real increase in the export of that sector during 2004–14, divided by the total increase in real GDP over the same period. For the factor of exchange rate, the estimates by the Selected Issues Paper for Uruguay (2016), of the exchange rate appreciation’s impact on GDP, is applied to the data for 2004–14, to calculate the growth impact of nominal appreciation against the USD. To estimate the rebound effect from the previous downturn, first, real GDP growth is regressed on its lag over 5-year intervals. The rebound effect is then calculated as the difference between the growth rate for the 5 years before the boom and the historical average growth rate, multiplied by the estimated regression coefficient.

19. Rebound from the crisis, positive terms of trade shocks, and emergence of new sectors are among the important factors explaining the 2004–14 boom. The estimation shows that the impact from the rebound accounts for about 13 percent of the boom years’ growth. And over 15 percent of the aggregate growth during the period can be attributed to the rise of various commodity exports, such as in soybean and livestock.5 In addition, the nominal exchange rate appreciation, also associated with the positive movement in terms of trade, explains around 6 percent of the growth during the period. Meanwhile, the export growth from the new industries, i.e., ICT outsourcing and paper pulp, accounts for about 10 percent of the boom-period growth.

20. The estimation result should be interpreted with caution and used as broad guidance. The estimates are prone to several biases. First of all, it is difficult to separate the impact of one factor from another. For instance, growth in the exports of soybeans and tourism is among the causes of exchange rate appreciation. Therefore, depending on one’s perspective, the direct and indirect impact of the supply side factors is likely underestimated. Similarly, external investment inflows also contributed to the appreciation, and therefore indirectly impacting domestic demand, among other possible effects. In addition, it is difficult to isolate the effect of exchange rate appreciation on domestic demand from other factors that boost growth, due to simultaneity bias. Overall, the contribution of appreciation on growth is likely overstated, while the supply-side factors may be understated.

D. Sustainability of Growth Factors

21. All growth drivers are not created equal. Looking at the various factors that contributed to the boom, it is not difficult to see that some factors are more sustainable than others. In particular, with external factors are no longer a support for growth, identifying the more sustainable growth factors will help us think about how to preserve and strengthen these drivers to achieve sustainable growth for the future. At the same time examining the functioning of the transitory growth factors can shed light on how to better capitalize on the temporary growth opportunities to enhance the country’s long-term economic potential.

Sustainability of Supply-Side Factors

22. Agricultural commodities are likely to provide less support to growth over the long haul.

  • First of all, despite the price surge during the 2000s, real agricultural commodity prices empirically display a trend decline over the long run, partly owing to the consistently rising productivity of the sector from technological advances.6 More broadly, commodity prices are expected to remain subdued.7

  • Secondly, data shows that the increased demand from China explained over 60 percent of the world demand increase in soybeans in the previous decade and a half. Yet with the slowing down of China’s growth, soybean price has been on the decline since 2013, and the trend may continue. Meanwhile, although the growth in Uruguay’s soybean exports had been initially exponential during the boom years, partly aided by the country’s geographical advantage as a regional logistics hub, neighboring countries, Paraguay and Brazil in particular, have shown to be strong competitors in the industry, in terms of both cost and productivity. As the market price came down after 2013, Uruguay’s soybean exports have been on the decline,8 while those of some neighboring countries continued to grow.

  • Without higher investments driven by strong external demand, productivity increase in the commodity sector alone may not be sufficient to support economic convergence. For example, soybean productivity as measured by output per planting area is already at par with the technological frontier, as represented by the sector’s productivity in the U.S. And historically, the U.S. soybean sector productivity has been growing at an average rate of 1 percent per year. As such, the productivity growth in the sector would be insufficient to support economic convergence with advanced countries.

  • Other emerging export industries may provide a sustaining source of growth, but not without challenges. The forestry and paper pulp industry enjoy relatively stable export prices and steadily increasing world demand over the medium term. With the second pulp mill investment from UPM, the industry is poised to become the largest exporting industry in Uruguay. The growth of the industry is also expected to positively affect regional income convergence within the country, as its operation primarily locates in the less-developed, inland part of Uruguay. However, aside from a one-time, level effect on GDP from the new pulp mill, the industry’s long-run impact on growth will depend on to what extent it is able to stimulate the growth of other local, auxiliary industries. That in turn, is affected by the various structural constraints of the Uruguay economy, which will be discussed in the next section.


Soybean Export Volume Indices


Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: UN Comtrade and IMF staff calculations.

Wood Pulp Price Index

(In 2015 price)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Source: FRED.

23. The growth prospect of high value-added service exports will depend on the cost, quality, and quantity of labor supply. Over the boom years, the ICT industry grew to be one of the fastest growing export sectors. The comparative advantage of Uruguay in the sector stems from its relatively good telecom infrastructure and its well-educated workforce, in particular compared to other countries in the region. However, data shows that compared to other top ICT exporting countries in the world, Uruguay lags behind in measures of education quality, such as secondary school completion rate and PISA scores and science and math. The quality and quantity of labor supply going forward may pose a challenge to the sector’s long-term competitiveness. Efficiency of labor markets (allocation of workers to high productivity sectors), which will be discussed in the next section, will also influence the sector’s international competitiveness.


Competitiveness in Human Capital

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: WEF, UN Comtrade, and IMF staff calculations.

The Role of Exchange Rate

24. During the boom, nominal appreciation has supported short-term growth. The relationship between growth and exchange rate appreciation is complicated. As a small open economy with a limited domestic market size, the high growth episodes in Uruguay are typically led by positive external demand shocks. And historical data shows that a surge in growth is almost always followed by immediate exchange rate appreciation. To an extent, the nominal appreciation serves to distribute the dividend of external demand windfalls across the population, via de facto increases in income. And the subsequent lift in domestic demand further stimulates growth.

25. While appreciation of the nominal exchange rate was reversed, the real effective exchange rate remained elevated reflecting various factors. During the commodity boom period (2004 to 2014), Uruguayan peso appreciated in real effective terms by 47 percent– and in real terms against the U.S. dollar by about 100 percent. Following the end of the commodity super cycle, the nominal depreciation did not translate into equivalent real depreciation in effective terms, reflecting both external factors (sharp depreciations of the currencies of its neighbors) and an inflation rate higher than its most trading partners. While competitiveness is a function of a broad set of structural factors, an elevated exchange rate might weaken the competitiveness of the noncommodity tradable sector and reduce firms’ profit level, reducing investment.9 This effect may be hard to observe during the boom period, when the general level of economic activity is trending upwards, but it may be more visible when the external demand stimuli are no longer present.10


Exchange Rate vs USD

(Higher = more appreciated, 2005 = 100)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Source: IFS.

26. Compared to regional peers, Uruguay seems to experience larger real exchange rate appreciation, which may potentially reflect a large impact of positive external demand shocks on inflation. The impulse response function from a VAR model for Uruguay and its regional peers11 shows that the short-term response (at t+1) of real exchange rate to GDP shock appears to be among the highest in the region. At the same time, inflation in Uruguay seems to be affected more strongly by terms of trade shocks. A SVAR estimation of terms of trade and inflation indicates a stronger contemporaneous positive impact from the former to the latter, compared to other countries in the region.12 In addition, this pattern is asymmetrical. When the SVAR estimation is run separately for positive and negative terms of trade shocks, the result shows that the positive linkage between terms of trade shocks and inflation is only present when the shocks are positive. In other words, positive terms of trade shocks have driven up inflation in Uruguay, but negative terms of trade shocks did not seem to do much to inflation.


Response of Real Exchange Rate vs USD to GDP Growth Shock

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: WEO and IMF staff calculations.

Impact of Terms of Trade Shocks on Inflation

(From SVAR estimates)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: WEO and IMF staff calculations.

27. This may be partly attributed to the close linkage with the Mercosur market, Argentina in particular. Although over the past two decades Uruguay has significantly diversified its international economic relations, the tie with the regional market remains substantial, and goes beyond the tradeable goods sector. Due to the Argentinian demand on tourism and other services, the prices of which tend to be locally determined, rather than globally set as in the case of most tradable goods, the fluctuations in the Argentinean economy may directly impact the price level of the nontradable sector in Uruguay, which feeds into inflation. And when the economies in the region are hit by the same external shocks, e.g., a surge in commodity prices, the pressure on inflation and real exchange rate tends to come from both global and regional levels, amplifying their impact.

E. Structural Considerations

28. To improve the sustainability of supply-side growth drivers, structural reforms that increase the dynamism of the domestic private sector are needed. A macroeconomic environment that provides stability and flexibility for private sector firms help strengthen the supply-side growth drivers that are mentioned in the previous section. Identifying what Uruguay’s strengths and weaknesses are in terms of the structural factors that define the economic environment is a helpful exercise in this regard.

29. Comparisons with other countries that were once at a similar development stage can help identify the focus of structural reforms. Conventional wisdom in economic growth often points to the general direction of reforms without taking into account the context of development stages. For example, although it may be easy to see that an educated workforce is good for growth compared to an uneducated workforce, the education level of workers also tends to be endogenous of economic development itself. Thus, to identify the appropriate reform priorities, it is helpful to make cross-country comparisons of structural factors conditional on a country’s development stage.

30. A high-growth peer group is selected for the comparison. The peer group is selected by first identifying the countries that were once at a similar development stage—proxied by their GDP per capita relative to the U.S. level—to Uruguay13 in 2018, at any point in time since 1950. Within this group, the countries with the fastest speed of economic convergence14 in the subsequent 10 years are then chosen as the high-growth peer group, provided that there hasn’t been any significant reversal in the country’s convergence process till 2018.

31. Also included in the comparison are the trade competitors of Uruguay. These are defined as the countries that have an export basket similar to that of Uruguay. The resemblance between two countries is calculated as the cosine similarity score between the vectors of “revealed comparative advantage” scores for all SITC 4-digit goods, for the two countries. (The appendix lists the country/year combinations included in both the high-growth peer group and the trade rival group.)

32. Uruguay is compared with the two peer groups across various structural factors. They are categorized into four groups—factors that may affect capital input, labor input, human capital, and total factor productivity of the economy. The appendix lists the data sources of all variables. It should be emphasized that especially for the high-growth peer group, the comparison is done between Uruguay in 2017/2018 and the high-growth countries when their income level was close to that of Uruguay today. When the historical data for a country-year combination is not available, the paper uses data of the closest available year instead.

Investment and Capital Accumulation

33. Investment rate is low compared to peer groups. Investment rate has quickly declined after the boom period, from its peak of 25 percent of GDP in 2012 to around 16 percent in 2017,15 which is close to the historical average rate in Uruguay. And even the peak investment rate during the boom years was still lower than the average of those in high-growth peer countries.


Gross Capital Formation

(In percent of GDP)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: Penn World table and IMF staff calculations.

34. Credit to the private sector is also low. Although obtaining financing is not perceived as difficult according to survey data, the private sector credit to GDP ratio is perennially lower than in most peer countries. This may primarily reflect financing model of private businesses and factors that lower the demand on real investment. On the other hand, supply-side structural issues leading to lower intermediation, such as limited banking sector competition, high lending rates, and insufficient nonbank market financing options may also play a role. The latter is echoed by Uruguay’s financial development score, which is lower than both comparison groups.


Private Sector Credit

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: World Bank and IMF staff calculations.

Financial Development Index

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: IMF Financial Development Database.

Labor Market

35. Uruguay fairs relatively well regarding labor welfare indicators, inequality, poverty, and informality (see SIP on Labor market conditions). As Uruguay continues to close gaps in living standards with advanced economies, it faces the challenge of maintaining social protection for workers while preserving economic efficiency and growth. These achievements, an important part of social cohesion, should be maintained. At the same time, Uruguay—as a small open economy subject to large macroeconomic shocks (including those leading to loss of competitiveness)—needs an adequate degree of labor market flexibility to enable sectoral reallocation of workers to jobs needed for productivity growth (micro flexibility) and to maintain employment at a high level (macro flexibility).

36. Survey data indicate that Uruguay could benefit from further increasing its labor market efficiency. According to survey data by the World Economic Forum, Uruguay is perceived as less flexible than both high-growth peers and trade rivals, in terms of wage flexibility and hiring and firing regulations. In addition, cooperation in labor-employer relations appear to be less favorable.16


Cooperation and Flexibility in Labor Market

(higher = better)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: World Economic Forum. IMF staff calculations.

37. Population growth is low compared to high-growth countries at a similar development stage. The quantity of human capital available in an economy, an essential input for sustainable growth, is strongly correlated with the growth of working-age population. Past researches have also shown that population growth may positively affect productivity growth and speed of innovation, by facilitating the communication and spread of new ideas. It is an established empirical observation that birth rate tends to be negatively correlated with a country’s income level, which helps explain the lower population growth in Uruguay compared to most other countries in the LAC region. However, even compared to the high-growth country group at a similar development level, Uruguay has a slower population growth, as well as an older population.


Annual Population Growth

(In percent)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: Penn World table and IMF staff calculations.

Human Capital

38. Although quantitative provision of education in Uruguay is at par with the high-growth peers, the quality of human capital lags behind. Uruguay scores similarly to the group of high-growth peer countries in measures of education quantity, such as the average years of schooling. However, survey data of private sector stakeholders indicates that the perceived quality of the education system is lower than in both high-growth peers and trade rivals. In addition, compared to the high-growth peer group, Uruguay scored 12–15 percent lower in the math and science scales of the PISA assessments, which measure educational achievements in secondary schoolers. This is consistent with the observation from the previous section that the quality of education, which affects the supply of future human capital, in Uruguay lags behind other countries that are also large ICT service exporters.


PISA Score in Math

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: PISA and IMF staff calculations.


39. TFP growth is lower than in the high-growth peers. Although the estimated TFP growth increased during the boom (reflecting the terms-of-trade shock), over the past 10 years, the average TFP growth was a little over 1 percent per year, close to the country’s historical average, and currently is estimated at around 0–0.5 percent. The TFP growth rate is lower than the average of the high-growth peers at a similar development level, though higher than the average of trade rivals. The following sub-sections will examine the various structural factors that may impact productivity growth.


TFP Growth

(In percent)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: Penn World table and IMF staff calculations.

Institutional Quality

40. Uruguay compares favorably in public governance. The country scores better than the average level of both comparison groups in the measures of judicial independence and corruption within the political system. The latter is shown in past researches to likely deter foreign investments, distort price signals in the economic environment, and reduce the efficiency of both public and private sectors. There is however room for improvement in terms of law enforcement, which might reflect rising crime rate in the country.


Law and Order

(Higher = better)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: ICRG and IMF staff calculations.


(Higher = less corruption)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: ICRG and IMF staff calculations.

Judicial Independence

(Higher = more independence)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: World Economic Forum and IMF staff calculations.


41. The quality of transport infrastructure trails behind high-growth peers and has declined over the years. The quality and quantity of transport infrastructure are crucial for reducing export costs and bridging regional economic inequality. Although the stock of infrastructure capital is not low in Uruguay, due to heavy investments in the late-1970s, infrastructure spending has dropped significantly since the mid-1980s and stayed at an average level of around 4 percent of GDP per year—and for the last few years it fluctuated at around 2 percent of GDP. The boom years of 2004–14 did not see any significant increase in infrastructure investments. As a result, the overall infrastructure stock has not improved, or even slightly declined, depending on the depreciation rate one assumes, over the past 30 years. This helps explain the low score of perceived infrastructure quality compared to the peer groups.


Public Investment

(In percent of GDP)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: BCU and IMF staff calculations.

Transport Infrastructure

(Higher = better quality)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: World Economic Forum and IMF staff calculations.

Business Environment

42. Uruguay is broadly at par with the comparison groups regarding some aspects of the business environment, but there is room for improvement. These include, for example, transaction cost associated with regulatory compliance for tradable sector, tax burden, and licensing and permitting procedures. Moreover, many measures of the business environment have seen improvements of various extents over the boom years, including the overall tax and contribution burden, the quality of business regulations, and export costs. There is still room for improvement in further reducing compliance costs of international trade (relative to high growth peers) and time and cost of registering property.


Compliance Costs of Importing and Exporting

(Higher = lower cost)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: World Bank and IMF staff calculations.

Total Tax and Contributions

(In % of total profits)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: World Bank and IMF staff calculations.

Ease of Starting a Business

(Higher = easier to start a business)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: World Bank and IMF staff calculations.

Registering Property

(Higher score = better)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: World Bank and IMF staff calculations.

43. However, these improvements have not translated into higher dynamism of the private sector. New business activities, as measured by the number of new firm registrations per 1,000 adult population, is 70 percent lower than both peer groups. Moreover, new business activities have been on a trend decline over the past 10 years.


New Business Density

(New registrations per 1000 population)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: World Bank and IMF staff calculations.

Macroeconomic Environment

44. Uruguay has preserved its macroeconomic stability despite severe regional shocks. Over this 10-year span, the annual growth in real GDP per capita averaged 4.9 percent, much higher than the 2.3 percent of Latin America and the Caribbean (LAC). In addition, despite the growth slow down, Uruguay preserved its macro stability in the face of severe regional shocks. In particular, spillovers from Argentina have been limited to the real sector and exchange rate channels, reflecting its robust financial sector, which had markedly reduced its exposure to Argentina prior to the onset of the crisis.

45. There is still room for further improvements. Public debt level, (nonfinancial public sector), real exchange rate volatility, and dollarization are higher than the average levels of comparison groups. In terms of inflation, Uruguay has much higher inflation than its trade rival group (excluding Argentina) and high-growth peer group in recent years.17 Keeping inflation low and stable would also help support efforts to reduce dollarization and indexation, deepen financial markets, and increase the effectiveness of monetary policy.


Real Exchange Rate Volatility

(5-year rolling standard score of USD/LCU rate)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: WEO and IMF staff calculations.

Public Debt

(In percentage of GDP)

Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: WEO and IMF staff calculations.

Current Inflation


Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: WEO and IMF staff calculations.


Citation: IMF Staff Country Reports 2020, 052; 10.5089/9781513530864.002.A001

Sources: IFS and IMF staff calculations.

F. Conclusion

46. The economic boom in Uruguay over 2004–14 was driven by a combination of positive external demand shocks, rebound from the crisis, and emergence of new sectors. The 10-year growth acceleration starting in the mid-2000s was the biggest economic boom in the Uruguay history over the past half century. This boom was propelled by several overlapping factors, including, but not limited to, a bounce back from the crisis in the early-2000s and the growth in external demand of commodities that boosted agricultural export prices, and emergence of new export sectors.

47. The external demand shocks were particularly strong because they came from both within and outside the region. Although the commodity price boom was primarily driven by the demand from outside Mercosur, demand from within the region increased as well. Because Uruguay’s main trading partners in the region, Argentina and Brazil, are also prime beneficiaries of the commodity price boom. The latter manifested as increased capital inflow and demand on tourism, particularly from Argentina.

48. External conditions are no longer supportive: The commodity super-cycle ended in 2014 and the commodity prices are expected to remain subdued going forward. In addition, potential growth of the global economy and key trading partners of Uruguay (including China) is much lower than a decade ago. Furthermore, risks to the global growth are on the downside (2019 October, World Economic Outlook) and Uruguay continues to be subject to large exchange rate shocks stemming from the region. Finally, prices of the some of the key export sectors (such as agriculture) may also be affected by a global trend decline, including due to productivity increases.

49. The emerging new export industries may prove to be a more sustainable driver of growth going forward. New export sectors such as ICT and related business services, as well as forestry and paper pulp, have grown in importance over the boom years but continued growth of new sectors would require leveraging strengths and eliminating the structural bottlenecks for private sector development.

50. Uruguay’s institutional strengths are key for sustainable growth. These include the country’s strong public governance and a stable regulatory environment for trade and foreign investment. In addition, the ongoing infrastructure projects (upgrading road networks and introducing a central railway) will help close the infrastructure gaps and set the ground for higher growth.

51. Structural policy reforms on key constraints to the private sector will help realize the potential of the new export industries and set the stage for inclusive growth.

  • a. Strong, flexible, and equitable labor market is key to support inclusive growth in the face of low population growth and declining labor force participation. Further improvements in the efficiency and flexibility of labor market would help facilitate labor allocation to high productivity sectors, accommodate large negative shocks and incentivize employment.

  • b. Quality and quantity of education should match the needs of skill-intensive new sectors.

  • c. Further improving the business environment, such reducing time and cost of registering property, and financial market development will support the business dynamism.

  • d. Low population growth and aging pressures could be alleviated by further raising female participation or facilitating integration of immigrants into labor market.

  • e. While crime is still low relative to the regional peers, the recent deterioration in crime rates should be addressed before they become macro critical or affects perception on law enforcement.

52. A strong and credible macro policy framework is also essential for growth sustainability. Efforts to reduce debt, inflation, and dollarization and keep them at low levels will lay the foundations for structural reforms to flourish.


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Annex I. The High-Growth Peer Country Group

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Annex II. The Trade Rival Country Group

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Annex III. Data Sources

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By Natasha Che.


The Banco Central del Uruguay aggregates the ISIC classification for exports, which consists of three broad categories: primary activities, manufacturing industries, and electricity, gas, and water. Products are classified as part of manufacturing as long as there is an element of post-primary value added. .


Also see the Selected Issues Paper for the 2016 Article IV Consultation staff report for Uruguay. A full analysis of the causes and consequences of persistent real effective appreciation (including on competitiveness) would require further research and beyond the scope of this paper.


TFP calculated by Penn World Tables is used.


This captures both price and quantity effects.


World Economic Outlook, October 2019.


One may argue that some of the decline can be explained by weather shocks. Though that explains the export volatility more than the trend.


Also see Uruguay’s Selected Issues Paper on exchange rate and competitiveness, for the IMF 2018 Article IV Consultation.


The model comprises real exchange rate vs USD, terms of trade, and real GDP. The sample consists of data for nine South American countries, from 1999 to 2018 at the annual frequency.


The model consists of CPI inflation, changes in terms of trade and GDP growth on an annual level. The text chart compares the estimated coefficients for contemporaneous effect of terms of trade shock on inflation cross country.


Defined as GDP per capita relative to the US falling within a 10 percent band around the level of Uruguay 2018.


Defined as the relative GDP per capita growth being higher than 70 percent of the whole sample.


For cross country comparability, PPP adjusted data from the Penn World Table are used.


Since the data is from a perception-based survey, it is not clear if the perceived lack of cooperation in labor-employer relations is related to any specific labor market policies. More research in this regard is needed.


When Argentina is included, the average inflation of the trade rival group is swayed by the data of Argentina, which is in double digits for much of the sample period. As for the high-growth peer group, inflation in previous decades (1950s–1980s) was generally more elevated than today, reflecting global inflation trends.

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