Uruguayan Economy Research Articles

Contribution of the forest sector to the Uruguayan economy: A first approach with National Accounts

The forest sector development in Uruguay has been based on planted forest areas, mainly with eucalyptus and pine. The Parliament passed the Forestry Law in 1987 and since then the sector has been growing rapidly. The objective of the study is to analyse the contribution of the forest sector in the Uruguayan economy, its evolution between 1997 and 2018 and its distribution in recent years. The research used information from the new National Accounts released by the Central Bank of Uruguay, and, in this framework, the forest sector is studied for the main macroeconomic variables and production. The results show that in the period 1997–2018, while the Uruguayan economy grew 2.6% in constant terms, on average, the forest sector grew 7.6% on average, with peaks in 2007–2008 and 2013–2015. In 2016, the forest production was allocated to exports (46.76%), which surpassed intermediate use (43.05%) after initial operations of the second pulp mill in the country. Furthermore, forest exports represented 10.5% of the country’s total exports of goods and services, showing an exporter profile.

A Contribution to the Explanation of the Long-Term Path of Growth in Uruguay: The Role of Risk Aversion, ICT, and Innovation

During the last five decades, the Uruguayan economy has shown evidence of decline, particularly in terms of GDP per capita at PPP, relative to knowledge-based economy countries. This paper examines - in an attempt to try to contribute to a better understanding of this phenomenon -, three main points. These are: What are the determinants of innovation?; What are the links between innovation and TFP?; and, What variables explain the growth of firms in Uruguay? The use of ICT (in positive) and RISK (in negative) explain the determinants of innovation dynamism in Uruguay. RISK - a variable usually non-existent in models for developed countries - is taken as a proxy of the risk aversion attitude of the entrepreneur and plays a severe negative influence on innovation. Process innovation has a positive effect on the explanation of the TFP, and the growth of firms is explained not only by labor or capital (human and physical), but also depends positively on the use of ICT, and negatively on RISK.

Large-scale mining in a small developing country: Macroeconomic impacts of revenue allocation policies

If fulfilled, the plan to start exploiting iron ore reserves at a large-scale in Uruguay would attract the country’s largest foreign direct investment and would change the productive structure of the country, historically based on agricultural and livestock production. The prospective of large-scale mining could increase public revenue by taxing the activity. However, as the “natural resources’ curse” hypothesis states, there may be some negative effects associated to the exploitation of natural resources: Dutch disease phenomenon, high-income volatility of resources, rent seizing, among others. The aim of this paper is to assess the impact that the exploitation of iron ore reserves might have on the Uruguayan economy, and to discuss different policy options in order to make use of funds derived from the activity. To do so, we apply a dynamic general equilibrium model, and we simulate different revenue allocation policies. Our results show that, even when the exploitation of iron ores reserves might lead to an appreciation of the domestic currency and thus have a negative impact on traditional export sectors, the magnitude of the effect would not be significant, and it would not adversely affect the long-term growth rate. The negative impact can be mitigated with the creation of an intergenerational investment fund, especially when a higher part of it is destined to foreign assets. Destining a high part of the fund to investment in infrastructure also contributes to boost the growth in GDP linked to the introduction of a large-scale mining activity in the country.

A composite leading cycle indicator for Uruguay

This study estimates a composite leading business cycle indicator for the Uruguayan economy following the methodology of The Conference Board. Prediction is based on the analysis of multiple series that have a leading relationship to the Industrial Production Index, which is used as the reference variable of the overall economic activity. Once selected, these series are aggregated into a single composite indicator. Our index covers a 20-year period (from 1994 to 2013). It includes variables covering diverse aspects of economic activity and reaches to advance the two turning points occurred in Uruguay during that period

The Big Question: Fixing Roles

The Big Question: Fixing Roles

Toward a “New” Inflation-Targeting Framework: The Case of Uruguay

Toward a “New” Inflation-Targeting Framework:The Case of Uruguay Matías Escudero (bio), Martín Gonzalez-Rozada (bio), and Martín Solá (bio) Empirical studies in the late 1980s, suggesting that monetary policy might influence the short-run dynamics of the real economy, contributed to the widespread use of inflation-targeting policy rules by central banks. More recent research on monetary economics provide a theoretical framework for the implementation of such rules. For example, Taylor (1993) recommends the use of a simple interest rate rule that is a function of inflation and the output gap. Nowadays it is standard to use the dynamic stochastic general equilibrium (DSGE) model and New Keynesian models to evaluate the effects of Federal Reserve policies. The success of alternative policy rules is usually assessed in terms of the short-run dynamics of the relevant macroeconomic variables. Many central banks use the reference interest rate as a conventional instrument to signal to the public changes in the monetary policy stance. In this way they attempt to achieve the convergence of inflation, and its expectation, upon a given target. Recently several central banks in Latin American countries (LAC) adopted stabilization policies using conventional and unconventional tools to meet their inflationary or financial stability objectives. Among the unconventional tools are reserve requirements (see Glocker and Towbin, 2012, and the references there for several emerging countries outside Latin America; for LACs, see Carvalho and Acevedo, 2008; Ocampo and Tovar, 2003; Ribeira and Barbosa, 2005; [End Page 89] Vargas and others, 2010). In highly dollarized LAC, changes in reserve requirements have been used as a macroeconomic prudential tool, with the main objective of accumulating liquidity being to address financial stress (see León and Quispe, 2010; Vargas and Cardozo, 2012; Tovar, Garcia-Escribano, and Vera Martin, 2012; Carrera and Vega, 2012) and to complement the use of the reference interest rate in order to achieve the inflation target objective (see Comunicados del COPOM, 2007–12, for Uruguay; Glocker and Towbin, 2012). However, most of the literature on the use of reserve requirements in LAC is not only empirical but is mostly focused on the impact of these requirements on interest spreads and bank profits. The main conclusion from those studies is that an increase in reserve requirements induces an increment in interest rate spreads and a fall in bank profits. An increment in reserve requirements acts as a tax on the banks and widens the spread between lending and deposit rates (see Glocker and Towbin, 2012). Monetary policy shocks typically generate a short-run fall in inflation through a contractionary effect on economic activity. Furthermore, in highly dollarized economies, these shocks may also have undesirable effects on the foreign exchange market (Montoro and Moreno, 2011). Therefore, the use of reserve requirements may be an important unconventional monetary policy tool, since it could help to achieve the inflationary target without having major effects on the exchange rate market (that is, without attracting capital inflows), and it may also reduce the negative impact of the increase in interest rates on output. Nevertheless, the short-run effects of this type of policy are not obvious, since it depends on, among other things, the combination of instruments chosen to achieve the target and the type of target under consideration. The main objective of this paper is to describe the impact of using conventional and unconventional tools to meet inflationary or financial stability objectives in a dollarized economy. This paper explores, for the Uruguayan economy, the impact of these policies, using a relatively standard model of a small open economy with sticky prices, financial frictions, and a banking sector that is subject to legal reserve requirements.1 The three main findings of the paper are as follows. One, reserve requirements can be used to achieve the inflationary objectives of the central bank. [End Page 90] However, reducing inflation using this instrument also produces a real appreciation of the Uruguayan peso. Two, when the central bank uses the monetary policy rate as an instrument, the effect of the reserve requirements is to reduce the negative impact on consumption, investment, and output of an eventual increase in the interest rate. Nevertheless, the quantitative results in terms...

Planting Progress? The Everyday Impacts of Plantation Forestry on Small Farmers in Interior Uruguay

A turning point in the Uruguayan economy came in 1987 with the creation of its Forestry Law, aimed at promoting the expansion of monoculture alien tree plantations. With the forestry came the foreign-owned pulp mills, and in 2007 the first load of cellulose was produced in Uruguay near the small interior city of Fray Bentos. Along with nearly one million hectares of Forest Stewardship Council (FSC) certified planted forest, the arrival of the pulp mill and eucalyptus trees brought with them the promise of more jobs for the country's interior, where rates of unemployment are highest, and an industry relying on the “best technology available” to ensure the most sustainable practices. With these developments, Uruguay officially entered the “green economy.” Yet, while the government and industry work to ensure that the environmental benefits of trees are recognized and contamination levels minimized, very little has been said on how small farmers working the land in the country's rural areas have been affected by the changing industry. Loss of productive land and traditional livelihoods, drying water wells, social isolation, and the destruction of longstanding communities are just some of the underexplored consequences of the plantation economy. Taking into account these impacts, this article will examine the ways that the growing pulp/plantation industry is changing the socio-cultural relationships of ranchers and farmers with the land on which they live and work and suggests that assessments of industry's environmental impacts need to consider residents' accounts of change along with the quantitative data to build a complete picture.

GREENHOUSE GAS EMISSIONS AND ECONOMIC STRUCTURE IN URUGUAY

Using input–output analysis, we identify the key sectors in greenhouse gas (GHG) emissions of the Uruguayan economy. The responsibilities of each sector in terms of its emissions are decomposed into an own component, generated during the activities of the sector, and an indirect component, generated by the induced activities in other sectors. This has important implications for the design of mitigation polices, as the appropriate policy measures are contingent on the nature of the pollution. Technical improvements and best practices are effective only when applied to directly polluting sectors, while demand policies may be more appropriate for indirectly polluting sectors. In addition, we analyze pollution generated during the production of exports. The results show that demand policies are going to be effective in the Building, the Hotel and restaurants, and the Wholesale and retail trade; and repair of motor vehicles and motorcycles sectors. These policies complement GHG emissions’ mitigation policies in directly polluting sectors (mainly the Cattle farming and the transport-related sectors). Finally, methane and nitrous oxide emissions are mainly the consequence of production for exports, while carbon dioxide emissions are mainly driven by production for domestic consumption.

Polarization and the Middle Class

There is an increasing literature that discusses how to measure the middle class. Some approaches are based on an arbitrary definition such as income quartiles or the poverty line. Recently, Foster and Wolfson developed a methodology which lacks of arbitrariness that enables us to compare the middle class of two different income distributions. We apply this new tool jointly with a complementary method - relative distribution approach - to household income data in 1994-2004 and 2004-2010, to analyze the evolution of the middle class and polarization in Uruguay. During the Orst period, which is characterized by an increasing income inequality, we find that the middle class declined and income polarization increased. In the second one, where the Uruguayan economy experienced a recovery from the downturn suffered in 2002, we find that the middle class rose and polarization decreased. However, this last result is attenuated when we do not consider the household income imputation because of the new health system implemented in 2008.

The Role Of Railways In Export-led Growth: The Case Of Uruguay, 1870–1913

ABSTRACT The social saving literature has highlighted the indispensable role that railways played before 1914 in several Latin American export-oriented economies, such as Mexico, Brazil and Argentina. The article analyses the case of Uruguay, a country that, by 1914, had built one of the densest railway networks in Latin America. The article shows that, in contrast to what happened in other economies of the region, the resource saving effects of the Uruguayan railways during the first globalisation were tiny due to the small share that railway output accounted for within the country's gross domestic product (GDP). Three complementary reasons are suggested to explain that result, namely: the geographical structure of the country; its sectoral specialisation; and the small scale of the Uruguayan economy. Due to these three characteristics, Uruguay was unable to benefit from railways in the way that other export-oriented Latin American economies did during the first period of globalisation. This conclusion draws attention to the geographic-specific character of railway technology.

Assessing the Impact of the Global Financial and Economic Crisis in Developing Countries: The Case of Uruguay

This paper uses a static computable general equilibrium model (CGE) linked to a microsimulation model to analyze how the global crisis and some adopted policy responses may have affected the Uruguayan economy. The focus is on the trade channel and foreign capital flows, since they are the most important mechanisms through which the global crisis affected the Uruguayan economy. The crisis had a strong impact on exports and fixed investment. Poorest households would be the most affected, as they face a stronger reduction in real wages and a rise in unemployment. We find a negative impact on extreme poverty, but not on moderate poverty, as households near the poverty line would benefit from the fall in some consumer prices. A policy based in increasing current public consumption does moderately counteract some negative impacts of the crisis, but benefits mainly skilled workers, and does not act directly towards the most affected.

Armington Elasticities: Estimates for Uruguayan Manufacturing Sectors

The high degree of openness of the Uruguayan economy and the fact that the country is characterised by being constantly subject to shocks, strongly suggest the use of simulation tools that allow for predicting its future evolution under different scenarios. Currently, Computable General Equilibrium Models (CGEMs) applied to trade are one of the most potentially powerful available instruments for doing such analyses. Although there already exists some research performing this methodology for Uruguay, accumulation in the area is still scarce. As it is well known, operational CGEMs critically rely on the availability of many parameters, especially related to elasticities, among which Armington elasticities of substitution are crucial when the models are applied to trade. In the case of Uruguay, these parameters have been imposed in order to have coherent simulations and/or using available estimates for other economies. Hence, in order to obtain more robust results, it is of upmost interest to specify and estimate Armington models that would provide estimates of the elasticities using Uruguayan data. The work here summarized intends to start filling in this gap. We performed the task at a 4 digit level of disaggregation (ISIC, Rev.2) for 32 manufacturing sectors along 1989 to 2001, using monthly and quarterly data. We specify our models following Armington’s original proposal. In doing so, we took special care in methodological issues that might hinder the robustness of results. Finally, it is worth mentioning that, in many cases, the value obtained as the upper bound of the estimated intervals is very similar to the magnitude needed for CGEMs simulations to be sensible, as reported in the literature and, particularly, when compared with those stemming from GTAP.

El largo declive de Uruguay durante el siglo XX

Durante el siglo XX Uruguay asiste a un sostenido declive económico. Tres hechos estilizados caracterizan el proceso: 1) el crecimiento comparado resulta pobre; 2) las fluctuaciones económicas son comparativamente profundas y 3) al menos durante la segunda mitad del siglo, el crecimiento de la economía se debe más a una intensificación en el uso de los factores de producción que a una mayor eficiencia en la forma en que estos fueron empleados. A raíz de ello, al finalizar el siglo los habitantes de Uruguay eran relativamente menos ricos de lo que lo eran 100 años antes. El artículo incluye un ejercicio de convergencia que muestra que durante el siglo XX la trayectoria económica de Uruguay no converge con su mundo relevante; una comparación de las fluctuaciones económicas cíclicas de la economía uruguaya, y un ejercicio de contabilidad del crecimiento que identifica la contribución de los factores al crecimiento de Uruguay.

The Fixed-Income Market in Uruguay

Uruguay’s capital markets remain underdeveloped despite the country’s financial liberalization dating back to the 1970s, which was reinforced by passage of several additional laws in the 1990s whose aim was to promote the local financial markets. The government is able to raise funds domestically in what is a liquid bond market, but private firms continue to fund themselves mostly out of retained earnings or else via bank loans and suppliers’ credit. Moreover, when compared to others in Latin America, Uruguayan firms feature the highest ratios of liability dollarization, and corporate debt structures with the shortest maturities – currency and maturity mismatches that render them (and by extension, their creditors) extremely fragile. A deepening of the domestic capital market would probably alleviate this vulnerability of the Uruguayan economy. The financial fragility of Uruguayan firms amplified by corporate governance issues are the main impediments for the development of the capital markets. Given the current firm practices and the absence of sizeable institutional investors besides pension funds, the fixed-income market will most likely remain a source of funding for very few firms.

The Effects of Increasing Openness and Integration to the MERCOSUR on the Uruguayan Labor Market: A CGE Modeling Analysis

Uruguay is a small economy. Its integration to MERCOSUR has increased the exposure to regional macroeconomic inestability. The aim of this paper is to assess the impact of regional integration and trade openness on labour market and poverty. The analysis of the Uruguayan labour market shows clear evidence of the existence of wage differentials between sectors and labour categories. We estimated wage differentials between labour categories, finding a 60% wage gap between formal and informal workers. Taking this into account, a CGE model with an efficiency wage specification for unskilled labour and full employment was developed. There is an informal perfect competitive sector where laid-off workers from formal efficiency wage sectors go. Other than this it is a conventional perfect competence model with Armington specification. Following Cox (1994) it is assumed that Uruguay is a quasi-small open economy with three trading partners: Argentina, Brazil and Rest of the World. One clear conclusion of the simulations carried out within that model is that the Mercosur economies deeply affect the Uruguayan economy through changes in relative prices. Similarly, a restriction on external savings as a consequence of the instability in the region have significant and negative effects on the Uruguayan labour market. The consideration of efficiency wage model is particularly important when shocks lead to a reallocation of resources towards sectors intensive in unskilled labour. The simulation of a specific policy –a 10% direct subsidy on formal unskilled employment- show that wage differentials and informality can be reduced, but in the long run this type of policy might have negative effects on investment and human capital accumulation. Finally, microsimulations were carried out in order to assess the impact of those shocks on poverty and income distribution. The results obtained are consistent with the results of the CGE experiments. The evidence presented in this paper show the importance of taking into account the existence of imperfections in the labour market. The effects of external shocks, as well as the impact of some policies, are clearly different in the presence of those imperfections. This fact emphasizes the need to make an appropriate diagnosis of the labour market when modeling the economy of a particular country.

Business Cycle Fluctuations in a Small Open Economy: The Case of Uruguay

This paper provides an empirical description of the business cycle regularities of the Uruguayan economy between 1975 and 1994. The method of estimation of the cyclical components is based on the application of the Hodrick-Prescott filter over the unobservable trend-cycle components estimated from reduced-form univariate models. The method used to derive cyclical components offers two advantages over the procedures usually used in the literature. First, the cyclical component is extracted from time series that have been previously seasonally-adjusted using a method which explicitly takes into account the specific characteristics of the estimated data generating process. Second, given that irregular components are excluded from the estimation of the final cyclical components, correlations considered in the characterization of the business cycle are not affected by non-systematic oscillations (noise) in the series. The pattern observed in the cyclical comovements of the aggregate supply and demand components as well as their levels of relative variability are similar, in general, to those observed in other economies. However, some characteristics seem to be specific to the Uruguayan economy: procyclical and low-volatility public sector expenditure, cyclical lag of monetary aggregate fluctuations and countercyclical interest rates. Exports, ex-ante real interest rates in local currency and the GDP of neighbor countries Argentina and Brazil behave as leading indicators of the reference cycle of the Uruguayan economy.

Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis: Evidence from Uruguay

Both analytical models and casual empiricism suggest that the timing of the recessionary costs associated with inflation stabilization in chronic inflation countries may depend on the nominal anchor which is used. Under money-based stabilization, the recession occurs at the beginning of the program, while under exchange rate-based stabilization the recession occurs later in the program. This paper provides a first attempt to formally test this hypothesis using a vector-autoregression model for Uruguay. The impulse response of output to different stabilization policies is broadly consistent with the recession-now-versus-recession-later hypothesis. The evidence also suggests, however, that the effectiveness of a monetary anchor in reducing inflation is hindered by the high degree of dollarization of the Uruguayan economy.

Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis: Evidence From Uruguay

Both analytical models and casual empiricism suggest that the timing of the recessionary costs associated with inflation stabilization in chronic inflation countries may depend on the nominal anchor which is used. Under money-based stabilization, the recession occurs at the beginning of the program, while under exchange rate-based stabilization the recession occurs later in the program. This paper provides a first attempt to formally test this hypothesis using a vector-autoregression model for Uruguay. The impulse response of output to different stabilization policies is broadly consistent with the “recession-now-versus-recession-later” hypothesis. The evidence also suggests, however, that the effectiveness of a monetary anchor in reducing inflation is hindered by the high degree of dollarization of the Uruguayan economy.

Microeconomic adjustments in Uruguay during 1973–1981: The interplay of real and financial shocks

This paper uses the financial statements of industrial firms to develop an integrated firm's eye view of the changes in the Uruguayan economy during 1973–1981. In the first of three subperiods, 1973–1975, real financial costs were very negative and tended to offset low returns on operating assets. During 1976–1978, the dismantling of interest rate controls increased real financial costs, but other factors increased the returns on operating assets more rapidly. During 1979–1981, financial costs jumped enough to more than absorb increases in gross earnings, which were probably due to Argentine demand. The rates of earning and capital formation were highest among exporters in the second subperiod, when a major export promotion program was in place. This pattern was reversed in the third subperiod, as the promotion programs were dismantled and real currency appreciation seemed to squeeze gross earnings of exportables relatively more. This unequal squeezing was probably due to redundant tariff and other protection for import-competing producers.

The Uruguayan Economy: Its Basic Nature and Current Problems

The economic history of Uruguay from the turn of the century up to the early 1950's is characterized by economic growth, by extensive governmental involvement in economic activity, and by an ardent secularist faith in the welfare state ideals of the great José Batlle y Ordóñez and the Batllista tradition which lived on after him. Its small size, stable democracy, and apparent aloofness from the problems of the rest of the continent have earned la Republica Oriental del Uruguay such sobriquets as the “Switzerland” or “Utopia” of South America. Beginning in the early 1950's, however, there were signs that this country which had for so long been a model laboratory for progress and reform to its crisis-ridden neighbors, was itself about to face a crisis. The economic dimension of the Uruguayan crisis is that the annual per capita gross national product (currently about 500 dollars) has not risen for over a decade, and has in fact declined slightly in the last several years.