Uruguay - Economic memorandum

A WORLD BANK COUNTRY STUDY PUB-2241 URUGUAY Economic Memorandum FILE COPY JANUARY 1979   URUGUAY Economic Memorandum This report js based on the findings of a mission to Uruguay in May 1978 consisting of: Alfredo Gutierrez, chief of mission Jose Luis Cordeu, agricultural economist Hernando Gomez-Otalora, consultant on industry Luci. Reca, consultant on agriculture Dolores Velasco, research assistant The report was discussed with the Uruguayan government in November 1978. Latin America and the Caribbean Regional Office The World Bank Washington, D.C., U.S.A.  The World Bank issues country economic studies in two series. This report is a working document and is, as such, part of an informal series based wholly on materials originally prepared for restricted use within the Bank. The text is not meant to be definitive, but is offered so as to make some results of internal research widely available to scholars and practitioners throughout the world. A second, more formal series entitled World Bank Country Economic Reports is published for the Bank by The Johns Hopkins University Press, Baltimore and London. Titles of these and all other Bank publications may be found in the Catalog of Publications, which is available free of charge from World Bank, Publications Unit, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. This report is a free publication. A small charge may be made if airmail postage is required. The views and interpretations in this report are the authors' and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting in their behalf. Copyright 0 1919 The International Bank for Reconstruction and Development/The World Bank The World Bank enjoys copyright under Protocol 2 of the Universal Copyright Conven- tion. Nevertheless, reproduction of any part of this report is hereby granted provided that full citation is made.  PREFACE World Bank country economic studies such as this "Economic Memorandum on Uruguay" .are prepared primarily for the Bank's own use. Their purpose is to provide the information and analysis the Bank needs for planninIg its own lending operations and for its discussions on economic deveiopment policies with the officials of the country concerned. Circulation of these reports is normally restricted to the "official community" -- governments which are members of the Bank and international organizations concerned with development problems. in cases where the issues studied have attracted considerable general interest, where we believe the Bank's report could contribute sub- stantially to knowledge and understanding of the problems involved and where the authorities of the country concerned agree to removal of the normal "official use only" restriction on distribution, it seems desirable to make these reports available to a wider audience. This is such a case. The reader is advised, however, that this is a working document rather than a study pre- pared and edited with a view to broader distribution. In recent years Uruguay has been undergoing a process of transition from a situation of economic stagnation to a period of moderate but steady economic growth. This turn-around in economic performance is explained by a significant change in development strategy from an inward-looking to an export-oriented growth policy. A basic objective of economic policy since 1974 has been to foster export growth through a more efficient allocation of resources. The implementation of a more realistic exchange rate policy has been instrumental in generating an unprecedented growth of non-traditional exports, which now account for about 60% of total export earnings. Over the foreseeable future, Uruguay's economic outlook will depend on the evolution of non-traditional exports as well as the recovery of agricultural production which has stagnated during recent years. The foundation of the Uruguayan economy will continue to be the agricultural sector, as the future development of non-traditional manufactured exports is largely tied to the output of agricultural raw materials. Recent policy mneasures aim at liberalizing the pricing and niarketing system in agriculture, and, if fully carried out, should contribute to the sector's development. Although short-term economic management still. remains a priority particularly with regard to the control of inflation, an important task facing the authorities is that of continuing to formulate a policy framework conducive to the relaxation of rigidities, such as price distortions, that still characterize the productive sectors. It is hoped that this study will contribute to a better understanding of these issues both in Uruguay and in other countries facing similar situations, and in this way support the economic development efforts of these countries. Nicolas Ardito Barletta Vice President Latin American and the Caribbean Regional Office   CURRENCY EQUIVALENTS Exchange Rates Effective May 25, 1978 Comnercial Rate Buying US$1.00 - NUr$5.75 Selling US$1.00 - NUr$5.76 Financial Rate Buying US$1.00 - NUr$5.76 Selling US$1.00 - NUr$5.77   TABLE OF CONTENTS PaRe No. COUNTRY DATA MAP SUMMARY AND CONCLUSIONS ............................... i-viii 1. RECENT ECONOMIC PERFORMANCE - Introduction ..................................... 0............ I - Growth of Income and Output ................. 2 - Money and Credit ............................... 5 - Public Finances ..................... 8 - Prices and Wages .................. ................. 15 - Balance of Payments and External Debt .... .......... 18 II. NON-TRADITIONAL MANUFACTURED EXPORTS AND INDUSTRIAL GROWTH - Origins of Industrialization ........................ 24 - Performance of Non-traditional Manufactured Exports and Industrial Growth ..... ............... 26 - Export Promotion Policies .......................... 28 - Prospects for Non-traditional Manufactured Exports 33 111. AGRICULTURAL DEVELOPMENT: POLICIES AND ISSUES - Introduction ........ .............. 39 - Agricultural Stagnation ............ .. .............. 40 - Past Agricultural Policies ........... .. ............ 49 - Recent Policy Shift ...... .......................... 55 IV. GROWTH PROSPECTS - Growth and Investment .............................. 58 - Public Investment Expenditures ..................... 59 - Balance of Payments and Creditworthiness .... ....... 61 STATISTICAL APPENDIX   Page 1 of 2 pages COUNTRY DATA - URUGUAY AREA 2/ POPULATION DENSITY 177.5 kim million (mid-1976) 2.8 per i- Rate of Growth: 0.8 (from 1974to 76 ) 18 per kz-/of arable land POPULATION CHARACTERISTICS 1975 HEALTH 1975 Crude Birth Rate (per 1,000) 20.4 Population per physician 840 Crude Death Rate (per 1,000) 9.3 Population per hospital bed 150 3/ Infant Mortai'Ly (per 1,000 live births) 48.1 INCOME DISTRIBUTIION 1967 DISTRIBUTION OF LAND OWNERSHIP % of national income, highest quintile 19.0 2 owned by top 107 of owners lowest quintile 14.2 % owned by smallest 10Z of owners ACCESS TO PIPED WATER 1971 ACCESS TO ELECTRICITY 1963 7 of population - urban 87.8 % of population - urban 49.0 - rural 66.4 - rural 29.0 NUTRITION 1975 EDUCATION 1975 Calorie intake as % of requirements 116.0 Adult literacy rate % 94.0 Per capita protein intake 98.1 Primary school enrollment % 95.0 GNP PER CAPITA in 1976-: US $1,390 GROSS _NATIONAL PRODUCTIN1977 ANNUAL RATE OP GROWTrH (C constant prices) US $ Mln. % 1965-70 197"-75 1977 GNP at Market Pr' es 4,126.2 100.0 2.2 0.8 3.3 Gross Domestic Irnvestment 598.5 14.5 6.6 1.3 39.3 Gross National Saving 499.8 12.1 -4.0 -0.4 20.3 Curnent Account Balance -98.7 -2.4 Exports of Goods, NFS 856.6 20.8 0.6 5.2 0.3 Imports of Goods, NFS 894.1 21.7 9.5 0.5 8.4 OUViPU, LABOR FORCE AND PRODUCTIVITY IN 1975 Value Added Labor Porced V. A. Per Worker US$Mln. % Mln. . US$ % Agriculture 430 13.7 0.21 19.8 2,047 0.70 Industry 1,027 32.7 0.31 29.0 3,312 1.18 Services 1,684 53.6 0.55 51.2 3,061 0.98 Unallocated Total/Average 37T41 100.0 1 07 100.0 2,935 100.0 GOVERNMENT FINANCE 4 General Government 4- Central Government (NLr$,Mln.) %. of GDP (NUJr$ Mln.' % of GDP 1977 1977 1975-77 1977 1977 1975-77 Current Receipts 7,810 39.2 37.2 2,938 14.7 13.7 Current Expenditure 7,414 37.2 35.8 2,796 14.0 14.1 Current Surplus 396 2.0 1.4 0.7 -04 4- Capital Expenditures 1,092 5.5 4.8 3F2 1.9 1.9 External Assistance (net) 187 0.9 0.9 33 0.2 0.3 1/ The Per Capita GNP estimate is at1975 market prices, calculated by the same conversion technique as the 1976 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 2/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. not available not applicable 3! 1970 data. s/ Total publi SeftnOl  Page 2 of 2 pages COUNTRY DATA - URUGUAY MONEY, CREDIT and PRICES 1972 1973 1974 1975 1976 1977 (7Million NUr$ outstanding end period) Money and Quasi Money 316.2 497.7 858.2 1,596.4 3,206.5 6,149.7 Bank Credit to Public Sector 82.9 90.1 209.1 388.0 551.3 731.0 Bank Credit to Private Sector 255.7 416.9 930.8 1,719.8 2,912.6 5,359.1 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 25.5 19.3 18.6 19.1 24.7 30.9 Consumer Price Index (1968 - 100)/1 407.6 723.4 1,499.6 2,501.7 3,501.1 5,506.3 Annual percentage changes in: Consumer Prige Iidex 94.7 77.5 107.3 66.8 39.9 57.3 Bank credit to Public Sector -13.2 -38.4 11.2 11.5 1.3 -15.3 Bank credit to Private Sector 5.0 -8.1 7.8 10.6 21.1 16.9 BALANCE OF PAYMENTS HZRCHANDISE MEPORTS (AVERAGE 1975-77) US Hl. % 1975 1976 1977 Beef 105.2 20.2 (Millions US $) Wool 106.9 20.5 Rice 30.6 5.9 Exports of Goods, NFS 551.1 696.2 871.1 Wheat 6.9 1.3 Imports of Goods, NYS 676.3 705.1 907.1 Linseed oil 7.4 1.4 Resource Gap (deficit - -) -T17.2 -F.9 :Co0 Hides and skins 30.5 5.9 Manufactured goods 189.5 36.4 Interest Payments (net) /3 -45.6 -57.2 -56.2 All other commodities 43.3 8.3 workers' Remittances . . . 520.3 1QQ- Other Factor Payments (net) -25.6 -15.2 -11.7 Net Transfers 6.9 7.7 6.6 EXTERNAL DEBT. DECEMBER 31. 1977 Balance on Current Account -189.5 -73.6 -97.3 US $ Mln Direct Foreign Investment Net MLT Borrowing - - - Public Debt, incl. guaranteed 706.3 Disbursementi 284.3 214.9 205.0 Non-Guaranteed Private Debt - Amortization -181.9 -148.3 -186.8 Total outstanding & Disbursed Subtotal 102.4 66.6 18.2 Capital Grants 5.4 5.4 - DEBT SERVICE RATIO for 1977 /2 Other Capital (net) -94.1 47.2 100.8 -, Other items n.e.i 103.0 66.1 1L.9 Increase in Reserves (+) 72.8 -111.7 -160.6 Public Debt, incl. guaranteed 27.9 Non-Guaranteed Private Debt Gross Reserves (end year) 218 315 459 Total outstanding & Disbursed 27.9 Net Reserves (end year) RATE OF EXCHANGE IBRD/IDA LENDING. JULY , 1978 (Million US $): Average 1971 IBRD IDA US S 1.00 -.NUr$0.563 1.00 - US $1.78 Outstanding & Disbursed 73.8 - Undisbursed 17.7 - June 197R Outstanding incl. Undisbursed 91.5 - US $ 1.00 - NUr$5.9 NUr$ 1.00 - US $0.18 /1 December index /2 Ratio of Debt Service to Exports of Goods and Non-Factor Services. /3 Interest on public debt only not available not applicable October 1978.  _ B R D 13752 _30, 58 / - ~~~~~~~~~56, 54. . ' i6 / ~~~~~~~~~~~ARTIGAS. URUGUAY t { AX R T I / G 5\ \ 1 0 1 POPULATION DENSITY, 1975 MEM I r/\ 1,750 Inhabitants per sqoare k lometer . < 65 \t t / \ 2 C <tEtlBA , I i hS Ir6 abitonts per sq,ore kilometer ER . . F J AArorE ) > '4rs a- 10-20 Inhoaitonts per sqoofe kilometer _ 0- 10 Inholsitores per square kilometer Z -K Main Roads 'k- $~~~~~~~~~~~~~~~~~~~~~~~~ecomdoq Roads Roilroads _ A,,)t| X R< T/O>/ 9 e - --- eprtment Bounadries . N#Y/ / - z \ l / \ - -. Internotional Boundaries 0 20 tO 60 so too S tt r ~~~~~~~<= ==+ \pichade a/L\ KlL~~~~~~~~~~~~~~~~~KOMtETERIS 32, 0 32 - O X X J A < P A Y S A N D U 4/ T A C U \ e<g9>b S . S'PAYSAND6 /3_ L\\ R S \ E / S \ ' 1/ ~~~~~~~~C E R R< 0 L RG B, 'at ft~OtnPatnUNG0 E00 i /\1 bRA L//~~~~~~~~RZN *pObvtLC 1 eAt lmDDettSyatTieNtXl ea _ T )NJ D I/ .riSa ,otC.,. &*tt , r;> t , ARGENTINA~~J-- E A R T/CO- 4ttnt \ . ,bt ;) Octan Be' 856- 54'*A   SUMMARY AND CONCLUSIONS General i. During the last four years the Uruguayan economy has been undergoing an important transition process from a situation of fiscal and balance-of- payments crises to a period of moderate and steady growth (2.6% per capita per annum between 1973 and 1977). This is a significant accomplishment in view of the difficulties experienced since the mid 1950s in sustaining positive rates of economic growth. Between 1954 and 1974 real per capita income increased at 0.5% per annum as the country encountered difficulties in improving living standards in the face of deteriorating terms of trade and a burdensome and inefficient industrial structure. Resources were drawn out of an already weak- ened agricultural sector to finance transfers for urban consumption and indus- trial activities with low a productivity. The result was the gradual stagnation of exports and periodic balance-of-payments crises. Inadequate fiscal and monetary management contributed to persistent inflation. The recent recovery of the economy has occurred in the face of generally adverse international factors such as the quadrupling of oil prices and protectionist policies against beef imports in the traditionally key market of the European Economic Community (EEC). The turn-around in economic performance is explained by a fundamental change in the authorities' development strategy from an inward-looking to an export-oriented growth policy. ii. The economic crises precipitated by external factors made the autho- rities realize that the country's development prospects depended not only on a sound stabilization program but also on essential reforms aimed at elimi- nating economic distortions and price controls. The basic objective of economic policy since 1974 has been to foster export-led growth through a more efficient allocation of resources. Perhaps the most important of the changes instituted in recent years has been a more consistent exchange rate policy, carried out through periodic minidevaluations. This policy has been instru- mental in reactivating manufacturing output, and together with a system of export tax rebates, is responsible for generating an unprecedented growth of non-traditional exports. The dynamism of non-traditional exports has been mostly responsible for the economy s overall growth performance and has brought about a substantial diversification of the export structure. Never- theless, reliance on export tax rebates to compensate for the high levels of protection to the manufacturing sector have generated other price distortions in the economy. iii. Over the foreseeable future, Uruguay's economic outlook will con- tinue to depend largely on the evolution of non-traditional exports, as well as the recovery of agricultural production which has stagnated during recent years. Recent policy measures have liberalized the pricing and marketing mechanism in agriculture and should contribute to the sector's development. Although short-term economic management still remains a priority, particularly with regards to the control of inflation, an important issue facing the authorities is that of continuing to mold a policy framework conducive to the development of the country's productive sectors.  - ii - Recent Performance iv. Economic policies since 1974 have aimed at stimulating investment while discouraging consumption growth. Liberalized financial and import regimes as well as the gradual elimination of domestic price controls and restraint on wage adjustments showed results again in 1977. Investment expen- ditures reached record levels as real fixed capital formation registered a 19% increase over the previous year, owing to the investment activity in non- traditional export subsectors, and the construction of the Salto Grande (jointly with Argentina) and Palmar dams. The higher investment levels were accompanied by a continued fall in the share of consumption in GDP (from 88.6% in 1974 to 77.2% in 1977), and an estimated drop in real wages of roughly 15-20% during the three-year period. The fall in real consumption amounted to 3.4% in 1976, but was followed by a slight recovery of 1.2% in 1977. Moreover, the increased levels of economic activity in 1977 made possible a reduction in the unemployment rate to 10.8% from 13% the previous year. These trends indicate modest but steady progress in the economic recovery program. v. A combination of improving fiscal performance (the overall Central Government deficit was reduced from 4.4% of GDP in 1974 to 2.5% in 1976) and restrictive monetary management and incomes policy led to a deceleration of inflation from 100% in 1974 to 40% in 1976, despite elimination of widespread price controls, important corrective price adjustments and the minidevaluation policy. Although the Central Government's fiscal position improved further in 1977 (an overall deficit of 1.1% of GDP) and the policy of wage restraints was maintained, a number of factors combined to make anti-inflationary policy the weakest aspect of short-term management, as inflation climbed to 57% (from December to December). Inflationary expectations appeared early in 1977 as poor weather conditions adversely affected the availability of foodstuffs and retention of cattle by ranchers led to beef scarcity, in the absence of emergency imports to alleviate the supply shortages. Throughout the year inflation became more generalized owing to the expansion of credit to the private sector, which was fueled by private capital inflows. Measures to reduce this source of inflation were not taken until the third quarter of 1977, and their initial effects were not evidenced until early in 1978 when the rate of increase of the price level slowed down to an equivalent annual rate of 40%. Nevertheless, private external capital inflows continued unabated in response to the still high domestic interest rates. Monetary management will therefore continue to require a careful balance of the objectives of economic expansion, and price stability. Further reductions in the Central Government's fiscal deficit--traditionally one of the most important causes of inflation in Uruguay--will increasingly depend on improved management of the public investment program. On the monetary side, the reduction of inflation is closely tied to the management of private short-term capital inflows and the expansion of credit to the private sector linked to these capital movements. vi. The authorities' export promotion policies, together with the liberalization of the financial market, have played a vital role in achieving large increases in net international reserves during 1976-77. Non-traditional exports have expanded to a level of US$349 million in 1977 from US$190 million two years earlier, or about 57% of total exports (compared with only 26% in  - iii - 1973). Their development has contributed to a significant diversification of the product composition of exports as well as to a broadening of export markets. Thus, they have played an essential role in providing stability and growth to export earnings at a time of unfavorable world market conditions for the country's principal traditional export--beef. Despite increasing imports and large service payments on external debt, the current account deficit has been reduced from an average of US$160 million in 1974-75 to US$85 million during 1976-77. Private short-term capital inflows, stimulated to unprece- dented levels (an average of US$175 million during 1975-76) by high interest rates, have been the other major force explaining the rapid recovery of the external sector from the 1974-75 crisis produced by the quadrupling of oil prices and the closure of the EEC beef market. These capital inflows also partly reflect the enhanced confidence of the international financial community in the country's economic outlook. Net international reserve gains of US$112 and US$161 million have been achieved in 1976 and 1977, respectively, compared with losses of US$58 and US$73 million during the previous two years. This trend should be maintained in 1978 with expected net reserve gains of US$190 million. From a longer-term perspective, these large inflows of short-term capital should be viewed cautiously since their usual volatile nature is not conducive to a stable balance-of-payments position. Given the need for increased imports of capital and intermediate goods, the growth of traditional and non-traditional exports should be essential for maintaining a manageable current account deficit. The country's public external debt position also improved noticeably in 1977 with the debt service ratio falling to 27.9% (from 41.4% in 1975), primarily because of export growth. The large debt service payments reflect the policy of the authorities of pre-paying loans obtained on unfavorable terms during the 1974-75 crisis in order to obtain new credits with improved maturity structure from commercial banks. This policy, together with the liquidity existing in international financial markets, has permitted the overall improvement of the maturity structure of the country's external public debt. Prospects for Non-traditional Manufactured Exports vii. Over the foreseeable future, Uruguay's overall economic performance will be considerably influenced by the evolution of non-traditional manufac- tured exports. The prospects for Uruguay's non-traditional manufactured exports should continue to be favorable, particularly in the case of products based on domestic agricultural inputs, where the possibilities offered by external markets have not been fully tapped. Based on the experience of recent years, it might be expected that exports of this type of goods could reach US$450 million (1977 prices) by 1982, up from US$280 million in 1977. Leather products, including shoes, and woolen textile products should continue to provide the lead in export expansion. A recent study of Uruguay's textile and apparel industry has indicated that good export possibilities exist for woolen men's suits, sweaters, and ladies coats. In addition to these products, there are a number of others which enjoy good prospects based on recent expe- rience and their relatively high share of domestic value added. These include: (a) auxiliary products for the apparel industry; (b) agroindustrial products, including fish; and (c) tiles, ceramic wares, and glass.  - iv - viii. The most essential element for sustaining the growth of these exports is the continuation of appropriate domestic macroeconomic policies, provided that trade policies in the developed countries do not curtail access to their markets. Three types of domestic policies can be considered of highest priority: (a) effective exchange rate adjustments to compensate for domestic rates of inflation above international levels or for lower protection barriers; (b) reduction of tax rebates which at present discriminate against traditional exports; and (c) reduction of tariff protection. These policies are complementary and could be carried out simultaneously. Trade liberaliza- tion is well-justified on various grounds. First, high tariff protection causes distortions in the allocation of resources in favor of industries which are by-and-large not competitive, and against more competitive export-oriented industries and the traditional exporting activities in agriculture. Second, inefficiencies in the urban, industrial sector result in a resource drain from agriculture, where Uruguay's comparative advantage is greatest. Finally, high tariff protection involves widespread social costs to the consumer in terms of the difference between domestic and international prices. Even with a gradual program of trade liberalization, the promotion of non-traditional exports may require continued adjustments to th-e effective exchange rate. The speed of these adjustments would in turn help to define the level to which tax rebates can be reduced. Thus, as hasv been the case during the last four years, exchange rate management would continue to be a crucial policy instrument for promoting export growth. With respect to tariff reform, appropriate adjustment mechanisms such as the provision of medium- and long-term credit, labor retraining programs, and technological support services would be required to ease the transition process of inefficient industries to a more competitive environment. Agricultural Prospects ix. Agriculture plays a fundamental role in Uruguay as nearly 90% of total merchandise exports represent agricultural products in various stages of processing. Yet, the pursuit of an inward-oriented industrialization strategy for many years was undertaken largely at the expense of agricultural growth and development. Agricultural stagnation, in turn, acted as a drag on the country's overall development. Many past policies instituted to promote industrialization acted to depress agriculture by transferring substantial income from rural to urban activities. Thus, policies such as: (a) price controls on agricultural products; (b) export taxes on traditional export commodities like beef and wool; (c) high tariff duties on industrial imports; (d) an overvalued exchange rate; and (e) subsidies to inefficient state enterprises through direct government control of industries, like meat packing, reduced the profitability of agriculture and fostered an inefficient system of land use. Even though all the available land is under some form of exploita- tion, land is worked under a low input-low output system. In the livestock subsector, extensive rangelands with almost no improvements and a carrying capacity of less than one animal per hectare are the norm. Crop production is characterized by poor agronomic practices and low yields. Low product prices are reflected in the low relative price of land in Uruguay, compared to similar land in neighboring countries. This, in turn, has perpetuated extensive production methods given the low price of land relative to other agricultural inputs.  - v - x. Government policy towards the livestock sector has exacerbated the unifavorable effects of international market conditions. Various instruments have been employed to transfer substantial resources out of the sector despite difficult external factors. The principal sources of distortions have been the maximum retail price of beef for domestic consumers and the high costs of processing and marketing beef. The latter is the result of inefficient state- owned or -operated meat-packing plants and administrative controls on slaugh- tering animals and marketing carcasses. Taking into account the international price of Uruguayan beef during the period July 1976-June 1977 and assuming a level of US$150/ton as an efficient level of local processing costs, a study commissioned by the producers' association estimated that the Government s beef price policy represented US$64 million in subsidies from producers to consumers and to the meat-packing industry during these twelve months. In addition, the high domestic costs of imported agricultural inputs above inter- national market prices contributed an additional transfer of resources of US$21 million. Direct and indirect taxes paid by the sector to the central government amounted to US$31 million bringing to US$116 million the amount of resources extracted from the sector. This amount represents 86% of the total value of beef production (63% if taxes are excluded) for the period. Further- more, the calculation of resource transfers does not include those that are implicit in an overvalued exchange rate, or unfavorable domestic terms of trade resulting from high tariff protection. It is reasonable to expect that an elimination of this transfer of resources could lead to a substantial increase in beef production in the longer term, which would permit Uruguay to take the fullest advantage of growing export markets in Brazil and the Middle East. Similar considerations apply to a lesser extent for milk and crop production. xi. The foundation of Uruguay's economy will continue to be the agri- cultural sector. Even the future development of non-traditional manufactured exports is strongly rooted in the country's agricultural raw materials. Whether Uruguay can achieve higher levels of economic and social progress in the longer term depends heavily on the policies which are followed in this vital sector. During recent years policies aimed at improving resource allocation at a macroeconomic level have met with notable success. Until very recently, the prevailing agricultural policies still reflected past biases and were not consistent with the view that agriculture is the basis of the Uruguayan economy. Critical developments such as adverse world market conditions for beef exports in 1974-75, and heavy weather damage to crop production in 1977-78 served to underscore the plight of the sector and stressed the deleterious consequences of official policies. In response to this situation, the autho- rities announced fundamental reforms in agricultural policies in August 1978 which, if fully carried out, augur well for the future of the sector. xii. The new agricultural policies are intended to assign high priority to the development of the sector, particularly the livestock subsector where the country's greatest comparative advantage lies. The essential objective is to provide an internal economic environment propitious for profitable livestock and agriculture activities. The various measures announced would, if imple- mented, represent a dismantling of the more important constraints discussed  - vi - previously. They include: (a) elimination of fixed livestock prices; (b) re- moval of geographic barriers for beef marketing; (c) sale of state-owned meat plants to the private sector and elimination of financial controls on the industry- (d) establishment of maximum 10% import surcharge on assembled tractors and farm machinery; (e) elimination of the 10% import surcharge on all other agricultural inputs; and (f) change of the tax on potential land productivity from a gross to a net income basis. The above package of measures represents a bold and fundamental break with the past. The authorities have opted for a gradual approach in implementing the new policy. A limiting factor in changing the beef marketing system is the speed aL which state-owned meat plants and local slaughterhouses can adapt to a competitive situation. The liberalization of beef prices will undoubtedly hurt consumers in the short-term. In the medium-term, however, the year-round availability of meat should compensate for the higher prices. The contrast between the short-term effect on consumption and the longer-term effect on production of beef price liberalization points to the need for a steady and consistent plan of implemen- tation on the part of the authorities in order to permit the positive results to be fully attained. In the longer-term, the pay-off for consumers is likely to be a rise in real incomes, once agriculture has become dynamic. xiii. Higher product prices and lower input costs are necessary conditions for achieving the objective of increased productivity in agriculture. The above package of measures should help correct many of the price/cost distor- tions that have contributed to the stagnation of the sector. Although the elimination of these distortions is a fundamental step, the authorities need to provide producers with adequate supporting elements to enable them to take fullest advantage of the freer economic environment. Supporting elements still missing such as medium- and long-term credit, supervised credit programs, and adequate research and extension services hold the key as to how quickly productivity increases and a diversification of production can be obtained. Increased efforts should therefore be devoted to the preparation of suitable programs which can provide adequate levels of credit and services. These are areas where external financial and technical assistance could provide a valuable input to complement the new policy. The principal limitation in this respect is the scarcity of qualified staff in key sector institutions. More competitive salaries for technical personnel is a basic condition for a sizeable public sector effort in agriculture. Growth and External Capital Requirements xiv. Uruguay's development prospects have been steadily enhanced by the export-oriented growth policies. The continued growth of the manufacturing sector, based on the impulse provided by non-traditional manufactured exports, together with the rehabilitation of agriculture's productive capacity, hold the key to the achievement of a growth rate of the order of 4.5% per annum during the coming years, a high rate by historical standards. In line with the export-oriented development strategy, private investment activity in the productive sectors will be instrumental in attaining this faster growth rate, which should also contribute to further reductions of unemployment. Public sector investment in key areas such as power, road transport, port facilities and other basic infrastructure will be needed to eliminate bottlenecks or  - vii - upgrade facilities so as to adequately support the higher levels of activity in agriculture and manufacturing. The important role of infrastructure in public investment expenditures for the next few years (about 90Z of expected capital expenditures) reflects long-standing needs which have not been met in the past owing to recurrent fiscal crises and the stagnation which character- ized the economy. The resurgeuce of economic activity iti recent years has underscored the critical nature of these bottlenecks. Similar factors also explain the thin project pipeline in the productive sectors of the economy. In view of the recent policy decisions for agriculture which should result in a recovery of private investment, and the envisioned reform in industrial protection which is likely to generate medium- and long-term credit needs for plant modernization and reconversion, it appears urgent to devote a stronger effort to the preparation of projects in support of the expected private investment activity in agriculture and industry. In general, the authorities would need to ensure that the public investment program is composed of economi- ally sound projects so as not to jeopardize the progress already achieved on the fiscal and monetary fronts. xv. The outlook for the current account of the balance of payments will be influenced not only by the growth of nontraditional exports but also by the prospects for traditional exports. International price projections for beef and wool suggest sustained improvements conducive to export growth. In the case of beef, real export growth over the next four years is unlikely to come from substantial production increases because the unfavorable conditions in the sector since 1974 have led to reduced investment. A more realistic domestic pricing policy is almost certain to result in reduced domestic consumption which could then free additional tonnage for overseas markets. As far as markets are concerned, Brazil and Egypt have emerged as important customers for Uruguayan beef. The combination of improving international prices, available overseas markets, and a liberalized domestic environment should be conducive to a recovery of investment levels in the livestock sector during 1979. Substantial increases in beef exports could therefore be expected from 1982 onwards. xvi. Despite the projected overall export growth (6% per annum), expanded import requirements to support the faster growth rate of the economy as well as steadily rising net factor payments on public and private borrowing would result in a widening of the current account deficit, from an average of US$85 million during 1976-77 to an average of about US$110 million in 1978-81. During 1982-83, the expansion of beef exports in conjunction with lower imported petroleum requirements (the start of operation of the hydroelectric projects should virtually eliminate the need for petroleum imports for power generation) would be instrumental in reducing the current account gap to US$50 million by 1983. The relatively moderate gross external financing requirements for 1978-83 (estimated to average US$210 million during 1978-83) will be covered in part by continued private capital inflows. These private capital movements are projected to average US$75 million during 1978-83, down from US$175 million in 1976-77, on the assumption that the authorities will continue to institute measures to reduce the recent sizeable inflows of short-term capital. Given their often volatile nature, thiese capital movements cannot be relied on as a stable element in the external balance. Thus, it is assumed that by  - viii - 1982-83 private capital inflows would average US$25 million, and that they would largely represent financing for medium- and long-term investments. Disbursements on public external debt should average about US$210 million per year which would be sufficient to cover the remaining financing requirements and still maintain a level of reserves equivalent to four months of imports by 1983. The lower levels of external commitments projected (relative to 1974-75) together with an improved maturity structure and the projected export growth, should permit Uruguay's debt service ratio to decline steadily from 28% in 1977 to about half that level by 1983. Thus, Uruguay's creditworthiness position would be strengthened as its development prospects are enhanced by the sustained implementation of an export-oriented growth strategy.  I. RECENT ECONOMIC PERFORMANCE Introduction 1. Uruguay is a small fertile country with a population of less than three million people, and is endowed with a relative abundance of land well suited to agriculture and grazing, and a pleasant temperate climate. Its population, which is increasing quite slowly, is culturally homogeneous, has attained a high literacy level and resides primarily in urban areas. 2. During the first half of the twentieth century, the highly prosperous and productive agricultural sector was able to provide the base for high income levels and extensive social benefits. In the post-World War II era, however, the country encountered increasing difficulty in maintaining living standards in the face of deteriorating terms of trade and a burdensome and inefficient industrial structure. Resources were drawn out of an already weakened agri- culture sector to finance transfers for urban consumption and industrial activities with low productivity. The principal tools used to effect this transfer out of agriculture were fiscal, exchange rate, and price policies. Economic policies emphasized income distribution, consumption and industrial protection instead of growth, investment, and exports. The result was the gradual stagnation of exports and per capita income, persistent inflation and periodic balance-of-payments crises. Between 1954 and 1974 real per capita GDP grew at only 0.5% per annum despite a population growth rate which was among the lowest in the world. 1/ 3. Uruguay's recurrent problems came to a head in 1974 when the quad- rupling of the price of imported oil (upon which the country is entirely dependent) and the concurrent closure of the EEC market to meat imports caused severe balance of payments and fiscal deficits that were accompanied by a rate of inflation surpassing 100%. These economic difficulties came soon after the Government had largely managed to control labor strife and urban terrorism. An effective program of economic stabilization was viewed by the authorities as an important element in the fight against social unrest. The economic team appointed in mid-1974 was given the mandate to implement policy measures required to overcome the short-term dislocations and to set the basis for sustained longer-term growth. 4. Decisive action by the economic team resulted in major reforms during 1974-76 aimed at improving the economy's resource allocation mechanisms. Among the most important were: (a) the establishment of a more realistic exchange rate policy and the liberalization of domestic interest rates; (b) the elimi- nation of cumbersome import restrictions and a substantial reduction in the list of domestic goods subject to price controls; and (c) tight control of central government expenditures and administrative reforms aimed at increasing revenue 1/ Average Annual 1954 1974 Growth Rate (M) Population (millions) 2.58 2.75 0.3 GDP (billions 1961 Ur$) 16,572 19,456 0.8 GDP per capita 6,423 7,075 0.5  -2- yields from existing taxes. The results were impressive: the current account deficit of the balance of payments was reduced from an average of US$160 million in 1974-75 to US$74 million in 1976, the Central Government's fiscal deficit was reduced to 2.6% of GDP from a level of 4.5% in 1974, and inflation was lowered from a level of over 100% in 1974 to 40% in 1976. These unexpec- tedly rapid achievements enabled Uruguay to surpass most of the performance targets embodied in successive stand-by agreements with the IMF. 5. By the second half of 1976 the more difficult aspects of short-term economic management were under control, and increased attention was focused on the longer-term objectives for the economy. Although the Government had given its approval to a development strategy based on a further liberalization of the productive sectors of the economy, and an export-led growth policy, an active debate ensued within the Government about the specific character of the proposed measures required to achieve the broader objectives. The intention of substantially reducing import tariff protection for the domestic manufac- turing sector and assigning top priority to the development of the country's agriculture became the focus of discussions concerning economic policy. An important issue facing Uruguay has become that of implementing a plan of action for relaxing rigidities, such as price distortions, that still charac- terize the country's productive sectors. This process will not be easy since many of the needed policy measures run counter to well-entrenched interests, primarily those of the most heavily protected manufacturing subsectors. Nevertheless, the implementation of such measures, at least gradually, will determine whether the economy can achieve a sustained growth performance above that registered in recent years (3.4% per annum during 1973-77). Crucial steps in this direction were taken in August 1978 with the liberalization of the internal price and marketing system for beef, and the elimination of financial controls on the meat-packing industry. This important break with the past augurs well for the development of the livestock sector, and the growth of Uruguayan agriculture. Growth of Income and Output 6. The continuation of macroeconomic policies instituted during 1974-76 permitted Uruguay to attain its fifth consecutive year of positive economic growth (2.6% per capita) in 1977--a significant achievement in view of the country's persistent inability to sustain real growth rates during most of the last two decades. Since 1970 real per capita GDP growth has averaged only 1.3%, as much of the recent growth represents a recovery from the decline experienced during 1970-72. Unemployment in the Montevideo metropolitan area declined from 13% to 10.8% between the second semesters of 1976 and 1977. The positive effect of these policies was also reflected in a 19% increase in the real level of fixed investments. As in previous years, the main impetus for growth continued to be the manufacturing sector (6.3% growth rate), particularly the non-traditional manufactured export subsectors. These subsectors again responded with sustained growth to the minidevaluation policy (36% by the end of the year) despite the lag in exchange rate adjustments in relation to the differential between domestic and international inflation, and to the tax rebates on exports which averaged 18% of f.o.b. value.  - 3 - Table 1: SECTORAL GROWTH OF GDP, 1973-77 L1 (annual percentages) Average Annual Structure Projected Growth Rate of GDP 1973 1974 1975 1976 1977 1978 1973-77 1977 Agriculture t2 3.9 0.4 3.3 3.6 -1.3 -6.5 1.5 14.6 Manufacturing /3 -0.3 3.7 6.7 4.0 6.3 5.0 5.2 25.0 Construction -19.1 10.7 31.7 -6.6 14.6 17.0 11.7 5.3 Services 2.1 3.2 1.8 2.6 2.4 1.5 2.5 55.1 Total 0.8 3.2 4.5 2.6 3.4 2.5 3.4 100.0 /I At factor cost in 1961 constant prices. /2 Including livestock and fisheries. /3 Including mining and quarrying. Source: Central Bank and mission estimates. 7. The leading non-traditional export subsectors (woolen textiles and garments, and leather apparel and shoes) led the way with growth rates of 14% and 9%, respectively. Other manufacturing branches such as beverages and metal products registered good growth performances because of the excellent tourist season and the demand of the hydroelectric projects. However, the food subsectors (including meat processing) experienced a negative growth performance (-3.6%) reflecting a reduction of activities by meat-packing plants, after a record year in 1976, and a smaller volume of oilseeds processed. The poor performance in meat processing was the result of unfavorable pricing policies for cattle which affected the volume of cattle slaughtered adversely. In addition to manufacturing, the recovery of the construction sector in 1977 (14.6% growth versus -6.6% in 1976) was an important contributor to the over- all growth performance. Construction activities in the hydroelectric projects of Salto Grande and Palmar, in the tourist resort area of Punta del Este, and in Montevideo all experienced a strong expansion. In contrast, agricultural output, the basis of the country's resource endowment, contracted by 1.3% as poor weather conditions and a smaller area planted reduced the levels of production of important crop categories such as cereals and oilseeds. Overall, the 1977 growth performance reinforced the trend observed in recent years, where the expansion of non-traditional exports have proven to be the key to the economy's more favorable evolution.  Table 2: SOURCES AND USES OF RESOURCES, 1973-77 LI x of GDP Growth (t) 1973 1974 1975 1976 1977 1975-76 1976-77 GDP 100.0 100.0 100.0 100.0 100.0 2.6 3.4 Terms of Trade 6.5 -2.1 -5.8 -7.4 -7.6 GDY 106.5 97.9 94.2 92.6 92.4 0.9 3.2 Imports 18.3 16.6 16.6 17.2 18.0 6.1 8.4 Exports (Import Capacity) 20.0 13.9 12.8 16.9 16.0 35.6 -2.2 Resource Gap -1.7 2.7 3.8 0.3 2.0 34.1 0.3 Available Resources 104.8 100.6 98.0 92.9 94.5 -2.8 5.1 Consumption 91.8 88.6 83.6 78.9 77.2 -3.4 1.2 Gross Investment 13.0 12.0 14.4 14.1 17.4 0.9 27.1 National Savings 14.5 8.7 9.1 12.3 14.1 39.4 18.1 Export Volume 13.5 16.0 18.6 24.3 23.6 34.1 0.3 /1 Derived from data in NUr$ at 1961 constant prices. Source: Central Bank 8. Continuing a trend begun in 1974 with the oil price rise and lower world beef prices caused by the closure of the EEC market, output expansion in 1977 was accompanied by a terms of trade loss equivalent to 7.6% of GDP (see Table 2 above). A similar loss was experienced the previous year, as the continued improvement in world beef and wool prices was not sufficient to offset higher import prices. In constrast to 1976, however, when a 34% increase in real export volume resulted in a negligible resource gap, the slight growth of export volume in 1977 brought about a resource gap equivalent to 2.1% of GDP. The stagnant export level was largely accounted for by a 26% reduction in the volume of beef exports from the record level achieved in 1976. Difficulties experienced in supplying new markets and the priority assigned to meeting domestic demand during the second half of the year resulted in a smaller export tonnage. 9. Economic policies since late 1974 have aimed at stimulating invest- ment while discouraging consumption growth. Liberalized financial and import regimes combined with gradual elimination of domestic price controls and moderate wage adjustments showed results in 1977. The share of investment in GDP reached an unprecedented level of 17.4% as real investment registered a 27% increase, owing to the investment activity in non-traditional export subsectors and the construction of the hydroelectric projects. The higher investment levels were accompanied by a continued fall of the share of  -5- consumption in GDP (from 88.6% in 1974 to 77.2% in 1977), which is consistent with the lower real wage levels throughout the economy. However, in constrast to 1976 when real consumption fell by 3.4%, consumption expenditures experienced a slight 1.2% recovery in 1977, although their level is still below those achieved in earlier years. The 1977 performance suggests that the Uruguayan economy is continuing in a path of steady recovery. This is borne out by substantial increases in national savings during the last two years, from an average of 9% of GDP in 1974-75 to about 13% in 1976-77, despite worsening terms of trade. 10. Preliminary estimates for 1978 indicate that GDP growth will pro- bably slacken to around 2.5%, primarily on account of a poor performance in agriculture. Depressed producer prices in the livestock and wheat sectors combined with weather damage to crop production should lead to a second consecutive year of negative growth for this important sector. In contrast to most other primary sector activities, fisheries will continue to grow at a brisk pace owing to a concerted effort by the authorities to develop the country's fishing fleet and processing capacity. As in 1977, the main impulse for growth should be provided by the manufacturing sector, particularly the non-traditional export branches, and the construction sector, where build- ing activity should continue in the hydroelectric projects and the resort area of Punta del Este. In general terms, the economy should show a moderate growth rate by recent standards in 1978, with the poor performance of agriculture being the key limitation to a more rapid evolution. The announcement of new pricing and marketing policies late in the year aimed at stimulating agricul- ture investment and growth is not expected to produce significant results until 1979 and thereafter. Money and Credit 11. For several years prior to 1976, the monetary and credit system was characterized by negative real interest rates. This situation contributed to a lack of longer-term financial savings and hence to a serious shortage of longer-term credit for industry and agriculture. Interest rates did not serve to allocate financial savings to the most productive uses and real investment and growth suffered as a consequence. In line with the current economic policy of decontrol of the domestic price system, the authorities freed all interest rates on deposits and loans in 1976, and raised the interest rate ceiling on local currency transactions to 62%, thereby enabling positive real interest rates to prevail for the first time in many years. This measure was instrumental in fostering the growth of time and saving deposits in the financial market. Interest rates thus began to regain some of their resource allocation role, although the credit structure remained basically short-term. In 1977 the high rate of inflation during the early part of the year combined with the above interest rate ceiling again resulted in negative interest rates, and induced the authorities to increase the ceiling to 90% during the third quarter (annual inflation was 57%). Since that time average interest rates on loans have remained at high levels (effective nominal rates reached close to 90% in some cases including the tax on loans in local currency),  -6- and the spread between borrowing and lending rates has been very wide. 1/ This situation is explained in part by the fact that expectations about inflation were greater than the actual results. Moreover, given the lower legal reserve requirements on long-term deposits, commercial banks have encouraged such deposits and thus locked themselves into paying high rates for one year. Banks have therefore been reluctant to lower lending rates in early 1978 even though inflation declined. The high domestic interest rates have stimulated foreign borrowing and short-term private capital inflows thereby contributing to the increase in net international reserves. From a longer- term perspective, the prevailing wide spreads on short-term lending operations and the high real interest rates are not conducive to commercial bank finan- cing of medium- and long-term investments. Moreover, given the volatile nature of short-term capital inflows, these cannot be relied on indefinitely to maintain a favorable balance-of-payments position. 12. Domestic credit to the private sector expanded strongly in 1977 (76% in nominal terms and 12% in real terms) despite substantial direct foreign borrowing by local firms. As in the previous year, the growth of private sector credit and the gain of international reserves were the major factors contributing to the expansion of the money supply in 1977 (see Table 3 below). By far, private sector credit was the most important element in monetary expansion, and its growth appears to have been more than necessary to provide adequate liquidity given the trends in output and prices. Net credit to the public sector played a relatively small role in monetary expan- sion as the financing needs of the Central Government deficit were in large part offset by a contraction of net credit to the rest of the public sector. I/ The following table shows prevailing nominal and real interest rates during late 1977 and early 1978. NOMINAL RATES /a (%) Deposits Loans 4th Quarter 1977 43 68 1st Quarter 1978 53 74 -------------------------------------------------------------------- REAL RATES /b (x) 4th Quarter 1977 16 40 1st Quarter 1978 6 21 /a Average annual interest rates for deposits and loans up to 6 months. /b Refers to deposits and loans up to 3 months. Source: Central Bank and IMF staff estimates.  -7- A significant portion of the growth of credit to the private sector was explained by the subsidized Central Bank line of credit for pre-export finan- cing (denominated in US$) which operated very actively. The strong growth of pre-export financing was at the same time made possible by the sharp increase in foreign currency deposits, which reached 50% of private sector financial assets. Low reserve requirements on US$ deposits relative to local currency deposits and the payment of interest above Eurodollar rates on US$ reserve deposits, acted as a strong stimulus to commercial banks to attract these deposits. These circumstances also contributed to the sizeable inflow of private external capital. In all likelihood, a substantial share of these capital inflows represented financial credits from abroad which substituted for expensive domestic credit. Thus, these external flows also contributed to the growth of credit to the private sector. Table 3: FACTORS EXPLAINING INCREASE IN MONEY SUPPLY (in millions of NUr$) 1976 1977 NUr$ % NUr$ x Assets i.516 100.0 2,465 100.0 Net International Reserves 473 31.2 582 23.6 Net Credit to the Public Sector 121 8.0 175 7.1 Central Government (299) (19.7) (440) (17.8) Rest of the Public Sector (-178) (-11.7) (-265) (-10.7) Credit to the Private Sector 1,116 73.6 2,033 82.5 Other Accounts (net) -194 -12.8 -325 -13.2 Liabilities 1.516 100.0 2,465 100.0 Money 504 33.2 535 21.7 Quasi-money 1,012 66.8 1,930 78.3 Source: Statistical Appendix, Table 6.1 13. In light of the above developments, monetary policy during the second half of 1977 aimed at controlling the rapid increase in credit expansion arising from foreign currency deposits and borrowing abroad by commercial banks, through a number of complementary measures. The terms of the pre-export financing line were adjusted to reduce the element of subsidy, the reserve requirement on foreign currency deposits was increased, and the interest rate paid on additional reserves was eliminated. Open market operations were also undertaken to limit credit growth. Additional measures were implemented early  -8- i.. 1978 to equalize the reserve requirements between local and foreign currency deposits in order to curtail the external capital inflow. Moreover, a new credit facility to finance exports without interest rate subsidy was introd'ced to gradually replace the existing one. Despite these measures, domestic interest rates remained high and external private capital inflows continued unabated. In an attempt to influence expectations concerning inflation and devaluation, the authorities began in late 1978 selling Treasury bills (of three months at an annual interest rate of 41%) redeemable in pesos or an equivalent amount in US$, which is fixed and announced at the time the bills are issued. In this way, the authorities announced the pace of mini- devaluations for a three-month period. At the same time, the commercial and financial exchange markets were unified through a Central Bank decision to buy or sell foreign exchange for financial transactions in unlimited quantities at the announced commercial exchange rate. A tax on loans denominated in local currency (8.4% of the loan amount) remains as a distortion in the finan- cial market. The tax is partly borne by borrowers in the local market and has contributed to the incentive to borrow abroad in a situation where high domestic interest rates prevail. The authorities, concerned with the adverse effects of this tax, are studying its substitution by a value-added type levy for all financial services, which would contribute to eliminate differences between interest rates in local and foreign currency. Public Finances Central Government 14. Fiscal policy was historically influenced by the objectives of maintaining urban incomes and improving urban employment opportunities. Although this policy orientation acted in the short-term to reduce the impact of adverse external price and marketing developments on urban incomes, it became unsustainable as growing fiscal deficits became a primary source of inflation, which in turn had a detrimental effect on investment and growth. In recent years, a reversal of this policy has been instituted with the objec- tive of achieving fiscal stability and stimulating private savings and invest- ment. New tax revenue measures were introduced in 1975 which helped to shift the composition of government revenues away from taxes on international trade and stamp taxes and toward taxes on consumption like the value-added tax. Equally important, significant improvements in tax administration have yielded increased revenues from existing taxes. On the expenditure side, current policy involves firm restraint on wage and salary adjustments, and a more realistic pricing policy for public sector services in order to reduce the need for Central Government transfers to the rest of the public sector.  -9- Table 4: SUMMARY OF CENTRAL GOVERNMENT OPERATIONS, 1974-78 (as percentage of GDP) Projected 1974 1975 1976 1977 1978 Revenues 12.8 11.7 13.2 14.8 15.3 Current expenditures 15.4 14.4 13.9 14.0 14.0 (of which transfers to consolidated public sector) (2.1) (1.8) (1.3) (1.4) (0.8) Current account surplus or deficit (-) -2.6 -2.7 -0.7 0.8 1.3 Capital expenditures 1.7 1.7 1.8 1.9 2.7 Overall deficit -4.4 -4.4 -2.5 -1.1 -1.4 Financing 4.4 4.4 2.5 1.1 1.4 External (net) (1.7) (2.0) (1.3) (0.2) Domestic (net) (2.7) (2.4) (1.2) (0.9) Source: Tables 5.1-5.3, Statistical Appendix. 15. The implementation of the above policies yielded unprecedented results for Central Government operations in 1977. For the first time in many years a current account surplus was achieved. This represents a particu- larly remarkable turnaround from the large deficits during the fiscal crisis of 1974-75. Since capital expenditures remained at the level of 1976 (1.9% of GDP), the current account improvement was also reflected in a marked reduction in the overall Central Government deficit from 2.6% of GDP in 1976 to 1.1% in 1977. This development eased the Central Government's financing requirements from the monetary authorities considerably, thereby attenuating this tradition- ally important source of monetary expansion and inflation. 16. Almost the entire improvement in the Central Government's fiscal position in 1977 was attributable to the continued strong growth of revenues. Total revenues experienced a significant jump from 13.7% of GDP the previous year to 14.8% in 1977, primarily on the basis of increased revenue yields from existing taxes. This performance largely reflects a variety of measures introduced by the tax authorities to improve administration and collection. These include: (a) reorganization of the general tax office along functional lines (instead of by specific taxes); (b) introduction of better auditing procedures for large contributors; (c) collection of taxes on a more current basis; and (d) institution of stiff penalties for late payment. By and large the authorities believe that the serious past problems with late payments,  - 10 - which were particularly troublesome in an inflationary environment, have been overcome. New and severe sanctions were introduced in 1977 in order to reduce fiscal evasion. Table 5: DISTRIBUTION OF CENTRAL GOVERNMENT REVENUE, 1973-78 Projected 1973 1974 1975 1976 1977 1978 As percentage of GDP 14.4 12.8 11.7 13.2 14.8 15.3 Taxes on income and profits 1.5 1.3 1.2 1.5 1.8 1.9 (of which IMPROME) (0.6) (0.6) (0.3) (0.5) (0.6) Taxes on property 0.5 0.4 0.6 0.8 1.0 0.9 Taxes on goods and services 7.5 7.8 8.7 9.8 10.1 10.5 Taxes on international trade 3.0 2.1 1.3 1.9 2.5 2.3 Stamp taxes 1.3 1.2 0.5 0.1 - - Other /1 0.6 0.0 -0.6 -0.9 -0.6 -0.3 As percentage of total 100.0 100.0 100.0 100.0 100.0 100.0 Taxes on income and profits 10.5 10.3 9.9 11.1 11.8 12.7 (of which IMPROME) (4.4) (4.6) (2.7) (3.7) (3.7) Taxes on property 3.5 3.2 5.3 6.4 7.2 5.6 Taxes on goods and services 52.1 61.0 74.2 73.9 68.3 68.5 Taxes on international trade 21.1 16.2 11.4 14.5 16.7 15.0 Stamp taxes 9.1 9.7 4.1 0.6 - - Other a1 3.7 -0.4 -4.9 -6.5 -4.0 -1.8 /1 Includes nontax revenue and adjustments for tax payments made with export credit certificates. Source: Tables 5.4 and 5.5, Statistical Appendix. 17. In general, the good revenue yields obtained recently have permitted the tax authorities to turn increasing attention to gradual efforts to unify and streamline the tax structure. The aim is to eliminate a wide variety of small levies by incorporating them into more important categories (such as the substitution of the tax on local banking transactions by a value-added type tax on financial services), the unification of tax rates, and the elimination of exemptions. In line with this objective, the basic rate of 20% for the value added tax was reduced to 18% in early 1978, an important step in the unification of the two existing rates (20%, and 7% for various specific products). Moreover, various products previously exempted, such as fresh poultry and pork, were included in the tax base. More recently, important modifications were announced for IMPROME (tax on potential productivity of land), basing it on a net rather than a gross income basis, and consolidating  - 11 - its role as the main agricultural tax. These various measures are bringing about a gradual but important change towards a more effective and manageable tax system in the context of fiscal stability. These have been important accomplishments in a relatively short period of time. 18. Following the pattern of the previous two years when current expen- ditures fell from 15.9% of GDP in 1974 to 14.4% in 1976, they registered a further small decline in 1977 (14%) and contributed to the improved fiscal performance. The authorities maintained their firm restraint on wage adjust- ments and this important component of current expenditures registered a slight decrease from 7.0% of GDP in 1976 to 6.8% in 1977. Similarly, the policy of liberalizing the domestic price system and pursuing more realistic pricing policies for public goods and services was reflected in a further reduction of subsidy and transfer payments from 2.2% to 1.5% of GDP between 1976 and 1977. Despite these key improvements, Central Government contribu- tions to the social security system increased somewhat, and together with a reduction in the payment period for purchases of goods and services, which contributed to a transitory increase in expenditures, prevented a more appre- ciable change in the overall current expenditure level. 19. As in the previous year, Central Government capital expenditures remained at about 1.9% of GDP, although their share in total expenditures continued to increase slightly. The major portion of capital expenditures was again accounted by the Salto Grande (joint project with Argentina) and Palmar hydroelectric projects, which are scheduled to be completed in 1981. These projects are part of the Government's strategy to reduce the country's reliance on imported fuels by exploiting to the fullest extent the available hydropower resources. When completed, the Salto Grande (1890 Mw) and Palmar (300 Mw) hydroplants will provide Uruguay with sufficient power generating capacity to meet domestic electricity demand until the mid-eighties, while at the same time reducing the country's dependence on imported oil for producing electricity. The current account surplus achieved in 1977 permitted the authorities to finance a substantial portion (37%) of its capital budget for the first time in several years. As in the past, only a small share of capital expenditures was tied directly to foreign borrowing, with the monetary authorities providing more than sufficient financing to cover the remaining gap and to permit the Central Government to amortize other existing debts.  - 12 - Table 6: DISTRIBUTION OF CENTRAL GOVERNMENT EXPENDITURES, 1973-78 Projected 1973 1974 1975 1976 1977 1978 As percentage of GDP 15.8 17.1 16.1 15.7 15.9 16.7 Current expenditures 14.4 15.4 14.4 13.9 14.0 14.0 Goods and services 10.1 10.9 10.4 10.7 10.7 12.1 Wages and salaries (7.3) (7.5) (7.0) (7.0) (6.7) (6.6) Social Security contributions (1.8) (2.0) (2.2) (2.5) (2.1) (3.2) Other (1.0) (1.4) (1.2) (1.2) (1.9) (2.3) Subsidies and transfers 3.8 3.9 3.1 2.1 2.3 1.0 (of which to consolidated public sector) (2.2) (2.1) (1.8) (1.3) (1.4) (0.8) Interest payments 0.5 0.6 0.9 1.1 1.0 0.9 Capital expenditures 1.4 1.7 1.7 1.8 1.9 2.7 As percentage of total 100.0 100.0 100.0 100.0 100.0 100.0 Current expenditures 91.6 89.9 89.2 89.2 88.0 83.8 Goods and services 64.0 63.8 64.5 67.6 67.4 72.5 Wages and salaries (45.9) (44.2) (43.4) (44.5) (42.4) (39.5) Social Security contributions (11.7) (11.6) (13.9) (14.8) (12.9) (19.2) Other . (6.4) (8.0) (7.2) (8.3) (12.1) (13.7) Subsidies and transfers 24.3 22.6 19.1 13.6 14.2 6.0 (of which to consolidated public sector) (14.0) (12.3) (11.4) (8.5) (8.8) (4.8) Interest payments 3.3 3.5 5.6 7.1 6.4 5.4 Capital expenditures 8.4 10.1 10.8 11.7 12.0 16.2 Source: Tables 5.4 and 5.5, Statistical Appendix. 20. The general trends in Central Government finances experienced during 1977 should continue in 1978 as no drastic changes are expected in the revenue or expenditure patterns. An improvement in the current account surplus from  - 13 - 0.8% of GDP to 1.3% is expected primarily on account of higher revenue collec- tion, since current expenditures should remain at the same level relative to GDP as in 1977. Improved revenue yields are projected from taxes on goods and services. Moreover, the authorities plan to offset lower revenues from IMPROME (due to reduced rates for tax relief purposes) and from import duties (due to the introduction of a consolidated tariff schedule), by requiring state enterprises to transfer a share of their operating surpluses to the Central Government and by advancing the payment schedule of taxes on income and profits. The projected current account surplus should help finance nearly 50% of the larger volume of capital expenditures (2.7Z of GDP compared with 1.9% in 1977). Overall, the Central Government's deficit in 1978 (1.4% of GDP) should be somewhat higher than the previous year largely because of the higher investment outlays. Given the objective of further improvement on the fiscal front, the growing capital expenditures would require better planning and control of the investment program of Central Government entities, in order to avoid undertaking projects of low economic priority. Rest of the Public Sector 21. The nonfinancial decentralized public sector, consisting of various public enterprises, autonomous entities, and the municipalities plays a signif- icant role in the overall operations of the public sector, accounting for about 40% of total public sector expenditures and 60% of public sector capital expenditures. Government policy towards this sector in recent years has aimed at improving the financial base of the various entities by achieving more realistic price levels for goods and services. Thus, between the end of 1974 and 1977, electricity tariffs for household consumption have been increased by 35%, gasoline prices have climbed 10%, and railway tariffs for passengers have been raised 15% (all in real terms). These adjustments have contributed to a steady rise in current revenues from 13.3% of GDP in 1974 to nearly 16% in 1977. Current expenditures have also increased rapidly during this period, reflecting the growth of expenditures on goods, since wage adjustments have been restrained. As a result, the current account surplus in 1977 was only able to cover 20% of the higher level of capital expenditures.  - 14 - Table 7: SUMMARY OF OPERATIONS OF DECENTRALIZED PUBLIC SECTOR, 1/ 1974-77 (as percentage of GDP) 1974 1975 1976 1977 Revenues 2/ 13.3 14.4 14.6 15.9 Current expenditures 13.6 14.2 13.7 15.3 Current account savings -0.3 0.2 0.9 0.6 Capital expenditures 2.7 2.2 2.5 3.1 Overall balance -3.0 -2.0 -1.6 -2.5 Financing 3.0 2.0 1.6 2.5 External (net) (2.9) (-1.0) (0.7) (0.2) Domestic (net) (0.1) (1.0) (0.9) (2.3) 1/ Excludes social security agencies. 2/ Excludes current transfers from central government. Source: Table 5.7, Statistical Appendix. 22. The financial results for public enterprises are primarily determined by ANCAP (the petroleum, alcohol, and cement company) and UTE (the power company), which together accounted for about two-thirds of the enterprises' overall deficits in 1976-77. ANCAP experienced an increase in its overall deficit (from less than 0.5% of GDP in 1976 to 1.5% in 1977) as price adjustments for petro- leum products were below the increase in the overall price level, while capital expenditures reached higher volumes with the completion of important projects. The petroleum terminal at Jose Ignacio and a pipeline linking the terminal to Montevideo entered into operation early in 1978. The plant and distribution capacity of the La Tablada petroleum terminal was expanded as was the cement plant at Paysandu. Two-thirds of the enterprise's overall deficit was covered through external financing. The financial position of UTE, whose operations account for nearly 20% of public enterprises' revenue and expenditures, regis- tered no significant changes in real terms during 1977. UTE's overall deficit remained at nearly 1% of GDP, as increased investment in transmission lines and a sixth thermal unit were entirely financed out of its own resources.  - 15 - Table 8: CONSOLIDATED OPERATIONS OF THE PUBLIC SECTOR, 1/ 1974-77 (as percentage of GDP) 1974 1975 1976 1977 Current revenues /2 34.6 33.5 36.3 39.2 Current expenditures 36.7 34.3 35.1 37.2 Current account surplus or deficit (-) -2.1 -0.8 1.2 2.0 Investment expenditures 4.4 3.9 4.4 5.1 Overall balance -6.5 -4.7 -3.2 -3.1 Financing 6.5 4.7 3.2 3.1 External (net) 3/ (4.7) (3.2) (2.4) (1.2) Domestic (net) (1.8) (1.9) (0.8) (1.9) /1 Includes social security agencies. 12 Current revenues include sales of goods and services by public enter- prises. /3 Includes treasury bonds believed to be held mostly by non-residents. Source: Table 5.7, Statistical Appendix. Prices and Wages 23. A combination of improving fiscal performance and more restrictive monetary management and incomes policy led to a fairly steady deceleration of inflation during the 1975-76 period, despite elimination of widespread price controls, important corrective price adjustments, and the policy of mini- devaluations. About half of the goods and services (including public utilities) comprising the consumer price index are still subject to government regulation by various agencies on the grounds of supply constraints and oligopolistic or monopolistic marketing structure. Price adjustments which are justified because of changed cost conditions are usually granted on a regular basis to avoid distortions which could eventually require sharper adjustments. Although the public sector's fiscal position continued to improve in 1977 and the policy of restraint in wage adjustments was maintained, a number of factors combined to make anti-inflationary policy the weakest aspect of short-term economic management. Inflation climbed to an annual rate of-57% after reaching a level of 40% in 1976, or slightly above the average annual inflation rate (52%) during the previous eight years.  - 16 - Table 9: CHANGES IN PRICES, WAGES, AND EXCHANGE RATES 1973-78 (Z change from December to December) 1973 1974 1975 1976 1977 March 1978 Li Consumer price index 77.5 107.2 66.8 39.9 57.3 45.9 Wholesale price index /2 91.7 87.5 65.0 45.1 44.8 39.2 Nominal wages /3 91.8 96.8 61.6 29.2 45.6 42.5 Public sector (97.6)(106.6) (55.1) (32.1) (45.9) (44.5) Private sector (87.1) (88.3) (67.8) (26.7) (45.4) (40.7) Real wages /3 8.1 -5.0 -3.1 -7.7 -7.3 -2.4 Public sector (11.3) (-0.3) (-7.0) (-5.7) (-7.2) (-1.0) Private sector (5.4) (-9.2) (0.6) (-9.5) (-7.6) (-3.7) Nominal exchange rate /4 30.6 69.1 67.6 49.8 36.5 29.0 Effective exchange rate /5 -8.4 -9.4 -2.6 22.0 3.2 ... /1 Computed as % change over March 1977. /2 For domestic products only. /3 Wage data refer to the official index that covers the city of Montevideo and basically measure minimum wage adjustments to the average salary levels in the base year. The index is thus only a partial indicator of actual wage rate movements. /4 % change in commercial buying rate. /5 Exchange rate in terms of Uruguayan pesos per a weighted average of currencies of major trading partners adjusted for relative prices. Source: Direccion General de Estadistica y Censo. Central Bank. 24. Inflationary expectations appeared early in 1977 as poor weather conditions affected the availability of foodstuffs adversely and retention of cattle by ranchers led to beef scarcity, in the absence of emergency imports to alleviate the supply shortages. Throughout the year inflation became more generalized, owing to the expansion in credit to the private sector generated by external capital inflows and an existing subsidized export credit line of the Central Bank. The authorities acted to dampen the effect of these sources of inflation during the third quarter of the year by increasing reserve require- ments for foreign currency deposits and undertaking open market operations. The subsidy element on the export credit line was also curtailed. The results of these measures were felt during the first quarter of 1978, as the rate of increase of the price level slowed down to an equivalent annual rate of about 40% during the first four months of 1978.  - 17 - 25. A restrictive wage policy continued to be an important part of the authorities' economic program. Throughout 1977 the official minimum wage adjustments continued to lag behind the rate of increase in the price level with a resulting 7.3% real decrease. Since 1974 the official real wage indices have experienced a 25% decline, which helps to account for the falling levels of aggregate consumption in the economy. A recent survey of more than 500 manufacturing and commercial enterprises suggests, however, that private sector wage adjustments have surpassed the official minimum adjustments. Thus, the size of the real wage reduction in the enterprises sampled was one- third less than that in the official figures shown in Table 9. Since the official minimum adjustments are most directly applicable to the public sector, the actual fall in real wages is most acute among public sector employees. However, a few Government agencies have been given some discretion in recent years in distributing the total wage adjustment according to their needs for retaining certain skilled and professional staff. This policy is consistent with the authorities' objective of fostering a shift in employment towards the productive sectors of the economy. In this connection, the reduction of the unemployment rate in Montevideo from 13% to 10.8% between the second semester of 1976 and 1977 is an important indication that new employment opportunities are being generated by the export-oriented growth strategy. This development presents a favorable contrast with the situation which prevailed in 1975-76 when the growth of the labor force exceeded new employment opportunities and resulted in a jump of the unemployment rate from 8 to 13%. 26. Considering a broader perspective, it should be noted that present unemployment figures alone do not provide an accurate picture of the failure of the Uruguayan economy to provide adequate employment opportunities. Global estimates based on the 1963 and 1975 population censuses place the total number of net emigrants during this period at 200,000, equivalent to about 20% of the working population and 7% of the country's population in 1975. In effect, net emigration has acted as an important safety valve for maintaining unemployment levels from climbing higher, but it has also deprived the country of valuable human resources. This level of net emigration, the relatively young age structure of the migrants (mostly in the 20-30 age bracket), and Uruguay's characteristically low rate of natural increase explain why overall population growth averaged only 0.5% p.a. during 1963-75, among the lowest in the world. 27. The dearth of adequate information on wages and income distribution makes difficult an accurate assessment of the effects of recent policies on the country's traditionally even income distribution pattern. The evidence available such as the fall in private consumption expenditures and the expanded investment and output activity in manufacturing suggests a reduction of the wage share in national income coupled with growing profits in the export- oriented manufacturing sector. Profitability in agriculture has been adversely affected by external factors and domestic price policies (see Chapter III), and thus its profit share has probably declined. Among wage earners, public sector employees have probably experienced the largest decline in real wages. The fall in real wages of-manufacturing workers, on the other hand, has been smaller and has been compensated to some extent by expanded employment oppor- tunities. These observations are to some extent of a speculative nature and would require better information than presently available to be confirmed.  - 18 - Balance of Payments and External Debt 28. Uruguay registered in 1977 a gain in net international reserves, despite a widening trade deficit, primarily on the basis of large short-term private capital inflows. Although non-traditional exports continued to expand strongly, the trade balance turned negative (US$68 million) from a positive level of US$28 million the previous year. The value of non-traditional exports expanded by 18% in current terms to a level of US$349 million, or about 57% of total exports compared with only 26% in 1973. Total value of exports grew by only 8% in current terms, however, as the value of traditional exports experienced a slight fall despite a significant increase in unit prices. This decline was largely accounted for by the 26% reduction in the volume of beef exports from the record level achieved in 1976. Even so, the volume of beef exported was relatively high by historical standards, reflecting the efforts in finding alternative markets after the closure of the EEC market in 1974. Wool exports increased by 10% in real terms as stocks were depleted in order to take advantage of the sustained improvement in world market prices. The most important factor explaining the larger trade deficit was the rapid expansion of imports experienced during the year (27% in current terms). Import growth was led by a 34% nominal increase in intermediate goods, reflecting the high levels of activity in the manufacturing sector and replenishment of stocks. In contrast, capital goods imports settled to a more moderate nominal growth of 11% after experiencing a 57% expansion the previous year. Despite the wider trade gap, the current account deficit increased moderately from 1.9% of GDP in 1976 to 2.3% in 1977, as the foreign exchange earnings from international tourism to beach resorts reached record levels, and interest payments on external debt remained at about the same amount as last year.  - 19 - Table 10: SUMMARY BALANCE OF PAYMENTS, 1973-78 Projected 1973 1974 1975 1976 1977 1978 Trade balance 79.0 -52.3 -110.9 28.4 -68.1 -6.0 Exports, f.o.b. 327.6 381.2 385.1 565.0 611.6 714.0 Imports, f.o.b. 248.6 433.5 496.0 536.6 679.7 720.0 Net service payments -35.7 -40.5 -33.8 -37.3 32.2 33.0 Net factor income -25.1 -42.6 -71.0 -72.4 -67.9 -72.0 Net transfers 18.9 17.4 12.9 7.7 6.6 7.0 Current account balance 37.1 -118.0 -202.8 -73.6 -97.2 -38.0 Official capital grants 12.2 5.3 5.4 5.4 - - Public medium- and long-term loans (net) 11.0 163.7 102.4 66.6 18.2 45.0 Disbursements (83.2) (289.0) (284.3) (214.9) (205.0) (152.4) Amortization (-72.2)(-125.3)(-181.9)(-148.3)(-186.8)(-107.4) Other capital transactions, n.e.i. /1 29.2 -109.2 22.4 113.3 239.6 187.0 Changes in reserves (- = increase) -89.5 58.2 72.6 -111.7 -160.6 -194.0 /1 Includes private capital flows, errors and omissions. Source: Table 3.1, Statistical Appendix, and mission estimates. 29. The current export-oriented development strategy has helped to bring about a significant shift in the country's export structure. Chapter II contains a more detailed discussion of the various policy instruments which have played an important role in promoting non-traditional exports. As recently as 1973, Uruguay's traditional exports of beef and wool accounted for 70% of total export earnings. In 1977, however, these products accounted for only 40% of total exports, while a wide variety of non-traditional export products accounted for 57%. Moreover, this shift in product structure has also led to a diversification of export markets. Europe, which traditionally was Uruguay's major export market and accounted for 75% of export earnings, now provides only 47%. Markets in North and South America, such as the U.S., Brazil and Argentina, have grown in importance from 14% in 1973 to 40% in 1977. These shifts are the combined result of a changed marketing situation  - 20 - ~or beef and the rapid growth of non-traditional exports in response to the policy of mini-devaluations and export tax rebates. The closure of the important EEC beef market in 1974 and the ensuing low international prices forced Uruguay to seek new outlets for its beef exports in countries like Brazil, Spain, and the Middle East. These markets, p rticularly in the case of Brazil with its rapidly expanding demand for beef, should grow in importance in the future since the current protectionist policies in the EEC do not indicate promising market possibilities. The growth of non-traditional exports during this transitional period has played an important role in providing stability and growth to export earnings. In the longer term, the diversification of products and markets should help insulate the economy to a greater extent from the often volatile market conditions for the traditional exports. Table 11: MERCHANDISE EXPORTS (f.o.b.), 1973-78 (in millions of US dollars) Projected 1973 1974 1975 1976 1977 1978 Beef 127.1 144.7 88.6 136.0 123.5 135.0 Wool 101.0 89.2 88.9 104.1 125.2 125.0 Rice 14.9 28.2 32.8 26.0 32.5 32.0 Manufactured goods A1 62.8 98.9 140.0 235.3 279.9 370.0 All other goods 21.8 20.3 34.8 45.1 50.5 52.0 Total 327.6 381.3 385.1 546.5 611.6 714.0 /1 Includes hides and skins in various stages of processing. Source: Table 3.2, Statistical Appendix, and mission estimates. 30. Total import expenditures experienced a marked increase in 1977 (24% in current terms) compared with a 6% increase the previous year. The increase was roughly divided equally between volume and price increases. As in the case of exports, the import structure is undergoing a noticeable shift with the share of fuel increasing from 19% in 1973 to 31% in 1977, and the share of capital goods almost doubling from 10% to 18% during the same period. The fuel situation reflects essentially the impact of the international oil price increase since consumption growth has been moderate, owing to the authori- ties' policy of passing external price adjustments on to consumers. More significantly the more important role of capital goods in import expenditures reflects the growth of investment in the economy, and the liberalized import and financial regimes instituted by the authorities.  - 21 - Table 12: MERCHANDISE IMPORTS (c.i.f.), 1973-78 (in millions of US dollars) Projected 1973 1974 1975 1976 1977 1978 Food 10.3 12.9 15.8 18.6 20.8 20.0 Other consumer goods 18.0 23.7 13.5 18.7 26.5 29.0 Fuels 54.7 163.8 189.9 187.1 227.3 239.0 Intermediate goods 173.5 254.8 255.9 240.2 325.0 354.0 Capital goods 27.1 38.9 73.6 117.6 130.4 149.0 Total 283.6 494.1 548.7 582.2 730.0 791.0 Source: Table 3.3, Statistical Appendix, and mission estimates. 31. The increase in 1977 of Uruguay's current account deficit of the balance-of-payments together with larger amortization payments for public external debt, led to an increase in gross external capital requirements. 1/ These requirements increased US$62 million to a level of US$284 million. Disbursements from external public borrowing more than offset the heavy amortization payments and contributed to finance 20% of the current account deficit. The sizeable inflow of private capital (US$240 million) was more than sufficient to cover the remaining gap, and generated an increase in net reserves of US$161 million. A major portion of these inflows represent short-term capital and partly reflect Uruguay's enhanced creditworthiness standing in the inteLrnational financial community. Capital flows of the above magnitude have been made possible by the establishment of a free exchange rate market for financial transactions and the liberalization of controls in the financial system. During a good part of 1977, high domestic interest rates stimulated private domestic borrowing abroad and also attracted inflows of short-term capital, thereby strongly contributing to the increase in reserves. This situation is not likely to remain stable in the longer term given the volatile nature of short-term private capital inflows, and this underscores the importance of export growth in achieving a manageable current account balance. 32. The overall trends of the balance-of-payments during 1977 continued during the first half of 1978 with a net reserve gain of nearly US$120 million. The trade deficit is projected to increase in 1978 on account of further strong I/ Defined as current account deficit plus amortization on medium- and long- term public external debt.  - 22 - import growth, with capital imports for the Palmar project experiencing an important expansion. High levels of foreign exchange receipts from interna- tional tourism should partially offset the effect of the worsening trade posi- tion on the current account deficit, which is nevertheless expected to widen. Private capital inflows should abate somewhat from the 1977 level as a result of the measures taken by the authorities, but should again contribute to a large overall balance-of-payments surplus in 1978, which may reach US$140 million. By the end of the year, net international reserves may well reach nearly 5 months of projected 1978 imports. Table 13: DEBT STRUCTURE AND SERVICING CAPACITY OF EXTERNAL PUBLIC DEBT, /1 1973-77 (in millions of US dollars) 1973 1974 1975 1976 1977 Debt outstanding and disbursed 344.1 516.0 615.7 684.2 706.3 Debt service 93.8 156.1 228.1 205.5 243.0 Composition of debt outstanding (x) 100.0 100.0 100.0 100.0 100.0 Multilateral agencies 21.4 17.7 16.1 17.4 17.5 Governments 39.1 34.9 26.7 20.1 17.3 Private banks 14.2 19.4 15.0 19.9 20.3 Suppliers 3.0 3.8 4.2 3.8 4.3 Bonds 22.3 24.2 38.0 38.8 40.6 Composition of debt service (X) 100.0 100.0 100.0 100.0 100.0 Multilateral agencies 14.0 9.6 6.7 8.2 8.5 Governments 17.9 15.4 12.9 19.3 16.1 Private banks 37.1 13.9 59.1 40.9 48.7 Suppliers 6.5 4.6 3.7 4.3 2.9 Bonds 24.5 56.5 17.6 27.3 23.8 Debt outstanding and disbursed as a % of GDP 11.6 13.4 16.6 17.6 16.6 Public Debt service ratio 21.8 31.2 41.4 30.3 27.9 /1 Repayable in foreign currency. Source: IBRD Debt Reporting System. 33. Uruguay's external debt service position reached a peak level in 1975 when the amortization of balance-of-payments support loans contracted on hard terms with private financial institutions combined with a stagnant level of exports resulted in a debt service ratio of 41.4%. Since that time,  - 23 - the debt service ratio has fallen to 27.9% owing primarily to export growth, as debt service payments climbed to a record level of US$243 million in 1977. The large debt service payments reflect the policy of the authorities of pre-paying loans obtained on unfavorable terms during the balance-of-payments crisis and obtaining new credits under more attractive terms with commercial banks. This strategy permitted the authorities to untie in 1977 the gold reserves guarantee included in a 1975 credit operation with a major interna- tional commercial bank. The successful overall economic management together with this pre-payment policy have resulted in a remarkable improvement in Uruguay's creditworthiness rating in the international financial community. The authorities have used the opportunity afforded by this enhanced credit position and the liquidity in international financial markets to negotiate relatively favorable credits with commercial banks. Recently, Uruguay obtained a US$100 million loan for the Palmar hydroelectric project, at 1-1/4 percentage points above LIBOR (compared with 2-3/8 three years ago) and 10-year maturity (including 4 years of grace), from a syndicate of international commercial banks. These terms are unusual for a small country like Uruguay and reflect the increased confidence of financial institutions in the country's development prospects. 34. The Government's policy of relying heavily on external borrowing to weather the balance-of-payments crisis of 1974-75 changed the structure of Uruguay's debt noticeably. Thus, the share of debt outstanding and disbursed held by international and bilateral agencies has fallen from 60% in 1973 to 35% in 1977, while that of private banks and public bonds have risen from 36% to 61%. The largest single share (41%) is that of dollar-denominiated govern- ment bearer bonds (10 years) sold to the private sector. It is impossible to determine the proportion of these bonds being held by residents and foreigners, but it is generally believed that a major portion are in the hands of foreign citizens. It can be expected that as the need for quick disbursing funds diminishes and the public sector's investment program increases, the debt structure will tend to stabilize somewhere between the earlier and the present pattern, thereby further contributing to a reduction in the debt service burden.  - 24 - II. NON-TRADITIONAL MANUFACTURED EXPORTS AND INDUSTRIAL GROWTH Origins of Industrialization 35. The policy of promotion of non-traditional exports being pursued in recent years represents a response to the costs and constraints of the import substitution strategy which had prevailed in Uruguay for roughly 90 years. The consequences of this strategy for a small country with limited mineral resources like Uruguay can be considered a classic case of balance- of-payments constrained growth. Originally, the idea of industrialization was tied to various objectives such as generating new employment opportunities, modernizing the economy, and satisfying a desire for national economic autonomy. The strategy that was to be followed in achieving these objectives was not clear, as the advantages of supplying the domestic market, competing with foreign goods, and exporting to overseas markets were valued as equally important. The early custom duty laws (1875) established relatively high duties with the principal purpose of raising fiscal revenues. A more clearly defined policy for promoting manufacturing growth emerged some years later (1888), with a law that set high duties on manufactured goods and lower tariffs for raw materials and capital goods. 36. Through the following years the protectionist tendencies intensifed: custom duties were raised, and multiple exchange rate practices, foreign exchange surcharges, prior import deposits and import quotas were adopted. The sharp fluctuations in foreign exchange earnings resulting from the country's heavy dependence on beef and wool exports did not change this orientation. During difficult years due to foreign exchange shortfalls, import controls were tightened, and the increase in income during the years of prosperity seemingly made tolerable the high costs of excessive protec- tion. The two world wars provided a strong external stimulus to the import substitution process, given the dearth of manufactured products in inter- national markets. 37. These policies led to an appreciable growth of the manufacturing sector, particularly during the years 1942-58. During this period production expanded at an annual rate of 5.7% in real terms, and employment grew at 5.1% per annum. The share of industry in GDP rose from 17% to 23%. This perfor- mance, of course, was made possible by the high level of protection and other forms of subsidies. Imports of raw materials were fostered by an overvalued exchange rate, and the supply of local agricultural raw materials was adminis- tered through quotas and prices fixed below international market levels. 38. High tariff protection and an inadequate exchange rate policy fostered an industrial sector primarily geared towards the domestic market. The accompanying distortions in resource allocation created an economic environment which was not propitious to the development of export-oriented manufacturing industries. The subsidies implicit in the above policies made possible the survival of inefficient enterprises. The difficulty, in many cases, of achieving economies of scale with a domestic market of  - 25 - 2.0-2.5 million people was also a contributing factor to the sector's 1i.r- efficiency. Furthermore, the import substitution policy created a bias against agriculture by making the domestic terms of trade unfavorable to it and by discouraging traditional exports through an overvalued exchange rate. The combined effect of these factors was reflected in unfavorable trends in the external sector of the economy. By 1958, the level of Uruguay's total exports was similar to that achieved in the 1940s (around US$155 million), while the import level had increased considerably (from an average of about US$79 million in 1942-46 to US$204 million in 1957-61), and the share of imported goods in manufacturing output had also increased (from 39% to 50%). Far from achieving economic autonomy, the import substitution strategy deepened the dependence of Uruguay on imported goods, and in particular that of its industrial sector. 39. Uruguay's import substitution possibilities were largely exhausted by 1958, while the country's export level continued to stagnate for several years owing to unfavorable conditions in international markets. This situation produced an appreciable fall in the level of imports (from about 17% of GDP in the late 1950s to 12% during 1965-67), which adversely affected the import- dependent industrial production. Thus, the manufacturing sector, in turn, stagnated during 1958-67. The agricultural sector, already debilitated by the effects of the import substitution policy, was further weakened by the poor prospects in world markets. As a result, overall economic growth was negligible; between 1968 and 1973 the manufacturing sector and GDP expanded at annual rates of 1.5% and 1.4%, respectively. Emergence of Export-oriented Policies 40. By the mid-1960s the limitations of the import substitution strategy started to become obvious and an effort was initiated to promote exports of manufactured goods. In 1964 the law creating tax rebates on non-traditional exports was first established in an attempt to compensate for the effects of high protective barriers. The so-called reintegros were fixed as a percentage of the f.o.b. value of non-traditional exports and could be used to meet tax obligations. The effect of this isolated measure was negligible, however, as overall economic policy continued to be geared to an inward-looking strategy. An overvalued exchange rate, price and qparltity controls on domestic raw materials, and high tariff protection continued to prevail. 41. The National Development Plan prepared in 1972 established for the first time the objective of achieving economic growth through the liberali- zation of domestic prices and controls, and the promotion of manufactured exports which could compete in world markets. Nevertheless, the adoption of an export-oriented growth strategy did not crystallize until 1974, when the crisis brought about by the quadrupling of the oil price and the closure of the EEC market to beef imports led to the recognition of the need for basic structural reforms. These reforms included the liberalization of the financial market and the more active implementation of minidevaluations. Quantitative and administrative restrictions on imports were eliminated except in the case of the automotive industry, although recent policy decisions have liberalized the importation of tractors. Price controls on domestic goods  - 26 - have been substantially reduced and interest rates in the financial market have been freed. Although progress achieved in eliminating past distortions has been. notable, particularly in the financial field, there still remain important distortions in relative prices such as excessive levels of effective protection (as high as 600% in some cases). 1/ Similarly, the system of tax rebates on exports (averaging about 18% of the f.o.b. value but including rates as high as 38%) has been maintained, in part, to offset the effects of high tariff protection. Performance of Non-traditional Manufactured Exports and Industrial Growth 42. The change in development strategy described above, particularly the more realistic exchange rate policy, has resulted in an unprecedented growth of non-traditional manufactured exports and a significant development of the industrial sector. Between 1973 and 1977 non-traditional manufactured exports expanded at an average annual rate of 45% in current prices, reaching US$280 million or about 46% of total merchandise exports in 1977. 2/ In real terms, non-traditional manufactured exports increased at an average annual rate of more than 30% per annum compared with a 6% growth for traditional exports. The principal product categories accounting for the sharp expansion have been leather apparel and accessories (28% of the value of non-traditional manufac- tured exports), textiles (14%), and shoes (9%). All of these categories registered rates of expansion well-above the annual average for non-traditional exports- In addition, a number of other products have contributed to the favorable export performance but in a smaller magnitude. These include cement, rubber tires, glass and ceramic products, and various chemical products. Table 14 below presents a general picture of the evolution of exports by type of products between 1973 and 1977. 43. The growth of non-traditional manufactured exports has made possible the revitalization of the industrial sector through the increased production in the most dynamic subsectors. During 1973-77 industrial production expanded at 5.2% per annum, significantly above the 3.4% p.a. growth rate registered by the economy. Exporting subsectors such as textiles, rubber products, and non-metallic minerals experienced growth rates well-above the average for the sector. During this period the value added share in gross industrial output remained relatively stable, although some subsectors such as leather and textile manufactures registered an increase, indicating a greater degree of domestic integration. 1/ J. Anichini, J. Caumont, and L. Sjasslad, La Politica Comercial y la Proteccion en el Uruguay, Banco Central del Uruguay, 1977. 2/ Non-traditional exports are those other than beef, mutton, raw hides, wool (tops and blousse), wheat, linseed oil, and sunflower oil. In addition to manufactured goods, non-traditional exports also include various unprocessed and semiprocessed minerals and agricultural products. See Table 14.  - 27 - Table14: EXPORT VALUE BY TYPE OF PRODUCT 1973-77 (millions of US dollars) 1973 1974 1975 1976 1977 Total exports 321.5 382.2 383.8 546.5 607.5 Traditional 235.8 238.1 193.9 250.9 258.8 Chilled and frozen beef 121.6 138.2 82.0 122.4 111.2 Raw and semi-processed hides 3.9 1.3 2.0 2.0 1.0 Raw and semi-processed wool 102.0 90.0 90.0 105.6 125.2 Cereals, oilseeds and oil 8.3 8.7 19.9 20.9 21.4 Non-traditional 85.7 144.1 189.9 295.6 348.7 Unprocessed 7.6 16.7 16.6 34.1 36.3 Stone blocks, sand and minerals 1.1 1.3 1.3 1.4 3.0 Live animals 1.4 4.0 5.0 8.0 7.5 Fresh fish 0.7 1.1 3.3 5.1 10.3 Miscellaneous agricultural products 4.4 10.3 7.0 19.6 15.5 (Fruits) (3.4) (4.5) (4.4) (5.2) (8.7) Semi-processed 15.3 28.5 33.3 26.2 32.6 Rice 15.0 28.2 33.2 26.1 32.5 Granite and marble blocks 0.3 0.3 0.1 0.1 0.1 Manufactures 62.8 98.9 140.0 235.3 279.8 Processed beef and derivatives 5.5 6.4 6.5 11.6 9.0 Processed agricultural products 4.2 5.7 11.5 28.4 18.3 Canned foodstuff 0.9 0.9 1.5 2.9 6.9 Tanned and finished hides 22.0 22.7 19.5 35.6 31.5 Leather products 10.4 19.4 40.9 72.6 103.5 Textiles 7.1 11.8 15.3 25.7 40.4 Pulp, paper and wood products 0.3 2.3 2.4 1.1 3.8 Chemicals, including fertilizers 1.9 5.2 4.6 6.5 8.7 Cement 2.6 4.5 8.8 12.9 12.1 Glass and ceramic products 1.7 3.4 6.8 7.1 8.3 Electric and electronic products 1.1 1.8 3.9 3.2 3.9 Metal manufactures 0.7 1.5 4.4 4.0 5.8 Automotive parts 3.0 4.8 4.0 6.1 7.0 Rubber tires and hoses 1.4 5.3 5.6 4.7 7.9 Other manufactures products - 3.2 4.3 12.9 12.7 Source: Direccion General de Comercio Exterior.  - 28 - 44. The growth of industrial output contrasts sharply with the poor performance of the agricultural sector (1.5% p.a. during 1973-77). This difference in performance is partly linked to the policies of tariff prctection and export rebates which distort the allocation of resources against agriculture by maintaining an unfavorable domestic terms of trade situation. During the last five years, the domestic terms of trade have registered a drop of nearly 30% against agriculture. The sectoral imbalances brought about by these and other policies in agriculture will be discussed in more detail in the following chapter. 45. The various liberalization measures adopted in the context of the export promotion effort appear to have contributed to an overall increase in the efficiency of the industrial sector. Between 1974 and 1977, for example, the index of industrial production increased at an average annual rate of nearly 6% while the number of hours worked expanded at only about half that rate. This increase in productivity together with the slight (1.4%) reduction in the overall level of employment in the sector suggests a shift of employment opportunities towards the more dynamic exporting subsectors. The realization of the objective of increased efficiency and competitiveness in the manufac- turing sector will probably imply a continuation of these trends in the medium-term. The potential for labor absorption, however, will be determined not only by increases of production in exporting subsectors, but also by the growth of the agriculture and services sectors. 46. A survey carried out by the Economics Department of the National University indicates that nominal wage increases in manufacturing enterprises have exceeded the official minimum adjustments, with actual adjustments being largest in the subsectors of leather apparel, shoes, and rubber. The same survey indicates that actual wage increases were larger in commerce than in manufacturing, thus contributing to an equalization of the wage structure between these employment markets. Nominal wages for workers in the firms sampled averaged two and one-half times the national minimum wage, but real wages fell by about 6% between 1976 and 1977. Judging by the high internal rates of return observed in investment projects presented to the Central Bank for external .financing, it is clear that the returns to capital have increased substantially in recent years. Part of these profits are being used to modernize and expand plant capacity which has traditionally suffered from obsolescence. Export Promotion Policies 47. The results achieved since 1974 have been notable despite the continued existence of relative price distortions such as those resulting from tariff protection and tax rebates on exports, which are not compatible with the objective of efficient resource allocation in the longer-term. Neverthe- less, the present policy framework represents a significant advance in com- parison with the previous situation. The main difference is due to a more consistent application of exchange rate adjustments, which combined with the incentives provided by tax rebates and special credit lines, has made possible the recent favorable performance. Although the policy of minidevaluations was first instituted in 1972, it was not until 1974 that this instrument was applied in a consistent manner. Thus, despite the existence of export tax  - 29 - rebates since 1964, the boom in non-traditional exports did not occur until 1974 when this instrument was combined with a continuous policy of minideval- uations. Exchange Rate Policy 48. Prior to 1972 the evolution of Uruguay's exchange rate exhibited two basic characteristics: (a) the persistent overvaluation of the peso; and (b) the recourse, after relatively lengthy periods of time, to sharp devaluations when the situation of the external sector became untenable. This policy was in accordance with the import substitution scheme since it afforded a subsidy to the import of intermediate goods. On the other hand, this type of exchange rate management was not adequate to promote export development. The overvaluation of the peso acted as a disincentive to exports by reducing the income of exporters in local currency and shifting relative prices in favor of imports. 49. Early in 1972, a 35% exchange rate adjustment took place and the policy of exchange rate minidevaluations to compensate for domestic inflation was adopted in order to correct the distortions produced by previous policies. For the most part the minidevaluation policy was not applied continuously during the following two years, and by the end of 1974 the effective exchange rate had fallen nearly 20% compared to its December 1972 level (see Table 9). During the 1974-77 period exchange rate adjustments were carried out with more frequency and led to an increase of about 23% in the effective exchange rate. Thus, although by the end of 1977 the effective exchange rate level was only slightly above that existing in late 1972, the continuity of the minidevalua- tions during the last three years has resulted in an improvement of relative prices to exporters. Moreover, the mini-devaluation policy has produced important effects, such as the improvement of expectations and the elimination of strong inflationary pressures produced by past large devaluations. These two factors have also contributed to the establishment of a more solid founda- tion for export development. In this connection, it should be noted that the pace of exchange rate adjustment in 1977 permitted only a 3.2% gain in the effective exchange rate (compared with a 22% increase in 1976), when the relative price movements of trading partners is taken into account. This small adjustment may have been influenced by the authorities' concern with the large increase in foreign exchange reserves arising from private capital inflows. Given the nature of the factors conditioning these inflows, it would appear that the pace of exchange rate adjustment should be more closely linked to the objective of fostering the growth of non-traditional exports, which are becoming an increasingly important factor for the country's external balance. In effect, tax rebates on exports act as a complement to the overvalued exchange rate, with the disadvantage that they discriminate against traditional exports and constitute a growing fiscal burden. The eventual elimination of these tax rebates is conditioned on the achievement of a more adequate exchange rate level.  - 30 - Tax Rebates 50. Tax rebates to exporters of non-traditional exports consist of a percentage of the f.o.b. value of exports, and constitute negotiable instru- ments which can be used to fulfill obligations for the nominal value of the rebate. Thus, they provide a direct incentive to non-tradit 'nal export activities. Currently a large number of products benefit from this subsidy which varies considerably among products, although the most frequent rate is 18%. The determination of the rates was in principle based on domestic value added but in practice the particular needs of firms were taken into account. This procedure tended to increase the inefficiencies permitted by tax rebates. Their period of effectiveness is usually six months and is often extended for an additional six. The policy of the authorities is to gradually reduce the level of rebates through annual across-the-board reductions (20% in 1977). This time limitation reflects the temporary nature of this instrument, although the existing levels of tariff protection and the resulting exchange rate level have required its continued use. An emerging constraint in the level of the rebates, at least for some important products, is the position of Uruguay's trading partners, principally the U.S., vis-a-vis the use of export subsidies. In the case of leather apparel and shoes, the consideration given by the US to the establishment of countervailing duties led to an agreement to reduce the rebates from 18% and 33%, respectively, to 6% by the end of 1978. A similar type of agreement can be expected to be negotiated with respect to textile products, which in addition to a standard 18% rebate enjoy a 20% incentive for using domestic wool. These external considerations may act as an important incentive to reduce the present overall level of subsidies. 51. Given that the system of tax rebates on exports contributes to inefficient allocation of resources, constitutes a loss of fiscal revenues (tax rebates represented 11.4% of total central government tax revenues in 1977), and could give rise to countervailing duties in important markets, it is advisable that the authorities continue the present policy of gradual reductions, and also the unification of present rates to avoid discriminating among products. A Central Bank study has estimated that about 50% of the tax rebates paid in 1976 (US$30 million) were excessive in terms of the additional net foreign exchange generated by non-traditional exports. Taking into account the import duties actually paid as a proportion of the c.i.f. value of total imports (16.5%) and the net expansion of import capacity generated by non-traditional exports (61%), it was estimated that a more efficient level for tax rebates would be about 10% of domestic value added 1/, or 5% in nominal terms (down from about 18% in 1978) given that on average domestic value added is roughly 50% of gross output. The efficient level of tax rebates would vary according to the level of tariff protection and the pace of devaluation of the exchange rate. The shift towards a more efficient tax rebate level would need to be gradual in order not to disrupt the favorable performance of non-traditional exports. However, the time horizon of five to eight years which has been indicated by the authorities to dismantle existing tariff barriers seems unduly long, unless a major portion of the tariff reform takes place in the first few years. I/ Anichini et al., op. cit., page 169.  - 31 - Industrial Promotion Law 52. With the objective of fostering industrial growth, two laws have been established: the Industrial Promotion Law and the Foreign Investment Law. T1.e latter law does not have much applicability given that the norms which it established for remittance of principal and profits abroad have ceased to act as incentives, since the establishment of a free foreign exchange market for financial transactions in 1975. The Industrial Promotion Law essentially grants fiscal exemptions to firms defined to be of "national interest" by the Technical Assistance Unit and the Advisory Unit of the Ministry of Industry. An important criterion being the extent to which the enterprise contributes to the objective of expanding and diversifying exports in an efficient manner. In effect, however, exporting enterprises enjoy some of these benefits without having been declared of "national interest". This is the case with the exemption of tariff duties on imported raw materials and intermediate goods employed in the manufacture of exports provided by the system known as "temporary admission". 1/ The main direct advantage provided by the law is the import of capital goods free of import duties. The declara- tion of the special status is also sought by enterprises as a sign of official approval in the light of the structural changes which the authorities are stimulating in the industrial sector. In a sense, the mechanism for obtaining a certification of "national interest" has acted as an ad hoc substitute for a more clearly-defined long-term substitute for a more clearly-defined long-term policy for the manufacturing sector. Receipt of this status is also required to obtain official financing from the Central Bank's Development Fund. 2/ Up to early 1978, 100 projects (about 52% of the total considered) totaling about US$90 million in investments had been declared of "national interest". These investments were projected to generate during the first five years net foreign exchange in the amount of US$260 million and nearly 5,000 new jobs. In general, the Industrial Promotion Law has not been instrumental in fostering these new investments, and its role in recent industrial growth is secondary in comparison with exchange rate and tax rebate policies. Export Financing 53. Subsidized credit for export financing has been another mechanism used by the authorities to promote the growth of non-traditional exports. The Central Bank's pre-export financing scheme is commonly known as the regimen de preanticipos. Under this scheme exporters borrow US$ from commercial banks and deposit them in the Central Bank, then exporters may draw 60% of the 1/ This mechanism is an important export incentive given the existing level of tariff duties. LATU (Laboratorios de Analisis Tecnologico del Uruguay) is responsible for checking that the imported goods are incorporated into export items. Imports under temporary admission amounted to nearly US$50 million in 1977. 2/ Fondo de Financiamiento de Inversiones para el Desarrollo (FOFIDE).  - 32 - peso equivalent of this amount at the prevailing exchange rate. Completion of the financial operation is done at the end of the export cycle with an allow- able maximum term of 420 days, and using the exchange rate in effect at the time of closing the transaction. Until recently, the interest rate charged by the Central Bank (15%), together with the benefits derived by the exporter from the mini-devaluations, resulted in negative effective costs of funds. The subsidy inherent in this scheme together with the large increase in foreign currency deposits in commercial banks during 1976-77 led to a heavy use of this facility, and contributed to the strong monetary expansion. In keeping with the objective of improved resource allocation and more restric- tive monetary management, the authorities limited the element of subsidy mainly by reducing to 60% (from 90%) the share of funds loaned prior to export- ing. Interest rates were also fixed at 30% of the rate for Treasury bills. In addition, the authorities have introduced the simple sale of foreign exchange prior to exporting without the need for interest rate charges or rate of exchange adjustments. The objective is to phase out the pre-anticipos scheme by gradually lowering the share of foreign exchange financed, thereby eliminating the incentive to borrow under this arrangement. Development Fund 54. The Central Bank also administers a Development Fund consisting of financial resources from multilateral and bilateral agencies, and its own resources for medium- and long-term financing of investments in the industrial sector, principally for export-oriented enterprises. Outside of credit facilities provided by suppliers, this Fund constitutes the main source of medium- and long-term credit for investments in the manufacturing sector. In effect, the Central Bank rediscounts the above credit lines through private commercial banks with project evaluation being carried out by the Technical Assistance Unit in the Ministry of Industry. Since late 1975 when the Fund was created, 18 investment projects have been approved with these credit lines amounting to US$8.4 million. This corresponds to 15% of the total number of projects certified of "national interest" and about 7% of the total investment costs of these projects. The evolution of the Fund's lending activities has not proceeded as quickly as originally expected pri- marily because commercial banks have been reluctant to engage in longer-term lending. In part, this is explained by the unfamiliarity of these institutions with the requirements of economic project evaluation, but also because their good liquidity position, ready access to lower cost funds from banking branches abroad, and the higher spread on traditional short-term operations have proven to be more attractive financially than the Fund's credit lines. The Govern- ment's delays in announcing a strategy for reducing tariff protection has also encouraged a cautious investment attitude among enterprises which may need to undertake new investments to adapt to a more competitive environment. Trade Agreements 55. Although Uruguay is a member of LAFTA (Latin American Free Trade Association), the limited impact of this multilateral trade agreement on  - 33 - Uruguay's exports to its other member countries led the authorities in 1975 to sign more effective trade agreements with its large neighbors--Argentina and Brazil. The bilateral agreements of economic cooperation with these countries are similar in their objectives, namely: (a) to expand and diversify commercial trade; (b) to stimulate and coordinate investments; and (c) to foster regional integration through joint infrastructure projects. The most important mecha- nisms up to now for achieving these objectives have been the reduction of custom duties and non-tariff barriers, and the creation of credit lines (US$50 million each) to finance Uruguayan import of capital goods from the two countries. The preferential trade status enabled Uruguay to export about US$40 million to these countries in 1977. Moreover, the credit lines were completely utilized by early 1978 and are in the process of being renewed along with new trade concessions. A striking aspect of the export growth associated with these bilateral agreemenits is the wide variety of "other" manufactured goods which are being exported. In contrast to leather and woolen products which are principally directed to overseas markets, the products exported to the neighboring countries include synthetic fibers, and assorted chemical, electronic and metal products. These are products in which Uruguay may not be competitive outside the above preferential arrangements. Although these agreements imply a diversion of trade, they have yielded favorable results in terms of increasing exports and exposing a broad range of manufacturing enterprises to external markets. Therefore, it is important that Uruguay continue to seek more permanent and complementary trade relation- ships with these important neighboring countries. While the import credit lines of the trade agreements played an important role in initiating the process of modernizing and rehabilitating plant capacity at a time of difficult external circumstances for Uruguay, the country's improved overall economic performance has made possible a broader range of financing opportunities for imported equipment. Prospects for Non-traditional Manufactured Exports 56. The prospects for Uruguay's non-traditional manufactured exports should continue to be favorable, particularly in the case of products based on domestic agricultural inputs, where the possibilities offered by external markets have not been fully tapped. During 1977 total non-traditional exports increased 18% which is significantly below the average annual growth rate of 42% achieved during the entire 1973-77 period. This slowdown is explained by the poor performance of unprocessed or semiprocessed agricul- tural products, such as beet sugar, which has been unable to compete in world markets. In the case of non-traditional manufactured exports, the growth performance was somewhat better (24%) 1/, although items such as leather, woolens, and rubber products maintained impressive gains (43%, 57%, and 68%, respectively). Moreover, the increase in unit prices of products such as textiles reflects a tendency to penetrate better markets with higher quality products. Based on the experience of recent years, it might be expected that Uruguay's non-traditional manufactured exports could reach US$450 million (1977 prices) by 1982, up from US$280 million in 1977. Leather I/ Excludes tanned and finished hides.  - 34 - products, including shoes, and woolen textile products should continue to provide the lead in export expansion. A recent study of Uruguay's textile and apparel industry has indicated that good export possibilities exist for men's suits, sweaters, and ladies' coats. 1/ In addition to these products, there are a number of others which enjoy favorable prospects based on recent growth performance and their relatively high share of domestic value added. These include: (a) auxiliary products for the apparel industry; (b) agroindustrial products (including fish); and (c) tiles, ceramic wares, and glass. 57. A longer-term outlook suggests that there are other products with export potential which would require more efforts to develop. These include cement, granite, wood, and rubber tires. Cement exports have already reached significant levels but future growth will depend on the ability to compete for the Brazilian market, and to a lesser extent, on whether Uruguay will be able to sell cement for the hydroelectric projects on the Parana River. 2/ Similarly, in the case of granite the current limitation is the need to develop the existing markets and establish new ones. In contrast, the limitations concerning wood and rubber products are more related to structural domestic constraints. Paper, pulp and wood products would require the estab- lishment of reforestation programs in order to increase the availability of raw materials. Such programs would also be important to supply the leather and woolen industries with packaging materials. In the case of rubber tires, export prospects will depend on the ability of the industry's single firm to attain higher efficiency by specializing in a few products and achieving economies of scale. This is an example of an import-substitution industry which apparently has the potential to adapt to a more competitive environment. It should be noted that the recent rapid export growth of these products has been fostered by the preferential trade agreements previously mentioned. Industrial Resources and Export Prospects 58. The stagnation of the industrial sector for nearly two decades contributed to the deterioration and obsolescence of plant and equipment. Moreover, the earlier inward-looking orientation did not provide a propitious environment for technological development or the evolution of modern entre- preneurship. The export promotion policies of recent years are primarily responsible for eliciting a dynamic response from the manufacturing sector. The realization of broad profit opportunities in external markets has stimul- ated a break with the limited domestic market in the leading non-traditional export subsectors. The relatively moderate drop in domestic consumption associated with the stabilization program has not played a fundamental role in the ongoing structural change. Evidence of this is that most of the current investment efforts aimed at modernizing and rehabilitating the capital stock, production and marketing systems is essentially export-oriented, and cannot be 1/ Kurt Salmon and Associates, The Modernization and Expansion of the Uruguayan Textile and Apparel Industries. 2/ A cement expansion project has already been declared of "national interest" but has faced difficulties in arranging the volume of necessary financing.  - 35 - justified by internal-market considerations. A good part of this investment effort is being undertaken through the reinvestment of profits and the use of suppliers credits. The relative lack of long-term credit mechanisms already discussed is probably acting as a limitation on the extent and nature of new industrial investments. Moreover, the absence of a more diversified capital market could well represent an important bottleneck in the future for the proposed structural shift from a heavily protected to a more outward-oriented sector. The volume of internal and external resources being mobilized by commercial banks suggests that the overall economic environment might be appropriate for the emergence of private development banks. Unlike commercial banks, private development banks could specialize in the mobilization and lending of, resources at medium- and long-terms, with the required project evaluation facilities. Equity participation in new projects might also become an important role for these institutions. The Central Bank's Development Fund could continue to act as a rediscounting agent for external credits to commer- cial and development banks. Consideration might be eventually given to transferring the Technical Assistance Unit to the Central Bank since the benefits currently provided by the "national interest" status under the Industrial Promotion Law will largely disappear with the proposed import taritf reform. 59. With regard to labor, Uruguay offers a highly literate and adaptable labor force at relative low labor costs. Labor costs (including social security and other benefits) in the textile industry are about US$0.76 compared with an average of US$4.0 in the U.S. Although Uruguay's labor costs are much higher than that in other areas of Latin America, like the maquila zone in Mexico where they average about US$0.52, the average Uruguayan worker is substantially better educated. However, there is room for improvement in the productivity of the labor force employed in labor-intensive industries such as those of leather and woolen apparel. Vocational and on-the-job training programs designed to upgrade and broaden the skills of workers in exporting industries can contribute towards the goal of improved labor productivity. In this connection, the authorities have recently taken initial steps to establish a national vocational training program with financial and technical assistance being provided under an IBRD project. An important factor which has tradition- ally affected labor costs in Uruguay is the high social security and benefit charges borne by employers. These charges represent about 51% of the workers' nominal salary out of which 33% go to social security agencies and 18% are paid directly to the worker. This probably acts as a brake to employment expansion and affects the price competitiveness of Uruguayan products in world markets. The Government is now considering a proposal to alleviate this situation by financing social security charges through the value-added tax. Since exporting enterprises do not pay this tax, their social security burden would thereby be eliminated. This measure does not obviate the need for a thorough streamlining and rationalization of the social security system which has been under discussion in the Council of State for a number of years. The proposed reform aims at establishing uniform guidelines for eligibility and for the calculation of benefits, and to eliminate many of the extremely generous benefit clauses which now plague the system.  - 36 - 60. An increasingly important consideration for future export growth is the availability of domestic raw materials for the leading export sub- sectors. Already there are indications of shortages of leather supplies because of seasonal or quality factors, which have required the import of suitable substitutes. In the longer-term, the development of the livestock sector and measures to permit a steady and growing supply of quality hides would contribute to the country s export prospects. With respect to wool, it is estimated that only about 10-15% of the country's production is of suffi- ciently good quality to be incorporated into high quality woolen apparel. An effort would thus be required to improve the quality and design of the country's production, since Uruguay's export market prospects are more favorable in the more demanding and higher quality markets. Penetration of these markets is still hindered by antiquated production methods which are not well-suited for competitive world markets. Under an IBRD project, LATU (Laboratorio de Analisis Tecnologico del Uruguay) is working with manufacturing firms to improve and expand its capabilities for export quality control and applied technological research, in line with perceived needs for more up-to-date production and quality standards. The above factors again point to the need to pursue sound agricultural policies which are well-integrated with the overall export strategy for manufactured goods. 61. As indicated prevlously, the achievement to date of broad spectrum of exports has taken place in the context of a heavily protected manufacturing sector. The stated intention of the authorities is to reduce the level of protection in gradual fashion during a period of no less than five years and no more than eight years. Such a policy appears necessary to promote a more efficient and outward-oriented manufacturing sector. The time horizon appears to have been chosen to minimize the possible effects on employment of a more rapid process. 1/ However, this time span may be unrealistically long as it poses the difficulty of continuous implementation at a time when the country will be experiencing important changes in the current political set-up. Presently there appears to be ample room for basic measures which would set the stage for effective tariff reductions. An initial phase could consist of a consolidation into single rates of the present system of custom duties (which has recently been unified), surcharges and consular fees, and their administration and collection by a single agency. Port charges which presently act as an import tariff, since they are defined as a percentage of the c.i.f. value of the import, could be converted to service fees related to the cost of the actual services rendered. A related measure could aim to rapidly reduce the "peaks" in order to establish a more uniform tariff structure. The actual reduction of nominal tariffs to more reasonable levels could be then carried out during a period of about three years after having announced beforehand the timing of the proposed reduction. Such a strategy would allow the heavily protected sectors to adjust their production and investment plans accordingly. I/ The total unemployment caused by reducing tariff levels to a uniform nominal rate of 30% has been tentatively estimated at 30,000, or about 3%' of the country's employed labor force.  - 37 - The process of tariff reductions would also need to be accompanied by the provision of adequate credit facilities to permit the affected industries to reconvert. 62. The export promotion efforts currently being made ire spread among several institutions including, among others, the External Trade Department of the Ministry of Economy and the Central Bank. The need for institutional coordination, although of second priority in relation to the policies discussed above, could become more important as Uruguay's exports diversify. When the number of products exported is relatively small and their total value is appreciable, the process of external marketing can often be carried out directly by the enterprises in an effective manner. On the other hand, when the number of exported products is large, their total value is low, and the enterprises relatively small, a well-structured system of export promotion is required beyond the individual enterprise effort. This is parti- cularly important with respect to sources of export financing, guarantees and technical assistance concerning export markets. The authorities may want to give consideration to improving and coordinating more effectively the functions of the various institutions currently engaged in fostering export activities. Priority and Coordination of Policy Measures 63. The most essential element for future expansion of non-traditional manufactured exports is the continuation of macro-economic policies aimed at improving resource allocation. Three types of policies can be considered of highest priority: (a) increases in the exchange rate; (b) reduction of tax rebates; and (c) reduction of tariff protection. These policies are comple- mentary and could be carried out simultaneously. Trade liberalization is well-justified on various grounds. First, high tariff protection causes distortions in the allocation of resources in favor of industries which are by-and-large not competitive, and against more competitive export-oriented industries, and the traditional exporting activities in the agricultural sector. Second, the proliferation of inefficiencies in the urban, industrial sector results in a resource drain from agriculture, where Uruguay's compara- tive advantage is greatest. Finally, a high tariff protection involves widespread social costs to the consumer in terms of the difference between domestic and international prices. 64. Even with a gradual program of trade liberalization, the promotion of non-traditional exports may require appropriate adjustments of the real exchange rate. The speed of these adjustments would in turn help to define the rate at which the level of tax rebates can be reduced. Thus, as has been the case during the last four years, exchange rate management would continue to be the most important single policy instrument for promoting export growth. As an illustrative example, and taking into account a nominal tax rebate of 5% as the target, the reduction of the average level of tax rebates from 18% to 5% would require a devaluation of roughly 20%. 1/ With respect to 1/ This calculation takes into account the share of external value added in non-traditional exports, and the average nominal tariff on imported inputs.  - 38 - timing, the acceleration of the pace of mini-devaluations and the process of trade liberalization could be implemented simultaneously. The gradual elimina- tion of tax rebates would follow as the new levels of the exchange rate obviate the necessity for tax rebates to promote exports. This in turn would have a favorable impact on the Central Government's fiscal situation. The above package of measures should permit a continued expansion of non-traditional exports even in the face of increased domestic demand, since this factor would be important only in the case of marginal export activities.  - 39 - III. AGRICULTURAL DEVELOPMENT: POLICIES AND ISSUES Introduct.on 65. Agriculture plays a fundamental role in Uruguay. Although agricul- ture accounts for only about 15% of GDP and employs 18% of the country's labor force, nearly 90% of total merchandise exports represent agricultural products in various stages of processing. The importance of agriculture in Uruguay's external trade reflects basic underlying characteristics such as, relative abundance of land suitable for agriculture and grazing, a small population, and a lack of known mineral resources. These structural features have limited the country's opportunities for large-scale efficient industrial- ization geared exlusively for the local market. The pursuit of an inward- oriented industrialization strategy ran counter to these fundamental limita- tions and was undertaken largely at the expense of agricultural growth and development. Agricultural stagnation, in turn, has acted as a drag on the country's overall development. 66. Many of the policies that have been instituted in Uruguay to promote industrialization have simultaneously acted to depress agriculture by trans- ferring resources from rural to urban activities. Thus, policies such as: (a) price controls on agricultural products; (b) export taxes on traditional commodities like beef and wool; (c) high tariff duties of industrial imports; (d) an overvalued exchange rate; and (e) subsidies to inefficient state enterprises through direct government control of industries, like meat packing, have reduced the profitability of agriculture and fostered an ineffi- cient system of land use. Even though all of the available land is under some form of exploitation, land in Uruguay is worked under a low input-low output system. In the livestock subsector, extensive range-lands with almost no improvements and a carrying capacity of less than one animal per hectare is the norm. Crop production is characterized by poor agronomic practices and low yields. The resulting low productivity generated by this style of produc- tion is reflected in the low relative price of land in Uruguay, compared to similar land in neighboring countries. This outcome, in turn, has perpetuated extensive production methods, given the low price of land relative to other agricultural inputs. 67. The foundation of Uruguay's economy will continue to be the agri- cultural sector. Even the future development of non-traditional manufactured exports is strongly rooted in the country's agricultural raw materials. The answer to whether Uruguay can achieve higher levels of economic and social progress in the longer term depends heavily on the policies which are followed for this key sector. An essential precondition is that agriculture be viewed as the primary generator of overall national development and not, as has been the case in the past, as a source of seemingly infinite resources to be exploited for the benefit of less efficient economic activities in other sectors. During recent years policies aimed at improving resource allocation at a macroeconomic level have met with notable success. Until very recently, the prevailing agricultural policies still reflected past biases and were not consistent with the view that agriculture is the primary sector in the economy.  - 40 - Critical developments such as the closure of the EEC market to meat imports, the resulting fall in world market prices, and heavy weather damage to crop production in 1977-78 have served to underscore the plight of the sector and have stressed the deleterious consequences of official policies. In response to this situation, the authorities agreed in August 1978 to implement fundamental reforms in agricultural policies which, if carried out, augur well for the future of the sector. The present chapter attempts to evaluate the underlying causes and consequences of Uruguay's agricultural stagnation in order to highlight the importance of the above policy shift from a historical and longer-term perspective. The historical evidence fully justifies current efforts to provide new directions to this vital economic activity. Agricultural Stagnation 68. Uruguay has experienced negligible increases in the gross value of agricultural production (in constant terms) during the last decade. Between 1965 and 1977 production expanded at an average annual rate of only 0.3%. The poor performance of the livestock subsector during this period (average annual growth rate of -0.3%) was an important element in this performance, since it has traditionally accounted for about 62% of the total value of production. Moreover, livestock production showed sharp fluctuations, caused primarily by international price changes, and the lags in the cattle cycle in response to those changes. The low technological level in the livestock subsector, induced by unfavorable price/cost relationships, has in turn acted to intensify the usual cattle cycle by limiting the speed of the producers' response. Table 15: GROWTH OF PRODUCTION FOR SELECTED PRODUCTS, 1965-77 (annual average growth rates) Bovines Wool Milk Poultry Wheat Oilseeds Rice 1965-70 6.3 0.4 0.7 1.8 -7.1 5.2 8.8 1970-75 -1.7 -7.1 -5.0 -1.6 3.3 -3.4 6.4 1975-77 -7.1 6.0 -4.9 10.6 -2.2 -6.4 10.1 1965-77 0.6 -1.9 -0.7 1.8 -2.1 -0.4 8.0 Source: Ministry of Agriculture and Fisheries 69. In contrast to livestock production, crops experienced a slight increase (average annual growth rate of 1.5%) during the 1965-77 period. Crop expansion has also been affected by generally unfavorable conditions for the subsector, although an additional ecological restriction in the form of thin and easily eroded top soil has contributed to limit the possibilities  - 41 - for bringing new lands under production. The experience of the principal cereal crop, wheat, is significant. Despite important developments in tech- nology associated with this crop, wheat production in Uruguay declined during this period at an average annual rate of 2.1Z. The principal exception to an otherwise poor crop performance is the case of rice, whLch expanded at an average annual rate of 8%. Rice exports more than doubled between 1973 and 1977, reaching a level of US$32.5 million and thus becoming the third most important export commodity after beef and wool. This unique behavior is explained largely by entrepreneurial initiative in bringing into production low quality land through irrigation, and by relatively few government controls on prices and inputs. The evolution of this crop is a reminder of the capacity of Uruguay's agricultural producers to respond positively to adequate profit incentives and a consistent government policy. Land Underutilization 70. Land underutilization and low relative prices of land in Uruguay are closely linked and are symptomatic of the depressed state of agriculture. A Central Bank study has estimated that the price of cropland in Uruguay in 1976 was 60% of the price of similar land in Argentina and 75% of the prevailing level in Brazil. For other types of land, prices in these neighboring countries were 20% above the level in Uruguay. In a situation where land is cheap relative to the costs of inputs required in more intensive technologies, farmers substitute land for capital and labor. This type of extensive agricul- ture is characterized by low utilization of inputs such as fertilizers and agricultural machinery. Table 16 below shows the price of land relative to the price of important agricultural inputs in the three countries. Table 16: COMPARISON OF LAND PRICES WITH PRICES OF SELECTED INPUTS (based on prices in current US$) Price of land (ha)/ Price of land (ha)/ Price of land (ha)/ Price of tractors Price of fertilizers Price of fuel oil (HP) (MT) (1,000 liters) Uruguay 1.40 .76 2.17 Brazil 4.00 .71 2.70 Argentina 2.99 1.58 6.33 Source: Anichini et al., op. cit.; Reca and Regunaga, "Costo de Insumos en el Sector Agropecuario Uruguayo," and mission estimates. 71. The adoption of technologies for land improvement involves higher entrepreneurial risks than extensive use of unimproved land. The benefits of improved pastures for livestock production, for example, can be adversely affected by weather conditions, seed quality, and inadequate farming practices.  - 42 - Moreoever, pasture renewal must be undertaken every three or four years in order to maintain the supply of forage. On the other hand, livestock ranching on unimproved land involves fewer risks in ranch management. Under these circumstances, extensive livestock operations have been traditionally the rule in Uruguay and probably help to explain the stability of the country s uneven land distribution pattern (6% of the farms account for about 55% of the agricultural land--although the quality of the land varies a great deal). Normally, one would expect a reduction in farm size as a result of land subdivision through inheritance, and of technological improvements which increase productivity, thus reducing the minimum size ranch required for economic production. In Uruguay, lagging technological improvements appear to have offset the usual tendency towards land subdivision overtime. Low Agricultural Yields 72. Land underutilization in Uruguay is also reflected in low agricul- tural yields in the livestock and crop subsectors. During the late 1960s there existed expectations that a rapid increase in livestock production could be generated through the adoption of a technology based on pasture improvement, which would increase carrying capacity per unit of land. At the time the government and IBRD estimated that by the mid-1970s 50% of the agricultural land would consist of improved pastures. However, the adoption of the more intensive-type of livestock operations has been limited by the unfavorable economic position of the sector. Improved pastures have not exceeded 10% (1973) of the land, and the low international and domestic prices of cattle in recent years have resulted in a reduction of this share to 8.5% in 1977, as previously improved pastures were allowed to deteriorate. As a result, carry- ing capacity in the livestock subsector is still low (less than one animal unit per ha). The limited carrying capacity of unimproved land is reflected in low beef production per ha in comparison with other beef-producing countries. In 1975, Uruguay's productivity in kgs per ha was only 56% and 32%, respec- tively, of the levels reached in Argentina and New Zealand. A similar situa- tion is found in the wool subsector (see Table 17 below). The cattle slaughter/ stock ratio provides further evidence of the low productivity of beef produc- tion in Uruguay. During the period 1971-76, this indicator averaged 16% in Uruguay compared to 19% and 33%, respectively, in Argentina and New Zealand.  - 43 - Table 17: COMPARISON OF PRODUCTIVITY INDICES IN THE LIVESTOCK SECTOR (Uruguay, 1961 - 100) Beef subsector / Wool subsector /2 Uruguay Argentina New Zealand Uruguay Argentina New Zealand 1961 100.0 147.8 255.1 100.0 125.0 171.9 1966 102.9 168.1 288.4 103.1 125.0 171.9 1970 105.8 189.9 326.1 112.5 131.2 168.8 1974 107.2 171.0 305.8 106.2 140.6 159.4 1975 107.2 191.3 330.4 115.6 146.9 165.6 LI Kilograms per hectare. /2 Kilograms per head. Source: "Costo de Insumos en el Sector Agropecuario Uruguayo," L. Reca and M. Regunaga, May 1978. 73. Low yields are also a common feature of the crop subsector. On average, yields in Uruguay for such traditional crops as wheat and sunflower are only one-third of those obtained in developed countries. Wheat, the country's main crop, has experienced a noticeable stagnation in yields despite the well-known technological improvements in production available since the early 1960s. Moreover, the stagnation of yields has taken place in conjunction with a decline in the area planted. A similar development has taken place with other crops with the exception of rice and sorghum; both of these crops being relatively new in the country (see Table 18 below). The poor yield perfor- mances are largely explained by the low levels of technology employed and the effect of erosion on soil quality; the latter being the combined result of thin topsoil conditions and inadequate soil management practices. Although it is known that not all of the land potentially suitable for cropping is presently under cultivation (1.1 million hectares were under crops in 1977), it is not clear to what extent this is explained by unfavorable price/cost relationships or by the deterioration of soil conditions. Some estimates place the amount of potentially arable land at between 3-4 million hectares, but land actually under cultivation has not exceeded 1.3 million hectares even during the 1950s when price conditions were relatively favorable for crop production. Thus, the extent to which crop production can be increased through expansion in the area cultivated might vary considerably depending on how much of the land classified as potentially arable is free from erosion problems. Nevertheless, ample room exists for increasing crop yields.  - 44 - Table 18: AVERAGE YIELDS OF SELECTED CROPS (kilograms per hectare) Wheat Sunflower Sorghum Corn Rice 1961-65 938 496 501 L1 622 3,212 1966-70 904 528 890 660 3,470 1971-75 1,044 567 1,549 971 3,996 1976-77 955 455 1,770 975 4,080 Average Yields in Selected Developed Countries 3,180 1,610 3,680 3,990 5,730 /1 Refers to 1965 only, when sorghum became a significant crop in Uruguay. Source: Ministry of Agriculture. Transfer of Resources from the Beef Subsector 74. The transfer of resources from the beef subsector through a variety of pricing policies has been a well-entrenched and most adverse feature of the country's agriculture. This has negatively affected not only livestock, but also crop development. The limited generation of profits in livestock, which is the most important single activity in agriculture and where there exists greatest comparative advantage, has acted as a disincentive to pursue cropping activities since diversification requires more intensive use of inputs. 75. Livestock production is an activity well-suited to Uruguay's resource endowment. The country's soils are most appropriate for livestock production. Moreover, cattle raising has a long tradition in the country, and good standards have been achieved in certain aspects such as breeding and other technological skills. However, economic conditions have not been propitious for the wide- spread adoption of more advanced production methods. The most important step required to increase beef production, aside from better farm management, is the use of improved pastures since, for the most part, cattle are currently raised on natural grasslands. The use of this technology in Uruguay has demonstrated that yields per hectare of land can quadruple (from 48 to 187 kg per ha in superficial soils and from 87 to 350 kg per ha in deep soils). This is the result of higher weaning rates, lower mortality, a shortening of the raising-fattening cycle, and managerial improvements associated with planting of improved pastures.  - 45 - 76. The higher risks involved in improved pasture technology have not been compensated by economic incentives. In February 1978, for example, the rate of return on capital using traditional technology was 3imilar to that obtained with improved technology (see Table 19 below). The unprofitable situation for livestock producers since 1974, brought about by unfavorable world-market conditions and accentuated by domestic policy, has been associated with a decrease in the total area under improved pastures. This is explained not only by lack of incentives for new improved pastures, but also by the reduction of land under pastures even below what could be considered optimal under the existing price conditions. These developments are strongly cor- related with a decrease in the cattle stock and a reduction in the proportion of cows within that stock (see Charts 1.1 and 1.2 on the next page). The downward trends in these two indicators suggest that the sector's capacity to reach higher production levels in the medium-term will be limited by these structural factors. Table 19: RATES OF RETURN TO CAPITAL IN LIVESTOCK PRODUCTION UNDER ALTERNATIVE TECHNOLOGIES AND BEEF PRICE/INPUT COST ASSUMPTIONS (percentages) Actual Beef Price Actual Beef Price US Beef Price /3 US Beef Type of and Input Costs in Uruguay and Input Costs Price and Technology in Uruguay a and US Input Costs /3 in Uruguay Input Costs Average 3.0 4.3 10.7 12.1 Improved /2 2.3 4.4 14.6 16.2 /1 Prices used were those in effect in February 1978. /2 Defined -as that of a production unit where 23% of the land is planted with improved pastures. /3 US beef prices and input costs were used as a proxy for international prices. Source: Reca and Regunaga, "Costo de Insumos en el Sector Agropecuario." 77. Beef price is the main element in the decision to adopt improved technologies and therefore in determining the expansion of beef production. As indicated in Table 19, even with the prevailing high input costs (above international prices), the rates of return for average and improved technologies improved markedly in the presence of adequate beef prices. The rate of return for the improved technology, however, was 35% higher than that for the tradi- tional production methods. The beef price to Uruguayan producers has been controlled by the Government at least since 1970. Prices declined sharply in 1975 after the closure of the EEC market and despite recent adjustments during the first half of 1978 were only 58% of the peak 1973 level (see Chart 1.3).  CHART 1.1 CHART 1.2 CHART 13 Evolution of the Cattle Stock Ares wit Iimproved Pwetum Evolution of Prodte' Price of eda Thoutans of Heds Thousands of Hectae in Constant USS of 1972 par k4 of C _cu Weight 12.00r 1440 / 0.48H 9.000 1080 0.38 6.000 @ _ 720 0.24 0 0 1 1 1 1 1 1 Or" I 0~~~~~~~80 .1 1970 1972 1974 1976 1977 1970 1972 1974 1976 1977 1972 1972 1974 1975 1976 1977 1Sl' * Soon.. I2INACOSF Sourc SERPA Swrce:. INAC onc.. 8otDncd bS U.S -.hI.p4 Dk.' jolt. CHART 1.4 Cost of Inputs CHART 1.5 CHART 1.6 s a Pemvetage of Groa Income for a Companion of Drect Taxes to Net Inconme Estimao ProftiIilSyl/ of a Fans Farm of 2500 Hacttes with Average Land per Hocure for a Farm of 2500 Ha of 2500 Heur-s with Ave Lad (CONEAT INDEX = 100) (CONEAT INDEX -100) (CONEAT INDEX -100) - 1906 NS Pw H 200* _ 20. 2 16 10 180 12 12 % 0'0" 1.0... 108% 1.2~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~T.. 120 0.4A 80 -i -0. 9 -0.5 0 2~~~~~~~~~~~~~~~~~~~-0 -1. T2/73 73174 74/75 75/76 76/77 7In3 73/74 74/75 75/78 78.17 Soon. 0 INACOSE IMo.iht,y 01 A91,co/1ur. and Fahono.).............. Sourcc DINACOSE /Min,ul,y of Agrinu/to,. _d Fjteri/S D SOAEM. 9.Ad Go Cha-t. 1a *ih 1.5 W-nd Batk - 19208  - 47 - Although this decline was largely brought about by the behavior of the inter- national market, the government policy of controlling domestic prices has further contributed to depressing prices to producers. Moreover, the adverse relationships between gross income and cost of inputs (Chart 1.4), and net income and direct taxes (Chart 1.5) have drastically curtailed the profitab- ility of livestock operations in recent years. During the 1974-76 period, for example, the cost of inputs utilized by a typical farm of 2,500 ha with traditional technology exceeded gross income. During the same period, the burden of direct taxes (principally the tax on potential land productivity) practically doubled the losses incurred by a ranch of that size. This situa- tion improved somewhat during 1976-77, but nevertheless profits per ha were only 25% of the level attained in 1973-74, or an annual total profit of roughly US$1,078 (1968 prices) for a 2,500 ha ranch. Under these circumstances it is evident that the main objective of livestock ranchers in Uruguay is to minimize expenditures. 78. Government policy towards the livestock sector has exacerbated the unfavorable effects of international market conditions. Various policy instruments have been employed to transfer substantial resources out of the sector despite difficult external factors. The principal sources of distortions are the maximum retail price of beef for domestic consumers and the high costs of processing and marketing beef. The latter is the result of inefficient state-owned or -operated meat-packing plants and administrative controls on slaughtering animals and marketing carcasses. Taking into account the international price of Uruguayan beef during the period July 1976-June 1977 and assuming a level of US$150/ton as an efficient level of local process- ing costs, a study commissioned by the producers' association estimated that the Government's beef price policy represented US$64 million in subsidies from producers to consumers and to the meat-packing industry during these twelve months. Table 20 shows the calculations used in arriving at these results. In addition, the high domestic costs of imported agricultural inputs above international market prices contributed an additional transfer of resources of US$21 million. 1/ Direct and indirect taxes paid by the sector to the central government amounted to US$31 million bringing to US$116 million the amount of resources extracted from the sector. This amount represents 86X of the total value of beef production (63% if taxes are excluded) for the period. Furthermore, the calculation of resource transfers does not include those that are implicit in an overvalued exchange rate, or unfavorable domestic terms of trade resulting from high tariff protection (see Table 21 following). It is reasonable to expect that an elimination of this transfer of resources could lead to a substantial increase in beef production in the longer term, which would permit Uruguay to take the fullest advantage of growing export markets in Brazil and the Middle East. Similar considerations apply to a lesser extent for milk and crop production. 1/ Calculations done by the Federacion Rural estimate that import duties increase the average value of a basket of inputs per hectare of land by roughly US$1.42. Since total land devoted to livestock production is 14.5 million hectares, the total income transfer implied by input costs above international prices is (14.5 million ha x US$1.42/ha) US$20.6 million.  Table 20: TRANSFER OF INCOME FROM LIVESTOCK SECTOR AS A RESULT OF FIXED PRICING POLICY (July 1976 through June 1977) Slaughter Export Potential Official Price Income Slaughter ~~~~Price to Price of Month (In Thousand (In Tons)l/ Price Producers Cattle Differential Transfer Heads) (InTons_ (In US$/Ton)2/ (In US$/Ton)cIl (US$/Ton) (US$/Ton) 4!/ ('000 US$)5/ July 172.3 35,666 674 524 329 195 6,955 August 96.7 20,017 612 462 319 143 2,862 September 86.0 17,802 563 413 345 68 1,210 October 118.3 24,488 553 403 371 32 784 November 112.7 23,329 576 426 389 37 863 December 143.8 29,757 561 411 377 34 1,012 - January 127.7 26,434 621 471 369 102 2,696 February 128.7 26,641 776 626 457 169 4,502 March 172.7 35,728 839 689 443 246 8,789 April 190.0 39,330 850 700 432 268 10,540 May 200.0 41,400 850 700 420 280 11,592 June 200.0 41,400 850 700 408 292 12,089 TOTAL 1,748.8 362,002 63,894 1/ 207 Kgs carcass weight per head 2/ Instituto Nacional de Carnes 3/ Export price less US$150/ton for processing and transportation 4/ Potential price less official price of cattle 5/ Price differential multiplied by number of tons of carcass weight. Source: Federaci6n Rural del Uruguay  - 49 - Table 21: DOMESTIC TERMS OF TRADE, 1968-1978 (Based on wholesale price index) Agriculture Livestock CroDs Manufactures Manufactures Manufactures 1968 100 100 100 1969 95 98 91 1970 97 109 83 1971 107 132 79 1972 127 162 88 1973 121 148 91 1974 105 151 94 1975 85 80 91 1976 76 78 73 1977 77 87 66 1978 /L 87 91 83 /1 January-April. Source: Banco Central del Uruguay. Past Agricultural Policies Pricing and Marketing of Beef 79. The main traditional features of Uruguay's beef policy have been: (a) a ceiling on the retail price of beef; (b) separation through administra- tive controls of the Montevideo-Canelones market from the rest of the country; (c) high processing costs due to the inefficiency of the meat-packing plants supplying the domestic market; and (d) Government financial control of the meat-packing industry through legal mechanisms. The Government's policy of maintaining domestic retail beef prices at unrealistically low levels contri- buted to a 50% reduction in the real price level between November 1972 and April 1978, when the domestic price was about 20% below the prevailing export market price. During this period the low price of beef relative to other foodstuffs encouraged high per capita consumption (78 kg per capita - among the highest in the world), which in turn led to the adoption of non-price rationing schemes such as outright bans on consumption during certain periods of the year (vedas). The reduction in real prices to consumers was passed along to producers who suffered a similar shortfall in their sales price. 80. The producers' beef price has been further reduced by the high costs of the processing and marketing system for beef. The domestic market has been divided into two segments: Montevideo-Canelones, and the rest of the country.  - 50 - Supply of the capital's market, which accounts for 50% of domestic consumption, has been largely the responsibility of the five state-owned meat-packing plants through an intermediary marketing agency (CADA - Comision Administradora de Abastecimientos). The rest of the country was supplied primarily with beef from cattle slaughtered as small local slaughterhouses. The local plants operate exclusively on the domestic market, and do not incur the additional costs involved in fulfilling the hygienic and sanitary regulations required by foreign markets. The export market is principally supplied by about 10 meat-packing plants which are primarily oriented to the external trade. Maximum retail prices for beef were set for the Montevideo-Canelones area by the Central Government, and the local departments set prices in the interior using the price in the capital as a reference point, although controls were more lax. Producer prices at the national level are set on the basis of the maximum retail price for the capital and the weighted average processing costs of the meat-packing plants. The average processing costs of the industry, however, are strongly influenced by the high processing costs of the five large and state-owned meat-packing plants. These plants are mostly obsolete and lack appropriate equipment and installations to fulfill the sanitary requirements of foreign markets. Mission estimates indicate that unit process- ing costs in these plants may be as much as 35-50% above the unit costs of the smaller and more efficient export plants. These inefficiencies are reflected in lower producer prices at the national level. Furthermore, since processing costs are lower in the local slaughterhouses in the interior, consumers there generally enjoy lower beef prices. This price differential, in turn, made necessary the operation of a monopolistic marketing agent (CADA) for sales in the Montevideo-Canelones market to keep individuals from profiting from the differential. 81. The inefficiency of the state-owned meat-packing plants, therefore, represents another important bottleneck in Uruguay's livestock sector develop- ment. Their survival, in view of unduly high processing costs, is attributable to the decision of the authorities to maintain them in operation primarily for employment considerations (the five plants have roughly 6,000-8,000 employees). The survival of these meat-packing operations has been accomplished not only through the complicated pricing and marketing mechanism described above, but also through the complete state control by government decree of the entire industry's financial affairs. This regulation dates back to the beginning of this decade when a liquidity crisis brought about by the modernization of plants with short-term credit resulted in default of payments to cattle producers. In order to avoid the financial collapse of the industry, the authorities stepped in to assure payment to producers while at the same time permitting the continued operations of the industry with a special credit line from the Banco de la Republica (BR). Under the established regulations BR still acts as the sole financial agent for the meat-packing industry. Revenues from export and domestic sales are deposited in BR which in turn pays producers for the cattle sold and reimburses the plants for their operating costs. In case of positive balances BR does not pay interest to the meat packers, but it charges interest if the account is negative. Moreover, no new investments can be undertaken in the industry without prior official approval, and profits Art- accumulated in BR and cannot be freely withdrawn.  - 51 - 82. The existence of these regulations has had important repercussions on the functioning of the whole livestock sector. While it is true that the system has eliminated the uncertainty which once faced producers concerning payment, there are more efficient and less cumbersome ways of achieving this objective such as a system of guarantees. More importantly, the power vested on BR as sole financial agent for the industry is not conducive to a sound management of the firms' financial resources, and permits the type of economic inefficiencies analyzed above. An additional disadvantage of these regulations is that the tight control of the sector's economic parameters has encouraged the authorities to experiment with ad hoc policy instruments, thereby post- poning a basic policy reform towards the sector. Agricultural Inputs Policy 83. Government policy towards imported agricultural inputs, such as farm machinery, has acted to increase their relative prices, thereby introducing an additional bias against the intensification of production methods. Cost comparisons for tractors based on domestic beef prices indicate that producers in Uruguay have historically paid relative prices well above those prevailing in other countries (see Table 22 below). 1/ On average, relative tractor prices in Uruguay were nearly twice as expensive as in Argentina, and more than four times more expensive than in the US. A major portion of the relative price differential is explained by the depressed price of beef, since, for example, the absolute cost of tractors was only about 40% higher in Uruguay than in the US. These combined factors have contributed to a serious defi- ciency in the country's tractor stock, with one-third of the tractors being more than 15 years old. Other agricultural inputs such as fuel-oil and fertilizers which were subsidized until 1976, but the subsidies were not entirely effective in compensating for low domestic beef prices. Low beef prices are primarily responsible for the sector's difficulties. Nevertheless, in the case of tractors there is considerable room for lowering input costs since the high domestic prices are essentially the result of trade protection measures for the local tractor assembly industry, which consists of about eight firms supplying only between 700-1,500 tractors per year. 1/ Cost comparisons were calculated relative to beef because of the impor- tance of this product in the composition of Uruguay's agricultural output.  - 52 - Table 22: COMPARISON OF AGRICULTURAL INrUT COSTS IN REIATIVE AND ABSOLUTE TERMS AT THE PRODUCER LEVEL/1 Relative costs A!solute costs Uruguay Argentina USA Uruguay Argentina USA (MT of beef liveweight required to pay TRACTOLS (current US$ per HP) for 1Ep) (60-90 HP) 1970 0.66 0.38 0.16 122 102 103 1972' 0.46 0.31 0.11 140 92 110 1974 0.65 - 0.38 0.19 231 146 136 1976 1.30 0.63 0.21 213 141 163 (MT of beef liveweight required to pay for 1000 liter of fuel oil) FUEL (current US$ per 1000 liters of fuel oil) 1970 0.22 0.17 0.07 40 46 47 1972 0.11 0.18 0.06 34 52 50 1974 0.37 0.34 0.13 132 127 ' 107 1976 0.98 0.36 0.14 138 79 110 (lIT of beef liveweight required to pay fc,r one Mr of active component of phosphate fertilizer) FERTILIZER (current USS per MT) 1970 0.82 0.90 0.35 151 251 235 1972 0.50 0.94 0.35 148 301 256 1974 1.00 1.82 0.60 349 757 520 1976 1.91 1.88 0.60 315 435 476 /1 Prices in current US$ were calculated using domestic prices and average annual exchange rates. Source: Reca and Regunaga, op. cit. Technological Policy 84. The process of generation and adoption of improved agricultural technologies in Uruguay cannot be considered independently of the evolution of product and factor prices. Technological development has typically reflected relative scarcity of factors. In a situation where product prices remain at low levels either because of conscious government policy, depressed market prices, or a combination of both, it is unrealistic to expect that gains in production can be achieved through new technologies, which frequently imply higher unit costs of production. The squeeze on farm incomes resulting from artificially low product and high input prices, has resulted in a negli- ble demand for new technologies. The creation of a freer economic environment thus represents a necessary condition for technological change in Uruguay's agriculture sector. From the supply side, the neglect shown by the authorities toward the sector for a number of years has naturally been reflected in inadequate reseerch and extension efforts. Limited financial resources, low salaries, 1 .le k of priority have resulted in a marked decline during recent years in the o f of re;ea-cch programs within the Ministry of Agriculture.  - 53 - Between late 1975 and early 1978, a research program financed by AID lost nearly 20% of its staff and reduction in the number of working hours resulted in a 20% additional loss in manpower. The cumulative effect over many years of this policy is partly reflected in stagnant yields in important crops such as wheat. 85. Technological packages presently available in Uruguay for the most important annual crops stress the more intensive use of fertilizers, pesticides, better quality seeds, and more careful land preparation. Although expected yields are substantially higher with this type of technology than with the traditional one, unit costs are also higher. Similar considerations apply to beef where technological improvements are based on different types of pasture improvement, such as fertilization of native pastures and substitution for new species. The higher unit costs of these technologies are likely to act as a deterrent to their widespread adoption until uncertainties regarding the level and variability of product and input prices are substantially reduced. How- ever, there appears to be potential for developing complementary technologies in Uruguay based essentially on biological-agronomic practices, such as crop rotations, mixed crop/livestock farming, cattle management, and regional specialization in production, such as the development of cattle fattening areas. The use of technologies based on these practices could result in significant productivity gains without much higher unit costs or dependence on "oil-based" inputs such as fertilizers and pesticides. Tax Policy 86. Uruguay currently has an advanced tax system for the agriculture sector by developing country standards. The principal direct tax is IMPROME (Impuesto a la Produccion Minima Exigible - established in 1968), which is a tax on the average potential yield of each farm. IMPROME is the single most important source of revenue in the sector and accounted for 40% of all agri- cultural taxes in 1977. The level of taxation is linked to a potential and predetermined level of production, irrespective of whether or not this level of production is actually reached. The predetermined level of production, which constitutes the tax base, is estimated on the basis of actual average produc- tion yields obtained for each kind of soil, thereby implicitly assuming average technology. IMPROME tnus constitutes a fiscal instrument which incor- porates incentives to at least achieve average productivity. Farms working below the estimated potential yields are taxed on the basis of the higher production levels, so that they incur a penalty for underutilization of land resources given the prevailing tehcnology standards. Although these techno- logical levels are currently low in Uruguay, the calculation of average potential yields could eventually reflect higher technological levels since they are undertaken every five years. This administratively complex tax is workable because of: (a) accurate studies about soil utilization; (b) rela- tively uniform soil types; and (c) the country's smooth topography and small size.  54 - 87. The difficult situation facing Uruguay's livestock sector since 1974 has underscored an important flaw in the IMPROME system. As previously shown in Chart 1.5, net income was negative during 1974-75 but ranchers were never- theless required to pay IMPROME, which contributed to practically doubling the losses of the sector. This situation arose essentially from the fact that IMPROME is calculated on the basis of gross income of farmers without taking into account the cost of inputs, which during those two years actually exceeded gross income. In order to correct this problem the authorities are consider- ing a reform of IMPROME in order to change the taxable base from a gross to a net system, which would require the calculation of the costs of an average basket of inputs. 1/ In addition, the reform of IMPROME contemplates the con- solidation of various other minor direct taxes (accounting for 20% of total agricultural taxes in 1977) into IMPROME's tax structure. Furthermore, specific treatment is being contemplated for land suitable for crops and for livestock products other than beef, mutton, and wool. This last proposed modification arises from the fact that currently IMPROME gross income is based only on the production of these three products, which introduces a bias against cattle and sheep production. This is because other agricultural activities such as crop, horticulture or poultry production have a higher value of produc- tion per hectare than that estimated using cattle- and sheep-based indicators. Consequently, IMPROME's contribution to the overall fiscal burden on meat and wool production (35%) is significantly higher than for other types of live- stock production (22%) and for crops (7%). 88. The shift of IMPROME to a net income basis, the incorporation into its structure of other direct taxes, and a more adequate taxation of other agricultural activities would represent meaningful improvements in terms of stressing the production-incentive aspect of agricultural tax policy. An important issue raised by this shift, however, is whether the amount of reve- nues collected under a reformed IMPROME can be maintained at current levels without introducing changes in the progressiveness of the tax structure. The latest proposal being studied indicates that the new tax system would need to be more regressive in order to maintain overall revenue yields. The exemption of taxes on the first 200 ha for farms of 2,500 ha or less, for example, would have to be eliminated. Moreover, the range of marginal tax rates for farms between 200-500 ha and above 10,000 ha would have to be modified from 8-53% (on a gross basis) to 20-81% (on a net basis). It has been estimated that under the proposed system a farm of 300 ha would contribute around 9% more taxes while the tax contribution of farms above 2,000 ha would depend mainly on the amount of income reinvested. Given that the central government's fiscal situation has continued to show rapid improvements and that IMPROME contributes less than 5% of total tax revenues, it might be advisable to consider a reform that involves less regressiveness. 1/ The basket of inputs would include items such as: (a) labor; (b) depre- ciation and maintenance of farm machinery; (c) gasoline and oil; (d) de- preciation and maintenance of housing and storage facilities; (e) expen- ditures on animal health; and (f) maintenance of pastures.  - 55 - Credit Policy 89. Agricultural credit policy in Uruguay has been mainly influenced by the often weak financial situation of farmers and the institutional character- istics of the Banco de la Republica (BR), the country's main agricutural institution. 1/ The financial situation of farmers has been adversely affected by the constellation of factors discussed above which has acted to curtail the profitability of the sector. Unfavorable climactic conditions for crops during the last two years have added to these difficulties, and have prompted BR to refinance existing debts in widespread fashion. BR's traditional policy of providing subsidized credit to the sector has not been sufficiently effec- tive to compensate for the other distortions arising essentially from price policies. It follows that the correction of price/cost relationships to producers would probably be the single most important step in determing the size and composition of the demand for agricultural credit, and may well obviate the need for subsidized credit lines. 90. The need to meet credit demand under more profitable sector condi- tions would require significant changes in agricultural lending activities. Development of medium- and long-term credit lines would appear to be of high- est priority. With the exception of livestock credits provided by an IBRD project, and credit lines from Argentina and Brazil for the import of capital goods, all other agricultural credit is for less than one year. Equally important, supervised credit to foster a more effective utilization of land resources would need to be introduced. Such credit lines could be aimed at: (a) stimulating more intensive livestock and crop development patterns; and (b) introducing soil conservation measures to redress erosion problems. Presently BR's institutional set-up and staff are not equipped to handle these types of responsibilities as its financial activities are spread over a wide variety of sectors. The development of Uruguay's agricultural sector, under more favorable economic incentives, will eventually require an institutional framework, within or outside BR, capable of handling agricultural credits of the types discussed above. Recent Policy Shift 91. A reorientation of agricultural policies in Uruguay would need to tocus on price policy for the livestock sector. A reversal of policy orienta- tion from the protection of the beef consumption standards of the population to the stimulation of production is a necessary condition for future agricul- tural development. A liberalized price mechanism would, of course, need to be supported by secondary policies in the areas of inputs, extension, tax and credit that would permit ranchers to derive the fullest benefit from more adequate price levels. The generation of surpluses in the traditional live- srozk sector should in turn, contribute to crop diversification and a more intensive use of land resources. The authorities have recently announced a series of measures aimed at redressing the adverse conditions of the sector. 1/ BR handles 90% of the institutional agricultural credit for crop produc- tion. Commercial banks supply a major portion of short-term credit for the livestock sector.  - 56 - @2. The agricultural policies announced in August 1978 are intended to assign high priority to the development of the agriculture sector, particularly t.ie livestock subsector where the country's greatest comparative advantage lies. The essential objective is to provide an internal economic environment which is propitious for profitable livestock and agriculture activities. The various measures announced would, if implemented, represent a dismantling of the more important constraints discussed previously. They include: (a) eli- mination of fixed livestock prices; (b) elimination of geographic barriers for beef marketing; (c) sale of state-owned meat plants to the private sector and elimination of financial controls on the industry; (d) establishment of maximum 10% import surcharge on assembled tractors and farm machinery; (e) elimination of the 10% import surcharge on all other agricultural inputs; and (f) modification of IMPROME to a net basis. 93. The above package of measures represents a bold and fundamental break with the past. The authorities have opted for a gradual approach in implementing the new policy package. A limiting factor in changing the beef marketing system being the speed with which state-owned meat plants and local slaughterhouses can adapt to a competitive situation. The liberalization of beef prices will undoubtedly be an unpopular measure among consumers, at least in the short-term, as it will represent a further erosion of real income levels. In the medium-term, however, the year-round availability of meat should compensate for the higher prices. In this connection, it should be noted that taking into account that beef's share in the consumer basket is 11%, a 20% adjustment in domestic beef prices to bring them in line with the prevailing international level would only represent a 3% direct increase in the consumer price index. The overall effect might be greater since the price of beef substitutes will also be pushed upwards because of current limitations to an immediate supply response. This should eventually stimulate production of poultry, pork and fish. The contrast between the short-term effect on consumption and the longer-term effect on production of beef price liberaliza- tion points to the need for a steady and consistent plan of implementation on the part of the authorities in order to permit the positive results to be fully captured. In the longer-term, the pay-off for consumers is likely to be a rise in real incomes, once agriculture has become dynamic. 94. Higher product prices and lower input costs are necessary conditions for achieving the objective of increased productivity in agriculture. The above package of measures should help correct many of the price/cost distor- tions which have contributed to the stagnation of the sector. Although the elimination of these distortions is a fundamental step, the authorities must now stand ready to provide producers with adequate supporting elements to enable them to take fullest advantage of the freer economic environment. Supporting elements still missing such as medium- and long-term credit, supervised credit programs, and adequate research and extension services hold the key as to how quickly productivity increases and a diversification of production can be obtained. Increased efforts should therefore now be devoted to the preparation of suitable public investment programs which can provide adequate levels of credit and services. These are areas where external financial and technical assistance could provide a valuable input to comple- ment the new policy orientation. An important limitation to the preparation  - 57 - of a public investment program for agriculture is the dearth of qualified staff in practically all of the sector's institutions. Low salaries are primarily responsible for the exodus of key staff in recent years. Thus, an essential condition for providing adequate levels of credit and servi.Ces is the strength- ening of institutions (such as Plan Agropecuario and the Planning Office of the Ministry of Agriculture) through recruitment of qualified personnel at compe- titive salary levels. 95. Finally, the liberalization of beef prices raises the issue of price stabilization given the volatile characteristics of world market prices for this product, and the possible repercussions on the country's overall price level. In anticipation of this problem the authorities have stated the inten- tion of creating a stabilization fund in hard currency with the sole purpose of attenuating sharp external price fluctuations to producers. The fund would initially be managed by private and public sector representatives, but the objective is to eventually turn it over completely to the private sector. A fund of this type, if well managed, appears to be a reasonable mechanism for dealing with the recurrent fluctuations of world beef prices. Important considerations are that: (a) the objectives of the fund be narrowly defined; (b) the accounts of the fund be completely separate from government finances; and (c) the management be accountable to the producers. The fund's manage- ment would also need to be well-qualified and remunerated, and supported by a competent technical staff.  - 58 - IV. GROWTH PROSPECTS 96. During the last four years the Uruguayan economy has been undergoing an important period of transition from a situation of widespread economic distortions and cumbersome government controls to a freer economic environ- ment. These changes in economic policy have been carried out as an integral part of a stabilization program that has succeeded in turning around the balance of payments and fiscal position from a serious crisis. Although important policy decisions are still pending, such as import tariff reform, and difficult problems remain such as higher-than-desired levels of inflation and unemployment, a foundation has been laid to exploit more effectively the country's physical and human resource potential. Uruguay's development prospects are brighter today than they have been for several years. The continued growth of the manufacturing sector based on the impulse provided by non-traditional exports, together with the rehabilitation of agricul- ture's productive capacity, hold the key to sustained economic growth of the order of 4.5% per annum during the coming years. 97. In line with the export-oriented development strategy, private investment activity in the productive sectors will be instrumental in attain- ing faster rates of economic growth, which should also contribute to lower rates of unemployment. The role of the government will remain important in two ways. At the policy level, the maintenance of an economic environ- ment conducive to private investment will be of particular importance. A lower inflation rate would be a significant contribution in this respect. In the industrial sector, the announcement of a time schedule for implemen- tation of the import tariff reform and export rebate reduction could help to overcome the cautious attitude of the sector with regards to new investments. In agriculture, particularly the livestock subsector, the effective implementa- tion of the recent measures should help accelerate the recovery of investment levels. In a more direct way, public sector investment in areas such as road transport, port facilities, power, and medium- and long-term credit for the productive sectors will provide the needed support for private efforts. A good portion of the infrastructure investments required are expected to eliminate bottlenecks or upgrade facilities to meet more adequately the levels of activity in agriculture and manufacturing. Growth and Investment 98. The main determinants of Uruguay's economic outlook over the next several years will be the continued expansion of manufacturing output and the recovery and growth of agricultural production. The main impulse for growth in manufacturing would be provided by sustained increases of non- traditional manufactured exports, while in agriculture a steady growth of traditional exports together with a diversification of agricultural produc- tion and exports will be required to achieve the sector's development poten- tial. The expected increases in domestic demand arising from increasing private and plublic investment and a moderate growth of domestic consumption should also contribute to the country's growth prospects. The realization of these possibilities rests primarily on private sector investment activity, with public s1-tor capital expenditures providing a supporting role.  - 59 - Public Investment Expenditures 99. A review of the major public investment projects under execution and those likely to be undertaken during the next few years indicates that public investment expenditures will be heavily concentrated on the energy sector, reflecting the strategy to minimize dependence on imported petroleum and the need to rehabilitate and expand the power transmission and distribution system. These investments are of high priority since they would help assure relatively cheap and reliable power to the expanding manufacturing sector. By far the most important projects in execution will be the completion of the Salto Grande (jointly with Argentina) and Palmar hydroelectric projects account- ing for about 40% of expected investment expenditures. Investments in UTE's transmission and distribution network would take up an additional 20% of capital expenditures so that energy would in total absorb three-fifths of public investment. An additional 30% of capital expenditures may be allocated to rehabilitate other basic infrastructure such as parts of the national road network, access roads to Montevideo, port facilities, telephone network and the railway system in the cereal-growing areas of the country. In general, these infrastructure investments aim to provide improved and more reliable services in order to meet the expanding requirements of the economy. 100. The composition of the expected public investment reflects long- standing needs which have not been met in the past owing to recurrent fiscal crises and the stagnation which characterized the economy. The resurgence of economic activity in recent years has underscored the critical nature of these bottlenecks. Similar factors also help explain the thin project pipe- line in the productive sectors of the economy. In view of recent policy decisions for the agriculture sector which are expected to lead to a recovery of private investment, and the envisioned reform in industrial protection which is likely to generate credit needs for plant modernization and reconversion, it appears urgent to improve project preparation capabilities in the areas of medium and long-term credit to both of these key sectors. An essential action to achieve this is that project preparation units in the Ministries of Agriculture and Industry be staffed with adequately remunerated professionals. The need for public sector investment in the social sectors is relatively modest given the fairly high levels of services and coverage which characterize Uruguay. Over the coming years, investment needs will be concentrated in the gradual upgrading and modernization of existing facilities. 101. An illustrative public investment program for the period 1978-83 is likely to reach US$1.8 billion in 1977 prices (or roughly US$2.3 billion in current terms), with the major share of capital expenditures being carried out by the decentralized public sector. The construction of Palmar and investments in the highway network are expected to result in a faster expansion of Central Government investments during the first part of the period, while those of the rest of the public sector should increase steadily after 1978. The attainment of the above investment level assumes continued improvement in the current account savings performance of the public sector, particularly the public enterprises which are expected to carry out a good portion of investments. Current savings for the Central Government are projected to reach 2.5% of GDP in 1983 (from a level of 1.7% in 1977) on the basis of a continued good  Table 23: PROJECTED PUBLIC SECTOR INVESTMENT AND FINANCING, 1977-83 (in million 1977 US$) - - - ---- As percentage of GDP - - - - - - - - - 1977 1978 1979 1980 1981 1982 1983 1977 1978 1979 1980 1981 1982 1983 Public Sector Investment 234 257 283 300 315 328 350 5.5 5.8 6.2 6.3 6.3 6.3 6.5 Central Government 82 119 131 139 146 153 160 1.9 2.7 2.9 2.9 2.9 2.9 3.0 Rest of the Public Sector 152 138 152 161 169 175 190 3.6 3.1 3.3 3.4 3.4 3.4 3.5 Current Savings 85 109 129 149 170 192 219 2.0 2.4 2.8 3.2 3.4 3.7 4.1 Central Government 72 82 91 101 111 122 133 1.7 1.9 2.0 2.1 2.2 2.4 2.5 Rest of the Public Sector 13 27 38 48 59 70 86 0.3 0.5 0.8 1.1 1.2 1.3 1.6 Net External Financing 18 82 80 83 86 83 83 0.4 1.9 1.8 1.7 1.7 1.6 1.5 Disbursements 205 183 168 168 166 175 181 4.8 4.2 3.7 3.5 3.3 3.4 3.3 Amortization (-) 187 101 88 85 80 92 98 4.4 2.3 1.9 1.8 1.6 1.8 1.8 Net Domestic Financing 131 66 74 68 59 53 48 3.1 1.5 1.6 1.4 1.2 1.0 0.9 Current Savings as a 7. of Public Investment 36 42 46 50 54 ;8 62 Source: Mission estimates  - 61 - revenue performance and a moderate expansion of current expenditures. Central Government revenues could expand at a rate slightly below GDP growth provided that ongoing efforts to improve tax collection and administration are continued. In addition, the burden of export tax rebates on revenues (11% of tax revenues in 1977) is assumed to be largely eliminated by 1983 as a result of the reduction in their rates. On the current expenditure side, a moderate expan- sion in real terms (3% per annum compared with no real increase between 1973-77) might be envisaged partly on account of the higher levels of purchases for goods which are likely to accompany the growing investment program. No significant changes are assumed for the authorities' wage policy although it is expected that salary adjustments to improve the relative salaries of key personnel would result in real wage increases. As far as the savings per- formance of public enterprises is concerned, the key would continue to be im- proved financial management and tariff adjustments to offset the effects of inflation and finance a higher share of their capital expenditures (only 13% in 1977). On the basis of these assumptions, public sector savings could finance a larger share of capital expenditures rising from 36% in 1977 to about 60% in 1983. This trend would be compatible with the objective of monetary stability since net domestic financing requirements are assumed to decline correspondingly, given a steady inflow of external capital. Balance of Payments and Creditworthiness 102. Uruguay's balance of payments outlook will be primarily influenced by the growth of non-traditional as well as traditional exports. The remark- able expansion of non-traditional manufactured exports in recent years in response to the policy of mini-devaluations and tax rebates suggests that their development is likely to continue provided such policies are maintained, and that no substantial changes occur in trade policies in the developed countries to curtail accessibility to their markets. The envisioned gradual reduction of tax rebates should not have a disrupting effect if exchange rate policy is relied on more heavily to provide the necessary incentives. An average real annual growth rate of 8.5% seems to be attainable in light of past experience. Among non-traditional agricultural products, rice can be expected to register a dynamic performance given the favorable projected international price prospects and the possibility of penetrating new markets with the production of a new pre-cooked rice plant. With respect to Uruguay's traditional exports of beef and wool, international price trends suggest sustained improvements conducive to export growth. In the case of wool, this should result in a steady but moderate expansion of exported volumes on account of increases in production. In the case of beef, real export growth over the next four years is unlikely to come from production increases because the unfavorable conditions in the sector since 1974 have led to reduced investment levels, but a more realistic domestic pricing policy is almost certain to lead to reduced domestic consumption which could then free additional tonnage for overseas markets. As far as markets are concerned, Brazil and Egypt have emerged as important customers for Uruguayan beef with growing domestic demand. The combination of improving international prices, available overseas markets, and a liberalized domestic environment will be conducive to a recovery of investment levels in the livestock sector during i978-1979. Given the usual length of Uruguay's cattle cycle substantial  - 62 - increases in beef exports can be expected by 1982-83. Overall, export growth during the period 1977-83 is projected to average about 6% annually in real terms, which should be readily achieved. 103. The growth of private and public sector investment during the coming years will require corresponding increases in capital goods impo-s. This is expected to be the most dynamic import category and is projected to increase at about 9% per annum in real terms, or roughly at the same pace as fixed investment. The projected growth of the manufacturing sector should also generate a growing demand for imports of intermediate goods which will need to grow at about 6% per annum in real terms (excluding petroleum products). In the case of imports of petroleum products during the period 1978-81, it is assumed that their growth will match that of the economy provided an adequate domestic pricing policy is maintained and that no need arises for emergency petroleum imports to compensate for poor hydrological conditions in the hydropower system. After 1981, the beginning of operation of Salto Grande and Palmar should result in a gradual elimination of petroleum imports for electricity generation which currently account for about 20% of total petro- leum expenditures. 104. The above trade projections combined with steadily increasing net factor payments on public and private borrowing would result in a widening of the current account deficit from an average of US$85 million during 1976-77 to an average of about US$125 million in 1978-81. During 1982-83, the expansion of beef exports in conjunction with lower imported petroleum requirements should reduce the current account gap to US$50 million by 1983. The size of these projected current account deficits is moderate in comparison with the average deficit of US$160 million experienced in 1974-75, when heavy external borrowing (average disbursements of US$285 million) was necessary to weather the balance of payments crisis. The relatively moderate gross external financing requirements for 1978-83 (estimated to average US$225 million during 1978-83) should be covered in part by continued private capital inflows but of a much smaller magnitude than experienced in 1976-77. These private capital movements are projected to average US$70 million during 1978-83, down from US$175 million in 1976-77, on the assumption that the authorities will continue to institute measures to moderate the recent sizeable inflows, and that a sharp reversal of short-term capital inflows does not occur. Disbursements on public external debt should then average about US$210 million per year which would be sufficient to cover the remaining financing requirements and still permit an accumulation of reserves equivalent to four months of imports by 1983. 105. The turnaround in Uruguay's net international reserves position during 1976-77 has permitted the authorities to amortize ahead of schedule various commitments signed with commercial banks on unfavorable terms during the 1974-75 period. This has resulted in an improvement of the maturity structure of the public external debt and has enhanced Uruguay's credit stand- ing in the international financial community. Private banks have responded to Uruguay's credit needs by providing more attractive maturity terms and smaller spreads over LIBOR. On the assumption that the maturity structure of public  Table 24: EXTERNAL CAPITAL REQUIREMENTS AND FINANCING, 1978-83 (In millions current US$) Projections 1977 1978 1979 1980 1981 1982 1983 Resource Balance -36 27 -53 -69 -78 -16 42 Exports of Goods and NFS 871 968 1047 1178 1324 1517 1739 Imports of Goods and NFS 907 941 1100 1247 1402 1533 1697 Current Account Balance -97 -38 -111 -134 -151 -101 -52 Amortization -187 -107 -100 -103 -103 -125 -141 Capital Requirements -284 -145 -211 -237 -254 -226 -193 Financing 284 145 211 237 254 226 193 Public Medium and L-T Loans 205 152 174 203 213 238 260 Multilateral (13) (31) (39) (57) (70) (86) (89) Bilateral (18) (15) (28) (38) (30) (34) (41) Banks (117) (39) (88) (88) (84) (76) (85) Bonds (48) (67) (18) (19) (26) (38) (43) Others (9) (1) (1) (2) (2) (2) (3) Private Capital Inflows 240 187 73 72 65 25 25 Changes in Reserves (-- increase) -161 -194 -36 -38 -24 -37 -92 Selected Indicators Reserve Level (months of imports) 2.5 4.8 4.5 4.4 4.1 4.4 4.3 Public Debt Service Ratio (%) 27.9 19.4 16.4 15.3 14.2 14.5 14.2 Average Interest (%) 10.2 9.8 8.2 8.4 8.5 8.9 8.8 Average Maturity (years) 8.6 10.9 14.9 14.0 13.5 12.2 12.5 Average Grace (years) 3.8 3.9 4.0 3.8 3.7 3.6 3.6 Source: Mission estimates.  - 64 - ex6arnal debt continues to improve and given the moderate levels of external commitments projected (relative to 1974-75) and the expected export growth, Jruguay's debt service ratio should decline steadily from 282 in 1977 to about half that level by 1983. Thus, Uruguay's creditworthiness position should continue improving as its development prospects are enhanced by the sustained implementation of an export-oriented growth strategy.  - a STATISTICAL APPENDIX Table No. I. POPULATION 1.1 Urban and Rural Population by Department, 1963-75 1.2 Urban and Rural Population Growth Rates by Department, 1963-75 1.3 Labor Force by Branch of Economic Activity in Montevideo, 1970-77 1.4 Employment by Branch of Economic Activity in Montevideo, 1970-77 1.5 Unemployment Rates by Branch of Economic Activity in Montevideo, 1970-77 II. NATIONAL ACCOUNTS 2.1 Availability and Use of Resources in Current Prices, 1970-77 2.2 Availability and Use of Resources in Constant Prices, 1970-77 2.3 GDP at Factor Cost by Sector of Origin in Current Prices, 1970-77 2.4 GDP at Factor Cost by Sector of Origin in Constant Prices, 1970-77 2.5 Gross Domestic Investment in Current Prices, 1967-76 2.6 Gross Domestic Investment in Constant Prices, 1970-77 III. BALANCE OF PAYMENTS 3.1 Balance of Payments, 1970-77 3.2 Commodity Exports, 1967-77 3.3 Commodity Imports, 1973-77 3.4 Exports by Destination, 1967-77 3.5 Imports by Origin, 1967-77 3.6 Commodity Exports Projections, 1978-83 3.7 Commodity Imports Projections, 1978-83 3.8 Balance of Payments Projections, 1978-83 IV. EXTERNAL DEBT 4.1 External Public Debt Outstanding as of December 31, 1977 4.2 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt as of December 31, 1977 4.3 Average Terms of Public External Debt Contracted During 1973-77 V. PUBLIC SECTOR FINANCES 5.1 Central Government Revenue, 1971-77 5.2 Central Government Expenditure, 1971-77 5.3 Summary of Central Government Operations, 1971-77 5.4 Central Government Revenue and Expenditure, 1971-77 (in percent of totals) 5.5 Central Government Revenue and Expenditure, 1971-77 (in percent of GDP)  5.6 Central Government Transfers, 1971-77 5.7 Consolidated Cash Operations of the Public Sector, 1971-77 5.8 Summary of Financial Accounts of Public Enterprises, 1971-77 5.9 Summary of Financial Accounts of Municipalities and Autonomous Entities, 1971-77 5.10 Summary of Financial Accounts of Social Security Bank, 1971-77 5.11 Summary of the Central Government Tax System, 1978 VI. MONETARY STATISTICS 6.1 Accounts of the Banking System, 1974-77 6.2 Accounts of the Monetary Authorities, 1974-77 6.3 Accounts of the Commercial Banks, 1974-77 VII. AGRICULTURE 7.1 Area, Yield, and Production of Selected Crops, 1970-77 7.2 Gross Output of Selected Crops, 1965-77 7.3 Gross Output of the Livestock Sector, 1965-77 7.4 Slaughter of Livestock by Origin, 1960-77 7.5 Cattle Slaughter in Meat Packing Plants, 1973-77 7.6 Beef Exports by Destination, 1970-77 7.7 Distribution of Farm Units by Size, 1974-77 VIII. INDUSTRY 8.1 Value Added in Manufacturing by Sub-sectors, 1955, 1960, 1965, 1970-77 8.2 Index of Value Added in Manufacturing by Sub-sectors, 1955, 1960, 1965, 1970-77 8.3 Export Values for Selected Commodity Groups, 1965 and 1971-77 8.4 Share of Value Added in Selected Industries, 1973-75 8.5 Index of Hours Worked in Selected Manufacturing Industries, 1974-77 8.6 Estimated Net Foreign Exchange Earnings and Employment to be Created by by Projects of "National Interest" (through March 1978) 8.7 Principal Exports to the US under the Generalized System of Preferences, 1975 IX. PRICES AND WAGES 9.1 Cost of Living in Montevideo, 1969-Mar. '78 9.2 Wholesale Price Index (National) 1968-78 9.3 Indices of Nominal and Real Wages, 1968-Mar. '78 9.4 Availability and Use of Resources, 1970-77 (implicit price deflators) 9.5 Implicit Price Deflators of GDP by Sector of Origin, 1970-76 9.6 Indices of Nominal and Real Public Utility Prices, 1967-77 9.7 Exchange Rates in Commercial and Financial Markets, 1970-78  - 67 - Table 1.1: URUGUAY - URBAN AND RURAL POPULATION BY DEPARTMENT 1963-75 (in thousands) 1963 Census 1975 Census Urban Rural Total Urban Rural Total Artigas 35.9 16.9 52.8 45.0 13.3 58.3 Canelones 175.5 82.7 258.2 237.8 82.8 320.6 Cerro Largo 44.4 26.7 71.0 51.9 22.3 74.2 Colonia 70.0 35.3 105.3 79.2 31.6 110.8 Durazno 37.0 16.6 53.6 42.3 13.7 56.0 Flores 16.1 7.4 23.5 18.3 6.5 24.8 Florida 39.9 24.1 64.0 45.9 20.4 66.3 Lavalleja 42.5 23.3 65.8 46.1 18.9 65.0 Maldnaado 48.0 13.2 61.2 61.8 14.1 75.9 Paysamdu 65.9 22.2 88.0 77.7 21.3 99.0 Rio Negro 30.7 16.2 46.9 35.9 13.8 49.7 Rivera 49.0 28.1 77.1 56.5 24.4 82.9 Rocha 38.8 16.3 55.1 45.5 13.4 58.9 Salto 65.2 27.0 92.2 80.6 23.7 104.3 San Jose 42.2 37.4 76.6 52.0 35.7 87.7 Soriano 54.7 23.2 77.9 59.8 20.8 80.6 Tacuarembo 42.2 30.8 77.0 55.4 28.0 83.4 Treinta y Tres 31.5 11.9 43.4 34.3 12.3 46.6 Interior 933.5 459.3 1,392.8 1,126.7 416.9 1,543.6 Montevideo 1,163.6 39.1 1,202.7 1,181.4 57.0 1,238.4 Total 2,097.1 498.4 2,595.5 2,308.1 473.9 2.782.0 Sources: IV and V Censo de Poblacion, Direccion General de Estadistica y Censo0  - 68 - Table 1.2: URBAN AND RURAL POPULATION GROWTH RATES BY DEPARTMENT, 1963-1975 (Annual Average) Urban Rural Total Artigas 2.7 -0.1 0.7 Canelones 1.3 2.7 1.8 Cerro Largo 0.9 -0.9 0.3 Colonia 0.9 -0.6 0.4 Durazno 0.8 -1.4 0.2 Flores 1.0 -1.3 0.4 Florida 0.7 -0.5 0.3 Lavalleja 0.7 -1.7 0.0 Maldonado 1.8 2.2 1.8 Paysandu 0.9 1.2 1.0 Rio Negro 1.2 -0.9 0.5 Rivera 1.3 -2.1 0.2 Rocha 1.2 -0.7 0.8 Salto 1.4 -1.3 0.7 San Jose -0.5 2.2 0.9 Soriano 0.7 -0.8 0.2 Tacuarembo 1.6 -0.5 0.8 Treinta y Tres 0.4 0.3 0.4 Interior 1.0 0.4 0.8 Montevideo 0.1 2.7 0.2 Total 0.5 0.6 0.5 Source: Table 1.1  Table 1.3: URUPJAY - LABOR FORCE BY BRANCH OF ECONDMIC ACTIVITY IN MDNTWIDEO, 1970-77 (in thousands) Page 1 of 2 lst Sem_eter 1970 2nd Semester 1970 lst Ssmeter 1971 2nd Sme_ter 1971 Jan. - May 1972 Feb. - June 1973 Number Percent Number Percett Number Percent Number Percent Number Percent Number Percent Agriculture 9.5 1.8 9.7 1.8 9.4 1.7 9.3 1.7 8.1 1.5 9.2 1.6 Manufacturing /1 164.8 31.5 168.6 32.1 171.4 31.9 176.3 32.2 169.2 31.0 172.8 31.2 Construction 22.8 4.4 21.6 4.1 20.7 3.9 21.2 3.9 22.9 4.2 23.7 4.3 Trade 84.0 16.0 84.5 16.1 86.4 16.1 88.5 16.2 92.5 17.0 90.1 16.2 Transport & comsunication 39.9 7.6 39.1 7.5 42.8 8.0 44.2 8.1 44.7 8.2 47.8 8.6 Electricity, gas and water 14.4 2.8 11.2 2.1 12.3 2.3 13.4 2.5 14.4 2.6 14.3 2.6 Government services 40.1 7.7 40.7 7.7 40.2 7.5 40.0 7.3 40.7 7.5 39.7 7.2 Other services 134.7 25.7 136.8 26.0 141.8 26.4 142.0 26.0 140.9 25.9 142.9 25.8 Never worked before /2 13.2 2.5 13.6 2.6 11.9 2.2 11.5 2.1 11.3 2.1 13.9 2.5 Total labor force 523.4 100.0 525.8 100.0 536.9 100.0 546.4 100.0 544.7 100.0 544.4 100.0  Table 1.3: URUGUAY - LABOR FORCE BY BRANCH OF ECONOMIC ACTIVITY IN MDNTEVIDED, 1970-77 (in thousands) Page 2 of 2 Aug. 1974 - Feb. 1975 1st Semester 1976 2nd Semester 1976 1st Semester 1977 2nd Semester 1977 Number Percent Number Percent Number Percent Number Percent Number Percent Agriculture 7.7 1.6 6.6 1.2 8.1 1.5 8.6 1.6 7.7 1.4 Manufacturing /1 143.1 30.3 157.4 29.9 148.2 27.6 156.8 28.6 155.2 28.9 Construction 21.0 4.4 21.2 4.0 19.7 3.7 19.2 3.5 17.3 3.2 Trade 78.1 16.5 98.0 18.6 108.0 20.1 108.3 19.7 108.8 20.3 Transport & communication 34.5 7.3 38.6 7.3 39.9 7.4 37.1 6.8 38.3 7.2 Electricity, gas and water 12.4 2.6 8.4 1.6 8.3 1.6 8.0 1.5 7.9 1.5 Government services 33.1 7.0 45.7 8.7 54.0 10.1 51.3 9.3 52.7 9.8 Other services 127.9 27.0 130.2 24.7 127.5 23.7 134.9 24.6 129.7 24.2 Never worked before /2 15.6 3.3 21.0 4.0 23.2 4.3 24.3 4.4 18.9 3.5 Total labor force 473.4 100.0 527.1 100.0 536.9 100.0 548.5 100.0 536.5 100.0 /1 Includes mining and guarrying /2 Includes data without specific economic activity Source: Encuesta de Hogares, Direccion General de Estacistica y Censo.  Table 1.4: URUGUAY - EMPLOYMENT BY BRANCH OF ECONOMIC ACTIVITY IN MONTEVIDEO, 1970-77 (in thousands) Page I of 2 1st Semester 1970 2nd Semester 1970 1st Semester 1971 2nd Semester 1971 Jan. - May 1972 Feb. - June 1973 Number Percent Number Percent Number Percent Number Percent Number Percent Number Percent Agriculture 8.9 1.8 9.6 2.0 9.1 1.8 9.1 1.8 7.9 1.6 8.9 1.8 Manufacturing Li 152.4 31.6 157.7 32.3 158.5 32.0 161.4 32.0 155.7 30.9 158.1 31.3 Construction 20.5 4.2 19.2 4.0 18.0 3.6 19.3 3.8 20.7 4.1 20.1 4.0 Trade 79.4 16.5 80.5 16.5 82.2 16.6 83.8 16.6 86.4 17.2 84.1 16.6 Transport & communication 38.7 8.0 38.6 7.9 41.5 8.4 42.7 8.5 42.5 8.5 46.3 9.1 Electricity, gas and water 14.2 2.9 11.2 2.3 12.2 2.5 13.1 2.6 14.3 2.8 14.0 2.8 Government services 40.1 8.3 40.6 8.3 39.9 8.0 39.4 7.8 40.3 8.0 38.6 7.6 Other services /2 128.9 26.7 130.2 26.7 134.6 27.1 136.1 26.9 135.4 26.9 135.5 26.8 Total employment 483.1 100.0 487.6 100.0 496.0 100.0 504.9 100.0 503.0 100.0 505.0 100.0  Table 1.4: URUGUAY - EMPLOYMENT BY BRANCH OF ECONOMIC ACTIVITY IN MONTEVIDEO, 1970-77 (in thousands) Page 2 of 2 Aug. 1974 - Feb. 1975 1st Semester 1976 2nd Semester 1976 1st Semester 1977 2nd Semester 1977 Number Percent Number Percent Number Percent Number Percent Number Percent Agriculture 7.4 1.7 6.1 1.3 7.6 1.6 7.6 1.6 7.3 1.5 Manufacturing /1 133.3 30.6 130.2 28.3 129.6 27.7 139.6 29.2 139.5 29.2 Construction 17.9 4.1 17.7 3.8 16.7 3.6 15.8 3.3 14.8 3.1 Trade 74.0 17.0 101.8 22.1 96.7 20.7 98.1 20.5 101.7 21.3 Transport & communication 34.1 7.8 36.2 7.9 38.0 8.1 36.0 7.5 36.4 7.6 Electricity, gas and water 12.4 2.9 8.3 1.8 8.2 1.8 7.9 1.7 7.4 1.5 Government services 32.6 7.5 44.9 9.8 53.0 11.4 49.5 10.3 51.3 10.7 Other services /2 123.5 28.4 115.2 25.0 117.4 25.1 123.8 25.9 120.1 25.1 Total employment 435.2 100.0 460.4 100.0 467.2 100.0 478.3 100.0 478.5 100.0 /1 Includes mining and quarrying /2 Includes unspecified activities Source: Encuesta de Hogares, Dirccion General de Estacistica y Censo.  Table 1.5: URUGUAY - UNEMPLOYMENT RATES BY BRANCH OF ECONOMIC ACTIVITY IN MONTEVIDEO, 1970-77 (in per cent) 1970 1971 1972 1973 Aug. 1974 1976 1977 1st Semester 2nd Semester 1st Semester 2nd Semester Jan. - May Feb. - June Feb. 1975 Ist Semester 2nd Smeater 1st Smsester 2nd Semest.r Agriculture 6.3 1.0 3.2 2.2 4.9 3.3 3.9 7.6 6.2 11.6 5.2 Manufacturing 7.5 6.5 7.5 8.4 8.0 8.5 6.9 11.2 12.6 I1.O 10.1 Construction 10.1 11.2 13.0 9.0 9.6 15.2 14.8 16.5 15.2 17.7 14.5 Trade 5.5 4.7 4.9 5.3 6.6 6.7 5.3 9.0 10.5 9.4 6.5 Transport & communication 3.0 1.4 3.0 3.4 4.9 3.1 1.2 6.2 4.8 3.0 5.0 Electricity, gas and water 1.4 - 0.8 2.2 0.7 2.1 - 1.2 1.2 1.3 6.3 Government services - 0.2 0.7 1.5 1.0 2.8 1.5 1.8 1.9 3.5 2.7 Other services /2 4.3 4.8 5.1 4.2 3.9 5.2 3.4 9.4 7.9 8.2 7.4 Total unemployment /3 7.7 7.3 7.6 7.6 7.7 8.9 8.1 12.7 13.0 12.8 10.8 L Includes mining and guarrying /2 Includes other unspecified activities /3 Includes persons seeking work for the first time Source: Encuesta de Nogares, Diriccion General de Estadistica y Censo.  Table 2.1: URUGUAY - AVAILABILITY AND USE OF RESOURCES IN CURRENT PRICES, 1970-77 (in thousands of new Uruguayan pesos) Preliminary 1970 1971 1972 1973 1974 1975 1976 1977 Consumption 551,635 653,924 1,086,025 2,222,665 4,202,924 7,654,154 11,486,141 17,257,904 Private (459,418) (535,329) (933,043) (1,858,413) (3,522,541) (6,538,529) (9,496,205) (14,978,904) Public (92,117) (118,595) (152,982) (364,252) (680,383) (1,115,625) (1,989,936) (2,279,000) Gross domestic investment 68,866 91,180 146,988 322,242 524,035 1,071,332 1,564,614 2,842,135 Fixed investment (68,478) (82,785) (121,258) (229,343) (464,007) (1,058,844) (1,658,947) (2,900,555) Change in stocks (388) (8,395) (25,730) (92,899) (60,028) (12,488) (94,333) (-58,420) Resource gap -8,347 -9,360 4,793 31,197 -122,532 -356,693 -47,707 -178,039 Imports (80,883) (80,135) (174,109) (322,878) (763,235) (1,531,595) (2,398,049) (4,246,819) Exports (72,536) (70,775) (178,872) (354,075) (640,703) (1,174,902) (2,350,342) (4,068,780) Gross domestic product 612,154 735,744 1,237,776 2,576,104 4,604,427 8,368,793 13,003,048 19,922,000 Net factor income -6,202 -6,054 -14,910 -21,686 -53,805 -167,560 -243,988 -317,093 Gross national product 605,952 729,630 1,222,866 2,554,418 4,550,622 8,201,233 12,759,060 19,604,907 Net current transfers 2,325 2,158 6,362 16,538 21,158 15,863 26,142 31,350 Gross domestic savings 60,519 81,820 151,781 353,439 401,503 714,639 1,516,907 2,664,096 Gross national savings 56,642 77,924 143,233 348,291 368,856 562,942 1,299,061 2,378,353 Source: Central Bank and Mission estimates  Table 2.2: URUGUAY - AVAILABILITY AND USE OF RESOURCES IN CONSTANT PRICES, 1970-77 (in thousands of 1961 new Uruguayan pesos) Preliminary 1970 1971 1972 1973 1974 1975 1976 1977 Consumption 17,237 17,206 16,808 17,305 17,225 17,014 16,438 16,634 Private (14,454) (14,611) (14,559) (14,594 (14,333) (14,265) (13,571) (13,535) Public (2,783) (2,595) (2,249) (2,711) (2,892) (2,749) (2,867) (3,099) Gross domestic investment 2,733 3,047 2,550 2,458 2,340 2,919 2,946 3,744 Fixed investment (2,745) (2,871) (2,341) (2,017) (2,134) (2,919) (3,191) (3,800) Change in stocks (-12) 176 (209) (441) (206) () (-245) (-56) Resource gap -376 -849 -645 -894 -109 387 1,464 1,179 Imports (3,304) (3,567) (3,171) (3,448) (3,232) (3,379) (3,585) (3,886) Exports (2,928) (2,718) (2,526) (2,554) (3,123) (3,766) (5,049) (5,065) Gross domestic product 19,594 19,404 18,713 18,869 19,456 20,320 20,848 21,557 Terms of trade adjustment 35 432 732 1,227 -410 -1,174 -1,535 -1,630 b Gross domestic income 19,629 19,836 19,445 20,096 19,046 19,146 19,313 19,927 Net factor income -270 -260 -291 -242 -203 -318 -342 -287 Gross national product 19,324 19,144 18,422 18,627 19,253 20,002 20,506 21,270 Net current transfers 101 93 124 185 80 30 37 28 Gross domestic savings 2,392 2,630 2,637 2,791 1,821 2,132 2,875 3,293 Gross national savings 2,223 2,463 2,470 2,734 1,698 1,844 2,570 3,034 Sources: Central Bank and Mission estimates  Table 2.3: URUGUAY - GDP AT FACTOR COST BY SECTOR OF ORIGIN IN CURRENT PRICES, 1970-77 (in thousands of current new Uruguayan pesos) Preliminary 1970 1971 1972 1973 1974 1975 1976 1977 Agriculture /1 67,164 82,962 184,428 429,030 661,295 850,813 1,227,691 2,016,000 Manufacturing /2 128,760 140,993 218,718 520,890 1,057,093 1,978,746 3,183,802 5,144,000 Construction 20,182 28,409 45,189 80,840 155,365 -325,096 423,881 703,000 Trade 70,800 80,867 132,252 302,507 546,965 1,055,455 1,660,763 2,593,000 Transport and communication 45,496 56,071 85,810 162,340 318,635 542,165 845,909 1,329,000 Electricity, gas and water 7,919 10,379 16,226 40,526 83,388 144,632 234,448 369.000 - Banks and financial institutions 20,803 22,445 49,779 87,447 145,943 328,294 552,256 /3 Ownership of dwellings 27,436 36,854 47,270 68,489 119,229 320,544 502,613 856,000 General government 76,734 95,984 124,956 294,200 554,598 880,949 1,258,497 /3 Others 66,336 87,468 119,995 246,266 452,256 847,392 1,287,188 4,467,000 Gross domestic product at factor cost 531,630 642,432 1,024,623 2,232,535 4,094,767 7,274,086 11,177,048 17,477.000 /1 Includes fishery /2 Includes mining and quarrying /3 Included in others Note: GDP at f.c. for 1977 is estimated to be 17,477 mln. of new Uruguayan pesos. Source: Central Bank and IMF.  Table 2.4: URUGUAY - GDP AT FACTOR COST BY SECTOR OF ORIGIN IN CONSTANT PRICES, 1970-77 (in millions of 1961 new Uruguayan pesos) Preliminary 1970 1971 1972 1973 1974 1975 1976 1977 Agriculture /1 2,872 2,839 2,560 2,659 2,669 2,758 2,867 2,819 Manufacturing /2 4,030 3,956 3,942 3,932 4,077 4,351 4,524 4,809 Construction 755 800 811 656 726 956 893 1,023 Trade 2,593 2,479 2,342 2,342 2,463 2,557 2,690 2,792 Transport and communication 1,385 1,427 1,363 1,400 1,487 1,548 1,605 1,671 ' Electricity, gas and water 394 415 407 412 396 441 464 490 Ownership of dwellings 1,009 1,024 1,009 1,007 999 996 996 996 Other services /3 4,460 4,387 4,290 4,443 4,565 4,549 4,603 4,657 Gross domestic product of f.c. 17,498 17,327 16,723 16,851 17,382 18,156 18,632 19,257 /1 Includes fishery /2 Includes mining and quarrying /3 Includes banks and financial institutions, general government and others Source: Central Bank  Table 2.5: URUGUAY - GROSS DOMESTIC INVESTMENT IN CURRENT PRICES, 1967-77 (In millions of current new pesos) Construction Machinery & Equipment Change in Gross Domestic Fixed Investment Year Public Private Subtotal Public Private Subtotal Stocks Public Private Total 1967 3,291 10,905 14,196 1,136 6,398 7,534 608 4,427 18,374 22,801 1968 6,282 19,205 25,486 1,512 7,878 9,390 - 258 7,793 30,527 38,322 1969 9,598 20,525 30,123 1,783 20,783 22,566 - 758 11,381 44,653 56,034 .1970 14,214 22,612 36,826 3,676 24,386 28,062 388 17,889 50,588 68,478 1971 17,983 30,360 48,343 4,485 21.142 25.627 8,395 22,468 60,317 82,784 1972 26,531 55,704 82,236 1,671 24,666 26,337 25,730 28,203 93,056 121,259 1973 42,696 114,091 156,787 4,850 39,080 43,930 92,899 47,547 181,797 229,343 1974 110,726 223,339 334,065 5,795 81,433 87,228 60,028 116,522 347,484 464,007 1975 295,346 414,987 710,333 49,148 263,977 313,125 12,488 344,495 714,348 1,058,844 1976 399,183 526,995 926,178 210,119 482,481 292,600 -94,333 609,302 1,049,645 1,658,947 1977 700,o30 836,077 1,536,907 436,901 869,364 1,306,535 -58,420 ,137,731 1,762,824 2,900,555 Source: Central Bank  Table 2.6: URUGUAY - GROSS DOMESTIC INVESTMENT CONSTANT PRICES, 1970-77 (in millions of 1961 NT$U) Gross Domestic Fixed Construction Machinery and Equipment Change in Investment Privatel Public Subtotal Private Public Total stocks2/ Private Public Total 1970 791 622 1,413 1,045 146 1,191 -12 1,977 768 2,745 1971 871 629 1,499 899 167 i,o66 176 2,076 796 2,871 1972 962 566 1,528 54o 41 581 209 1,734 607 2,341 1973 844 394 1,238 460 68 528 441 1,555 462 2,017 1974 854 516 1,370 492 4o 532 206 1,578 556 2,134 1975 973 855 1,828 801 159 960 - 1,904 1,014 2,919 1976 883 824 1,707 940 437 1,377 -245 1,930 1,261 3,191 1977 962 994 1,956 1,135 609 1,744 -56 2,197 1,603 3,800 l/ Includes permanent and cash crops. 2/ Do not include change in stocks of the public sector. Source: Central Bank.  Table 3.1: URUGUAY - BALANCE OF PAYMENTS, 1970-77 (in millions of US$) Preliminary 1970 1971 1972 1973 1974 1975 1976 1977 Trade balance 21.0 -6.4 35.4 79.0 -52.3 -109.1 28.4 -68.1 Exports, f.o.b. (224.1) (196.6) (214.1) (327.6) (381.2) (3B4.9) (565.0) (611.6) Imports, f.o.b. (203.1) (203.0) (178.7) (284.6) (433.5) (494.0) (536.6) (679.7) Non-monetary gold - 0.2 27.9 - - - - - Net service payments -50.6 -44.0 -31.9 -35.7 -40.5 -16.1 -37.3 32.2 Freight and insurance (-28.6) (-29.9) (-27.4) (-31.5) (-52.1) (-45.5) ('35.9) (-39.8) Other transportation (-13.6) (-11.6) (-5.5) (-3.8) (-3.9) (-5.5) (-13.7) (... ) Travel (-2.4) (5.1) (4.5) (-0.7) (14.3) (36.6) (8.0) (84.3) Other (-6.0) (-7.6) (-3.5) (0.3) (1.2) (-1.7) (4.3) (-12.3)12 Goods and non-factor services -29.6 -50.2 31.4 43.3 -92.8 -125.2 -7.7 -35.9 Net factor income -24.8 -21,6 -23.6 -25.1 -42.6 -71.2 -72.4 -67.9 Interest on public debt (-15.7) (-15.5) (-18.7) (-21.6) (-30.8) (-46.1) (-57.2) (-56.2) Other k-9.1) (-6.1) (-4.9) (-3.5) (-11.8) (-24.9) (-15.2) (-11.7) Net transfers 9.3 8.3 11.3 18.9 17.4 6.9 7.7 6.6 1 OD Current account balance -45.1 -63.5 19.1 37.1 -118.0 -189.5 -73.6 -97.2 0 Official capital grants 1.1 2.7 2.5 12.2 5.3 5.4 5,4 ... Public medium and long-term loans Disbursements (36.6) (61.3) (122.0) '83.2) (289.0) (284.3) (214.9) (205.0) Amortization (-47.0) (-41.2) (-88.5) (-7^.2) (-125.3) (-181.9) (-148.3) (-186.8) Net Disbursements -10.4 20.1 33.5 11.0 163.7 102.4 66.6 18.2 Private medium and long-term loans 17.2 15.8 -8.2 -24.1 -19.9 -94.1 47.2 100.8 Allocation of SDRs 9.2 7.4 7.9 - - - _ Other capital tranaction, n.e.i. /L 7.4 -43.6 -68.1 53.3 -89.3 103.0 66.1 138.8 Change in reserves (- increase) 20.6 61.1 13.3 -89.8 58.2 72. 8 -111.7 -160.6 /1 Includes short-term capital, errors and missions /2 Includes other transportation, Sources: Central Bank, IMF and mission estimates  - el - T1bl. 3.2 URU0 UAY - CO?MDITY EXPOR8S, 1967-77 (Valu, in tho-aeod. of USj. onion. In ton, unit value In U00/ton) 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 Tnadlttonal Value 131,789 146,714 149,120 174.513 147.446 162,10 235,758 238,081 793 94B Z50,910 258.906 1. M.sat 3=7.397 5669 8 268 82725 6667 99 2-69 121 594 138.245 195 122 359 11.240 eaetf,hiiled and fro--au 171 408 !1~ 310 IIT IiI ThM 13.6 645 rrT 0,4 8 ci1edan nVolume 60,699 94,250 106,460 131,656 79492 13,568 98,392 98,848 77,45 145,744 108,500 Price 523 499 487 556 740 945 1,216 1,356 884 747 926 ~titon-hill.d sad froze.Vlu 2,749 4,561 3,959 806 6,287 88 109 2537 10,15 5 689 5,372 lltoncllVolume 7,129 13,692 10.763 18,6635 16 321 1,449 1129 2,529 '9,18 5038 4,3972 noIce 386 333 568 433 385 611 916 1,089 1,101 1.129 1,222 Other ean Valuo 2,897 5,070 2,485 1,507 561 501 967 1,559 3,405 7,856 5.426 2. Wool !j.afl& 62~123144 69,877 75 325 365.95 56.9842 102.G95 89.959 892 105,595 125.169 crasse oool ~~~~~~ ~~~~~~Voloo. 46,297 46,964 34,961 41,56 5,0 772 5,4 796 4,1 281 5.5 Cre o Volume 40,110 47,384 32 490 34,614 40,606 23,227 14,573 25,000 29,668 17,912 24.098 Priae 1,154 991 1,076 1,201 892 1,194 2,508 2,317 1,487 1,876 2,330 ue.hed cool Value 6,774 3.497 7,755 5,947 7,272 5,131 20,578 8,97 12,500 15,1163 14,119l Volume 4,64 4,410 5 766 4,562 6,348 53 813 6,602 3,689 6,767 6,194 5.154 Price 1,460 1,246 1,344 1,304 1,146 1,345 3,087 2,432 1,847 2,448 2,739 Wool tops Value 23,829 23,536 24,664 25,674 21,173 21,616 40,617 20,307 29,952 52,5V4 50.226 Volu 13 330 15,595 13 938 14,918 14:156 12,776 10,654 6,000 11,840 15,809 14,103 Prnie 1,936 1,637 1,770 1 721 1,496 1,692 3,812 3,385 2,539 3,323 3,561 Blou-- Value 1,754 1,502 1,703 1,986 823 2,020 3,587 1,959 2,281 3,533 3,187 VolV 2,479 1,881 2,052 2,555 1,621 2,968 1,763 1,700 1,525 1,82, 1,701 ftine 708 799 830 621 508 681 2,035 1,633 1,505 1,937 1,789 Other uool Value 661 705 794 542 484 483 881 806 1,059 1,498 4,282 tides and ktne ValOr 7,039 7 452 7.719 4.444 3 897 3 644 388Z 1,302 I 980 2,048 9 79 Volume/I 7,929 9,627 7,105 3.123 2,825 2 626 1,272 422 985 1,205 485 Price 888 774 1,086 1,423 1,379 1,388 3,052 3,085 2,011/ 1 699/1 2,106/1 4. Coais, oilarede and nile 6_039 2.419 13U256 12,017 11U929 2 915 8,277 8.575 20,071 20,908 21 418 Wheat V.lue 1,216 - 4,053 - 5 741 161 - - 10,152 4,061 6,573 Volume 20,600 - 68,997 - 98,133 2,748 - - 67,064 28,902 48,464 Ptice 39 59 - 59 59 - - 151 141 96 Li..e.ed oil Value 1,880 1,:417 24,171 6,007 3,519 1,3001 3,939 5,902 7,089 8,241 6872 Volume 12,511 7,552 21,108 31 732 18 997 6,141 11 776 69000 9 755 16,992 12 884 PrIor 150 188 198 189 175 212 334 984 727 485 533 Ocher Value 2,943 1,002 5,032 6,010 2,869 1,454 4,338 2,673 2,830 8,606 7,973 Noo.iradltional Value 26,883 32,444 51.216 58,196 58,247 51.267 85.752 144,101 189,899 295,566 348 717 1. Possed r. Valr 4,830 3,06 7,583 3,666 7,019 5,904 14,956 28,198 33,236 26,121 32,498 CVolume 33,108 21,038 59,222 37,07 68,288 44,800 62,769 70,490 98,482 107.555 12824 Pniae 146 147 128 99 103 132 255 400 337 243 267 2. Hides and kine Valor 7,378 9,011 16,165 19,902 17,619 19,920 21,955 22,701 19,482 35,505 31,479 Volume/I 8,311 11,642 14,878 13,986 12,776 14,351 7,193 7,358 8,190 2O,950 14,947 Price 988 774 1,086 1,423 1,379 1,388 3,052 3,085 2,011/1 1 699/1 2,106/1 3. Menuf-turer Value 10,079 16,352 22,842 28,206 26,575 20,591 40,811 75,599 120 434 199,605 243,359 Loather Value (336) (753) (1,568) (3 916) (3,494) (4.385) (10,390) (19.384) (40 836) (72,641) (103,484) T-ailee Value (2,228) (3,685) (3.893) (4.006) (4,380) (3,142) (7,078) (11,750) (15,347) (25,732) (40,399) Other VWlu. (7,515) (11,914) (17,381) (20,284) (18,701) (13,064) (23.343) (44,445) (64,251) (101,232) (104,476) 4. 41 other goode Value 4,596 3,995 4,626 6,422 7,034 4,832 8,030 17,603 16 747 34,245 36 381 Fiah Value (-) (93) (395) (6755 (459) (253) (766) (1,146) (35299) (5,144) (10 251) Other Value (4,596) (3,903) (4,231) (5,747) (6,575) (4,599) (7,264) (16,457) (13,448) (29,101) (26,130) Adjuatment for ol , Value _ _ _1,100 -8,600 9,100 _ 6 100 -900 1,200 18.500 4 100 Total mrohanaie. port. (fo.b) Value 1- 15B674 179,158 199,236 224,109 196593 214077 327.610 381,282 385,47 564,976 611 623 /I Eatnitod Soucer: Central Book, IMP and mid aon eatmtee  Table 3.3: URUGUAY - COMMODITY IMPORTS, 1973-77 (in millions of US$) /1 /1 ~~~~~~~~~~~Preliminary 1973'- 1974/1 1975 1976 1977 Food 10.3 12.7 15.3 18.0 19.2 Other consumer goods 16.9 23.2 13.1 18.1 24.7 Intermediate goods 228.2 410.4 432.6 413.8 510.3 o.w. Petroleum products (54.7) (160.6) (184.3) (181.2) (209.5) Capital goods 27.1 38.2 70.9 113.8 120.9 Transport (12.3) (15.2) (23.3) (35.7) (39.3) Machinery (14.8) (23.0) (47.6) (78.1) (81.6) Other goods 1.1 9.6 16.8 18.5 54.3 Total merchandise imports (CIF) 283.6 494.1 548.7 582.2 729.4 Non-factor services /2 82.9 98.3 127.6 122.9 177.7 Total imports and n.f.s. 366.5 592.4 676.3 705.1 907.1 /1 Estimated so as to be consistent with the latter years (1975-77) which were based on the SITC broad economic classification. /2 Do not include freight and insurance. Sources: Central Bank, IMF and mission estimates.  Table 3.4: URUGUAY - EXPORTS BY DESTINATION, 1967-77 (percentages) 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 AMICA 18.7 23.2 22.3 21.5 26.4 16.1 13.6 40.4 36.3 37.1 39.9 1. Latin America Free 10.8 10.5 15.3 12.5 21.4 12.4 10.0 36.3 29.2 24.7 24.4 Trade Association 2. U.S. 12.1 6.6 8.5 8.5 4.7 3.4 3.4 3.7 6.7 10.8 14.4 3. Central-America 0.1 - 0.1 0.1 0.2 - - - - - - Comnon Market 4. Others 0.6 0.6 0.3 0.4 0.1 0.3 0.2 0.4 0.4 1.6 1.1 EUROPE 74.4 69.3 69.4 68.8 63.0 76.3 75.2 51.2 51.5 49.8 47.0 1. European ComuDn Market 26.3 26.7 34.1 36.7 38.6 41.4 46.6 27.7 34.0 34.6 31.0 2. European Free Trade 27.2 25.3 16.4 10.3 9.6 12.8 4.0 3.0 2.8 4.0 5.0 Association 3. Eastern Europe 7.1 3.9 5.3 12.2 4.8 7.5 11.8 10.6 7.5 3.3 6.3 4. Spain 9.5 6.8 8.1 3.1 3.0 11.1 11.6 6.0 3.1 4.2 2.1 5. Others 4.5 6.6 5.5 6.5 7.0 3.5 1.2 3.7 4.1 3.7 2.6 OTHER ODUNTRIES 6.9 7.5 8.3 9.7 10.6 7.6 11.2 8.4 12.2 13.1 13.1 Source: Central Bank.  Table 3.5: URUGUAY - IMPORTS BY ORIGIN, 1967-77 (percentages) 1967 1968 1969 1970 1971 1972 1973 1974 1975 197b 1977 TOTAL 100.0 100.0 100.O 100.O 10. 1 100.0 100.O lQO.0 100.0 100.0 AMERICA 45.0 53.0 47.5 47.4 47.9 54.0 54.3 43.4 41.9 47.1 43.4 1. Latin America Free Trade Association 27.4 26.4 29.5 31.4 33.2 36.0 42.9 34.1 28.8 35.3 31.4 2. U.S. 14.0 22.6 13.6 12.9 10.0 15.5 8.6 7.4 10.3 8.7 9.9 3. Central America Common Market - - - - - - - - - _ 4. Others 4.2 4.0 4.4 3.1 4.7 2.5 2.7 1.8 2.8 3.1 2.1 EUROPE 36.5 30.7 38.9 35.5 33.6 26.9 25.5 22.2 26.3 24.4 24.5 1. European Common Market 19.3 17.5 19.1 18.0 16.6 14.2 19.4 17.4 19.9 18.3 19.4 2. European Free Trade Association 13.5 11.2 10.7 11.7 12.0 9.8 3.6 2.9 3.6 3.2 2.5 3. Eastern Europe 2.9 1.2 3.3 3.6 2.0 1.3 1.6 1.0 1.6 1.7 1.5 4. Spain 0.8 ) 0.8 5.3 1.8 2.2 1.0 0.7 0.8 1.0 1.0 1.0 5. Others - 0.5 0.4 0.8 0.6 0.3 0.1 0 2 0.2 0.1 OTHER COUNTRIES 17.9 16.3 13.6 17.1 18.5 19.1 20.2 34.4 31.8 28.5 32.1 Source: Central Bank  -85- Table 3.6: URUGUAY - COMMODITY EXPORS PROJECTIONS, 1978-83 (in millions of US$) Actual Projected 1977 1978 1979 1980 1981 1982 1983 Exports in Current US$ Beef 124 135 160 174 185 246 322 Wool 125 125 139 153 171 185 201 Linseed oil 7 7 8 7 9 10 10 Hides and skins 31 33 34 36 38 38 40 Wheat 6 - 9 11 12 14 16 Rice 33 32 51 64 76 93 111 Manufactured goods 248 337 338 392 451 514 582 Other goods 37 45 39 42 46 50 55 Total merchandise exports 611 714 778 879 988 1,150 1,337 Non-factor services 260 254 269 299 336 367 402 Total exports and n.f.s. 871 968 1,047 1,178 1,324 1,517 1,739 Export Price Index (1977'100) Beef 100.0 110.0 127.0 135.2 140.9 150.0 163.5 Wool 100.0 97.1 109.8 119.4 131.7 140.9 150.8 Linseed oil 100.0 95.0 109.7 101.3 123.6 128.7 133.3 Hides and skins 100.0 109.9 120.8 132.7 145.9 160.3 176.2 Wheat 100.0 116.6 133.9 159.8 173.6 183.9 197.5 Rice 100.0 113.2 131.3 148.8 161.3 178.5 193.7 Manufactured goods 100.0 106.9 113.9 120.8 128.0 135.7 143.8 Other goods 100.0 95.5 98.4 102.4 108.7 114.6 122.0 Total merchandise exports 100.0 105.2 116.1 12X.4 133.0 142.2 152.7 Non-factor services 100.0 106.9 113.9 120.8 128.0 135.7 143.8 Total exports and n.f.s. 100.0 105.7 115.6 123.5 131.7 140.5 150.5 Exports in 1977 US$ Beef 124 123 126 129 131 164 197 Wool 125 129 127 128 130 131 133 Linseed oil 7 7 7 7 7 7 8 Hides and skins 31 30 28 27 26 24 23 Wheat 6 - 7 7 7 8 8 Rice 33 28 39 43 48 52 57 Manufactured goods 248 315 297 324 352 379 405 Other goods 37 47 39 41 42 44 45 Total merchandise exports 611 679 670 706 743 809 876 Non-factor services 260 238 236 248 262 270 280 Total exports and n.f.s. 871 917 906 954 1,005 1,079 1,156 Source: Mission estimates  - 86 - Table 3.7: URUGUAY - COMMDITY IMPORTS PROJECTIONS, 1978-83 (in millions of US$) Actual Projected 1977 1978 1979 1980 1981 1982 1983 Imports in Current US$ Food 21 20 21 22 24 25 28 Other consumer goods 27 29 32 34 37 41 44 Petroleum 227 239 284 320 353 350 364 Intermediate goods 325 354 411 469 531 598 671 Capital goods 130 149 178 206 237 274 316 Total merchandise imports 730 791 926 1,051 1,182 1,288 1,423 Non-factor services 177 150 174 196 219 245 273 Total imports and n.f.s. 907 941 1,100 1,247 1,401 1,533 1,696 Import Price Index (1977-100) Food 100.0 94.0 96.1 99.3 105.1 110.7 117.8 Other consumer goods 100.0 106.9 113.9 120.8 128.0 135.7 143.8 Petroleum 100.0 102.4 114.5 124.2 131.5 139.5 147.9 Intermediate goods 100.0 104.2 112.0 120.8 129.5 138.0 146.7 Capital goods 100.0 106.9 113.9 120.8 128.0 135.7 143.8 Total merchandise imports 100.0 104.0 112.8 121.3 129.1 137.2 145.6 Non-factor services 100.0 106.9 113.9 120.8 128.0 135.7 143.8 Total imports and n.f.s. 100.0 104.4 112.9 121.2 129.0 136.9 145.3 Imports in 1977 US$ Food 21 21 22 22 23 23 24 Other consumer goods 27 27 28 29 29 30 31 Petroleum 227 233 248 258 268 251 246 Intermediate goods 325 340 367 388 410 433 457 Capital goods 130 139 156 170 186 202 220 Total merchandise imports 730 760 821 867 916 939 978 Non-factor services 177 140 153 162 171 181 190 Total imports and n.f.s. 907 900 974 1,029 1,087 1,120 1,168 Source: Mission estimates.  - 87 - Table 3.8: URUGUAY - BALANCE OF PAYMENTS PROJECTIONS, 1978-83 (in millions of US$) Actual Projected 1977 1978 1979 1980 1981 1982 1983 Exports of goods and NFS 871 968 1,047 1,178 1,324 1,517 1,739 Imports of goods and NFS 907 941 1,100 1,247 1,402 1,533 1,696 Resource balance -36 27 -53 -69 -78 -16 43 Net interest -44 -42 -39 -44 -51 -60 -68 Other factor service income -23 -30 -28 -30 -33 -37 -40 Net transfers 7 7 9 10 11 12 13 Current account balance -97 -38 -111 -133 -151 -101 -52 M & L loans to the public sector 18 45 74 100 110 113 118 Disbursement (205) (152) (174) (203) (212) (238) (259) Amortization (-187) (-107) (-100) (-103) (-102) (-125) (-141) Capital n.e.i. 240 187 73 72 65 25 25 Change in reserves (- = increase) -161 -194 -36 -38 -24 -37 -92 Source: Mission estimates.  08/08/78 8:21 AM Table 4.1 - URUGUAY PAGE 1 EXTERNAL PUBLIC DEBT OUTSTANDING INCLUDING UNDISDURSED AS OF DEC. 31, 1977 DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS (IN THOUSANDS OF U.S. DOLLARS) D E B T O U T S T A N D I N G : I N A R R E A R S TYPE OF CREDITOR ----------------------------------- ------------___________ CREDITOR COUNTRY DISBURSED :UNDISBURSED: TOTAL PRINCIPAL : INTEREST __________________