LOADING

Type to search

Uruguay: In Lula’s Footsteps

Share
By emulating Brazil instead of Venezuela, Mujica will make Uruguay one of the most attractive economies in Latin America.

BY WALTER T. MOLANO

On a late summer day in the bustling port of Montevideo, Jose "Pepe" Mujica was sworn in as the new president of Uruguay. The former Tupamaro guerrilla did not show any rancour, despite having spent more than 15 years in prison. On the contrary, the elderly man focused on the vast opportunities that sat at Uruguay’s feet. At his side was his wife, Senator Lucia Topolansky, another Tupamaro guerrilla, who also spent three years in jail. Senator Topolansky is the President of the Uruguayan Senate, and, along with her husband, was the co-founder of the Popular Participation Movement (MPP)—one of the key parties of the ruling Broad Front (FA) coalition.

However, unlike some of the other left-wing leaders in the region, such as Presidents Evo Morales, Hugo Chavez and Rafael Correa, who are set on improving social conditions through the forced redistribution of wealth, Mujica is taking a page of the Lula handbook by focusing on more investment and economic growth. Instead of taking measures to alienate foreign capital, Uruguay, like Brazil, is taking steps to attract investment. In the space of just a few years, Uruguay doubled its gross fixed investment to 20 percent of GDP. However, President Mujica wants to make it even higher. In his inauguration speech, he vowed to modernize the country’s railroad network, expand the ports and improve the electrical grid. Uruguay’s traditional sectors were beef, leather and wool. Now, the country is moving into agriculture, real estate, logistics, tourism and forestry. In 2009, the Uruguayan economy expanded 2 percent y/y, making it one of the fastest growing countries in the region. In 2010, the rate of growth will be well in excess of 5 percent y/y. By emulating Brazil instead of Venezuela, the new leftist government in Uruguay will make it one of the most attractive economies in Latin America.

Uruguay’s debt crisis in 2002 was an important catalyst. For the previous four decades, the country was a sleepy backwater—with an aging population and a tragic diaspora. Except for the resort town of Punta del Este, the country was characterized by its poverty and aging infrastructure. Unlike most of its neighbours, Uruguay never embarked on major structural reforms during the 1990s. On the contrary, a referendum on the partial privatization of the major state-owned companies was rejected by the electorate. However, the debt crisis of 2002 spurred it into action. With GDP plunging 11 percent y/y, Uruguay finally took measures to attract foreign capital. One of the major projects was Botnia’s construction of a new eucalyptus pulp plant in Fray Bentos. The rising global demand for commodities, and the government’s new attitude towards foreign investment, led to huge capital inflows. The same happened with agriculture. President Kirchner’s hostility towards the Argentine farming community led many farmers to decamp for Uruguay—driving up land prices and importing new technology. Likewise, the economic boom in Brazil, led many companies to seek acquisitions in Uruguay—particularly in the beef sector. Given that Uruguay had unfilled beef quotas in Europe and the U.S., Brazilian companies were able to use it as a way to expand into new markets. Moreover, the government took steps to increase investment across a variety of sectors through the use of free trade zones, which brought an influx of new multinationals, particularly in finance, data processing and call centers. All of these factors helped transform Uruguay into a dynamo. Instead of seeing most of its youth depart for greener pastures abroad, Uruguay is now seeing a massive inflow of highly educated workers seeking better opportunities.

President Mujica clearly understands that the road to prosperity is lined with jobs, not handouts. This was the reason why he gave a speech to Uruguay’s business community at the Conrad Hotel on the eve of his inauguration. His discourse calmed any trepidation that may have been harboured due to his radical past. He stressed the need to push ahead with the construction of the Stora Enso/Arauco pulp plant outside Colonia. The plant will bring in $1.8 to $2 billion in foreign investment and generate thousands of jobs. However, the country will also need to revitalize its ancient rail network. Uruguay once had the densest railroad system in Latin America, but the demise of the beef industry following World War II led to its decline. Now, the government hopes to revive the railroads as a way to effectively move the timber from the dense forests in the north to the processing plants that are proliferating across the land. With the continued leadership of the most senior members of the previous economic team, Uruguay is sending a message to the business world that it is open for business.

Walter Molano is head of research at BCP Securities.

 

 

To read this post, you must purchase a Latin Trade Business Intelligence Subscription.
Scroll to top of page