The Private Sector
A. W 0 R L D        A N K   C     U N T R Y  ST U D Y .
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A   WORLD   BAN            CONR            STUDY ,. ..\  






A W O RL D B AN K C OU N TRY STUDY
Urugua y
The Private Sector
The World Bank
Washington, D.C.



Copyright C) 1994
The International Bank for Reconstruction
and Development/TiE WORLD BANK
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First printing February 1994
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ISSN: 0253-2123
Library of Congress Cataloging-in-Publication Data
Uruguay: the private sector.
p. cm.
ISBN 0-8213-2730-5
1. Industry and state-Uruguay. 2. Business enterprises-Uruguay.
3. Government business enterprises-Uruguay. 4. Privatization-
Uruguay. 5. Uruguay-Economic policy.  I. International Bank for
Reconstruction and Development.
HD3616.U73U78 1994
338.9895-dc2O                                         93-44828
CIP



Contents
Page No.
Currency Equivalents and Abbreviations                                            ..                               vi
Acknowledgments ....................................... vii
Executive Summary and Reform Agenda                                                ..                              ix
Chapter 1.          Endowments and Markets   .........................   1
Chapter 2.         Private Sector - Profile and Perceptions  .................   9
Chapter 3.  Macroeconomic Policy Issues ....................... 17
Chapter 4.         The Foreign Trade Regime   ........................ 21
Chapter 5.  The Financial System ............................ 29
Chapter 6.  The Regulatory Environment ....................... 39
Chapter 7.  Labor Market Issues ............................ 45
Chapter 8.  The Tax System ............................... 53
Chapter 9.  The Legal Framework ........................... 59
Chapter 10.   Infrastructure Issues  ..........                              ................... 65
Chapter 11.   Private Sector Development Strategy  ................... 159
Annex                          ........................... 81
Additional Survey Tables ................................... 97
Appendix Tables ....................................... 103
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- iv -
List of Tables
Table 1.1:    Basic Indicators.       ......................... ........... 2
Table 1.2:    Trade-to-Output Ratios  .........  5
Table 2.1     Sectoral Gross National Product at Producer Prices  . . . . . . . . . . . . 10
Table 4.1:    Chronology of Legal Tariff Reform in Uruguay ................ 24
Table 5.1:    Uruguay: Deposits by Private Sector at End of Period .46
Table 5.2:    Uruguay: Credit to the Local Private Sector at End of Period .32
Table 7.1:    Distribution of Industrial Firms by Size .46
Table 7.2: Real Wages .51
Table 8.1:    Uruguay: Evolution of the Tax Structure .................... 53
List of Figures
Graph 2.1:  Credit to the Private Sector .1
Graph 2.2:    Private Savings & Investment in Uruguay .12
Graph 2.3:    Uruguay: General Constraints on Private Sector Development .14
List of Boxes
Box 1.1:      Growth and Productivity in Uruguay.                                4
Box 6.1:   Montevideo Taxicab Market .40
Box 6.2:  Exit Constraints .42
Box 7.1:      Social Security Wage Declaration - Lottery .47
Box 9.1:      Weak Property Rights: Imputed Values .................... 59
List of Annex Tables
Table 1:      Characteristics of Uruguay Sample, Overall and By Size .84
Table 2:      Constraints to Procurement and Sales .86
Table 3:   Origins of Inputs and Duties .87
Table 4:   Destination of Production .87
Table 5:      Finance Constraints by Firm Size ........................ 88
Table 6:      Sources of Finance by Size . ....................... 89
Table 7:      General Regulatory Constraints by Sector .90
Table 8:      Constraints to Closing an Enterprise by Size .91
Table 9:      Constraints on Informal Competition .93
Table 10:     Infrastructure Constraints by Size .94



v -
List of Annex Figures
Figure 1:     Composition of Uruguayan Private Sector Sample  .....      ......... 83
Figure 2:     Uruguay: General Constraints on Operations and Growth  ... ...... 85
Figure 3:     General Constraints to PSD by Location             ..                86
Figure 4:     General Regulatory Constraints on PSD             ..                91
Figure 5:     Uruguay: Labor Regulations Problems of Temporary Reduction  ... 92
Appendix Tables
Table Al. 1:  Uruguay: National Accounts Summary at Constant 1983 Prices,
1980-1992            ....................... 105
Table A1.2:  Uruguay: National Accounts Summary at Current Prices, 1980-1992 . . 106
Table Al.3:  Uruguay: Changes in GDP by Sector, 1980-1992   .       .107
Table A2.:1:  Summary Constraints by Sector, 1992    ..107
Table A3. 1:  Uruguay: Balance of Payments Summary, 1980-1992  .      .108
Table A3.2:  Uruguay: International Reserves and External Debt, 1980-1992 ..     110
Table A3.3:  Uruguay: Public-Sector Accounts: Central Administration, Public
Enterprises, 1980-1992    ..111
Table A3.4:  Uruguay: Financing of the Central Administration Deficit, 1980-1992 . . 112
Table A4. 1:  Uruguay's Trade in Goods and Non-Factor Services, 1980-1991 .... . 113
Table A4.20: Total Merchandise Imports of Uruguay by Trading Partner, 1965-1991    114
Table A4.30: Total Merchandise Exports of Uruguay by Trading Partner, 1965-1991    116
Table A4.40: Uruguay's Main Exports to MERCOSUR by Commodity, 1965-1991  .   119
Table A4.50: Uruguay's Main Exports by Commodity, 1965-1991  .       .120
Table A5.1:  Uruguay: Demand for Financial Assets by the Private Sector at End of
Period, 1980-1992    ..122
Table A5.2:  Uruguay: Participation of Public Banks in Resident's Deposits (End of
Period, 1977-1991)    ..123
Table A5.3:  Uruguay: Share of Public Banks in Credit to the Local Private Sector
(End of Period, 1977-1992)    ..124
Table A5.4:  Uruguay: Intermediation Margins (First Quarter of Each Year,
1985-1990) ...................................... 125



Currency Equivalents
March 31, 1993 US$1 = New Pesos 3.69
Abbreviations
AFE             -      Government railway company
ANCAP           -      Government petroleum, alcohol and cement company
ANP             -      Government port system
ANTEL           -      Government telecommunications company
BHU             -      Government mortgage bank
BROU            -     Bank of the Republic of Uruguay
CIF             -     Cost, insurance and freight
ICASA           -     Tax on expansion of companies
IMABA           -      Tax on bank assets
IMESI           -      Sales tax rate
IRIC            -     Tax rates on business income
IRP             -      Tax rates on personal income
IVA             -      Value-added tax
LRM             -      Monetary regulation bills
MERCOSUR    -          Common market of the south (Argentina, Brazil, Paraguay, and
Uruguay)
OSE             -      Government water company
PLADES          -      Plan for deregulating foreign trade and investment
PLUNA           -      Government airline company
PRONADE         -     National program of debureaucratization
PSAS            -     Private sector assessment survey
TGA             -      General import duty
UTE             -      Government power company
- vi -



Acknowledgments
This assessment is based on a mission, led by Sarath Rajapatirana and also
including Mariluz Cortes, Luis Guasch and Rosalinda Quintanilla, that visited Uruguay
from December 1 to 10, 1992. Andrew Stone helped to develop the questionnaire for the
private sector survey conducted in Uruguay in September 1992 by Centro de Estudios de
la Realidad Econ6mica y Social and prepared the Annex on the survey.
This work was undertaken in close collaboration with the IFC. The IFC's input,
coordinated by Araceli de Leon, was based on the findings of a mission conducted by
Enrique Mendez (consultant) in late 1992 and reflects the views and experience of the
Corporation's LAC Regional Department and the Foreign Investment Advisory Service.
William Mayville edited the report.
- vii -






Executive Summary and Reform Agenda
A. Introduction
Uruguay has reached a turning point in its economic development. It can either take steps
to raise productivity and growth by modernizing the economy through the adoption of a private
sector development strategy, or it can maintain the current low-productivity,
high-unemployment, and slow-growth economy dominated and constrained by government
regulations. Unfortunately, the country has not felt compelled to move in the direction of a
broad-based, clear-cut reform agenda because of its relatively high income level and significant
benefits derived from a veritable welfare state. Complacency still remains a serious threat to
prospects for the country's future development. On the horizon are opportunities for Uruguay
to become a dynamic economy. Indeed, Uruguay is well positioned to become a successful open
economy. It still has a comparatively well-educated population (despite the need for educational
reforms) and a long tradition of democratic government with mature political institutions and is
well located to reach important markets and trade opportunities.
The Lacalle Administration, which came into power in 1989, has undertaken a number
of reform measures and a new policy agenda. As a consequence, the macroeconomic climate
has improved. Moreover, a Brady plan workout has reduced the debt-service burden--although
Uruguay has always remained current in its debt service, and the trade liberalization agenda has
been carried out on schedule notably, the agreed tariff cuts and the reduction of the exemption
list under the MERCOSUR agreement. Financial reforms are now underway with support from
the Inter-American Development Bank and the World Bank. Since the mid-1980s, Uruguay has
maintained an open capital account, a free exchange rate, and market-determined interest rates,
and currently there are no price controls of any kind. All this augurs well for the development
of a clearly articulated private sector development strategy. However, based on the findings of
this report, Uruguay must address five fundamental issues to enable it to follow a private sector
development strategy. The country also will need to consider a reform agenda along the lines
of the one delineated in Section C below.
B. Issues
A social consensus needs to be achieved to enable the government to pursue a wide
and sustainable private sector development strategy. In Uruguay, the pervasive labor-
management conflict largely centers on distributive questions. The consensus, therefore, must
be based on the premise that distributive goals can best be reached in a growing economy
characterized by increases in productivity and efficiency. Failure to reach such a consensus
leads to stop-and-go reforms, with episodes of macroeconomic instability interrupting and usually
unraveling reforms. The defeat in Congress of the earlier attempt to reform the social security
system in 1989 and the recent defeat of the law to privatize the national telephone monopoly
- ix -



x 
(ANTEL) indicate the lack of a social consensus about the means to raise productivity and
efficiency. The reform of the social security system lies at the heart of establishing the
credibility of macroeconomic policies; and privatization will be an important vehicle to achieve
increased efficiency and to modernize the economy.
Private sector perceptions need to be changed about the govermnent's commitment
to give the private secltor a fair share in the economy by creating a proper business climate
based on improved incentives. These perceptions were revealed in a survey of the private
sector sponsored by the World Bank. Most enterprises found the high level of taxation and
policy uncertainty the inain obstacles standing in the way of expanding production at existing
capacity and increasing investment in the economy. Moreover, many believed that public
officials and the court system consistently side with labor in the settlement of disputes. Other
more tangible concerns were unreliable power supply, poor port services prior to the recent
privatization reforms, and lack of access to, and high cost of, peso credit for small
entrepreneurs.
The size of the public sector needs to be reduced. This is necessary to relieve the
heavy tax burden and to lend credibility to fiscal policy and macroeconomic stability. Since
under the current slow-growth scenario there can be no large expenditures related to salaries or
other emoluments for public sector employees, this will necessitate levying higher taxes.
Reducing the size of the public sector will also help resolve the time inconsistency arising from
yearly budgetary financing of long-term public entitlements.
Product markets need to be made more competitive and the factor movements more
flexible across sectors. Previous inward-looking strategies created oligopolistic firms while
labor policies, social security laws, and the presence of large public employment (nearly 25%
of the labor force) have made the labor market rigid. Incentive reforms to increase competition
and make the factor markets more flexible would also make macroeconomic policy more
effective and allow the economy to withstand potential macroeconomic shocks from Argentina
and Brazil.
There is a need to establish strong property rights by continuing the reform of the
legal framework. Legal reforms will help reduce transaction costs, permit the execution of
more efficient contracts, and improve enforcement. Property rights interact with incentives to
determine cost and the competitiveness of the economy. In addition, a clear definition of
property rights will help to raise savings and the supply of credit, and to attract foreign
investment.
C. A Reform Agenda
Based on the above fundamental set of issues, Uruguay needs to pursue a specific reform
agenda to allow the private sector a greater role in the economy. The reform agenda can be
divided into eight broad categories, namely, those relating to issues of macroeconomic policy,



- xi -
the trade regime, regulatory environment, labor market and social security system, taxation,
financial system, the legal framework, and infrastructure. Each of these reform areas constrains
the competitiveness of the economy. The complementary nature of macroeconomic policy
reforms linked to incentive reforms should be stressed along with the interdependence of
incentive reforms similarly linked to legal reforms and improvements in infrastructure to produce
a strong supply response.  These reforms should help to raise productivity and reduce
unemployment. The specific agenda identified in this summary has a three- to five-year horizon.
Chapter 11 delineates a private sector development strategy including long-term elements.
Macroeconomic Policy Reform
Fiscal reforms lie at the heart of the macroeconomic policy reform. Fiscal reform should
center on the reduction of expenditures rather than raising taxes, which are already high and
which have been the main source of the recent fiscal improvement. In Uruguay, the social
security system is a prime candidate for reform, since it maintains a permanent deficit and has
raised the cost of production due to high taxes on labor. Three types of reforms could be
undertaken in the short to medium term:
(a)   Cut the permanent social security deficit by progressively reducing expenditures
related to social security, as currently programmed, by extending the age of retirement
to 65 as well as increasing the timeframe for averaging wages to estimate benefits and
making benefits more equitable.
(b)   Carry out the current plan to reduce the size of public employment, which will
help contain future salary and social security-related benefits.
(c)   Lower tax rates, make tax liabilities predictable, and avoid the use of temporary
taxes in the future.
Foreign Trade Reform
The pace and extent of trade reforms increased under the Lacalle Administration. Unlike
previous episodes, trade liberalization has been maintained without reversal. The improving
macroeconomic climate and commitments made under the MERCOSUR agreement are the
building blocks that undergird the continuance of trade reforms. Although the trade regime has
now become less complex, there are other measures to be taken to make the foreign trade regime
more competitive and to further open the economy. Three measures should receive attention
now.
(a)   Replace the remaining reference price categories with tariffs and continue tariff
reforms to reduce the dispersion in tariff rates and permit exporters to operate close to
international prices. The tariff reforms geared to the MERCOSUR arrangement have
continued on schedule.  Even lower rates are needed for transactions outside



- xii -
MERCOSUR. Given the discussions to adopt a common external tariff of 20% by 1994,
this becomes a priority.
(b)   Continue, under PLADES, rationalizing the administrative processes and
deregulating the trade in services. Also, rationalize the role of BROU in import activities
and the trade facilitation at customs offices and ports.
(c)   Progressively revamp infrastructure to reduce transaction costs in trading
activities. This means improving transport access from inland areas and increasing the
efficiency and availability of trade-related services, including telecommunications,
freight, insurance, and access to raw materials, spare parts, and technical services.
Financial Sector Reforms
Uruguay has pursued the goal of becoming a regional banling center with some success,
But the financial system has been less successful in meeting domestic demands. The financial
market is dominated by public sector banks. This has reduced competition in the financial
system. Uruguay paradoxically has among the highest ratios of financial assets to GDP in Latin
America but only a limited number of financial instruments, especially for the long-term needs
of the market. The access to finance is limited by the overhang of the forced loan writeoffs that
occurred in the 1980s.  This overhang also contributes to macroeconomic uncertainty.
Uruguay's existing equi.ty market is among the smallest for a country with its level of per capita
income.
A reform program--supported by the Inter-American Development Bank and the World
Bank--is being implemented to improve regulation and supervision, restructure public banks, and
create conditions for the development of a securities market. The remaining agenda for the
sector should include thre following:
(a)   Clean up the balance sheets of firms that have received forced refinancing as well
as the corresponding poor asset portfolios of commercial banks, and make a clear
declaration that forced refinancing will be not resorted to again.
(b)   Consider partitioning and eventual privatization of BROU, in the interest of
fostering competition at this stage in the domestic financial market, and rationalizing the
operation of BIHLJ.
(c)   Permit private pension funds to invest in the private security market and offshore.
Regulatory Environment Reforms
The regulatory environment in Uruguay determines the commercial orientation and the
cost structure of private sector production. The pervasiveness of the regulatory system provides



- xiii -
the government with a dominant role in the economy that determines private sector participation,
efficiency, and growth. Reform of the regulatory environment constitutes the starting point for
modemizing the economy. In Uruguay, it is manifest through three major channels: (a)
influence on the labor market; (b) rules governing entry and exit; and (c) the operation of firms,
including fostering an anti-competitive environment under existing regulations. Moreover, the
interaction of the regulatory environment with the trade regime and the tax system creates a
substantial synergy that effectively obstructs private sector development by freezing the structure
of production. Formidable regulations condition private sector behavior in several ways: labor
market regulations impose a high social security tax burden; tax avoidance behavior leads to
non-optimal size and organization of firms; and government influence on wage contracts appears
biased toward labor. The cost of wage arbitration arises not only from indexation but also from
the influence that public sector wage increases have on private sector wage demands by labor,
which is linked to the absence of well-defined norms in the settlement of labor disputes. The
agenda for reform should include the following measures.
(a)   There should be a reevaluation of the regulatory framework specifically to
eliminate all unnecessary regulations. This means the extension of the work of
PRONADE as well as the adoption of a zero-based approach to regulations, such as the
numerous licensing procedures.
(b)   The government needs to persist in addressing the privatization issue, despite the
defeat in the plebiscite of the privatization of ANTEL. Its resolve to go ahead with the
privatization of the airline (PLUNA) represents an important signal to the private sector.
Tax Reforms
The PSAS found the level of taxes and the uncertainty of tax liabilities a major problem
for private enterprises. In addition to the reduction of the level of taxes and the abandonment
of the practice of imposing temporary taxes, the government should undertake measures to
obtain neutrality in the tax system, reduce discretionality, and improve tax administration. The
following measures can be undertaken.
(a)   Adopt a single tax rate that does not discriminate by activity, size of firm, or type
of ownership. For example, large firms pay higher taxes on IVA, IRIC, and ICASA
compared to small firms. Similarly, tax exoneration under the industrial promotion law
should be discontinued.
(b)   Taxes that discriminate against financial transactions, such as the IMABA, should
be discontinued, while the tax treatment of different liabilities could be equalized by
removing the deduction of tax liability on the basis of commercial debt but not on
debentures issued by a firm.



- xiv -
(c)   Tax administration improvements being carried out with advice from the IMF
should be accelerated. The government should penalize evaders, raise the remuneration
of tax inspectors, and disseminate tax information on a broader and more routine basis.
Legal Framework Reforms
Because of its impressive political history and institutional stability, Uruguay has a highly
developed legal framework. This is true for all major civil codes, laws, and regulations
governing public order, At the same time there are deficiencies in the legal system that lead to
a poor definition of property rights, a judicial system that should be modernized, and an
anachronistic foreign investment law that places strictures on foreign investment, when in
practice there are no restrictions on foreign investment. For the private sector to play an
enlarged role in the economy, a number of legal reforms will have to be instituted.
A new commercial code is being adopted that improves on the earlier code. In addition,
Uruguay has been implementing a comprehensive judicial reform program that has introduced
modern practices such as the use of oral hearings, created 100 new judgeships, and established
a school for judges. There are a few other areas where reforms can proceed now.
(a)   Speed the legal process by introducing new technology in areas such as
recordkeeping and registries, and facilitate new means of dispute settlement, such as
arbitration, mediation, and conciliation.
(b)   Decentralize the administration of the judicial system to permit the recruitment
of judges directly to new positions in the commercial courts.
(c)   Reform the foreign investment law to give it parity with domestic law, and make
the law consistent with that of other MERCOSUR partners to the extent possible.
Infrastructure Reforms
One-third of the firms surveyed indicated that infrastructure problems impeded filling
orders on time. Enterpiises outside major cities gave greater weight to infrastructure problems
than to urban ones. In urban areas, where most manufacturing is located, the infrastructure
problems commonly cited are unreliability of power supply and inadequate port services. Most
infrastructure problems arise from the mode of operation rather than large deficiencies in the
system. Most of the critical infrastructure is owned and operated by state enterprises.
Port services now have been privatized, with dramatic gains in productivity and a port
waiting time that has been cut in half. The remaining agenda is to provide norms for port
services, use of infrastructure, and expansion and investment by private sector operators who
now run these activities. Other port services that can also be given out as concessions include
towing, repairing, and dredging. The port authority (ANP) could also confine its role to that
of a regulator and relinquish its role as port service provider.



- xv -
In the short term, highway maintenance standards should be raised. The current
expenditures for this purpose seem inadequate, given the age of the road system and the likely
increase in use upon expansion of trade after full implementation of the MERCOSUR agreement.
The system could also adopt better pricing policies to increase the efficiency of road
infrastructure use and to generate revenues for system expansion by inviting the private sector
to participate by offering attractive toll road concessions.
The power sector entity, UTE, has unrelated responsibilities, such as the operation of a
cement factory. The main issues are to increase the reliability of power supply, adopt pricing
policies that lead to better allocation of power use, and encourage private operators interested
in creating additional generation capacity to use the national grid.
The telecommunications system is operated by ANTEL. The recent defeat of the
privatization of telecommunications services casts a shadow over the prospects for the sector.
A main issue is to increase service reliability, even though Uruguay has the highest telephone
density in Latin America. The short-run agenda should be to cater to peripheral markets (such
as faxes and cellular services) and to reform the price structure, which now cross-subsidizes
domestic services at the expense of international ones.






Chapter 1. Endowments and Markets
A. Overview
1.1   This report examines private sector participation in the Uruguayan economy. The
objective is to assist the Govemment in the development of a strategy to modernize Uruguay's
economy, which has remained essentially dormant over the last four decades. With the current
opening of the trade regime, and the drive to realize the potential regional trading gains under
MERCOSUR, firms would feel more compelled to replace capital stock and to refurbish
industrial facilities, as evidenced in recent increases in private investment. The perceptions of
the private sector about impediments to their full participation in the economy are described in
Chapter 2. Specific areas of concern relate to macroeconomic developments (Chapter 3), the
trade regime (Chapter 4), the financial system (Chapter 5), the regulatory environment (Chapter
6), the labor market (Chapter 7), the tax system (Chapter 8), legal issues (Chapter 9), and
infrastructure (Chapter 10). Major themes include the lack of mobility of factors of production,
poor labor relations, and high production costs. In addition, the traditional Uruguayan
preoccupation with income distribution or social welfare has prompted numerous state
interventions that have stymied the economy and ultimately increased costs and posed risks to
business activities. Internal and external uncertainty is also a recurrent theme. Domestically,
the plebiscite on privatization and lack of clarity about policy direction has generated confusion,
given initially strong but now mixed signals about government privatization initiatives.
Regionally, the success of MERCOSUR hinges on macroeconomic factors in Argentina and
Brazil, as well as agreement within the consortium over the next 12 months about which
industries to drop from the MERCOSUR exemption list. Finally, global trade policies of the
major importers as well as emerging trading blocks represent another source of concern.
1.2   Opportunities for exploiting the growth potential of the economy are increasing with the
MERCOSUR agreement and its implications for other trading relationships worldwide. Sound
policies supported by appropriate institutional changes and the infrastructure provision of public
goods will be needed to increase the confidence and the ability of the private sector to play a
more dynamic role in the economy. Correcting existing inefficiencies or distortions can be done
quickly at very low cost--although with political fallout, since many measures of such a strategy
have short-term redistributive effects. The policy environment, institutional ethos (particularly
the legal framework), and infrastructure represent key elements in persuading the private sector
to expand its production activities, save more, and invest in areas most beneficial to national
development. The private sector's ability to meet these challenges comprises the thrust of this
analysis and will require a private sector development strategy for the short, medium and long
term (Chapter 11). The remainder of Chapter 1 reviews Uruguay's considerable resource
endowments and the current status of its output and input markets.
B. Endowments
1.3   Uruguay is a small country of less than 3.5 million people and an economy of only $9.5
billion in output; however, its per capita income of $2,840 places it among the upper-middle-



- 2 -
income group of the World Bank classification table (Table 1.1). Uruguay's past economic
performance contrasts sharply with other small but outward oriented economies such as Hong
Kong, Korea, Taiwan, and Singapore. In 1962, Uruguay's per capita income was 15 % and 22%
higher than that of Singapore and Hong Kong, respectively, and three times higher than that of
Taiwan.
Table 1.1: Basic Indicators
Population Area           GNP per capita     |    Inflation
(mil)     (000 km')          (*)         Growth   Growth Rate (%)
Rate
1962    1991    1965-    1965-    1980-
91       so       91
Upper-middle-income I/          458        18,706 t          2,640w      5 w     19 w    102 w
Paraguay                          4          407       180   1,210        3        9       25
Costa Rica                        3           51       380   2,160        1       11       23
Chile                            13          757       570   2,170        0      130       21
Argentina                        32         2,767      640   2,790       (0)      79      416
URUGUAY                           3          177       550   2,840        1       59       65
Brazil                          150         8,512      240   2,900        3       31      328
Korea, Rep.                      43           99       110   6,350        7       18        6
Singapore                         3             1      480   12,890       6        5        2
Hong Kong                         6             1     450   13,200        6        8        7
Taiwan, China                    20           36      170    8800 2/      7        8        2
Sources:  WDI-STARS, 1992; ANDREX, January 1993.
1/     Economic group defined by the World Bank as including countries with a GNP per capita from $2,556 to
$7,909. A 't' indicates group totals and 'w" weighted averages.
2/     GDP per capita; Country Report, 1/1993, Economist Intelligence Unit, London.
Conditions in the early sixties suggested that Uruguay had better prospects for achieving the
levels of income reached by the small Asian economies. By 1991, per capita incomes of these
Asian economies were lhree and five times higher, respectively, han Uruguay.



- 3 -
1.4   Uruguay's resource endowment potential, labor force quality, and market access
opportunities rival that of Singapore, Hong Kong, and Taiwan. It has had for decades a high
literacy level; a stable govemance structure (with one recent exceptional peziod); democrafically
elected governments responsive to electoral demands; and income distribution better than most
countries in Latin America. Moreover, it benefits from essentially level terrain, temperate
climate, and abundant rainfall ideally suited for livestock farming, a location that commands
access to its large neighboring markets across the Rio de la Plata (navigable by ocean vessels),
and a port that serves as gateway to the markets of Europe and North America. So, what
restrained Uruguayan economic development?
1.5   Before the Great Depression, Uruguay played an important part in the commercial
activity in the region. Capitalizing on its comparative advantage, Uruguay was able to reach
levels of income among the highest in Latin America. However, as in many Latin American
countries, the economy turned inward following the Great Depression. This approach, continued
through the mid-1920s with disastrous results, low export growth, and high and volatile levels
of inflation, which severely reduced the growth of capital stock and total factor productivity and
ultimately GDP growth' (Box 1.1, following page). A long period of stagnation (1955-74) saw
real output increase by only 1.9% per annum, capital stock by 1.4%, and total factor
productivity by 1 %.2
1.6   The country began a path of economic reform in the mid-1970s and has continued on that
path--with the exception of an interruption caused by widespread macroeconomic crises
worldwide that arose in the early eighties. In contrast, in the 1975-81 period, rapid growth
occurred based on a series of reforms, with output growing by 4.9 %, capital by 4.5%, and total
factor productivity by 2.4%. In the most recent episode of stagnation, between 1982 and 1988,
real output growth became zero with capital growing by 0.3% and total factor productivity
declining by 0.3%. The current environment is less restrictionist than in the 1970s, although
many other countries on the continent have surpassed the reforms that Uruguay initiated in the
last two years, leaving the country with a large unfinished agenda. The operation of the output,
labor, and financial markets provide a framework for analyzing Uruguay's private sector
development issues relative to the economy. This should facilitate identification of key issues
to provide a basis for formulating a policy, institutional, and infrastructure agenda that
incorporates the aims and perceptions of the private sector itself.
1 Roldos, Jorge. E. 'Trade Policies, lIstability and Grcwth: A Long-Run Perspective" in Connolly and de
Melo eds. ...," forthcoming; and Jos6 de Gregorio (1992), "Economic Growth in Latin America," Jouanl of
Development Economics, 39, 59-84.
2 Numbers derived from Roldos' work. His framework is set up in per capita terms. The figures for the
share of capital are derived by assuming a population growth rate of 0.5 %.



-4 -
Box 1.1
GROWTH AND PRODUCTIVITY IN URUGUAY
Results fiom two recent studies on Uruguay are presented in the table below.
De Gregorio's study covering 1950-85 attributes half of Uruguay's growth of real GDP
to capital, over a quarter to labor, and a fifth to total factor productivity. Roldos'
estimates for 1955-88 attribute much smaller shares to capital and labor, and a much
larger share to total factor productivity. For the entire period, total factor productivity
increased at an annual rate of only 1.0 percent.
Annual Growth Rates                Growth Decompositios '
Real                                    Shareof              | Sh areof
GDPR      Labor2   I Capital    TFP 3   Labor       Capital  I TFP
I. De Gregorio
1950-85         1.5%       -          -           -      27%         50%        20%
II. Roldos 2
1955-74         1.8%     (0.5%)      1.4%       1.0%     12%         33%        56%
1975-81         4.9%     (0.5%)      4.5%       2.4%     5%          46%        49%
195548          2.2%     (0.5%)      1.8%       1.0%     13%         38%        46%
1/      Figures may not add to 100% because of rounding.
2/      Roldos' estinates are in per capita terms. The aggregate estimates are made by assuming a
population growth rate of 0.5% per annum for 1955-88 (extrapolated from the World Development
Report 1992, which gives a population growth rate of 0.5% for the period, 1965-90).
3/      Total Factor Productivity.
Sources: De GregoriD, Jose (1992), 'Economic Growth in Latin America," Journal of Development
Economics, :39, 59-84.
Roldos, Jorge. E. (1993) "Trade Policies, Instability and Growth: A Long-Run Perspective" in
'Essays on the Effects of Protectionism in a Small Country," ed. by Michael Connolly and Jaime
de Melo (forthcoming).



-5-
C. Markets
Output Market
1.7   The main activities of the output market are concentrated in services and agriculture,
particularly livestock farming and crops, such as barley and wheat. In analytical terms, Uruguay
can be classified as a small open economy. Its smallness is defined by its inability to change
its terms of trade and its trade-to-GDP ratio of around 40% (Table 1.2). These two features of
the economy imply that the country is prone to rather sizable external shocks. In fact, the two
largest economies in the region, Argentina and Brazil, historically have had a profound influence
on the Uruguayan economy. For the government, this adds an important dimension to economic
policy-making. It also requires the private sector to adjust to potentially sizable economic
shocks originating from neighboring countries.
Table 1.2: Trade-to-Output Ratios"' (percentages)
i    _________ I 1980  1981  1982  1983   1984  1985  1986  1987   1988  1989  1990  1991
Paraguay    44    35    32    25        38    48    53    54    63    71         76    61
Costa Rica    63    91    87    73      68    63    62    68    70    74    76          79
Chile       50    43    41    45        50    55    57    63    68    72    70          67
Argentina   16    19    24    24        21    25    20    21    22    29    21    21
URUGUAY    37    34    32    49         48    48    46    41    43    45    46          43
Brazil      20    19    16    20        21     19    15    16    17    13    13
Korea,      75    78    72    72        72    68    71    75    72    65    62    61
Rep.
Singapore   423   413   386   344    325    318   310   343   379   368   372    360
Hong Kong   181   187   174   194   210    210   217   238   262   260   264    278
Taiwan      106   102    95    97    101    95    96    98    98    93    90    911
Source:   ANDREX January 1992, World Bank
1/  Trade to output ratio is defined as exports plus imports as a percentage of GDP.
1.8      Clearly the economy would have been more open had it not followed inward-oriented
policies up to the 1970s, and had not reduced its openness in the wake of macroeconomic
problems of the early 1980s. During the 1950s and 1960s, a complex trade regime evolved that
combined with domestic regulations to reduce both external and domestic competition. These
attempts to isolate itself from external shocks resulted in inefficiencies and reduced growth.



- 6 -
Some observers have noted that when the rest of the world experienced strong growth Uruguay
did not share in it; however, when the rest of the world faced economic doldrums Uruguay
continued to grow.3 The price of isolation was high in terms of growth and access to new
technology and management know-how, as reflected in the contrast between Uruguay and the
Asian open economies. For these reasons, beginning in the 1970's, policy-makers tried to open
the economy.
1.9     The other impact of earlier protectionist policies and attempts to reduce openness was
the progressively conservative and oligopolistic nature of the private sector (see Chapter 5).
Devoid of external competition, a sine qua non for a small economy, this result was inevitable.
Consequently, cost structures rose and the business community became much less prone to
advocate economic liberalization. Organized labor acquiesced to protectionist policies, even
though it had to pay higher prices for wage goods, because it temporarily received higher wages.
One legacy of the reforms of the 1970s that helped the economy to adjust to external shocks,
despite the oligopolistic structure of industry, was the absence of price, exchange, and interest
rate controls. In particular, abandoning the exchange rate as a nominally fixed price after the
macroeconomic failure of the early 1980s was beneficial, in that it allowed Uruguay to pursue
a policy of trade liberalization in the latter part of the decade.
1.10    The other feature of the economy that bears on macroeconomic adjustment is that
since the mid-1980s t]here has been consistent liberalization of the trade regime. Thus, the
external sector could act as a safety valve, even though the same sector transmitted shocks into
the economy. Increases in aggregate demand could spill over into imports and relieve pressure
on domestic prices. At the same time, increasing openness in product markets would make
policy-makers more sensitive to the need for maintaining greater economic equilibrium than in
the past. While tariff rates have been reduced progressively, adhering to the schedule of the
MERCOSUR agreement, a few quantitative restrictions (QRs) remain, such as reference prices
and minimum import prices (see Chapter 4). The planned elimination of these mechanisms will
make the private sector, and consequently the economy, more competitive.
1.11    Finally, a conspicuous feature of the output market in Uruguay is the pervasive
character of govemment regulations that seems to overcompensate for its relatively small share
of ownership. Govermnent regulations affect entry and exit of firms, require licenses to remain
in operation, provide public ownership and price determination of crucial inputs such as
petroleum products, power, and telecommunications--all of which are state-owned monopolies,
and foster high taxation (particularly social security and VAT).
Labor Market
1.12    The labor force in Uruguay consists of 1.2 millon people or about 40% of the
population. The labor market is complex, highly unionized, and has a fundamental impact on
3     Angus Maddison, Two Crises: Latin America and Asia. 1929-38 and 1973-83. Organization for
Economic Cooperation and Development, Development Center, Paris 1985.



-7 -
the determination of production costs in the economy. The high cost of labor arises from steep
social security taxes, high insurance premiums, a combative labor and management environment,
and the absence of agreed norms to settle industrial disputes. Several characteristics of the labor
market have strong implications for private sector development. First, the country has a literate
labor force than can be trained to handle advanced production techniques when the pattern of
production shifts with the further opening of the economy. Second, because of the socially
advanced features of Uruguayan society, as well as the presence of strong trade unions, the labor
force enjoys substantial job security and social security benefits, which have recently been
safeguarded against dilution from price increases by legislative action and a 1989 referendum.
In this sense, a part of the real benefits from employment is guaranteed. Third, there is
significant emigration, particularly of the young and the better trained. This leaves a gap
between labor demand and supply in the more technology-based sectors of the economy.
Fourth, real wages have risen compared to the mid-1980s and appear to be high by regional
levels--in fact, public sector wages have fallen while those of the private sector have risen,
causing an overall increase in real wages. The presence of oligopolistic structures in the product
markets and demands by the labor unions to share rents make entrepreneurs more willing to
grant higher wages, since marginal product values are higher under oligopoly than competition.
Moreover, research on income distribution in Uruguay confirms a pattem of high real wages due
to the resource-based nature of the path of development in Uruguay.4  increasing
competitiveness will necessitate an increase in labor productivity in direct proportion to
economic opening through greater trade liberalization.
1.13    Finally, and most importantly, there is evidence of real wage rigidity in the economy
that makes the adjustment to macroeconomic shocks more difficult and costly in terms of
foregone output. For example, labor demand recovered following the recession of the early
1980s but the unemployment rate stands at 8.5 %. At least a part of the real wage rigidity has
to be ascribed to the large public sector participation in the labor force (some 27%), in addition
to government intervention in wage settlements.  Many entrepreneurs believe that the
government is biased towards labor in wage settlements as well as in the adjudication of labor
and management disputes.
Financial Market
1.14     Uruguay's financial market has a number of features that impinge on private sector
development. First, the economy is essentially dollarized, with some 70% of financial assets
held in dollars. Second, of these dollar holdings, nearly half are thought to be foreign-owned.
Consequently, the economy is highly sensitive to changes in exchange rate expectations in
Uruguay as well as in Argentina and Brazil. Third, dollar interest rates in the financial markets
reflect international levels. This is the corollary of the open capital account. Fourth, although
the capital account is open, there has been little direct foreign investment. This is probably due
to the narrowness of the product market under the earlier inward-oriented trade regime, the
4     Povertv. Eguity and Growth: Costa Rica and Uruguay. Claudio Gonzales-Vega and Edgardo Favaro
(forthcoming). Oxford University Press, 1993.



- 8 -
relatively high costs of the economy including transport costs, and the lack of mineral resources.
Foreign asset holdings in Uruguay are short term and confined to deposits, despite the
reasonable national treatment accorded to private foreign investment. Recently, Uruguay joined
MIGA, which offers insurance against political risks to ameliorate this situation. Fifth, the
domestic capital market is quite small and remains underdeveloped. Sixth, there is a large
proportion of self-financing given the problem of adequately defining collateral. Finally, the
country's financial market is dominated by state-owned entities with mostly peso assets, such as
Banco Oriental de Uruguay (BROU).



Chapter 2. Private Sector - Profile and Perceptions
2.1      This chapter profiles the current role of the private sector in the economy, including
results of a Private Sector Assessment Survey (PSAS) of 147 private enterprises, conducted for
the World Bank by the Centro de Estudios de la Realidad Economia Social (CERES) in
September 1992. It also reflects extensive follow-up interviews with private sector personnel
by a Bank mission that visited Uruguay in December 1992 (see Annex 1 for a summary of
survey results and a description of the methodology;5 see also Gustavo Michelin and Luis
Viana.6)
2.2      The private sector plays an important role in the economy in terms of ownership and
its share in the generation of income (Table 2.1). However, its behavior-crucial decisions
regarding the level and composition of output and inputs, investment, savings, and sales and
purchases in the domestic versus foreign markets are highly conditioned by the role of the
govemment. The pervasive role of the government belies its size in the economy. Thus, the
private sector is circumscribed by the power wielded by the public sector
Private Sector Size and the Role
2.3      The private sector produces some 72%  of GDP, and dominates ownership and
production in many sectors--including agriculture, manufacturing and services. Uruguay's
government is not heavily involved in manufacturing or mining which in any case is small. On
the other hand, the public sector owns and controls vital sectors such as electricity, gas, cement,
alcohol, water, petroleum refining, air transport, railroads, roads, ports, telecommunications and
a large part of the financial services--which are needed by nearly all sectors. The private sector
share in the total investment in the economy is about 63 %, most of which is in the productive
sectors, especially agriculture and manufacturing, mirroring its share in total output. The sector
finances most of this investment through retained earnings. The PSAS revealed that some 70%
of investment was self-financed in the areas of manufacturing, transport, storage, and tourism.
Total private savings exceeds investment.
2.4      The private sector accounts for 73%  of total employment, the remaining 27%
(270,000 employees) working in the public sector. In addition to wages and salaries, the private
sector must pay substantial social security taxes for its employees; moreover, the ability to hire,
fire and pay its employees is regulated by national labor laws. Moreover, until recently, there
was direct public sector participation in wage-setting. Public sector wage settlements remain an
advance indicator or a reservation price that the private sector invariably follows.
5     IThe PSAS was designed with the assistance of Andrew Stone who helped CERES conduct the
survey and prepared Annex 1 of this report.
6     Gustavo Michelin Salomon and Luis Viana Martorell, "Which Factors Restrain the Growth of the
Private Sector?' Results of a survey carried out by CERES, November 1992.



- 10-
Table 2.1
SECTORAL GROSS NATIONAL PRODUCT AT PRODUCER PRICES*
Sectoral Structure (%)               % GDP
Activity                             I
Public         Private           Public            Private
Farming                                    0.3              99.7                0.0             12.8
Fishing                                    0.0             100.0                0.0              0.2
Pits and Mines                             0.0              100.0               0.0              0.2
Manufacturing Industries                  10.5              89.5                2.9             24.3
Electricity, Gas and Water               100.0                0.0               2.7              0.0
Building                                   0.0              100.0               0.0              3.3
Commerce, Restaurants and Hotels           0.0              100.0               0.0             11.4
Transport, Storage                        33.1               66.9                1.9             3.8
Financial Inst. & Securities              70.9               29.1               7.0              2.9
Real Estate and Services                   0.0              100.0               0.0              9.9
General Gov. Services                    100.0                0.0               9.3              0.0
Other Community Services                  59.2               40.8               4.5              3.1
TOTAL                                     28.4               71.6              28.4             71.6
Source: The Central Bank of Uruguay
Note:  Corresponds to the sum of the sector's gross value-added import rights and financial institution's imputed remuneration.
*      Using the 1988 averaige exchange rate.
2.5        The public <sector is no less dominant in determining financial market conditions on
which the private sector depends for its working and investment capital. Thus, while the private
sector (foreign banks klcated in Uruguay) owns nearly 50% of total financial intermediation, the
public sector owns not only the other 50%, but has the leverage to set the terms and conditions
of peso operations. The largest financial intermediary, BROU, acts as a price leader in setting
peso deposit and lending rates. At the same time, the government also retains the right to
enforce its own conditiDns on existing private contracts, which detracts from the property rights
of private sector lendeirs (see Chapter 5).
2.6        The public sector, in addition to commanding fiscal revenues, has a large presence
in the financial market. It preempts some 33 % of the domestic credit. In fact, the recent trend
is for this share to increase, implying a relative decline in the share of real credit available to
the private sector (see Graph 2.1).



- 11 -
Go& 2.1:Cme& to the Pdvatc aat(MiIiom Of POat 1985 i 'm)
3500D00
450000
200000
150000
100000
50000
1980  1981  1982  1983  1984  1985  1986  1987  1988  1989  1990  1991  199Q
l_ DaD idc cred    Pd vat sret cld
Source:    Central Bank of Uruguay
Principal Characteristics of the Private Sector
2.7       The private sector in Uruguay is oriented towards services which have a 55% share
in the economy. This is inevitable given the country's high per capita GDP. The share of
services also reflects Uruguay's proximity to Argentina and Brazil, whose citizens enjoy
Uruguay's tourism, financial, and residential services. Another reason for the large service
sector may be that in the past there were fewer constraints on its expansion compared to the
goods-producing sectors, especially industry, given the protectionist environment and the small
size of the domestic market.
2.8       If microenterprises are included, the modal size of firms is 10-15 employees. This
small size results from the protectionist regime that encouraged production for the small
domestic market as well as firms' conscious efforts to avoid the burden of the regulatory
environment. A few large firms dominate many activities because of barriers to entry.
2.9       The other significant characteristic of the private sector is its considerable age. Forty
years of protectionism have conditioned most Uruguayan firms to a non-competitive climate.
Producers customarily not only expect but actively seek government intervention on their behalf
to preserve rents. Given a lack of professional managerial culture as well as an inherent anti-
entrepreneurial bias, firms and entrepreneurs in Uruguay typically are described as conservative,
risk averse., and non-innovative. As a corollary, firms in Uruguay use outmoded technology,
remain conservative in responding to reforms and new incentives, and require a more than usual
convincing that any reforms will be long-lasting. In addition, most subsectors conform to a tight



- 12 -
oligopolistic structure of traditional firms. The result is a deteriorated capital stock and
antiquated structure of the industrial and manufacturing sector, with several industries having
bleak prospects for survival in an open trade environment. Private investment has fallen since
the early 1980s (Graph 2.2). This fall reflects the drop in external funds, crowding-out by the
public sector, and the inadequate credit situation (Chapter 5). There was a recovery in private
investment in 1992. But there is no evidence of a permanent recovery in investment. In
essence, the prospects for growth in manufacturing are not strong.
0mph 2.2JPva Savinp mid Ivesamm in Uragay(s  of GiDP)
25
20
10
5
1981   1982   1913   1984   1985   1986   1967   1988   1989   1990   1991   1992
_I_    PilPvato iat        Pdvao avhaw
Source:    Central B,k of Uruguay
2.10      Public-Private Sector Interface. The private sector, as noted, heavily relies on inputs
from the public sector: electricity, fuel, gas, water, sanitation, segments of the transport sector,
and telecommunications are partially owned and operated by the public sector. In addition,
public enterprises must buy vital inputs from the public sector. For example, public enterprises
have to buy their cement from ANCAP, the state petroleum refining enterprise, which also
operates this cement plant.
2.11      Almost all the infrastructure in Uruguay is publicly owned. Consequently, all private
enterprises use public facilities of some type, even if an enterprise does not buy any direct inputs
from the public sector; thus, public sector pricing policies have a strong impact on the private
sector cost structure giLven a lack of alternatives. The input-output table for Uruguay (1983
factor prices) shows that all private sector activities use public sector inputs directly as well as



- 13 -
indirectly. The input-output coefficients of the private sector are skewed towards the public
sector on the input side.7
2.12     The Government not only has a strong effect on private sector prices through service
provision but also, as noted, influences wages by national wage policies and by participating in
wage arbitration. Similarly, regulations, taxes, and tariffs impinge on private sector costs and
profits. Tax policies are also biased by activity. In fact, activities owned and operated by the
private sector pay a disproportionate share of government costs.
2.13     Uruguay's tax revenue to GDP (these figures refer to GDP at factor prices--most
figures refer to GDP at market prices, which understates the tax burden) ratio is above 30%,
of which the private sector contributes over 96%. The surplus from state enterprises is less than
3% of public revenue, even though the public sector share of GDP is nearly 28%. The largest
part of tax revenue, about 30%, comes from wage taxes (social security), which fall squarely
on the private sector. Social security payments for public officials are also raised through taxes
imposed on the private sector, since the public sector's contribution to total tax revenues is
marginal.
2.14     The government exerts great influence over private sector activities through its
regulatory power, which is pervasive in Uruguay. The regulations apply to licenses needed for
an enterprise to enter and operate an activity plus its access to product and factor inputs. The
PSAS revealed that a firm needs to obtain an inordinate number of licenses to operate. They
include licenses to invest, construct, and use public infrastructure, among others. More stiking
is the discretionary power given to public officials in granting these licenses as well as the
absence of clear-cut norms for issuing them. This tends to raise both the direct financial costs
and the transactions costs of the private sector enterprises. The former arises from the need to
pay licensing fees and the latter largely from the time managers spend trying to conform to the
various regulations.
Private Sector Perceptions
2.15     A survey of private enterprises (PSAS) was conducted in Uruguay during September
1992, followed by a Bank mission which conducted extensive follow-up interviews. Together
they provide private sector perceptions about the environment it faces and the important issues
that need to be addressed before it can play a larger and more dynamic role in the economy (see
Annex 1 for complete survey results).
2.16     The most prominent issues that the private sector sees as inhibiting it are related to
taxation and the uncertainty of the policy environment. The level of taxation is high in Uruguay,
amounting to some 30% of GDP. Moreover, considerable uncertainty exists about the tax
liability faced by a firm in a given year in the wake of temporary taxes that have been
7     Uruguay Input-Output Table: 1983.



- 14 -
introduced in recent years to finance social security payments. The other aspect is the
uncertainty regarding the government's ability to maintain fiscal discipline in the medium term
and the fear that another bout of inflation is in the offing. The private sector sees a policy
uncertainty that emanates from the use of temporary taxes to finance permanent expenditures on
wages and salaries and the social security system. Another area of policy uncertainty pertains
to the MERCOSUR agreement. Given the potential for macroeconomic volatlity from its
regional partners, especially Brazil, the private sector is reluctant to make the necss6ry
investments to fully realize the benefits possible under this agreement.
Graph 2.3: Uruguay: General Constraints to Private Sector Development
(all firms)
1                      2                       3
l*h level of W_e
Poicy InSW4lif
Proues&aiiq
pbmm                             -  
R _ 
.6ui +-             - -
ideholog t productkmn
Source:  Private Sector Assessment Survey, September 1992
2.17     The private sector also perceives the regulatory environment as a formidable constraint
in several specific areas (Graph 2.3). First, there is the tax regulation aspect, where it is
believed that tax norms are not well-defined. Second, there are labor regulations and implicit
labor taxes that are burdensome, particularly on large firms. Third, private firms have to obtain
many licenses to establish as well as to operate businesses. Finally, municipal regulations-e.g.,
waste disposal and access to raw material--are believed to inhibit private sector operations.



- 15 -
2.18     Small and medium size firms find interest rates in pesos high compared to dollar loans
from private commercial banks. Large firms do not find interest rates a problem as they borrow
in dollars; however, all firms find non-interest costs high due to the ineligibility of certain types
of collateral, especially movable property. The survey found that 70% of operations are
financed using own resources.
2.19     With respect to infrastructure, the private sector finds the reliability of power supply
and distribution a problem, although power generation appears adequate. Transport facilities
outside the main cities are not well maintained, causing additional costs to private enterprises.
Port facilities are also problematic as a constraint on the procurement and availability of raw
materials, particularly for exporters, although recent reforms have dramatically improved
services.
2.20     As regards the legal framework, the legal system also represents a constraint given
poorly defined property rights, in particular for owners of capital, and the arbitrary interpretation
of commercial codes. Commercial law creates problems for the incorporated public enterprises
("orden publicos") since it gives a minority of shareholders a disproportionate say in the daily
operations of firms and unnecessarily restricts their financial options.
2.21     These perceptions condition private sector behavior, even though some of the areas
identified as constraints are being improved-e.g., port services and legal administration. Hence,
a viable private sector development strategy will depend on concrete actions to address these
issues.






Chapter 3. Macroeconomic Policy issues
3.1     lMacroeconomic policies play a vital part in Uruguay's private sector development for
three main reasons. First, a stable macroeconomic environment would permit the government
to continue its reform agenda, without interruption, and facilitate the economic integration with
MERCOSUR and the rest of the world. Second, a sound macroeconomic policy environment
would allay the uncertainty of the policy environment experienced by the private sector in
Uruguay that was revealed in the PSAS. The reduction of this uncertainty is essential for an
enhanced role for the private sector given the adverse effects of uncertainty on business planning
and contracting, and in meeting costs and output goals. Third, the reduction of inflation from
the present high 59% would be needed to avoid relative price distortions, since inflation raises
prices nonuniformly. Attempts to guard against this distortion solely through indexation can be
of limited value only. The optimal policy in this regard is to take measures to avoid inflation
rather than attempt to live with it. In this Chapter, the World Bank's recent comprehensive
analysis of Uruguay's macroeconomy8 is updated, following which issues germane for private
sector development are identified.
Recent Developments
3.2      The main achievement of recent macroeconomic developments is the recovery of GDP
growth. Real GDP growth, which increased to 2.9% in 1991, grew by 7.4% in 1992--better
than in any year since 1987. There are two reasons for this: (a) increased demand for
Uruguayan goods and services, fueled by rapid income growth in Argentina, and the favorable
price shift towards Uruguayan goods and services linked to the appreciation of the Argentine
compared to the Uruguayan peso; and (b) a recovery in domestic investment.
3.3      The second important development was a steady decline in the inflation rate over the
last three years, even though the inflation rate for 1992 remained high at 59%. This high rate
was associated with the monetization of foreign assets rather than with a fiscal deficit--which fell
below 1 % in 1992 and was within the standby arrangement with the International Monetary
Fund. Over the last three years, there has been a strong fiscal adjustment from a deficit of 8 %
of GDP to an estimated 0.3% of deficit in the 1992 account. There was strong growth in
revenue due to temporarily increased taxes, the elimination of some loopholes, and a reduction
in tax evasion. While there was some restraint, growth in expenditure took place, despite a fall
in expenditures on debt service due to the fall in international interest rates, and despite the
improved operational position of public sector enterprises. The main reason for the expenditure
increase was an increase in social security payments. In fact the increase in these payments by
4% of GDP exactly matched the increase in public revenues (defined to include the surplus of
public enterprises).
s     World Bank, Ugav: Macroeconomic Assesment. Report No: 10639-UR, November 12, 1992.



- 18 -
3.4     The third element in the macroeconomic story was the worsening in the external
current account while the balance of payments was in surplus. The external current account
recorded a deficit of UJS$180 million in 1992, following an improvement the previous year.
Imports rose rapidly propelled by the increase in investment as well as the pent-up demand for
consumer durables, particularly automobiles. Meanwhile, the capital account strengthened due
to foreign borrowing by the private sector. Exports grew moderately pulled for the most part
by expanding demancl in Argentina on account of favorable relative prices (due to the
appreciation of the Argentine peso).
3.5     The fourth element in 1992 was that Uruguay experienced an investment recovery that
was in sharp contrast to the low levels of recent years. The investment boom was concentrated
in the construction, durable goods sectors and vehicles. There was strong evidence of the boom
in the increased impoit of capital goods and in increased sales of cement recorded by ANCAP.
The increase in investment has been largely financed by funds of the domestic investors
themselves rather than domestic credit, and to a lesser extent by foreign capital (mostly
Argentine). The construction activity was concentrated in tourism and retail trade.
3.6     Finally, the peso appreciated during 1992 given 59% inflation and a 2% monthly rate
of crawl of the nominal exchange rate (an annualized rate of 27%). This appreciation was the
combined result of a strong private capital inflow and an increase in nominal wages. There
could be further nominal wage increases that would not be conducive to keeping the inflation
rate from rising again. The private sector has already identified inflation as a significant
problem that they face. This translates into a real exchange rate appreciation problem and
therefore to reduced incentives for producing tradeables.
Uisues for Private Sector Development
3.7     The recent economic developments and the features of the economy described above
suggest a set of macroeconomic issues germane for private sector development.
3.8     The first issue is the extent to which recent fiscal improvements will be perceived as
"permanent" by the private sector.  Much of the revenue increases that permitted this
improvement were based on many temporary measures so that the private sector may not
consider the fiscal improvement as sustainable. In March 1990, the Fiscal Adjustment Law
raised the basic value-added tax rate (VAT), applicable to nearly 90% of the tax base, from 21%
to 22% for a period of 12 months (see Chapter 8), and extended into 1992. The tax increase
was earmarked to finance the social security inflation adjustment mandated by the November
1989 plebiscite. The saLme law temporarily raised the tax rates on business income (IRIC) and
personal remuneration (IRP) from 30% to 40%. These taxes were also extended and remained
in force through 1992 aLnd were eliminated thereafter. The "temporary" nature of these taxes
accounts for at least a part of the policy uncertainty that the PSAS revealed as an impediment
to its development. A fbndamental issue is that the increases in the VAT and the payroll taxes
are basically ad hoc measures to finance an increase in social security liabilities of the
government, which are an ongoing concern (see Chapter 7), and throws the govemment's budget



- 19 -
into a perpetual catch-up mode. Moreover, public expenditures are expected to increase with
special wage increases to certain groups of government workers, higher social security outlays,
higher future real wages, and public investment.
3.9     Second, the current size of the government fosters the need to maintain the current
high level of taxation in the economy to finance its activities. This issue also relates to
increasing the overall efficiency of the economy. In addition, not only is financing public wages
and salaries a burden, given the number of government employees, but it suggests the need to
redefine the role of government to place the economy on a more competitive footing. To reduce
the number of public employees, the government instituted a voluntary retirement program under
which public employees could leave with 12-months' salary as severance pay. However, less
than 10% (20,000 of 268,000) have taken advantage of this offer. The size and function of
government lies at the heart of the necessary deregulation and debureaucratization of the
economy. Moreover, reducing the size of the government would send a powerful message to
the private sector that a permanent cut, in expenditure can be achieved. This, in turn, should
help restore the credibility of the government's fiscal stewardship.
3.10    Third, the issue of social security benefits and contributions seems fundamental for
medium- and long-term macroeconomic stability as well as the viability of economic reforms.
When the November 1989 plebiscite voted against the reform of the social security system, it
created a large and untenable burden on the state that dominates medium- and long-term
macroeconomic poiicy-making. The aging structure of the population and the manner in which
the benefits are determined so as to preserve the real value of these benefits represent a burden
for the fiscal system and the economy. In October 1992, the Congress approved measures to
strengthen the finances of the social security system. These measures included reduction in the
wage replacement ratio, incentives to delay retirement beyond the minimum retirement age and
to base pensions on the average wage for five years instead of three years. (Later, the pensions
are to be based on the average wage for 10 years.) In addition, the new measures included
increased contribution to health insurance. These reforms are expected to reduce the deficit in
the social security system. Despite these measures, the social security system will continue to
be a fiscal burden and remain inefficient without more drastic reforms.
3.11    Fourth, given the size of the economy and its links to Argentina and Brazil in trade
and fimance, Uruguay is highly vulnerable to external shocks that emanate from these two
countries. While it cannot isolate itself from these shocks, the economy can become more
flexible to withstand these shocks better than in the past. For example, the shocks could be
better absorbed by allowing relative price movements to work through the economy, rather han
by quantity adjustments via output and employment. Of course there is no need to adjust to
short-term  transitory shocks.  That is already being done by private sector financial
intermediaries, given the open capital account, through their arbitrage function in responding to
differential returns to financial assets arising from exchange and interest rate changes.
3 12    Finally, there is the issue of how to raise levels of savings and investment in the
economy. This is crucial for medium- and long-term growth. In the past, during periods of



- 20 -
reform (1974-82), the economy responded well to policy change in terms of current output, but
there was a less of a response in savings and investment. Indeed, the level of investment has
faLLen since the early 1]980s (see Graph 2.2 note that investment may be underestimated in the
national accounts). Investment as a proportion of GDP has decreased from 1981 to 1991 but
recovered in 1992. However, there is no assurance that this was a permanent recovery.
Investment alone cannot increase growth; efficiency gains are a large part (i.e., the factors
contributing to growth; see Chapter 1, Box 1.1. But without higher investment, it is unlikely
that there wiLL be large productivity gains or much growth.
3.13     There is eviLdence of decapitalization in some parts of the economy; in others, the
capital stock in use is s(D antiquated it seriously undermines attempts to raise productivity. Gross
fixed capital formation on the order of 10% of GDP is inadequate.' There is an urgent need to
replace public capital that complements private sector activity, such as investment in
infrastructure, and to provide more opportunity for the private sector to increase its investment
in the economy. In a,ddition, the changing patterns of trade in support of MERCOSUR will
require sizable private investment to respond to emerging new trade patterns. This would also
help to modernize the economy and incorporate new technology. Of course, an increase in
investment requires both domestic and foreign savings. Uruguay's gross national savings have
remained low; however, there has been some improvement with the reduction in inflation.
9     See Uruguay: Macroeconomic Assessment, World Bank (1992), Part HI, where an esfimate of the
capital st:ck is made to undarscore the point that the rate of capital accumuadon is proving to be inadequate.



Chapter 4. The Foreign Trade Regime
Trade Policy Evolution
4.1       The trade regime is the primary means whereby competitive forces are brought into
play to influence resource allocation, provide access to new technology, and create a dynamic
economic environment. For a small country like Uruguay, an open trade regime is all the more
necessary so that its growth is not constrained by the size and limited capacity of the domestic
market. Realizing the value of open trade, the Government of Uruguay has been undertaking
trade reforms since the late 1950s. Although there were some reversals in the late 1960s,
reforms resumed in the mid-1970s and again in the early 1980s. The PSAS found that firms
selling in the domestic and regional markets believed insufficient sales were an important
constraint, while firms exporting outside regional markets said their main problems were
availability, price, and quality of inputs. The survey also found that the restrictions on trading
services, particulady ports and shipping services, were obstacles to the expansion of export-
activities. Overall, export-oriented firms found policy uncertainty, deficient trade services, and
infrastructure were the main barriers they faced in increasing exports.
4.2       There are four main characteristics in the evolution of the foreign trade regime in
Uruguay with significant impact on its private sector development. First, the private sector
evolved under very limited competition from abroad and the import competing sector has been
characterized by oligopolistic practices and high dependence on Government resources and
concessions.10 Second, since 1959, Uruguay has sporadically liberalized its foreign trade
regime by selectively reducing trade barriers while introducing trade promotion mechanisms.
During the 1960s and 1970s, the incentive structure became increasingly complex, which for the
most part discouraged the restructuring of productive activities. It was only in the mid 1970s
that a more uniform approach to trade liberalization was adopted."1 Third, the evolution of
foreign trade liberalization has often been reversed or limited due mostly to macroeconomic
imbalances, as in the 1970s and early 1980s. Policy reversals may have increased uncertainty
about the profitability of new economic activities that implicitly taxed investment in new
ventures. Thus, the private sector did not find it profitable to expand investment into activities
other than traditional Uruguayan exports. Fourth, the regulatory framework for international
transactions increased in complexity as laws and decrees accumulated, with changes in the
regulatory environmente2 providing virtual monopoly power over several activities. This
'°    See CERES (1990), Monopolios Estatales: XCuanto le cuestan a los consumidores?, Informes y
Propuestas No. 2, February; CERES (1990), El R6eimen de Compras del Estado: otro mecanismo de protecci6n
arancelaria, Informes y Propuestas No. 6, February; and Favaro E. and P.T. Spiller (1991), UruMuav, in
Papageorgiou, Michaely and Choksi, editors, Liberalizing Foreign Trade: The Experience of Argentina. Chile and
Urugy, Vol. 1, Basil Blackwell, Oxford and Cambridge MA.
See Favaro E. and P.T. Spiller (1991), supra; and UNDP/The World Bank (1990), Uruguay: Trade
Reform and Economic Efficiency, Trade Policy Division, Country Economics Department, The World Bank,
Washington, D.C., June.
12    See PLADES, March 1992, Desregulaci6n del Comercio Exterior, Presidencia de la Repiiblica,
Montevideo, Uruguay; and PRONADE (1991), Reforma del Estado: El Nuevo Procedimiento Administrativo,
Secretarfa de la Presidencia de la Repilblica.



- 22 -
effectively limited private sector development, especially trade in services as well as ports and
shipping provision."3 The latter are the very activities in which Uruguay has an inherent
comparative advantage because of Uruguay's geographical location--between Brazil and
Argentina with access to the Rio Parana on the Atlantic coast--as well as the recent rapid
increases in these services, which have accompanied the process of economic and foreign trade
reforms in Uruguay and other countries in the region.
4.3      Uruguay has used a wide variety of instruments other than tariffs to directly reguilate
imports. These include import quotas, reference and minimum prices, import surcharges, local
content requirements, state trading, and government procurement practices. Similarly exports
have been regulated by export taxes, surcharges and levies, minimum export prices, duty
drawbacks, special credits for capital goods, and free trade zones.'4 Uruguay has maintained
export restraints on textiles and clothing with the US and Canada as part of the Multifibre
Arrangement as well as regulated exports of beef, lamb, and citrus produce to comply with
market access arrangernents with the European Community.
4.4      There have been two major trade liberalization episodes in the past: one in 1959 and
the other between 1974 and 1978. In both episodes Uruguay took a gradual approaclh to trade
liberalization, introducing selective trade instruments for export promotion.  Also, trade
liberalization was either limited or reversed in the wake of macroeconomic imbalances; however,
these trade reforms and supportive policies did not change the basic incentive structure
appreciably, nor were the changes maintained over time to make it profitable for the private
sector to expand investment and production of nontraditional exportables. Thus, the effects on
commodity composition of exports were quite limited.
4.5      In general, foreign trade reforms have slightly increased the foreign-trade
(merchandise and non-factor services) to GDP ratio of Uruguay to about 40% (see Box 1.4).
And yet this ratio is well under those of other economies such as Chile and Costa Rica (with
ratios above 60 percent) and East Asian economies (with ratios above 80%). Thus Uruguay's
private sector has evolved with relatively limited competition from abroad.
4.6      Historically, the framework regulating trade flows in Uruguay has been complex. A
large number of laws and decrees regulating trade accumulated over several Administrations
reflecting the selectivity of Uruguay's trade policies at different points in time. The Ley de
Reforma Monetaria y Cambiaria de 1959 (Exchange and Monetary Reform Law of 1959) has
provided the regulatory framework for trade regulations.  The Ministry of Economy and
Finance, the Ministry of External Relations, the Office of Planning and Budget, the Central
Bank, and BROU have been the main agencies involved in the design and implementation of
trade policies in Uruguay. The administrative processes in international transactions have
involved 17 different agencies and as many as 34 different processes. The complexity of the
13    See Chapter 6 on the regulatory enviroument.
14    For further detaLils on reference and minimum prices used to regulate imports and their linkages see
Chapter 6 of UNDP/The World Bank (1990), Uru2uav: Trade Reform and Economic Efficiency, Trade Policy
Division, Country Economics Department, The World Bank, Washington, D.C. June.



- 23 -
system led to the establishment of trade agents who represent exporters and importers in carrying
out compliance with administrative requirements. Indeed, these administrative processes have
been an important non-tariff barrier to Uruguay's international transactions.
4.7     Uruguay's bilateral policies had a significant impact in Uruguay's trade flows and
commodity composition of exports. Most of Uruguay's trade flows have been with the US and
the European Community. Trade agreements with Argentina and Brazil in the mid-1970s
reoriented Uruguayan trade flows from the European Community and the US to Brazil and
Argentina. The Convenio Argentino-Uruguayo de Cooperaci6n Econ6mica (CAUCE) was signed
in 1974 and the Protocolo de Expansi6n Comercial (PEC) was signed with Brazil in 1975. The
shares of Brazil and Argentina in Uruguay's exports increased from 5% and 3%, respectively,
in 1970 to 24% and 10%, respectively in 1991 (see Table A4.30). The arrangements also
expanded the market of Uruguayan exports with limited worldwide comparative advantage such
as road motor vehicles, plastic materials, paper products, rubber, and chemical products. The
increase in import share from Brazil and Argentina, however, was smaller--15% and 12%,
respectively, in 1970 to 24% and 18%, respectively, in 1991 (See Table A4.20).
4.8      CAUCE and PEC increased Uruguay's trading ties with Brazil and Argentina. In
turn, the effects of economic instability in Brazil and Argentina on Uruguay's economy have
steadily increased. Differences in inflation rates and exchange rate policies in Uruguay and
those in Brazil and Argentina have led to large fluctuations in Uruguay's export competitiveness
in those markets.
Receni Developments in Foreign Trade Policies
4.9      Trade reform since 1989 has had four main components: (a) tariff reduction; (b)
changes in the scope of non-tariff barriers; (c) deregulation and simplification of administrative
procedures; and (d) the evolution of MERCOSUR. This section briefly reviews each of these
developments and explores their implications for Uruguay's private sector development.
Tariff Reform
4.10    There has been significant tariff reform in Uruguay since 1980. Table 4.1 shows the
chronology and profile of tariff reforms between 1980 and November 1992. It should be noted
that additional tariff reform, unilateral or within the MERCOSUR framework, beyond November
1992 would need to be addressed to determine the actual changes in tariffs that should be
differentiated from policy commitments and announcements of policy change.
4.11     Uruguay undertook significant tariff reforms between 1980 and 1983; however, the
pace of reform slowed and by 1985 Uruguay had increased 1983 tariff rates by 5%. Since the
Lacalle Administration took office in September 1990, there have been no reversals in tariff
reforms; in fact, the pace of tariff reductions has accelerated.
4.12     Tariffs were further simplified following the Plan de Desregulacion de Comercio
Exterior y las Inversiones (PLADES) recommendation, whereby a decree eliminated the consular



- 24 -
fees and the cargo handling charges in October 1991.15 Thus, Uruguay's general tariff or TGA
since then contains only two of its previous four components.
4.13      The tariff reform between September 1991 and November 1992 is shown in Table 4.1.
There are two exceptions when a zero tariff is applied: designated imports of capital goods and
most agricultural imported inputs. The tariff exemption on some imports of capital goods was
to be removed at the end of December 1992.
Table 4.1: Chronology of Legal Tariff Reform in Uruguay
Number of                      Tariff range
Date                        Tariff Rates                   (Percentage)
1980                                       29                  0-103
1983                                       5                   10, 20, 35, 45, and 55
1985                                       5                   15, 25, 40, 50, and 60
Sept. 1990                                  4                  15, 25, 35, and 40
Sept 1991-March 1992                        3                  10, 20, and 30 '
April 1992                                  3                  10, 17, and 24
November 1992 '                             3                  10, 15, and 20
Source:   Summary based on Ministry of Economy and Finance, November 1992, "Reciente Reforma Comercial
de la Repilblica Oriental de Uruguay," mimeo, Montevideo, Uruguay.
11   A 40% ad-valorem tsriff applied to one tariff line--cabins for transport equipment - and 12 other tariff lines
were exempted.
2/   An additional tariff c]hange (which needs to be verified with the government) is the adoption sometime after
November 1992 of a 6 % tariff on certain raw materials.
4.14      A TGA  (the general tariff) of 10%  is applied to imports of capital goods used in
agricultural production, and noncompeting imports of capital goods, raw materials, and
intermediate inputs. A TGA of 15% is applied to intermediate inputs and basic products with
low value-added content. And a TGA of 20% is applied to imports of consumer goods, imports
of manufactured goods, and intermediate inputs with high value-added content. The TGA is
applied ad-valorem on CIF values unless traded commodities are subject to reference and
minimum prices. Import licenses, import permit requirements or advanced deposits are no
longer required.   Import prohibitions cover fireworks, some products used in livestock
15     The rationalization of importing procedures has also made progress as the TGA has been simplified,
import restrictions on edible oils eliminated, the import certificate by DINACOA (Direcci6n Nacional de Comercio
y Abastecimientos) required prior to initiating the import process with BROU eliminated, and commercial bank
services required by BROU at three different points during the importing processes eliminated.



- 25 -
production (such as hormones), hazardous waste materials, imports of seeds prone to specific
parasites, and some hazardous chemicals often found in animal feedstuff.
4.15    Export taxes formerly were an important source of public revenue, but were eliminated
in the 1974 tariff reform. The 1982 debt crisis led to a standby arrangement with the IMF in
which an export tax of 15 % was reintroduced. In 1984, a law set an upper limit on export taxes
at 5 % which applies to most of the traditional exports such as wool. Uruguay uses a duty
drawback system introduced in 1983 that reached a value of US$32 million in 1989. The system
was modified in July 1991 to reduce the duty drawback rates and the duty drawbacks were
estimated at US$15 million for 1992. Uruguay also provides financing to exporters through
credit lines administered by BROU.
Non-Tarifir Barriers
4.16    Uruguay has made important progress in tariff reform, particularly under the Lacalle
Administration; however, reference and minimum prices are important contributors to protection
and resulting distortions. Reference prices were introduced in 1981 to discourage under-
invoicing of imports. The trade liberalization between 1980 and 1983 which increased
competition from abroad and the 1982 macroeconomic crisis put pressure on the Government
to seek import relief measures. The use of reference prices expanded from an instrument used
against underinvoicing to one used in response to dumping. Late in 1983, minimum prices were
introduced. Reference and minimum prices became the main instruments to respond to unfair
trade practices."6 However, these instruments then became a source of protection as well."7
4.1]7    Reference and minimum prices establish a lower boundary in US dollars on which
trade duties are calculated. The importer is required to pay a sliding surcharge on the difference
between the reference or minimum price and the cifimport price (see footnote 16). The process
whereby specific commodities are placed on reference or minimum price lists is initiated at the
request of individual firms or at the discretion of the Ministry of Economy and Finance. Before
November 1990, evidence of large price differentials were sufficient to prescribe or modify a
reference or a minimum price. The import competing producer was not required to provide
evidence of economic injury. These became tailor-made instruments of protection, and their
commodity coverage increased rapidly over time once these instruments were introduced.
4 18    Stricter procedures in the use of these two instruments began to be implemented in
1989; thus, by March 1992 the commodity coverage subject to reference or minimum prices
declined compared to 1989. A Decree of August 1991 requires three conditions to use reference
and minimum prices, which should be met simultaneously: (a) import prices do not adjust to
16    A reference price can be summarized by Pd = Pd, + t P,, where P., is the import price declared by the
imnporter, t is the tariff rate, P, is the reference price so Pd is the implicit price paid by the importer.
17   In-depth analyses of reference and minimum prices can be found in: Nattino E., February 1990, Poiftica
aitidumping or aranceles diferenciales?, CERES, Montevideo, Uruguay; and The World Bank, June 1990, Uruguay:
A Trade Expansion and Reform Prog2ram, Chapter 6, "Administered Protection in Uruguay: reference and minimum
e.xport prices," Washington, D.C.



- 26 -
normal changes in international prices as defined by GATT; (b) actual or threat of material
injury; and (c) evidence that imports caused, or threaten to cause, material injury. Thus
Uruguay has increased discipline in the use of these protective instruments.
Administrative Proceidures
4.19     The rationalization of administrative processes and procedures is being carried out by
Plan de Desregulaci6n del Comercio Exterior y las Inversiones (PLADES). PLADES, an
advisory unit in the President's Office, was created by a Presidential Resolution in May 1991.
The work of PLADES started by taking stock of administrative procedures regulating Uruguay's
international transactions and identifying the laws, decrees, and regulations from which the
procedures originated. PLADES first focused on analyzing the administrative procedures
regulating Uruguay's international transactions. Then it began to implement its rationalization
program on exports, which is near completion, and later on imports, on which significant
progress has been made.'8
4.20     By March 1992, PLADES recommendations led to the elimination of more than 40
regulatory measures. These measures removed inconsistencies in procedures and spurious but
costly paperwork.  Arnong these were the elimination of instruments for foreign exchange
surveillance on exporters, export permits for many agricultural products, import approval by the
Ministry of Extermal Relations, elimination of certificates and approvals by several government
agencies, and certificates of credit approval by banks providing credit to importers. PLADES
has also started simplification of customs procedures that have yet to be implemented. Exporters
of beef, the main exportable commodity of Uruguay, were required to go to 5 different
government agencies involving 7 different steps and 10 different registration forms to obtain the
sanitary certificate. This procedure now involves only two government agencies, with the
process now completed in two steps requiring only four registration forms.
4.21     Economic activities in services contribute about 55%  of GDP, with most of the
economic growth in recent years coming from the service sector. In addition, Uruguay's
geographical location and reliable institutional framework provide an important advantage for
private sector development in services--particularly those related to trade in services with other
countries. These activities are still subject to complex regulations and the role of the State is
extensive; however, economic reforms in these activities have been initiated.'9
4.22     In addition to tariff reform, facilitation at customs offices and ports could provide
important opportunities for private sector development, since trading services such as shipping,
warehousing, and transport could be rapidly developed. Similarly, simplification of regulations
18 See PLADES, December 1991, Sistema de Promoci6n de Inversiones de Uruguay: analisis y propuestas
de reforma Presidencia de la Repilblica, Montevideo, Uruguay; PLADES, March 1992, Desregulaci6n del
Comercio Exterior: el primer ano, Presidencia de la Repdblica, Montevideo, Uruguay; and PLADES, October 1992,
Desregulaci6n v Reforma del Regimen del Contralor del Comercio Exterior del Uruguay: el caso de las
importaciones, Montevideo, Uruguay.
'9   See chapters on the financial system, the regulatory framework and infrastructure.



- 27 -
and administrative procedures, financial sector reform, and allowing for the participation of the
private sector in areas currently in the exclusive domain of the State would facilitate private
sector development in areas such as tourism, telecommunications, and informatics. Historically,
export receipts for tourism, shipping and transport services have ranged between 4% and 8%
of GDP. T hese services have recently increased rapidly, with their value nearly doubling from
US$280 million in 1982 to more than US$550 million in 1991 (see Table A4. 1). MERCOSUR
prospects have underscored Uruguay's potential in expanding these areas which remain under
complex regulations. Economic reforms that liberalize services to private sector participation
would have an important effect in reestablishing growth in Uruguay.
M1ERCOSUR
4.23    MERCOSUR is one of the most important recent developments in Uruguay's foreign
trade policies and it poses by far the most challenging trade policy choices for Uruguay. An
assessment of those choices is beyond the scope of this report. This section first briefly
describes what is being proposed and then discusses its main implications for private sector
development in Uruguay.
4.24    The proposal for MERCOSUR originated in the Tratado de Asunci6n signed in March
1991 by Argentina, Brazil, Paraguay and Uruguay. If achieved, MERCOSUR would create a
common market by the end of 1994 comprising a combined output of US$500 billion and a
market of more than 190 million people--of which Brazil represents about 80%. The
Government of Uruguay has reiterated its commitment to actively participate to bring
MERCOSUR into reality. This commitment in turn has provided scope to maintain the process
of foreign trade liberalization.
4.25    ]MERCOSUR provisions include free trade in goods, services, investment as well as
fIee movement of factors of production. A common external tariff is under discussion to be less
than 20 in the interim, rules pertaining to country of origin are being used. December 31, 1994,
is the deadline for MERCOSUR members to define and adopt a common external tariff. Goods
are defined to originate in MERCOSUR if they are produced by the primary sector or if foreign
components in manufactures are less or equal to 50% of the fob value. MERCOSUR has an
automatic timetable for the preferential reduction of tariff rates,20 which in the case of Uruguay
meant a preferential reduction of 68% by December 31, 1992, with a 100% preferential
reduction of tariff rates scheduled for December 31, 1994. Similarly, Uruguay is to reduce the
scope of commodities initially exempted (960) for MERCOSUR treatment as per an automatic
timetable, the exemptions gradually reduced to zero by December 31, 1994.
4.26    MERCOSUR also includes coordination of macroeconomic, sectoral, and institutional
policies. There are 12 working groups: trade, customs procedures, technical norms, fiscal and
monetary policies related to foreign trade, road transportation, other transportation, industrial
and technological policy, coordination of macroeconomic policies, labor market regulations,
agricultural policy, energy policy, and institutional framework. Technical norms, customs
:    A preferential reduction of tariff rates of say 50% implies that Uruguay charges half of the tariff to
MERCOSUIR members it charges to third countries.



- 28 -
procedures, coordination of exchange rate policies, and tax harmonization are the areas with
potentially important irnplications for Uruguay. Currently various proposals are being prepared
in these areas. Their implementation, however, remains uncertain given significant differences
in macroeconomic performance among the four MERCOSUR countries.
4.27    Around 35% of Uruguay's total exports currently are with MERCOSUR, mostly with
Brazil and Argentina. In other words, MERCOSUR would basically expand the scope of
CAUCE and PEC, further increasing the role of bilateral trading ties that emerged strongly in
the mid-1970s (See Tables A4.30 and A4.4). Some 25% of Uruguay's exports go to Brazil and
10% to Argentina.
4.28    The potential net benefits of MERCOSUR can be significant if MERCOSUR improves
the competitiveness of Uruguay's private sector. The expansion of Uruguay's trade within
MERCOSUR by itself does not, however, ensure an improvement in Uruguay's competitiveness
(see Tables A4.50 and A4.4). Table A4.50 shows the 30 most important commodities exported
by Uruguay to non-MERCOSUR countries. In 1991, these represented more than 90% of
Uruguay's exports to non-MERCOSUR markets and about 80% of Uruguay's exports to
MERCOSUR. Uruguay's exportable commodities to non-MERCOSUR markets are competitive
in those markets as well as regionally (see Table A4.50).
4.29    Table A4.4 shows that some commodities exported to MERCOSUR markets, however,
are not competitive outside the preferential arrangement. This seems to be the case for motor
vehicles, paper and paperboard products, plastic materials, rubber and chemical products.
Consequently, welfare losses and lower growth rates are likely to be associated with the
diversion of investment in Uruguay into economic activities with limited comparative advantage
in MERCOSUR markets and comparative disadvantage in non-MERCOSUR markets. The costs
could double if investmznt is expanded into exports destined for limited and relatively unstable
markets, not to mention the opportunity cost of foregone investment in activities with worldwide
comparative advantage.
4.30    MERCOSUR can enhance Uruguay's international competitiveness if it supports further
unilateral trade liberalization in all participating countries. In this case, it becomes a relatively
liberal arrangement facilitating regional trade without excluding foreign competitors if interim
exceptions are limited ard discipline in the use of non-tariff measures is increased. Up to now
MERCOSUR has provided scope for maintaining the process of trade reform; however, it has
also increased incentives for activities with comparative disadvantage outside MERCOSUR
markets. In tum, Uruguay's vulnerability to unstable MERCOSUR markets could increase
thereby reducing the scope to expand trade in non-MERCOSUR markets.  In addition,
uncertainties about Brazil's ability to stabilize the economy would prevent the complete
realization of MERCOSUR objectives.
4.31    Uruguay would need to intensify the scope and pace of trade reforms to expand private
sector development in economic activities with worldwide comparative advantage. MERCOSUR
could benefit private sector development in so far as its process is consistent with that objective;
if MERCOSUR leads to a more liberal trade regime than what Uruguay can achieve unilaterally.
The greatest potential seems to be in the areas of rationalizing administrative processes and
deregulating trading services.



Chapter 5. The Financial System
5.1     Uruguay has pursued the goal of becoming a regional financial center with some
success and the sector now provides significant employment. However, that success may be
threatened as Argentina's stability continues, particularly given the sector's cumbersome labor
relations and possible future communications problems. The financial sector has been less
successful in meeting domestic demands, particularly since the massive refinancings of the early
1980s reduced foreign bank's interest. Uruguay's private firms consider problems of cost or
access to credit less of a constraint to their development than other problems, such as the level
of taxes and political uncertainty. However, as expected, small firms rank financial constraints
as more important than larger firms. Nevertheless, the role of Uruguay's financial sector in
investment financing has decreased in the last few years and could become a major constraint
to enlarging the role of the private sector and raising the growth rate.
Background
5.2     The current structure and behavior of Uruguay's financial system reflects the effects
of the financial crisis of the late 1970s. During the mid-1970s, the financial sector underwent
a comprehensive deregulation that eliminated restrictions on capital movements, exchange
transactions, and interest rate controls on credits and deposits. Later, restrictions were lifted on
entry into the banking business and exposure of commercial banks to foreign exchange risks.
This was done to improve Uruguay's competitiveness as a regional financial center. However,
the deregulation of the financial system was not supported by prudential regulations and
supervision aimed at preserving the solvency of the financial system, particularly the few local
private banks. Furthermore, some previous regulations were eliminated--such as minimum bank
reserves and limits on foreign exchange indebtedness. Under conditions of easy entry, the
financial system expanded with the creation of financial houses and the establishment of several
new banks. In 1982, there were 44 financial entities (22 private banks, 2 official banks, and 20
financial houses) compared to 35 in 1970. The new intermediaries were all foreign owned.
5.3     Financial deregulation in Uruguay coincided with a process of trade and price
liberalization, which provided the conditions for a period of rapid economic growth and strong
expansion of financial intermediation. Economic growth halted in 1982 as a result of external
shocks and macroeconomic policy errors. The recession and deflation that followed led to a
deterioration of the equity position of the highly indebted private sector, particularly agriculture,
and widespread loan defaults. This, in turn, caused an insolvency crisis that involved nearly the
entire banking system.2' Many financial institutions had embarked on unsound lending
practices due to lack of controls and the existence of the government's implicit deposit insurance.
In response to the crisis, the Central Bank of Uruguay (BCU) acquired the bad loans of banks
with solvency problems, in exchange for "new money," and intervened in the locally owned
commercial banks. Also, the government exerted pressure on all the banks to suspend the
execution of bad loans and laws were enacted to force banks into compulsory loan rescheduling.
21   J. E. Rold6s; "La Crisis Bancaria Uruguaya de los '80," CERES, Temas Econ6mico Sociales N.4, April
1991.



- 30 -
5.4     The way in which the banking crisis was addressed by the government had significant
fiscal effects and damaged further the profitability of the banking sector. Acquisition by the
BCU of bad loans from banks with solvency problems explain most of its current deficit (2%
of GDP)22; reserve requirements, compulsory holdings of public debt, and a substantial amount
of inflation tax were used as a source of finance. CERES' estimates the accumulated direct
costs of the financial crisis from 1982 to 1991 at about US$840 million, about 9% of 1991 GDP.
The forced rescheduling of bad loans, together with the impact of reserve requirements and the
compulsory holdings of public debt by commercial banks, reduced the profitability of the private
banking sector. In addition, the public banks retained preferential treatment with respect to
reserve requirements and enjoyed other benefits relative to private banks. As result, the private
banks' market share was reduced after the banking crisis, and their business increasingly became
offshore.
5.5     Possibly more important, but more difficult to estimate, are the costs involved in the
form in which the government confronted the crisis in terms of the unwillingness of the private
banks to lend to local firms and the lack of creditworthiness of many private sector enterprises.
Since the crisis, banks in general and foreign banks in particular, have lost confidence in the
enforceability of financial contracts and are reluctant to lend to the private sector out of fear of
further forced refinancings. Moreover, many firms that were subject to refinancing have not
resolved their financial situation, and thus remain unable to borrow due to lack of
creditworthiness (see Chapter 6).
5.6     Uruguay's private financial sector remains predominantly foreign-owned. Foreign
ownership increased following a new banking regulation in 1982 authorizing tax-free offshore
banking. In the public sector there are two public banks, BROU and BHU, and two formerly
private banks now under BROU's management (Banco Pan de Azucar and Caja Obrera). Of the
other two private banks intervened in the mid-1980s, one was closed and the other, Banco
Comercial, was sold to the private (foreign) sector in 1990.
5.7     Only after 1989 did private banks begin to be subjected to prudential regulation as well
as supervision of these regulations by BCU. A "Financial Intermediation Law" was approved
in late 1992. This law established a framework to assure the efficiency and solvency of the
financial system by: increasing the transparency of regulations regarding the entry of financial
institutions; establishing procedures for dealing with troubled banks, ranging from preventive
measures to liquidation; and increasing the supervisory powers of the Central Bank, including
over the operations of public banks. In addition, preferential treatment of BROU was reduced
by the Central Bank, imposing reserve requirements for the first time. A new Charter for the
Central Bank has been submitted to Congress that would complement the Financial
2    The operating position of the Central Bank improved in 1992 due to a reduction in interest rates paid
on its liabilities and the transi.er to the Treasury of the debt accumulated by the Central Bank to finance the purchase
of non-performing loans of commercial banks during the financial crisis of 1982-1984.
3    J. R. Rold6s and L. Viana; 'Regulaci6n y Desregulaci6n del Sistema Bancario en el Uruguay," CERES,
Descripci6n e Indices N.8, September 1992.



- 31 -
Intermediation Law in strengthening the supervisory powers of the Central Bank. This new
Charter would also establish a formal legal framework for the operations of the Central Bank
and increase its autonomy by making its principal objective the stability of the currency.
TABLE 5.1: URUGUAY: Deposits by Private Sector at End of Period
(% of GDP)
BROU               BHU                  PRIVATE
BANKS                 l
Total
Deposits    Local      Dollars      Local     Local        Dollar       Dollars
Currency               Currency   Currency    Nationals     Foreigners
1984         54.5        3.4          9.7       4.4        8.9          15.2         12.9
1985         58.1        3.9         13.9       3.9        8.0          15.1         12.3
1986         54.7        3.7        12.63       4.2        6.7          15.8         11.7
1987         49.1        3.7         12.63      3.6        4.8          13.6         10.8
1988         51.5        3.6        14.13       3.5        4.3          14.4         15.2
1989         68.1        0.5        19.6        3.5        3.5          17.6         23.4
1990         79.1        3.1        22.3        3.5        2.7          19.0         28.5
1991         69.6        0.6        21.1        3.5        2.3          17.6         24.5
Source: Mission calculation based on data from BCU 'Boletfn Estadistico No. 141, Junio 92
*       Excludes deposits in current accounts
**     Includes securities and bonds issued by BHU.
Characteristics of the Banking Sector
5.8      Dposits. Uruguay's financial sector is highly dollarized. Since the crisis of 1982,
the private sector demand for financial assets in pesos has dropped markedly, but this has been
compensated by an increase in dollar deposits. Financial assets in pesos (M2 plus public
securities in pesos held by the private sector) as a percentage of total financial assets dropped
from 75 % in 1980 to 21% in 1992 (see Table A5. 1). The main reasons for this transformation
are: (a) low or negative interest rates on peso deposits relative to dollar deposits; and (b)
uncertainty caused by high inflation and frequent devaluations.
5.9      A sizeable proportion of dollar deposits are short-term from nonresidents. Uruguay
is a center of attraction for financial capital from neighboring countries. Dollar deposits of
nonresidents accounted for an estimated 35 % of all financial sector deposits in 1991; in addition,
nonresidents also deposit through Uruguayan agents. This is a consequence of tax free status,
strong secrecy laws, and the existence of branches of foreign banks. In the long run, as
Argentina stabilizes, the inflow of dollar deposits may diminish (Argentina now allows deposits



- 32 -
in dollar accounts). As a result of nonresident deposits, Uruguay has one of the deepest
financial sectors in Latin America: time, savings, and foreign currency deposits amounted to
about 70% of GDP in 1991. Public banks account for a growing share of deposits both in local
currency and in dollars. Their share of deposits in both currencies increased from less than 30%
before 1982 to about 60% in 1991; their share of foreign currency deposits increased from about
30% in the early 1980s to over 55% in the early 1990s from residents and nonresidents (see
Table A5.2).
Table 5.2: URUGUAY - Credit to the Local Private Sector at End of Period
(% of GDP)
Total        BCU         BROU          BHU         Private
Credit                                              Banks
1984            61.9          11.1         17.8         12.4         20.6
1985            62.5          8.9          19.6         14.8         19.2
1986            53.5          5.5          17.3         14.0         16.7
1987            48.2          4.1          16.2         13.3         14.6
1988            50.3          3.0          18.0         14.0         15.2
1989            50.2_         0.3          20.5         14.5         14.8
1990            47.8          1.4          19.4         14.6         12.8
1991            42.1          0.3          15.8         15.2         10.7
Source: Mission calculations based on data from BCU 'Boletfin Estadfstico No. 141, Junio/92
5.10    Credit. Credil: to the private sector, both in pesos and dollars, has decreased over time
as a percentage of GDP, from 50% to 60% in the mid-1980s to 42% in 1991 (see Table 5.2).
Public banks are the main source of credit to the private sector (particularly BROU). The share
of public banks in total credit to the private sector has increased from 37% in the mid-1980s to
71% in 1992 (see Table A7.3). BROU's outstanding credit to the private sector decreased by
10% in real terms between 1990 and 1991 due to limits imposed by the Central Bank. About
80% of private bank credit to private residents is in dollars. Most of BROU's credit to the
private sector is also in dollars. The share of BROU's credits in dollar has increased from 64%
in 1989 to 74% in mid-1992.
5.11    The government's credit policy aims at limiting the expansion in real credit to the
private sector at levels consistent with anticipated growth in economic activity. Credit policy
is implemented through open market operations and control over official banks. To ensure that
BROU's credit operations are in accordance with government policy, foreign currency
denominated deposits in BROU above certain limits are considered offshore deposits and



- 33 -
deposited at the Central Bank or abroad. Also, the Central Bank sets limits on the credit
expansion of the Mortgage Bank, in line with the overall credit plan.
5.12     Foreign banks concentrate on short-term financing for consumption (salary advances,
purchase of household goods). These banks lend medium-term (three-year) revolving loans to
selected clients, mostly large firms and foreign subsidiaries. Several foreign banks have recently
started to lend for housing (one of them through leasing) at 5 and 10 years. Very few of these
banks would lend to agriculture, agroindustries, or fishing. There are several reasons why
foreign banks are reluctant to lend to these sectors:
(a) A perception that the legal framework and judicial systems do not protect the
rights of creditors.  The judicial system is slow and considered biased against
creditors. It is difficult and time consuming to execute guarantees (as explained in
Chapter 9).
(b) Banks are cautious about lending because they were negatively affected by forced
restructuring of bad loans (retroactively and with generous conditions) in 1985 and
1991. In addition, slow operation of bankruptcy proceedings may leave creditors
without assets (Chapter 6).
(c) Banks prefer to concentrate on consumer loans that earn high interest and have
low risk. Also, short-term lending matches the short-term nature of the bank's
deposits.
(d) Lack of creditworthiness of a substantial group of firms. Although a number of
fiirms that were affected by the financial crisis of 1982 have been closed, a large
number of those that received refinancing (about 5,000) still operate, but are in
precarious financial straits (or "financial limbo," as discussed in Chapter 6). Most of
these firms are in BROU's portfolio. Also, the lack of international competitiveness--
partly caused by high labor costs and past inefficient import substitution--explains
Uruguay's low investment.
(e) Competition from public banks that used to lend at lower rates and were more
lenient in collecting the loans.
(f) Collateral problems.3' Lenders are willing to lend only if the collateral offered
is real estate; they are unwilling to accept movable goods (equipment, inventory,
cattle, etc.) as collateral because of difficulties in repossessing and selling these goods.
The problems arise from: slow and costly judicial procedures, and inadequate legal
registries and legal provisions that limit the type of property that can be used as
collateral. This situation limits the access to credit by firms that either do not have
24    Based on the findings of a World Bank mission in December 1992, to assess collateral and access to
credit.



- 34 -
real estate or have already used it as collateral. It also limits the development of
leasing. Loans secured by movable goods (only BROU accepts these goods as
collateral) are treated as unsecured loans under new prudential regulations.
5.13    Interest Rates. Interest rates in Uruguay are market-determined. There is a large
variation in interest rates, both in dollars and in pesos. Most lending is in dollars. Preferred
clients can borrow at low rates for up to three years at around 7% or 8% in dollars. Other, less
creditworthy borrowers, pay between 9% and 14% in dollars. Housing loans are at about 14%
and consumption loans range between 14% and 19%. With low international deposit rates and
devaluations of the peso kept behind the rate of inflations, deposit rates in pesos declined in 1992
by 35 percentage points to below 40%, or negative in real terms. Lower borrowing needs of
the public sector also contributed to lower deposit rates. Peso lending rates, however, remained
highly positive. The structure of reserve requirements and taxes is unfavorable to financial
intermediation in pesos. Half of the intermediation margin in peso loans by private banks can
be explained by the existence of high reserve requirements. These reserve requirements
discriminate against peso transactions due to their effective high costs.
5.14    Until recently, rates charged by public banks were lower than rates charged by private
financial institutions. BROU's rates on peso loans were lower than rates charged by private
banks because: (a) BROU's lower intermediation margins (in 1990 BROU's spread was 8%
compared to 29 % for private sector banks) due to lower reserve requirements than private banks,
as well as many subsidized cost elements; and (b) other privileges (no taxes and unremunerated
deposits of public enterprises) that reduced BROU's cost of funds. Also, BROU charges
different interest rates that differ by economic sector or subsector. Under an Inter-American
Development Bank financial sector loan, BROU is being restructured. It now must comply with
the norms and regulations that apply to the banking sector concerning capital adequacy,
provisions, and reserve requirements. BROU now has to calculate its spreads according to a
formula agreed with Initer-American Development Bank that takes into account the marginal cost
of its liabilities.
The Capital Market
5.15    The equity, tbond, and money markets in Uruguay are almost nonexistent. Average
market capitalization during the period 1980-88 was 0.5% of GDP.25 This figure is almost
insignificant compared to average rates of market capitalization in developed (35.4%) and
emerging capital markets (8.8%). Trading volumes account for US$5 million a year of which
90 % is concentrated in the distribution of government securities. The number of companies that
have their equity traded in the Stock Exchange has dropped from 40 in 1970 to 17 now.
25   E. Talvi and L. V. Martorell; Inversi6n y Mercado de Capitales; CERES, Serie Foros, July 1991.



- 35 -
5.16    There are several reasons for the underdevelopment of capital markets:
(a) Taxes discriminate against securities financing. For income tax calculations,
corporations can deduct as an expense interest on bank loans, but interest payments on
debt instruments can be deducted only up to the rate paid by BROU on 180-day
deposits. Individuals do not pay taxes on interest income from government securities
and bank deposits but they are required to pay taxes on dividend income.
Furthermore, for wealth tax calculations, corporations can deduct bank liabilities but
not those stemming from the issuance of debentures (see para. 8.10).
(b) Absence of private institutional investors. Neither pension prograns (social
security) nor insurance programs (a government monopoly) can invest in securities.
Around 80% of the Social Security System is under the administration of the
government and is not allowed to invest in private paper. In any case, this part of the
social security system does not have resources to invest because collections are not
enough to finance expenditures of the currently retired. The part of social security
system that is private can only invest its surplus in state liabilities, municipal bills,
Banco Hipotecario notes, or real estate. Banco de Seguros del Estado (BSE) is obliged
to invest its technical reserves only in public debt.
(c) Lack of regulatory and supervisory mechanisms to provide protection to investors.
Few companies are required to provide audited statements. The Bolsa de Valores is
privately-owned and is not subject to any regulation or control.
(d) Inadequate Corporate Law that regulates debentures. This law, modelled on an
old Argentine law, gives shareholders excessive power in the operations of the firm.
The law also establishes that corporations cannot issue obligations for more than 50 %
of their paid-in capital and reserves. In addition, banks are not allowed to invest in
shares or bonds; the only investment they can make is in subsidiary.
(e) Lack of legislation with respect to mutual funds. A recently approved law (1990)
provides the legal framework for establishing investment banks. It allows banks to
take deposits from nonresidents for over a year, borrow abroad, issue debentures, and
invest in all types of securities.
(f) Government ownership of enterprises. The largest companies in Uruguay are
government-owned and do not issue shares (government enterprises account for 50%
of fixed investment and over 20% of GDP).



- 36 -
Housing Financing
5.17    More than half of total housing investment in Uruguay is financed by Banco
Hipotecario del Uruguay (BHU). The share of BHU in housing financing has decreased from
about 70% during the 1987-89 period to 51.3% in 1990. Other financing mechanisms are:
leasing, savers circles, and bank financing to private builders. In the latter case, financing is
based on 50% cash and the rest due in 70 months.
5.18    The practical monopoly of BHU in housing financing has been accompanied by a
policy of no execution of its portfolio in arrears (portfolio in arrears in 1991 estimated between
13% and 15% of total portfolio) and often by subsidized interest rates. These policies have
deteriorated BHU's financial position. Currently, BHU's financing is based on external debt,
government transfers and foreign exchange deposits (short-term). There is a severe mismatch
between funding at 6 months and loans at 22 years, and a severe uncovered foreign exchange
risk, which in the short-run has allowed paper profits because of the real appreciation of the
peso. BHU's monopoly has limited the possibilities for expansion of private financing of
housing.
5.19    A new Housing Law (16.236, amending Law 13.728), approved in 1992, confirmed
BHU as the head of the financial system for housing and as administrator of the National
Housing and Urban Development Fund. The housing policy reflects two clearly defined sectors,
each handled by a specific agent: (a) housing for needy sectors (income of no more than 60 UR
(readjustable index-linked units) per nuclear family, per month, is handled by the Ministry of
Housing, Land Use Management, and Environment, using noncommercial criteria; and (b)
housing for sectors with incomes higher than 60 UR is handled by BHU, which has limited
funds to lend. The government has taken steps to restructure BHU. The Central Bank now
requires BHU to act as any other than a banking institution. BHU has introduced new
mechanisms to facilitate the acquisition of housing, such as contractual savings. In this system,
members are assured cf a loan within a maximum of 60 months either by drawing or bidding,
with loans amortized in 15 years.
5.20    Private sector housing finance is limited.26 There are few specific lines of credit for
remodeling or acquisition of housing. Lately, some banks have been entering into real estate
leasing. The system of consortia or advance savings groups has evolved as an alternative, in
view of the lack of adequate lines of credit, for groups that have a relatively high savings
capacity.
5.21    There is scope for the development of other housing financing instruments that could
make the market more dynamic, such as mortgage notes, mortgage bonds, and other means of
securitizing banking mortgage assets. Issuing securities backed by mortgages would allow banks
to obtain more resources through placement of paper. There are, however, some legal obstacles
26   This section is bised on the findings presented in: L. Viana; "Potential Funding Sources for Long and
Medium Term Financing in Uruguay," CERES, Mimeo, December 1992.



- 37 -
to the securitization of mortgages. BHU's Charter which establishes the BHU monopoly for
issuance of mortgage securities, bonds, and obligations against third-party property, is an
obstacle for the acceptance of mortgage notes. The limit on companies set forth in the law
regarding the amount of obligations that a corporation can issue--50% of paid-in capital and
reserves--is also a constraint. Mortgage bonds are not limited by BHU's monopoly, since they
would be issued against own and not third-party property. However, a problem arises, in that
under Uruguayan law, it is not clear that transfer of securities implies the transfer of guarantees
that are an accessory to them. There are other possible legal difficulties in linking a portfolio
of guarantees to the issuance of securities. The attribution of such a portfolio to a legal person
other than a bank (but controlled by it) could be prevented by Article 18 of the Financial
Intermediation Law, which prohibits participation of banks in other types of companies.
Recent and Ongoing Efforts to Improve the Financial System
5.22    There have been efforts recently to reform the financial system supported by World
Bank and IDB loans. Under a World Bank SAL II loan, extended in 1989, Uruguay initiated
the process of strengthening the framework for bank supervision and regulation (i.e., adoption
of international standards for assets classification, provisioning, and capital requirement).
5.23    In addition, there are efforts to improve the organizational structure of BCU and
training for bank supervisory staff. There are ongoing efforts to rationalize BROU operations,
and, more recently, the operations of BHU. To make BROU's operations more in line with
other banks, it established interest payments on deposits of public enterprises, adopted BCU
accounting principles, and pays equal VAT taxation on all loans to the private sector. Other
reform efforts include the rehabilitation of intervened banks, such as the liquidation of Banco
de Italia, privatization of Banco Comercial, and restructuring for privatization of the other two
intervened banks.
5.24    Under an IDB loan approved in 1991, further financial sector reforms are being
undertaken. The major reforms include further strengthening of the legal basis of BCU's
supervisory and regulatory power through the new Financial Intermediation Law and the
adoption of a new Central Bank Charter.
5.25    Other measures taken under the loan include strengthening regulation of banks, more
stringent standards for capital adequacy, improving the monitoring of offshore activity,
strengthening banking supervision, and the elimination of distortions in the levels, structure, and
method of calculation of reserves so as to reduce incentives for dollarization and intermediation
costs.
5.26    The loan also supports the reorganization of BROU and BHU.  As part of its
reorganization, BROU had to take action to meet the standards applicable to private banks. The
measures included: keeping accounting records and asset classification in line with private
banks; maintaining reserves on private sector deposits similar to the private banks; making
explicit its capital situation and recapitalization; improving the methodology for setting lending
interest rates; adopting a program to reduce arrears; and implementing a new organizational



- 38 -
structure. The restructuring of BHU involves the reduction of construction activities undertaken
by the bank, changes in the maturity profile of its liabilities, and a downsizing of its operations.
5.27    Further financial sector reforms are being undertaken under another IDB loan:
Investment Sector Reform Program. These measures are intended to encourage institutional
savers by entering an agreement on a reform plan for the Social Security System, legislative
proposals to modify pension programs, and the passing of a law to demonopolize the insurance
industry. Under this loan, measures are to be taken to change tax law to equalize tax treatment
for securities and debt financing (the present tax treatment favors debt over equity). The
proposal is to create a commission to revise the Companies Law to facilitate the raising of
capital, enhance the self-regulatory structure, modernize the operation of the Stock Exchange,
and reform auditing practices. The Government will also develop regulations to create
investment funds, allow privatized companies to undertake public distributions of shares, and
allow the issuance of rnortgage securities by entities other than BHU. A legislative proposal on
Bankruptcy Law is also to be developed.



Chapter 6. The Regulatory Environment
6.1      The objectives of a regulatory regime are to protect workers, consumers, and the
environment, to prevent anti-competitive practices and discrimination, and to correct market
imperfections. The regulatory apparatus often preempts these objectives and causes inefficiency.
Three distinct aspects of the regulatory environment faced by the private sector warrant scrutiny:
(a) the general regulatory and institutional environment practices affecting the use and costs of
inputs, such as labor and capital; (b) rules and norms affecting intersectoral resource mobility,
incentives for competition, and the reliability and cost of contractual transactions; and (c) the
exclusive provision of key inputs and services by state owned enterprises and its implications
for private sector development. Each one of these aspects has direct and indirect effects on
private sector development. These translate into perhaps the most complex and contentious firm-
related regulatory issues, such as entry and exit and anti-competitive policies.
Firm-Related Regulatory Issues
6.2      The presence, control, and interference of the state directly or indirectly in economic
activities is pervasive in Uruguay. It has a long tradition of government intervention mostly
through regulations. This statism culture originates from the traditional social concerns that have
characterized socioeconomic politics in Uruguay. Government red tape is excessive even by
Latin American standards. The result is an economy riddled with tedious and bothersome
norms, procedures and regulations, some relevant but many unnecessary, some with significant
economic impact, others more like nuisances.  According to the four largest business
associations, an excessive number of permits are required across-the-board, administrative
decisions are too centralized causing unnecessary delays, and lack of coordination among
different government agencies causes extensive duplication of administrative requirements.
According to the PSAS, a large number of permits are required to operate. Most affected are
the larger firms and the manufacturing and transport sectors, particularly exporting firms. For
export-oriented firms the cost is estimated at 2.3% of sales value. In the process, the state has
historically built a powerful administrative and bureaucratic apparatus. That makes change
difficult and increases the costs of economic activity.
6.3     In key sectors, there is direct and monopolistic state intervention in the production of
goods and services. Many of them are non-tradable and some with economies of scale. The
functioning  of  these  sectors--transport  (airlines,  port  facilities  and  railroads),
telecommunications, power, energy and water and sanitation--has direct implications for private
sector development. As discussed in Chapter 5, the state also owns two major banks: the Banco
de la Republica Oriental del Uruguay, and the Banco Hipotecario del Uruguay (mortgage
monopoly), plus the Banco de Seguros del Estado (insurance monopoly).  State direct
interventions raise costs and effect the level of economic activity.
6.4      Ihere are many unwarranted state-imposed restrictions and requirements on economic
activity. The extent and consequences of those restrictions vary across sectors. In some, legal
or constitutional restrictions constrain private sector activities. This is the case in hydrocarbons,
alcohol, railways, airlines, insurance, telecommunications, and power, where the state has a
monopoly on operations. The inefficient running of these activities affects significantly the



- 40 -
pricing and quality of their goods and services. This affects considerably the cost of private
sector operations since they are extensively used as inputs in the private sector. For example,
the prices of petroleum products appear extremely high by Latin American standards, and there
is little desire to lower them. ANCAP has a monopoly on importing, exporting, refining, and
selling crude oil and its products. It also acts as a producer and regulator, ANCAP is also
responsible for producing and selling alcoholic beverages, cement, and refined sugar, and has
the monopoly for producing industrial alcohol. For most of these activities, there is no
economic rationale for state participation or its monopoly structure. The sugar and alcohol
sectors are the worst cases: both continue to be a budgetary drain, losing an average of US$6
million per year, not counting the effects of protection on consumer prices. Apparently,
ANCAP would like to divest itself of these sectors, but a constitutional provision and
parliamentary approval remain formidable obstacles.
6.5     In some sectors the restrictions appear in the form of licenses to operate, which are
limited in number or very expensive to obtain. That is the case of the urban passenger
transportation, intercity bus lines, taxi services and airline routes. The extent of entry restriction
can be gauged by a single statistic: the market value of a taxi license in Montevideo is
US$65,000 (see Box 6.1).
Box 6.1
Montevideo Taxicab Market
In a now famous example studied by a generation of economics students in US
universities, Milton Friedman has described the regulation of the market for taxicab
medallions in New York. The situation in Montevideo is much worse. Although the
market price of a taxicab medallion in 1990 was some US$60,000 in Montevideo
compared to US$125,000 in New York, lower Uruguayan per capita income means that
the market value of the license as a proportion of per capita income is more than four
times higher in Montevideo than in New York! The regulation of the taxicab market has
led to a scarcity of taxicabs - reflected in difficulty in hailing taxicabs in the downtown
area and in long waits when requesting by telephone, in high costs borne by consumers,
and in wasteful rent-seeking activity by the taxi-owners association.
6.6     In other sectors, such as the banking, cement, sugar industry, hotels, print shops, and
car repair shops, restrictions on private sector activities arise from the state presence. This has
unfavorable effects on the performance of the private firms in the sector, mostly through price
setting, procurement rules, and undue influence on availability. For example, in the cement
industry, the state company sets the market price, and unfairly benefits from the procurement
rule that all public works have to purchase the needed cement from the state company regardless
of price. The sugar sector is one of the most flagrant examples of state intervention and
protection. Not only is the state venture a money-losing activity but the sugar price in Uruguay



- 41 -
is more than double the world price, which is sustained by protectionist policies. To make
maltters worse, the state company buys raw sugar abroad in order to refine it domestically and
keep operations ongoing.  This protected high price has stifled the development of a
confectionery industry in Uruguay.
6.7     In all sectors, there are regulations and a large number of procedures affecting the cost
of economic activity through direct and indirect costs. Although many of them have nominal
costs, the main costs are in terms of staff-hours spent complying with procedures and lost
opportunities when there are accidental failures of compliance, such as the misplacement of
certificates, or failure to carry any of the large number of permits to undertake an activity, or
use of vehicles other than those indicated on forms for the provision of service. All of these
situations lead to a failure to provide the service or undertake the economic activity. The PSAS
provides extensive evidence of the pervasiveness and costs of these procedures.
Entry
6.8     A firm enters an economic activity when it is legally possible and the expected returns
exceed the opportunity costs of the committed resources. In Uruguay, a new enterprise does not
need to be licensed to start operations except in the restricted sectors mentioned above. Except
for microenterprises and perhaps small firms, direct entry costs are seldom an obstacle to entry.
The exceptions are types of services were there is some form of entry rationing, usually
implemented through the granting of a limited number of licenses, such as in the passenger
transportation services sector. Overall, while entry in most sectors in Uruguay, is not difficult,
it dcoes entail non-trivial direct and indirect costs. The latter are mostly in the form of waiting
time and man-hours spent complying with a plethora of bureaucratic requirements. They range
from little things such as the requirement to notarize minor documents to more substantial
requirements like the need for four different agencies to grant approval to import capital goods.
6.9'    However, the most important factor affecting entry is the behavior, structure, and
strategic analysis of the sector.  Accepting the premise that for firms other than micro-
enterprises entry costs are not an obstacle, the fact that little entry has taken place implies that
perceived risks is an effective barrier to entry.
6.10    Over 90% of Uruguayan firms are closed for public ownership; the rest are open,
incorporated public entities. The former are only subject to initial scrutiny (control previo)
while the latter are continuously scrutinized (control continuo). The new Ley de Sociedades
Anonimas is an improvement over the previous outdated commercial code. Yet it contains some
important shortcomings. One is the public framework of the law (orden publico), in that no
procedural changes or improvements at the corporate level can be made easily. For example,
many decisions legally require only a 51 % majority; however, if the firm would like to increase
the required quorum, e.g., to increase minority shareholder rights, the law does not allow it.
There are also unwarranted limitations on the amount of debt capital that can be raised--in some
cases only a one-to-one debt/equity ratio is permitted for issuance. Another issue is the
treatment and rights of shareholders, particularly bondholders.  The new  law  permits
shareholders and bondholders to intervene in the company's day-to-day operating decisions



- 42 -
through a set of stated procedures. That is clearly an undesirable business practice and most
often counterproductive.
6.11    The Treasury Inspector General (Inspector General de Hacienda) is responsible for the
resolution of administrative problems in incorporated firms. However, the evaluation and
resolution occur far fi-om public scrutiny with results usually not divulged. Consequently, there
is little opportunity to learn from the experiences of other firms, and administrative interpretation
of the law cannot be determined for the establishment of an effective commercial code.
Exit
6.12    At present, the main obstacles to efficient exit from an economic activity in Uruguay
are labor compensatlon costs, the legal bankruptcy process (which entails a plethora of
procedures and regulations governing the transfer of assets), and the abuse of agreed contracts
(concordatos). While Uruguay has a Bankruptcy Law, it has not proven effective in providing
workable norms that facilitate exit from an economic activity or the redistribution of assets.
Exiting an economic activity, other than outright sale, and particularly for a firm in bankruptcy
condition, is usually a very lengthy and resource-consuming process, often lasting from four to
five years (see Box 6.2). Frequently, by the time the transfer of assets is authorized, there is
little of value to transfer. To some extent the delays can be traced to the abuse of the
concordato. In Uruguay, this convention facilitates extension of the exit process. It is an
agreement between the firm and some of the creditors that provides the bankrupt firm with a
moratorium to carry on its economic activities without having to further respond to demands
from creditors. Often one concordato follows another to the point where bankruptcy becomes
a moot point, and creditors are left without compensation. This of course is another factor
reducing credit.
Box 6.2
Exit Constraints
In Uruguay there are 187 slaughterhouses and 45 packing plants, 39 of which handle beef.
Of the latter, 30 are licensed to prepare beef for export but only 15 of those are licensed
by the USDA and only 12 by the EC. Excess processing capacity in the export group
alone is estimated at 82 %. Uruguayan producers are rebuilding their herds; thus, a lower
average number of cattle are and will for some time to come go to packing houses, where
volume and profits are already down. In a well-functioning market, there would be a
significant shakeoul;--yet 13 plants have closed in the last three years. This gives an
indication of the diffliculties in the exit of firms, particularly those that owe debt to BROU.
6.13    The role of the state in Uruguay in monitoring exit and to some extent in protecting
firms from going banlrupt is excessive. There is a profound reluctance to let firms become



- 43 -
bankrupt. The attitude of the state, perhaps responding to the deeply rooted principles of statism
and distributive concerns, has been not only to condone such behavior but in fact to
institutionalize it. The evidence is the pattern and programs of debt forgiveness enacted by the
state through the Central Bank or BROU during the 1980s and into the 1990s, in an effort to
rescue firms in financial distress. Eight liberal laws of internal refinancing have been passed
since 1982 to protect indebted firms during this period from going bankrupt. Many of those
laws involved de facto partial debt forgiveness through direct discounts, refinancing at a nominal
value, or redeeming debt at face value. Most of these indebted firms (many in the agriculture,
meat processing, textile, and fishery sectors) are still operating but are in a type of financial
limbo, preventing sale or purchase of assets by other firms, mergers, or final dissolution.
Further, these generous repeated refinancing laws pose a credibility problem for future
government policies if a similar situation was to develop (see Chapter 5). This affects
commercial bank lending policy adversely and casts a long shadow on the robustness of property
rights affecting significant contracts in the economy. The result of these programs has often
been a delay in the inevitable, and a distortion of competition in the sectors affected.
6.14    Moreover, workers in bankrupt firms have priority in exercising the creditors right to
make claims against the business. This doctrine, although not reflected in the adopted law of
the Congress, has influenced many businesses and creditors to avoid formal bankruptcy
procedures. The consequence is that firms with insufficient capital continue to operate, creditors
are forced to settle for a fraction of their claims, resources are not allocated to their most
productive uses, resulting in a suboptimal level of transactions and economic activity.
Moreover, since many of these firms exploit their predicament by not complying with tax
liabilities, labor or otherwise, unfair competition and pricing distortions develop.
Anti-competitive Practices
6.15    Competitive policy in Uruguay is limited to the area of the Patent-Trademarks-
Copyright Law (Ley de Marcas y Patentes) enacted in 1940, but only with domestic jurisdiction.
Speculators register foreign trademarks in anticipation of later attempts by foreign trademark
owners to register their trademarks in Uruguay, or to use a well-known trademark for goods of
a different kind. For example, Uruguayan firms are free to adopt a well-known foreign brand
name (such as Gucci or Calvin Klein) and use it to market their products; however, they cannot
adopt a registered domestic brand name or one resembling it. Moreover, use of a trademark is
not required under the law, and actions to nullify registration because of confusing similarities
must be initiated within two years of registration, or otherwise there is no recourse. Also,
pharmaceutical and chemical products are excluded from any form of protection. As a result
there is lack of clarity about protection of biotechnology products and processes. This describes
the extent of Uruguayan legislation for anti-competitive practices. In sum, there has been a,
perhaps, not unexpected lack of interest by the government, trade associations, and producers
on the subject. The only concern relates to dumping policies from abroad. What is lacking and
most needed is the enactment of a Consumer Protection Law and a Competition Law. The
absence of this legislation has strong implications for private sector development.  A
harmonization of legislation to facilitate accords under MERCOSUR is highly desirable, since
competition policy is a vital part of the MERCOSUR agenda. Also, a description of legislative
jurisdiction and enforcement protocols should be agreed to by all parties.



- 44 -
6.16    At present, the tight oligopolistic structure prevailing in Uruguay can be an effective
barrier to potential domestic entrants. In many subsectors a single producer or a small group
dominates the industry and protection barriers give them considerable market power. Explicit
or tacit collusion among the few firms that control each sector appears to be pervasive. The
distribution sector (particularly, for food) is essentially a cartel. The absence of consumer
information and protection groups and a resigned attitude of consumers diminish pressures to
compete in quality and service. Also, at the wholesale-retail level there appears to be a lack of
competition; domestic prices tend to be 50% to 100% higher for some types of imports, despite
tariffs and duties of under 30%. The lack of entry during the last decade, despite the existence
of rents that could be captured, is an indication of the effectiveness of incumbents in deterring
entry. Any increase in competition in the established sectors is likely to come from neighboring
countries or from external sources. The enactment of antitrust legislation is desirable in any
event to achieve a level playing field and preempt anti-competitive behavior .
6.17    The evasion by firms of both social security and VAT taxes leads to unfair
competition. The firms most successful in avoiding tax payments are usually small where the
degree of monitoring is weaker and less frequent. The resulting lower cost provides these firms
with a cost advantage over the larger ones. But small firms have a (cost) advantage even
without transgressing the law, since they have fiscal advantages over larger firms. If a small
firm is organized legally as one firm, its taxes will be based on fixed rates that are lower than
those of the incorporated firm (Sociedad Anonima), inclusive of social security taxes.
Moreover, their asset taxes are also smaller than those of the incorporated firm. Similarly, firms
that experienced debt refinancing problems originating in the 1982 crisis have a de facto cost
advantage over other firms. Estimates indicate that about half the firms that were technically
bankrupt by the debt crisis of the early 1980s have been restructured or eliminated, and those
still active are reasonably healthy. However, the other half remain in operations without equity,
in effect financed by BROU, and in many cases allegedly not paying their taxes or social
security payments required by law. This implicit cost advantage is clearly unfair to existing
firms who compete with those companies. The results of the enterprise survey underscore the
point. Practices described as the most damaging to competition by the surveyed firms include
selling below domestic costs and dumping, while factors affecting competition are listed as
secondary in importanice by the firms surveyed.
6.18    The government has explicitly recognized  the excessive, unnecessary, and
counterproductive duplications and complexities of much regulatory activity. In consequence,
the government has established two programs, PRONADE and PLADES, to improve the
efficiency of the public sector, simplify and eliminate numerous administrative barriers,
unnecessary regulations, procedures and requirements, unify taxes and fees, and reduce the
number of steps and agencies. Those programs have already had a measurable impact, and they
should be continued and strongly supported. But even that is not enough. PRONADE tends to
accept as a given government actions and thus concentrates on helping the government do it
more efficiently, to lighten the burden on the private sector.  But there are reforms of
procedures and conceptual questions about the rationale for government intervention that need
to be addressed that E'RONADE is not inclined to tackle and thus will need attention as a part
of a reform agenda.



Chapter 7. Labor Market Issues
Labor Market Issues
7.1     The labor force in Uruguay is about 1,250,000, with Montevideo accounting for
700,000. Between the government and the state-owned enterprises (SOE), the state employs
about 267,000 and manufacturing, the largest sector, accounts for 300,000 workers. There are
700,000 pensioners.
7.2     At first appearance, labor laws in Uruguay seem to be among the most flexible and
better functioning in Latin America. With the exception of the public and banking sectors, the
hiring and firing of labor can be and is done with relative ease and low costs. The evidence for
this lies in the labor turnover rates and short-term fluctuations in the unemployment rate. For
the 1991/92 period, they have been, on average, 7% for forced separations and 10% for
voluntary separations. The smaller firms have higher labor turnover rates in both categories,
12.3% and 12.2%, respectively. Similarly, the rates are also higher for non-unionized firms.
During 1992, the unemployment rate has fluctuated from 8.6% to 11.3% to 8.4%. However
the highest unemployment rates for the year are recorded during the summer months. This is
because individuals seek temporary employment during this time and as do the first-time job
seekers after finishing school. The turnover rates are most likely to overestimate true values on
two grounds. First, a policy often pursued by firms is to rotate layoffs. That is, a worker is
fired and when the unemployment insurance benefits terminate, the same worker is hired back
and another is fired and so on. Second, since 1991, a number of firms have been actively
engaged in voluntary plans to reduce their labor force. This can be quite costly, particularly in
the banking sector, where severance pay of 18 months salary is not unusual. Small and non-
unionized firms apparently can adjust their labor force with relative ease, but not larger
unionized firms. Organized labor's objectives seem to concentrate more on maximizing short-
run gains for its membership. Labor union strength and the high level of conflict between labor
and management tend to undermine the benefits of flexible labor laws. The result is higher than
optimal labor costs, other efficiency losses caused by suboptimal organization of production, and
the fear and deterrence of firm's growth. To some extent, this explains the relatively small size
of Uruguayan firms. According to the 1988 census (Table 7.1), there are 25,042 industrial
firms (unidades economicas) and only 134 with over 200 employees, with 93% employing less
than 20 workers. However, data from the 1988 census are likely to have overestimated the
number of firms and underestimated the number of large firms. The reason being that the unit
that was measured was the "unidad economica" defined as any entity that stands physically
separated. Therefore, two physically separate outlets or factories of the same company were
counted as two separate firms. The largest subsectors both in terms of the number of firms and
the number of large firms are food processing, distribution and retail and textiles and clothes.
Those three subsectors account for nearly 50% of all firms.



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Table 7.1: Distribution of Industrial Firms by Size
Num of Employees:       < 4   | 4-9   10-19   2049  | 50-99  1 100-199 1 >200
Num of Firms (25042)   18110   3499   1778    964        352       205      134
% of Firms            72.3%    14%    7.1%      3.8%     1.4%     0.8%     0.5%
% of Employment       13.9%    10%    11%    13.2%    10.9%    12.7%    28.3%
Total number of employees: 221,000
Source: 1988 Economic Census
7.3     More specifically, a host of factors raise labor costs, directly or indirectly reducing
efficiency at the firm level and resulting in a reduced level of economic activity, employment
and output growth, and to higher prices and reduced demand. These factors and their specific
effects are the following:
(a) Excessilve Social Security Taxes: The tax burden placed on the firm and labor
is very high by any standard. The employee contribution is 16% of wages while the
employer ccntribution is 21.5% (19.5% as of 1993). As matter of fact, Uruguay has
the highest labor costs, particularly in relation to the other MERCOSUR countries.
(b) Tax Evasion: As a consequence of high social security taxes, firms have devised
ways to reduce their tax burden. The most common practice of tax evasion is for
firms to underreport employee earnings. Workers usually tolerate such practices, since
they can reduce their social security tax contribution. Moreover, the practice does not
reduce the benefits collected at retirement, since these are computed based on the
average wage of the last three working years. As a result, firms typically report actual
labor earnings only for the three years (recently the basis of calculation was increased
to five years) prior to retirement.
The foregone revenue in social security taxes due to underrerporting is estimated at
3%  of GDP.  Similarly the foregone revenue in VAT due to underreporting is
estimated at 1.8% of GDP. In fact, the effects of tax evasion are undermining the
financial viability of the social security system, raising the permanent budget deficit,
increasing costs, and providing an unfair advantage to those who evade taxes or are
less subject to monitoring.
(c) Organization of Work Impact: As a consequence of the high fiscal cost of labor,
firms have dlevised schemes to reduce their employment tax liabilities. Most firms
disengage from a number of activities that are natural for them to perform within the
firm itself. The common policy is to subcontract many activities to third parties to the



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Box 7.1
Social Security Wage Declaration - Lottery
To encourage accurate wage reporting, the Government has begun a monthly lottery,
where employees can participate at no cost, submitting a form declaring their earnings,
which are later contrasted with the firms' statement. From all forms submitted, one is
randomly chosen and an award of 100 times the reported earnings is made to the
winner. While this is a novel idea, the expected payoff does not compensate for
truthful reporting, and thus it is unlikely to correct underreporting. The payoff is 2
US$ cents given that the average monthly wage is $280 and there are 1.4 million
workers.  This two cents should be compared to the difference between reported
minimum wages and actual wage.
extent possible. In doing so they are legally released from employment tax obligation
and the firm's social security tax obligation is reduced. According to the PSAS, not
counting services such as those listed above, on average firms subcontract over 10%
of their productive activities. While some subcontracting can be efficiency enhancing,
social efficiency can be reduced in this context. Subcontracting translates into higher
social costs, and suboptimal organization of work and use of labor inputs. The
excessive fragmentation of the industrial sector (indicated in Table 7.1) can be traced
to subcontracting practice.
(d) Work Casualty Insurance Premiums: Insurance contracts can and should be
instruments that enhance efficiency by eliminating risk. It is questionable that they
serve that role in Uruguay. The BSE, a state-owned institution, operates as a
monopoly for the provision of this compulsory insurance.  As a consequence,
insurance premiums are high (up to 8% of wages) and are levied on the employer.
Moreover, further distortions exist since often the premiums, which are firm specific,
appear to have little relation to the probability and cost of injury. This results in
distorted costs of production.
(e) Banking Sector Labor Practices: For historical reasons labor unions in the
banking sector are powerful enough to have secured for themselves highly favorable
terms of employment, compensation, and almost total job security. The wages in the
banking sector have been on average 1.5 times the national average for similar job
categories. These banking labor practices affect private sector enterprises by raising
financial intermediation costs.
(f) Public Sector Labor Practices: The constitution guarantees job security to all
public employees. In addition, they have powerful unions. As is the case in most



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countries in the region, at least nistorically, the central administration and state-owned
companies have been used as a political source of job creation. The end result is
significant overstaffing and an inefficient yet powerful bureaucracy. Since most of the
state owned companies are legal monopolies, labor costs and other inefficiencies affect
state established input prices, and thus the costs of production and economic activity.
They also aLffect private firms indirectly through increased government expenditures
and consequently through a higher tax burden imposed on the private sector.
Beginning in 1991, a number of state companies such as BCU and UTE have
implemented voluntary labor reduction and early retirement programs at very generous
terms by Uruguayan standards, such as 30 to 35 months severance pay. BCU has
budgeted US$5 million for its program. The objective is not only labor reduction to
an optimal level but a gradual convergence to offer market salaries, as well as the
eradication of multiple employment. Yet, to this date, very few employees have taken
advantage of these programs. In a sense that reflects the perceived strength of the
benefits derived from state employment.
(g) Conflict Environment and Resolution of Disputes:  The labor-management
relationship in Uruguay is highly conflict ridden. As a result of the non-existence of
legislation, norms or agreed procedures to resolve conflicts between labor and
management, there is a strike culture. While there are good reasons for the existence
of unions and the exercise of their market power, the high frequency of impasses in
negotiations results in inefficiencies. At present, the unions influence labor market
practices significantly. Although unionization has declined, it remains at 55% level.
They are the main labor negotiating party in collective agreements, and they have
strong political influence. The constitution guarantees labor's right to strike, and labor
has exercised that right frequently, over and within conventional and collective
bargaining agreements. Also, labor in individual plants often respond automatically
to the requests of national labor leadership, which focuses offers on political stances
rather than on job and salary issues. (Firms experienced slowdowns in their own firms
during periods of strike at the Port of Montevideo). The result is high levels of
impasses and a high incidence of strikes and intermittent work stoppages, with
significant social and private cost to both employers and employees. For example, in
1992, Uruguay witnessed strikes among the following groups: public employees,
teachers, police, passenger buses operators, taxi drivers and architects. Firms live
with a permanent threat of strikes. This has significant direct and indirect costs on the
firm. Management effort and resources must be deployed continuously to diffuse the
threat. The unions have refused to accept any form of "clausulas de paz" in collective
bargaining. A rough estimate places the average number of days lost due to strikes
per 1,000 workers per year at over 1,000 in Uruguay, (when it is 5 in Germany, 136
in UK, 8 in Netherlands, 84 in Portugal, 271 in Italy, and 647 in Spain). Their effects
on productivity and competitiveness are drastic. As a result of that environment,
potential industrial strife often dissuades large firms from adjusting their labor force
as much as they would like. Smaller and non-unionized firms freely make labor force



- 49 -
adjustments since the fear of strikes or labor unrest is rarely present. This is reflected
in the 1988 industrial sector survey where it was found that the yearly layoff rates
were 2.4% and 12.3%, respectively, for large and small firms, and 4.7% and 9.2%,
respectively, for union and non-union firms. To some extent, this predicament deters
firms from expanding. Diminishing the conflict atmosphere is crucial, particularly
since international experience reveals that successful industrial reconversion often leads
to a sharply reduced (short-term) workforce. In the current environment this would
be problematic and lead to slow reconversion. Finally, the shortage of labor law
judges (there are only 8 in Montevideo) compounds the problems and delays the
resolution of disputes. The consequence of this environment is higher production
costs, lower economic activity, and suboptimal firm sizes.
(h) Education/Skill Shortages/Information: While literacy and education levels
remain high in Uruguay by Latin American standards, the quality of human capital has
been deteriorating. Slill migration and the reduced nurturing of the education system,
caused by squeezed education budgets, are the mLi causes. A 1991 study of Uruguay
by CEPAL points out a significant deterioration in the quality of education, at both
pre-college and college levels, and training. The average number of training days a
year is below 2 days for the labor force. These low levels of expenditure on in-plant
training, management training and the decline of the last 20 years in the level of
expenditure on and in the standards of public education greatly contributes to the low
productivity of the economy. Moreover there is a mismatch between needed and
offered skills. A frequent complaint from the business community is the lack of
trained staff for management and an excess supply of lawyers, accountants, and
doctors. This issue--shortage of technicians and skilled labor--identified by the survey
sample of firms appeared at the top of the list of problems affecting the production
process. This environment undermines labor productivity growth, unabling firms to
obtain reductions in the costs of production and supply increases. Also in Uruguay,
trade and business associations devote much less effort to disseminating information
concerning best practice techniques and productivity improvement than in more
advanced countries. The fragmentation of producers particularly in the agro-industrial
sector, is worrisome for trade purposes among others. Owner-managers of many
small- and medium-size firms appear to have little notion of economies of scale of
plant size in their product line, or those that can be achieved by longer production
runs. Absence of management training or hiring individuals with such training leads
to small and inefficient operations and failure to employ recent technology or to use
best practices.
(i) Employment and Wage Patterns: Wages are usually determined through yearly
collective bargaining (convenios collectivos) at a sector rather than firm level. These
agreements usually set wages and minimum compensation by job category and contain
clauses to adjust wages for inflation, three or four times a year. The adjustment is
backward-oriented and is tantamount to wage indexation, with inflationary



- 50 -
implications. The relatively short span of collective agreement of one year drains
resources and efforts away from more productive activities. Wage Councils, previously
used with extensive government participation and control, are gradually being phased
out. All firms in the sector, regardless of their affiliation with the sector association,
would have to comply with any tripartite agreement reached by the government, labor,
and managemrent. Only if the government objected to a labor-management agreement,
would firms not affiliated with the sector association be free to seek their own terms.
Real wages have increased slightly in the last few years, particularly in the private
sector, while the unemployment rate after the 1982/83 crisis and more so after 1985.
has remained relatively steady in the 8.5% to 9.5% range, despite the large swings in
the GDP growth rate. Real wages increased by 5.2%  and 2% in 1991 and 1992,
respectively, in the private sector and declined in the public sector (except for the
interior). The unemployment rate in UCTruguay is relatively high by Latin American
standards. That and its inability to adjust to output swings tends to indicate labor
market rigidities and the presence of inefficiencies in the allocation of resources.
Thus, measures to enhance the flexibility of labor markets would be most desirable.
It is somewhat puzzling that real wages remain relatively stable despite swings in
output. The plausible explanations are: (i) the strength of unions and their influence
in collective bargaining protect real wages and their employment share; (ii) the
difficulties of firms to optimally adjust their labor force induces rigidities in the level
of employment; and (iii) the informal sector, migration and adjustments in
subcontractin,g absorb the slack or the business cycle fluctuations.
7.4      The Informal Market: There is no reliable information on the size of the informal
sector. To further complicate matters, there is a problem of definition, since it appears that a
number of individuals involved in informal activities also have some type of formal participation
given the phenomenon of multiple jobs. The structure of the informal market is closer to the
Southern European model than to the stand&-d Latin American one. It is driven mostly by
motives of tax evasion give., the high level of taxes, both social security taxes (36.5%) and VAT
taxes (22%). Overall, the informal market is believed to account for 25% of the labor force
(PEA); 40% of the Montevideo labor force is presumed to be involved. Their main activities
are services, crafts, and retail trade. They tend not to be "ambulantes," the standard mode of
the informal sector in Latin America; instead they are subcontracting, working at the household
level and often holding other jobs, both part- and full-time. A 1986 survey of the informal
sector reported that over 12% of the households were engaged in some in-house productive
activity. The activities most often mentioned were industrial and service related. On the other
hand, the number of "ambulantes" in Uruguay is small, estimated at around 3,000.



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Table 7.2: Real Wages
Average     Private   |   Public    Central  1 State-Owned | Government | Unemployment   GDP
Sector      Sector    Government   Enterprises | Department   Rate      Growth
1985    100        100         100         100          100         100         13             1.5
1986    106        108         106         96          102          107         10.7           8.9
1987    111        116         105         97           103         101         9.3            7.9
1988    113        119         10o         102          100         92          9.0            0.4
1989    112        121         102         101         93           88          8.5            1.3
1990    104        114         92          88          87           102         9.1            0.9
1991    108        121         93          82          97           133         8.9            2.9
1992k  111         126         92          77           101         155         8.4            7.4
Source: Coyuntura Laboral, November 1922. Ministry of Labor, Montevideo
*      As of October 1.
7.5    Social Security System and Reforms: As indicated in the macroeconomic section, the
structure and financial predicament of the Social Security system in Uruguay presents serious
problems, with crucial implications for macroeconomic stability, labor costs, and the ability to
provide the service. The Social Insurance Bank, BPS, manages the general social security
system and embraces three major branches: (a) civil servants and teachers; (b) industry and
commerce workers; and (c) rural and domestic workers. About 87% of the insured and 90%
of the pensioners are in the BPS. The rest are covered by seven independent pension schemes.
Coverage of the labor force is at 76% down from a peak of 81% in the 1970s. However, since
there are public assistance pensions for the poor, the coverage is virtually universal. Pensions
are imputed from the average salary of the last three working years and are adjusted for
inflation. This period will be extended in 1993 to the last five working years, with the idea of
further extending it to 10 years in another five years.
7.6    The demographic structure in Uruguay is such that the ratio of contributor to pensioner
is one to one, the lowest in Latin America, and as the population continues to age, this is likely
to worsen. Almost one-fourth of the population now receives a pension. Pensions represent
80% of benefit expenditures and cause 60% of the national budgetary deficit. The cost of the
social security system as a percentage of GDP reached a record 15.4% in 1982, declined to
10.3%  in 1985, and in 1992 rose to 14%. The BPS overall deficit averaged 2%  of GDP in
1986-92, with two-thirds of it the pension deficit. In 1992, the BPS deficit was 25 times higher
than the central government deficit. Within BPS the industry-commerce branch generates a
surplus that is used to partly offset the deficit of civil servant-teacher and rural-domestic
colleagues. State subsidies to pensions have an overall regressive effect because they mostly go
to high and middle-income insured groups, such as the Armed Forces and civil servants.



- 52 -
Moreover, there are numerous unjustified differences in pension amounts. For example, with
reference to the average BPS pension, those on the Armed Forces are 400% higher, civil
servants 56% higher, industry-commerce 16% lower, and rural-domestic 37%. Political officials
and teachers can retire with any number of years of work regardless of age, and they often do
so while they are in their forties. The future looks even bleaker. In 1991, BPS prepared a
projection of its pension deficit showing that it will rise to 33 % of income by the year 2000 and
to 75% by 2045. As EL percentage of GDP, the pension deficit will be between 4.5% to 5.8%.
7.7   Finally, the contributors rates are inordinately high and overall evasion in the BPS is a
high 55%. About 25% of the VAT, a 20% tax on registration of vehicles, and part of the
income tax revenue is channeled to offset the social security deficit.
7.8  Institutions administering Supplementary Pension Funds (SAFCPs) were approved by a
1984 law and regulated in 1989. Their number is about 25, but they only have around 33,000
members or 4% of those covered by BPS. These funds can be administered by BPS, the State
Insurance Bank, or rnon-profit societies organized by unions and professional and trade
associations approved by BPS. Commercial corporations, such as Chile's AFP, are excluded.
Participation is voluntary, and investment must be mostly in public instruments and a minority
in real estate and personal loans. As of now, they have made negligible impact.
7.9  In light of this dire situation, the government, in 1992, after almost a year of debate
considering a number (Df proposals submitted to Congress, with apparent consensus, a reform
proposal entailing a mixed system of three levels: (a) a reformed public scheme but with the
addition of individual accounts based on which pension would be paid; (b) a noncontributory
public assistance pension financed by the state; and (c) supplementary pensions provided by a
variety of institutions already approved in the 1980s. However, ages of retirement were not
changed (60 for males and 55 for females, which results in average pension periods of 16 and
24 years respectively). Payroll contributions would remain unchanged. A minimum of 10
years' contribution was set. The innovative part of the proposal was the introduction of
individual accounts, to be used as the basis for determining all future pensions which earn an
annual real rate of 3.5%. The replacement rate for old-age pensions would be 60% of the
average monthly deposits plus 0.5% for every additional year of contribution up to 65%. The
minimum pension would be equal to the minimum salary. The scheme would also pay basic
disability and survivor's pensions. The noncontributory public assistance pension would be paid
to those age 70 and older, providing they are not covered by BPS and are destitute. This
pension would be financed by general state revenue. This relatively modest reform was voted
down by Congress. At this time, the draft is being revised for resubmission.
7.10 Other evidence of the difficulty of reform in social security in Uruguay was the
constitutional amendment approved by 80% of the population referendum at the end of 1989,
which mandated the adjustment of all pensions to the cost of living index and rejected a ceiling
on pensions established two years earlier. The fragmented political party structure tends to
politicize issues with direct impact on the population, i.e., Social Security, greatly complicating
the process of reform. The common instrument to use is national referendums, for this issue
as well as for the privatization program (e.g., ANTEL).



Chapter 8. The Tax System
8.1    Many private sector entrepreneurs view the level of taxes and tax regulations in Uruguay
as the main obstacle to private sector development. Firms included in the PSAS of all size
categories and from all four sectors of activity ranked level of taxes and tax regulations as a
principal constraint to their activities. However, the distribution of the tax burden among factors
of production and activities in Uruguay, more than the tax level itself, has important implications
for private sector development.
Structure of the Tax System
8.2    Uruguay's tax system' rests basically on wage taxes (social security contributions) and
consumption taxes, notably the value-added tax VAT. The evolution of the tax system in the
last two decades has moved toward substitution of direct for indirect taxes. For the period 1985-
90, indirect taxes on average amounted to 18%  of GDP compared to 12% in Brazil and 4%  in
Venezuela.
Table 8.1: URUGUAY - Evolution of the Tax Structure
(percentages)
l         Tax Structure               Percentage of GDP (f.c.)
Type of Tax                  | 1972   1986   1989   1991    1972   1986   1989   1991
Personal Income                  1      0       0      0       0.2    0.0    0.0      0.0
Salaries and Wages              47      29     29      33      8.8    5.6    7.1    10.2
Corporate Income                 3      5       4      4       0.6    1.0    1.0    1.1
Wealth                           2      5      16      15      0.4    1.0    3.8      4.5
General Sales VAT               12      29     24      25      2.2    5.6    5.9      7.6
Specific Sales                  27      21     19      16      5.0    4.0    4.5    5.1
Trade                            9      11      8      7       1.6    2.2    2.0      2.3
Total                        101     100   100    100       18.8   19.4   24.4   30.9
Sources: 1972, 1986: de Haedo and Sapelli; op. cit. Table 3
1989, 1991: Borba and Fernandez; op. Cit. Tables I1 and A2
8.3     Uruguay's current tax structure is the result of the tax reform of 1973, which eliminated
the personal income tax  and  substituted  a VAT  (consumption  tax) for social security
contributions (tax on wages) and a number of nuisance taxes. The tax reform had several
important objectives.28 It aimed at the establishment of a simpler and more neutral tax regime;
27 This section makes extensive use of the information on taxes in: Carlos A. Borba and Adrian Fernandez,
"Incidencia de los Aspectos Tributarios en las Empresas," mimeo, CERES, November 1992.
28  Javier de Haedo and Claudio Sapelli; "Simplificaci6n y Modernizaci6n del Sistema Tributario en Uruguay:
1972 - 1986," Serie Temas Economicos y Sociales, CERES, November, 1988.



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the reduction of collection costs for both the government and the taxpayers; and increasing the
competitiveness of exports through the rebate of indirect taxes to exporters. Most importantly,
with the adoption of the VAT as a major source of fiscal collections, the tax reform implied an
important departure from the previous objective of using the tax system for distributive purposes.
The tax reform and enforcement efforts not only changed the structure of taxes, but increased
tax collections by about 5 percentage points of GDP between 1972 and 1989 (See Table 8.1).
8.4   Mounting budgetary problems in 1989/90, aggravated by the effects of the reform of the
indexing mechanism for public pensions, led the government to increase tax rates and to
introduce some new taxes in 1990 and 1991 (Fiscal Adjustment Law of 1990). Several taxes
were increased--VAT, excise taxes, taxes on bank assets, and corporate income taxes. New
taxes on wealth, transactions, and commissions were introduced29 and rebates on exports were
removed. The new taxes were expected to be temporary, but they have become a permanent
feature of the tax regime. The tax measures succeeded in increasing collections to 30.9% of
GDP in 1991, but they detracted to some extent from the objectives of the 1973 reform with the
creation of small taxes of low yield, and by once again placing strong emphasis on taxing
personal income and labor. Some new taxes, such as the taxes on personal contributions and
commissions are, in effect, taxes on personal income but without the clarity of a personal income
tax. The use of temporary taxes to address budgetary problems also introduced greater
uncertainty into the environment for private sector development.
Characteristics that Affect Private Sector Development
8.5   Uruguay's tax structure contains a number of problems that impinge on the development
of the private sector.  Principal among them are: (a) lack of neutrality; (b) excessive
discretionality; (c) high degree of evasion; and (d) inefficient implementation.   The
predominance of indirect taxes suggests the system is also excessively regressive but the
evidence is not clear cut. Furthermore, high social security contributions, which total nearly
40% of labor costs, increase the cost of labor and reduce the competitiveness of Uruguay's
producers. Social security contributions could be considered a wage tax, since the system is
unable to render the services it is supposed to provide.
8.6   Lack of Neutrality.  A number of taxes have numerous exemptions or are applied
differently according to firm size, type of ownership, type of product or activity. Lack of
neutrality in the tax system introduces distortions in relative prices and hence in resource
allocation. For example, income taxes discriminate against large firms. Small personal firms
with incomes below a certain limit are exempt from the corporate income tax (IRIC). They pay
taxes based on "fictos" that imply lower rates; they also have lower social security contributions.
Small firms are also exempted from IVA. This exemption, however, works against them
29 Taxes created after the 1974 tax reform include: IRP tax on personal retributions; IVEME tax on the sale
of foreign exchange, 1984; tax on commissions, 1990; tax on the transfer of real state property, 1990.



- 55 -
because the IVA included in their purchase of goods and services constitutes a cost for them that
they cannot offset against fiscal credits.
8.7   Small firms not only pay lower taxes but are also more likely to evade taxes, since tax
collection efforts concentrate on a relatively small group of large firms. Nearly 80% of IVA
collections come from a group of 10,000 large firms registered in the System of Special Control
of Taxpayers (CEDE). Similarly, 70% of social security contributions come from the 5,000
largest tax payers.
8.8   Several taxes ,.7apply more heavily to incorporated public companies than to personal
companies. For examole, under the IRIC, all rents of a public company are taxed while some
rents of personal companies are not. Also, cooperatives are in some cases exempt from the
IRIC and in other cases are charged 50% of the applicable rate. The wealth tax (patrimonio)
is also lower for personal companies than for public companies. Finally, the ICASA, a tax on
the constitution and expansion of public companies, obviously apply only to this type of firm.
Tax discrimination against incorporated public companies works against the development of the
capital market in Uruguay. On the other hand, the IRIC makes no distinction between
distributed and reinvested profits, which, according to some entrepreneurs, does not encourage
reinvestment. There are also tax differences according to types of activity. Agricultural
activities are subject to a different income tax regime than industrial and commercial activities.
As a result, there is a very unequal distribution of the tax burden between the agricultural sector
(which pays little taxes) and the formal urban activities.
8.9   The existence of two different IVA rates and of products and activities that are either
exempt from IVA or that pay zero IVA reduce the neutrality of this tax. IVA has a basic rate
of 22% but some products of mass consumption such as foodstuffs, medicines, and the raw
materials pay 12%. Hotel services, not a mass consumption service, also pay 12% IVA.
Products exempt from IVA include agricultural inputs, petroleum derivatives, printing material,
transport services, and provision of water and electricity. The effect of IVA exemptions works
against producers of some of these products. Since the sale price of exempt products does not
include the IVA as a separate item, producers do not have IVA credits against which to discount
the IVA incorporated into the purchase of their inputs, which become a cost30. The exemption
of IVA is less of a problem for agricultural products because some inputs are also exempt from
IVA. New and long-maturing investments are discriminated against under the current IVA
system, since the IVA credits lose real value over time due to inflation. In investments of long
duration the loss can be substantial. Exporters pay zero IVA. They have a fiscal credit for the
IVA paid on their inputs, but delays in processing the taxes affect them because their IVA
credits also lose real value over time due to inflation.
30 CERES: Informes y Propuestas 6 'Hacia Una Primera Racionalizaci6n del Sistema Tributario: El Impuesto
al Valor Agregado," February, 1991.



- 56 -
8.10 Uruguay's tax system discriminates against certain forms of financing. Different tax
treatment of liabilities stemming from bank credit or the issuance of debentures has contributed
to the lack of developrnent of the capital market. Liabilities from bank credits can be deducted
for the calculation of the wealth (patrimonio) tax but those stemming from the issuance of
debentures cannot, resulting in a 2 % difference in the cost of financing from these two sources.
Also, non-bank loans, including debentures, can be deducted for income tax purposes only up
to the limit of the deposit rates of BROU. On the other hand, the IMABA, a tax on banking
assets, increases the cost of bank credit. Banking assets are subject to double taxation under the
IMABA and the wealth tax on banking institutions. The wealth tax also discriminates against
financing of equipment through suppliers credit, since these credits cannot be deducted in the
calculation of the enterprises' net worth. The 4% tax on the constitution of mortgages between
private entities and the above-described higher income tax on incorporated public companies also
work against the development of the capital market.
8.11 Tax exoneratioris under the Industrial Promotion Law of 1974 (IPL) reduce even further
the neutrality of the tax system. Exonerations apply to activities declared of National Interest
by the executive. Different sectors have been declared of national interest such as tourism,
export activities (specific products mostly agricultural), forestry, mining. The law does not
specify the extent or duration of the exemption; this is left to the criteria applied by the many
authorities involved in this regime. The main exonerations granted under the IPL are: (a)
exoneration of import tariffs on equipment not produced locally; (b) exoneration of IVA on
imports of capital equipment and reimbursement of IVA on locally purchased equipment in
activities of long maturation; (c) exoneration of IRIC for channeling of savings and
autochanneling of savings; and (d) exoneration of the wealth tax.
8.12 The application of some incentives under the IPL discriminates against new investment.
For example, new enterprises do not have profits and therefore cannot use a tax break on
retained earnings. Other general incentives are the exoneration of IRIC on reinvested fiscal
benefits, accelerated aimortization of capital, and deduction of up to 50% of the cost of the
imported machinery for the calculation of the wealth tax.
8.13 The costs of the industrial promotion regime in terms of misallocation of resources and
foregone revenues are probably high, while its effect in attracting investment is dubious. Lost
revenues due to fiscal incentives are estimated to be about US$50 million per year, more than
0.5% of GDP. In December 1991, the government imposed limitations on the exonerations
contemplated in the IPL (IVA and IRIC). However, the law has not been modified and the
incentives could be easily reinstated.
8.14  High social security contributions increase the cost of labor (40% of labor costs) creating
a bias against labor-intensive activities. One affected sector is tourism. In Uruguay, labor costs
in the hotel business amount to about 50% of the operational costs, compared to 40% in
developed countries and less than that in other developing countries.



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8.15 High Discretionality. The tax laws give the tax administration a large degree of
discretionality to determine the level of taxes and to introduce exemptions and temporary taxes
for budgetary reasons. The high degree of discretionality makes taxes unpredictable and
confounds attempts at long-term planning by firms. This explains why firms interviewed in the
PSAS consider tax regulations a major constraint on private sector activities. The IPL leaves
to the discretion of the authorities the criteria for declaring an activity or an enterprise of
national interest. Also, it is up to the authorities to determine the type of tax to be exempted
and the duration of the exemption. Moreover, the granting of a tax exemption to a firm in a
particular sector does not imply that the same treatment has to be given to all the firms in that
sector. Since there are about 40 government agencies dealing in some way with industrial
promotion, the result has been a completely disorganized net of exemptions.
8.16 High Level of Evasion. Tax evasion in Uruguay appears to be substantial. Estimates
by CERES3' suggest that in 1989 evasion of IVA was about 25.5% of potential collections--
equivalent to 2.2% of GDP. The IMF has estimated that evasion reached 33% of potential
collections for the same year and that evasion decreased to 29% in 1991. This means that IVA
evasion in 1991 could have reached $150 million. Different levels of IVA evasion among
sectors decreases the system's neutrality. Estimates for 1983 indicate that evasion levels varied
from 9.1% in financial transactions to 55.3% in services. Evasion of IMESI, a sales tax, for
alcohol products could reach 16% of the potential collection. Tax evasion to the social security
system is also substantial. Since, until recently, retirement benefits were computed relying on
the average income compensation during the last three years, firms and employees agreed not
to report wages during the early years of employment. The recent extension of the base for
calculating social security pensions to five years will reduce evasion32. Tax evasion due to
non-registration with the Banco de Previsi6n Social is also common. Estimates of tax evasion
affecting the social security system (not counting payments for maternity, health and
unemployment insurance)33 indicate that it amounted to more than US$300 million in 1990,
eq uivalent to 31 % of potential collection and 3 % of GDP. There is also substantial tax evasion
through smuggling. Collection losses due to smuggling may have reached US$60 million in
19903. These estimates indicate that total tax evasion in 1990 was about US$500 million,
more than 5 % of that year's GDP. This high level of tax evasion is partly explained by a faulty
collection system, weak enforcement mechanisms, and leniency towards evaders.
8. 17 Inefficient Implementation. The tax administration has improved with the introduction
of a system of enterprise control (CEDE) concentrated on the 10,000 largest tax-payers, who
31 CERES, "Informes y Propuestas 6"; Op. cit.
32 The period for calculating the social security pension will expand to reach 10 years in 5 years' time.
33 Estimates by the Institute of Statistics of the Economics Faculty of the Universidad de la Repdblica, quoted
by Borba and Ferndndez, 'Incidencia de los Aspectos Tributarios en las Empresas"; 2p. cit.
34 Estimates by Borba and Fernandez based on smuggling estimates by M. Bergara and A. Masoller (1991).



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provide about 80% of fiscal collections. However, to increase collections, the group of large
taxpayers will need to be expanded. Control methods, however, remain inadequate because of
lack of personnel and efficient information systems. In addition, the administrative procedures
for the payment of taxes are frequently cumbersome and time consuming, which act as incentives
for tax evasion. A program to improve tax administration financed by IDB/CIAT is under
implementation. The IMF has recently made recommendations to improve control and
enforcement of IVA, I1MESI, and contributions to the Banco de Seguridad Social. Nevertheless,
there have been significant reductions in tax collection costs in recent years. Administrative
costs as a percentage of tax collections of the Tax Revenue Service (DGI) have decreased from
2% in 1974 to 1.1% in 1991; for the BPS administrative costs decreased from 8.7% in 1987 to
5.9% of collections in 1990.
8.18 Regressiveness. The high share of consumption taxes in Uruguay's tax structure would
seem to indicate a high degree of regressiveness. However, two estimates quoted by CERES35
show that the regressive effect of IVA and IMESI are relatively low. The incidence of IVA in
the households of higher income was 7.76% against an incidence of 9.35% in the lowest income
households. The incidence of the IMESI was 4.5% and 3.28%, respectively.
8.19 The tax system as a whole lacks transparency due to unclear definition and lack of
dissemination of the legal text on which the taxes are based, and is plagued by protracted and
cumbersome procedures. The government currently lacks adequate instruments for disseminating
norms issued with respect to laws and decrees on taxes. Usually the only information available
is from newspaper articles. This creates a problem for enterprises and tax advisors in gaining
information on a timely basis. Also, tax norms are often not clearly written, which leads to
mistakes of interpretation.
35 CERES; Informes y Propuestas 6; op. cit. quotes estimates by Bisogno y Grau: "Tributaci6n Indirecta y
Distribuci6n del Ingreso," Suma, 6, 1989 and J. de Brum: "Una Evaluaci6n del Impuesto al Valor Agregado en
el Uruguay," CERES, 1991.



Chapter 9. The Legal Framework
Introduction
9.1   The legal framework is a highly important element for the efficient functioning of a
modem economy. The mere existence of a legal system makes a fundamental difference in the
activities of the private sector by reducing transactions costs, facilitating contracts, resolving
disputes and assuring property rights in a fundamental way. Uruguay has a well established
legal framework that is the result of its political maturity and democratic institutions. Despite
this, there are many lacunae in the law, deficiencies in its administration and procedures, as well
as in its enforcement (See Box 9.1).
Box 9.1
Weak Property Rights: hnputed Values
While it is difficult to quantify the impact of weak property rights on the private sector,
a rough estimate can be inferred by the following observation. The market price of real
estate (buildings, apartments, land) when occupied (squatters or delinquent tenants) is
about half what it would be if unoccupied. There are a large number of unoccupied
housing units (allegedly 40,000 units) in Montevideo because owners do not want to rent
them for fear of not being able to recover their properties without large costs.
Weak property rights also affect contracting. In interviews, a sample of entrepreneurs
indicated that they would increase their sales by 10% if they had more confidence that
contracts were binding.
Property Rights
9.2   Property rights appear to be well defined and there is a well functioning property registry
system, albeit with a significant backlog. The issue lies in the difficulty to repossess property
in light of breach of contract. The inability to rely in a timely and fair fashion on the judicial
system for the resolution of disputes, including speedy transfer of property rights and collection
of penalties contractually agreed to, affects significantly the level of economic activity and
private sector development.
9.3  In Uruguay, the interaction of the existing law with the incentive structure has produced
many inefficiencies. Two of the basic issues relate to the mandated public ownership of certain
activities and the inadequacies encountered in the corporate law and the commercial codes. The



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assignment of property rights, particularly to operate certain economic activities, is an issue.
Many activities are state-owned including petroleum refining, cement, alcohol, air transport,
telecommunications, inisurance and port services of which many are monopolies. But more
importantly, these activities do not have a public good or natural monopoly character.
Moreover, the law also provides for a dual role for state enterprises as owner and regulator.
This contravenes public interest directly and detracts from consumer welfare.
9.4   There are marny deficiencies in the legal framework, particularly with respect to
commercial codes and corporate law. They impinge on both output and financial markets. In
the output market, the law dealing with the exit of firms, the bankruptcy law, is deficient. It
provides for a protracted process that is extremely costly. The main reason for this is the abuse
of the "concordato, " which alows firms to remain in "financial limbo" and provides them with
legal protection to use delaying tactics, which prevents the exit of an inviable firm. The
inadequacies of corporate law prevents firms from being publicly incorporated because it gives
minority shareholders extraordinary power to influence the day-to-day running of a firm and to
resort to the court system to bring injunctions against management. This is well beyond what
is needed to provide a healthy amount of minority rights in a firm.
9.5   Property rights in the financial market are infringed upon in a variety of ways. First,
creditors rights are not guaranteed. The government has at least on two occasions forced
refinancing of debt an,d has damaged the sanctity of contracts between two private parties.
Second, the existing law is not adequate to allow the use of movable property as collateral.
Moreover, the system of recordkeeping is deficient so that the size and maturity of an existing
debt is not unambiguously defined. Third, the tax law favors debt over equity and inhibits the
growth of an equity market. Finally, there is much ambiguity about the status of a financial
guarantee given to a firm when there is a transfer of securities between owners.
9.6   As mentioned in Chapter 6, there are deficiencies in the protection of intellectual property
rights. The existing law enacted in 1940 is dated, and seldom properly enforced. It contains
a number of provisions, particularly in the areas of pharmaceutical/chemical biotechnology that
creates difficulties for both foreign and national investors who are working with advanced
technology. Moreover, there is no provision for trade secrets protection. Piracy and speculative
registration of foreign trademarks by domestic agents is rampant. The unfamiliarity of judges
with modern technology and the value of intangible assets compounds the problem. Moreover,
the inefficiency of the patent and trademark office has lead to a colossal backlog of cases and
disruption of the industrial property system.
9.7   Apart from the above instances where property rights are not adequately defined, there
is the provision available to the electorate to call for a plebiscite with 25 percent of the electorate
and rescind any law the Congress has passed within a year (as was the case of the December
1992 plebiscite). In addition, in the private sector, there is the general sentiment that the court
system as well as the state bureaucracy renders its judgments or makes administrative decisions
that are based in favor of labor over management.



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The Judicial System
9.8   Uruguay's judiciary system enjoys an enviable reputation of being free from corruption.
Yet it has other problems caused to a large extent by a deficient judicial system that provides
at best incomplete protection of contracts and transactions. Delays in the resolution of conflicts
or breaches of contract and the lack of confidence in the professional capacity of the judicial
system are the main issues. Consequently, in addition to the inadequate law, the weak judicial
system contributes to the weak property rights.
9.9   Uruguay has recently embarked on a fairly comprehensive judiciary reform program.
Main improvements have been the adoption in 1989 of a new civil procedure code that focuses
on the use of oral hearings, the creation of 100 new judgeships, and a new school (CEJU) for
judges to educate the legal community in the new civil code, implementation of a program to
automate the calendaring system, the development of a statistical data base in conjunction with
AID, and the creation by the Supreme Court of the Office of Planning to improve resource
allocation and decision-making. These measures, particularly the first one, can and have
decreased the expected time for processing civil cases. Despite these recent improvements in
the system, problems remain.  The main problems are the excessive centralization of
administrative policy in the Supreme Court, the lack of alternatives for resolution of disputes,
the existing abuse of procedures to delay case resolutions, the rigid structure of career path of
judges, the relatively small number of judges, the interpretive approach to law as opposed to the
precedent case approach, and deficiencies in the qualification of judges. The interpretive
approach where each judge freely interprets the law, not having to consider previous rulings or
opinions, leads to subjective decisions which vary from judge to judge, and are thus more
difficult to predict than the precedent case that builds on previous decisions. These problems
cause long and costly delays in litigation, uncertainty, and arbitrariness in court decisions, and
lack of specialization and expertise in judges.
9.10 The extent of the delays can be seen in the following examples. The first hearing for a
car accident case can take from 9 to 12 months; the execution of a collateral mortgage guarantee
can take up to 5 years. Also, in the legal jargon there is the term, "chicanas," which denotes
procedures that are irrelevant to the case which causes delays and are commonplace.
9.11 The newly appointed judges are young, with little legal experience and inadequate
understanding of commercial law. There is a need to implement educational programs to cover
the law and to increase the knowledge of the judges about law and economics. In addition, there
is a widespread perception in the business community that there is prejudice against businessmen
and creditors. This perception is based on the large percentage of cases decided in favor of
workers against employers (90%) and in favor of debtors against creditors (80%).
9.12 The rigid career path for judges and inadequate remuneration have made it difficult to
attract high-quality professional lawyers. All appointments have to be made at the entry level
of the system. The constitution requires that any lawyer wishing to pursue a career as a judge
slart at the bottom -- which are judgeships in rural areas as justice of the peace (jueces de paz



- 62 -
rurales). Promotions are made by the Supreme Court. This process takes the judges through
a long career path before they are assigned to Montevideo, the most desired location. Also, as
a result of that career path, judges have no experience in the practice of law, and their human
capital, particularly in areas of commercial law, and to some extent civil law, depreciates while
in their rural stint. T'he current training provided by CEJU on the new code ought to be
expanded and include new programs for judges and court staff covering commercial law, law
and economics, antitrust and business related subjects.
9.13 The absence of data on rulings compounds the problems of the judiciary. For example,
the effectiveness of the new corporations code adopted in 1990 is very difficult to asses since
there is no compiled data on the rulings. Clearly a law and its interpretation, defining the rights,
privileges and responsibilities of corporations and minority shareholders is most vital for private
sector development. Thus the compilation and dissemination of court decisions on a timely basis
is vital for the well functioning of the private sector.
9.14 In addition, the current judicial system is excessively centralized in the body of the
Supreme Court. The exercise of administrative functions has occupied an undesirably high
fraction of the Court's time, burdening and affecting its effective jurisprudence function as the
ultimate legal arbiter.
9.15  Standard alternative means of resolving disputes, such as arbitration, mediation,
conciliation, and private judgment, are not developed or accepted yet in Uruguay. The response
of the private sector to the deficient judiciary environment has been to engage only in
transactions where self-enforcing contracts can be established. The consequences are suboptimal
levels of economic activity. To alleviate the problem, some groups within the private sector are
considering bypassing the court system. They would enter into private agreements among
themselves, in such cases as payment default, to bring about quicker resolution. There are a
number of alternatives that ought to be considered. They include arbitration, mediation,
conciliation, private judge, etc. They offer faster and cheaper means to resolve disputes. The
use of retired judges and highly respected lawyers for these endeavors would be appropriate.
9.16  As a result of the current environment, a number of transactions or activities that would
have otherwise taken place on efficiency grounds, are not realized and the costs of those that
take place are significantly increased. While it is difficult to quantify the impact of the problems
of the judiciary system on the private sector and on economic activity, an imprecise cost due to
the problems can be inferred indirectly. The market price of real estate (buildings, apartments,
and land) when occupied (squatters or delinquent tenants) is about half what it would be if
unoccupied. Entrepreneurs have indicated that if they had more confidence in the judicial
system, they would engage in additional contracts which could increase sales by at least 10%
over the present level.



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Foreign Investment Law
9.17 None of the common legal or administrative impediments to investment that FIAS so
often finds elsewhere are present in Uruguay. Yet private investment, both local and foreign,
has been low and stagnant for many years. The problem has been: (a) a lack of profitable
opportunities, coupled with (b) a paternalistic state that allowed bankrupt businesses to keep
operating (one cause of a very weak domestic financial system), and interfered in many ways
with the day-to-day investment and operating decisions of private firms.  Following
recommendations by FIAS, the Government has taken significant steps to remove discretion and
government red tape as well as interference in granting investment incentives.
9.18 The current Law 14.179 and its regulations (Decree 808\974) are deficient in a number
of ways. For firms opting to be subject to this law (they have a choice), the state guarantees
the right to remit dividends and repatriate capital, under the following conditions: (a) three
years must lapse before capital can be repatriated; (b) profits not remitted within two years shall
be regarded as capitalized; (c) firms whose capital originating from abroad constitutes more than
50% of their capital may not avail themselves of domestic loans with repayment periods over
one year; (d) the Minister of Economy and Finance must approve the previous investment
recommendation of the Foreign Investment Advisory Unit; (e) investment in electric power,
hydrocarbons, petrochemicals, atomic energy, strategic minerals, agriculture and livestock, meat
packing, radio, press, television, financial brokerage, railway, telecommunications require the
authorization of the Executive Power in the Council of Ministers, supported by corroborative
evidence; and (f) investments must be registered with Central Bank. However, none of these
laws are enforced. Thus, the legal system does not act as a barrier against foreign investment,
even though these laws have remained in the books. What the current law does is to provide
confusion to foreign investors regarding the applicability of those restrictive rules. Hence, the
law is detrimental to the image projected abroad of the broad and liberal investment framework
in Uruguay, thereby making investment promotion difficult.
9.19 Given the described red tape and restrictions plus the favorable institutional capital
environment in Uruguay, it is not surprising that this Law has been largely ineffective. With the
establishment of free currency markets and with no restrictions on dividend remittances or
capital repatriation, investors believe that they have more freedom to operate if they do not
subscribe to the Foreign Investment Law. This is one more reason to repeal it. There should
be an effective and binding law that provides clear norms, minimal restrictions compatible with
efficiency, protection to industrial and intellectual property rights, and provisions and insurance
against the event of legal expropriation, as well as a level playing field for domestic producers.
9.20 A simple, new investment law, to repeal the obsolete one and codify existing freedoms
and guarantees, is being drafted in conjunction with and IDB investment sector reform loan.
Uruguay is taking steps to liberalize international trade, an important consideration for potential
foreign investors. Great progress has been made in making the judicial system more effective
in enforcing debts, administering bankruptcies, etc., and the financial system is being



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strengthened. The pro,posals for strengthening the promotion agency (CDI) have been accepted
by the government and passed to donor agencies, which have approved future funding.
9.21 An additional issue is the policies and regulations in Uruguay concerning the use of
arbitration as a means t:o settle disputes and enforce private international law, and the impact of
arbitration clauses in bilateral treaties for the promotion and protection of foreign investment.
Uruguay has been unable to conclude negotiations for bilateral investment protection and
promotion treaties with countries like the USA and France because of differences concerning the
use of commercial arbitration as a means to settle disputes. While these countries contend that
they should have immediate recourse to international arbitration, Uruguay contends that the
remedies that domestic courts offer must be first exhausted.
9.22 Recently, Uruguay joined the MIGA convention, which provides guarantees against
political (war, expropriation, inconvertibility, breach of contract) risks.  In joining the
convention, Uruguay bound its investment codes to an international agreement that has well-
defined rights and duties for member countries.



Chapter 10. Infrastructure Issues
10.1 In Uruguay, as in other parts of Latin America, infrastructure has progressively
deteriorated over the last three decades mostly due to reduced spending on maintenance. The
PSAS results indicate unreliability of power, inadequate transport, poor communications beyond
major cities, plus generally unsatisfactory trade facilitation and logistics. Moreover, the
efficiency, quality, and quantity of existing infrastructure needs to be improved through proper
pricing and utility charges, as well as by well-conceived concessions to the private sector. Given
that the trade and economic location and activity patterns are likely to change with the advent
of MERCOSUR, the main infrastructure issues related to private sector development clearly need
to be revisited.
10.2 Practically all infrastructure services are operated by SOEs, with mostly poor
performance. Inefficiencies translate into high costs, low quality, and unreliable service
provision, which critically affect private sector development. Among the most promising
developments has been the passing of the Public Enterprises Law (no. 16.211) and the Law for
the Reform  of Port Services.   The former allows private capital involvement in
telecommunications (ANTEL), air transport (PLUNA), electricity services (UTE), as well as the
closure of the state fishing company (ILPE). The latter facilitates private sector participation
in provision of port services (see below). This chapter then assesses the impact on the private
sector of the major infrastructure components.
10.3 Port Services. The recently enacted Ley Nacional de Puertos has dramatically changed
the efficiency of this crucial activity. The quality of the port infrastructure and related services
was singled-out by exporting firms interviewed during the PSAS as the most important
infrastructure problem they faced. The following port services have been transferred to the
private sector: loading and unloading, stevedoring and drydock movement of commodities.
Significant improvements have been achieved in the few months since the new law was passed.
Ship-waiting time in dock has been cut 50%, and productivity has increased significantly: for
example, 300% for gravel, 250% for packaged goods, 30% for containers, and 50% for fruit
crates. Asociacion Nacional de Puertos (ANP) has reduced its labor force by 40% through
incentive programs, although some 2,650 employees remain. Most of the former ANP
employees have been absorbed by the new private port operators. The port reform has created
a strong precedent for breaking up a very powerful state enterprise and a powerful union--
SUANP.
10.4 Significant improvements also have been achieved in reliability and productivity, giving
greater confidence to port users. According to the new law, ANP reserves the jurisdiction to
maintain, administer, and develop port facilities; however, some important issues remain
unresolved. These include norms to guide the provision of port services, the use of port
infrastructure, and port services expansion and investment. The current law also does not permit
concessions of existing infrastructure. Further concessions to private sectors of additional
services--such as towing repair services, machinery, and dregging--could be considered, with
ANP handling only administration and coordination of new investments. Finally, the current



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jurisdiction of ANP as both regulatory agency (granting concessions of port services) and
provider of services seems inappropriate. In this regard, ANP could relinquish the latter
function.
10.5 Pricing of poIt usage is still determined by ANP. The fees remained the same until
December 1992, after which they were reduced by 40%, though only temporarily. On top of
the port fees, users are charged loading and unloading fees by the new (private) port operators.
The time-productivity gains, however, have compensated for the increased charges, but rents
accrue to ANP. The expectation is that the overall fees will decrease as competition emerges
and ANP charges are set more in line with the actual costs of the service.
10.6 Highway System. There is a 10,000 km road network, nearly all of which is single lane.
Maintenance expenditures total $60 million per year. This is considered inadequate given the
age of the network and the poor quality of maintenance to date. A private sector toll roads
concession system has been adopted to finance improvements and double the capacity of the
primary road network.
10.7 The main investment issues in the sector are (a) the construction of a bridge of 34 km
over the Rio de la Plata to link Uruguay and Argentina by road, and (b) the waterway project
along the rivers Paraguay-Parana and Cuenca del Plata, to be used by Bolivia, Paraguay, Brazil,
Argentina, and Uruguay, and which will provide Bolivia and Paraguay direct access to the
Atlantic. The tradeoffs, cost, and benefits of the bridge over the Rio de la Plata project have
not been rigorously evaluated. A tentative estimate of the required investment is nearly $1
billion, with an estimated rate of return near 20%.
10. 8 Freight transport has been fully deregulated. There is free entry and prices appear to be
market determined. On the other hand, government intervention is widespread. There are a
large number of procedures, permit requirements, norms on loads and vehicles, and fees in the
sector. The streamlining of permits and procedures should be seriously considered.
10.9 Railroads. There is no passenger service provided and the freight market share is not
large. Without a complementary railway infrastructure in Brazil to establish connections, the
long-term viability of the Uruguayan railroad is questionable. As of now, it lacks financial
viability and its social contribution is doubtful. A rationalization of the system should thus be
considered.
10.10 Power. The power sector is operated by the state-owned enterprise, UTE, which also
owns and operates a cement factory. Generation is not an issue as the capacity appears adequate
to satisfy medium- and probably long-term needs. Distribution and pricing are another matter.
The PSAS respondents placed power unreliability at the top of the list among infrastructure
problems. UTE will invest US$200 million (through a World Bank loan), to shore-up its two
thermal plants and increase their capacity to over 930 megawatts. Both plants will be adapted
to operate entirely with natural gas. This investment along with the generating capacity of
UTE's hydroelectric plants will meet Uruguay's power demand until 2030. The principal



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problem is the distribution of power. Blackouts and power surges are common, disturbing
economic activity with enough frequency to be of great concern for private enterprises. UTE
is in the process of restructuring its tariffs into a three-tier structure based on demand volume,
capacity, and time of use. This seems appropriate since tariffs reflect its U-shaped cost curve
but that is not the case.  Currently, the three-tiered tariff structure presents discontinuous
increases in the marginal rate for each tier. UTE's average cost of appears high by world
standards. While it is claimed these costs could be lowered to 4 cents, it is not clear why they
were not lowered before.
10.11 Electricity tariff revenues have declined in real terms by some 85% through the period
1985-92. As of now it is not a profitable enterprise. The reason given for this is the need to
service debt on the Palmar Dam. That debt was transferred to UTE from the government.
However, dam financing cannot be considered an additional burden, since UTE makes extensive
use of the (low-marginal-cost) energy supplied by the dam. Consequently, a further revision of
the tariff structure will be required to recover the costs of this investment.
10.12 The Government could develop a regulatory framework to allow private operators to
participate in the national power system, which could lead to the privatization of some generation
plants, and to allow private generators to sell power to the national grid. This measure is being
considered for 1993.  Law  16.211 allows the Government to provide authorization for
integration of private generating plants into an interconnected system, as well as for UTE to
purchase privately produced electricity. For that purpose, a regulatory body separate from UTE
should be established.
10.13 Telecommunications. The telecommunications sector is being operated by ANTEL, a
state-owned enterprise that operates as a monopoly. Plans to privatize the company were set
back by the unfavorable outcome of the December 15, 1992 plebiscite. Uruguay has the highest
telephone density in Latin America, with 13.4 lines per 100 population. Near 60% of the
installed lines are connected to digital exchanges, providing high call-completion rates to
subscribers. However, the overall call-completion rate is near 35%, while in most developed
countries the rate is around 70%. In addition, in Uruguay each line is out of service on average
about two weeks a year. Expected waiting time for installation of telephone service is over a
year--and much longer outside Montevideo. The waiting list is over 50,000. Twenty percent
of the enterprises surveyed consider their access to telephone lines inadequate. The tariff
structure is cross-subsidized from international calls to local calls, the former being 50% higher
than average international tariffs.
10.14 While ANTEL has been profitable, earning 18.3% on fixed assets and 23.1 % on equity
in 1991, its overall evaluation in terms of consumer welfare is not favorable. As noted, pricing
is distorted, quality is deficient, and operating costs are high. The needed investment crucial
for private sector development to expand the network and to improve quality has not been
forthcoming. With the defeat of ANTEL privatization, the plans for the regulatory agency,
CONTEL, which was to be established, have been put on hold as well. Yet, the regulatory need
remains, since the cellular telephone market as well as the valued-added and peripheral services



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market are developing. The granting of concessions and procurement has to be overseen by a
regulatory agency if not fully liberalized.
10.15 Airline. The privatization of the national airline, PLUNA, is proceeding smoothly. Four
international companies have prequalified--American Airlines, Aerolineas Argentina, VASP, and
Iberia. The privatization process is expected to be completed in 1993. The state will keep 49%
of the value, including up to an 8% employee share, and the private consortium will include
domestic investors holding no less than 2% of total capital, to ensure domestic control.
10.16 Gas Company. The gas company, formerly privately operated, includes a cracking plant,
storage tanks, and distribution network. It was taken over by the state to avoid bankruptcy. The
government is considering a 15 to 30 management concession to the private sector. This should
be welcome, although these plans could be affected by the recent referendum on privatization,
which has weakened the government's overall privatization program.
Pricing Policies
10.17 There are questions concerning the rationale for setting tariffs. With the exception of
petroleum products and port services, where prices appear extraordinarily high, the periodic
tariff adjustments have lagged behind realized and expected inflation, thus eroding the revenue
base and distorting economic prices.  Operating costs are excessive, reflecting allocative
inefficiency in many enterprises. These are distortions in both costs and prices. Management
proposes periodic tariff adjustments; the Planning Office, in consultation with the Ministry of
Economy, approves or modifies the request. Tariff setting is handled separately from enterprise
budget decisions. The criteria for tariff selection varies among state enterprises. Some of them
(e.g., ANCAP) appear to be aimed at earning an appropriate positive real rate of return; others
appear to be aimed at merely breaking even.
State Ownership
10.18 State-owned enterprises control key sectors of the economy which could remain in state
hands with little compulsion for them to increase efficiency. These services are deficient in
terms of quality, prices, and quantity.  Some enterprises are net revenue earners (e.g.,
hydrocarbon operations); others are an unwarranted budget burden. Moreover, the government
does not have the resources to initiate an urgent investment program to provide the needed
improvements in services to facilitate private sector efficiency. The defeat of the five articles
of the newly enacted Ley de Empresas Publicas at the December 13, 1992 plebiscite, which
would have permitted the privatization of the telecommunications monopoly ANTEL, has cast
serious doubts on the future of any privatization program in Uruguay. The privatization
procedure suggested was among the most timid and restrictive in the region--designed as a joint
venture but with the state reserving the right to extensive control. It would be both feasible and
desirable at this stage to form a Commission on Privatization to seek a more informed
consensus, so that political and social support for a privatization program could emerge. The
privatization of PLUNA, the state-owned airline, provides some hope for future privatization
efforts in Uruguay.



Chapter 11. Private Sector Development Strategy
11.1  In the 1970s and 1980s, policy-makers came to the realization that the role of the state
needed to be streamlined and that the private sector should increasingly become the means to
improve economic performance. To accomplish this, the private sector must have confidence
in the government's ability to play this crucial role within the framework of a detailed private
sector development strategy.36  This chapter develops the elements of a private sector
development strategy the government of Uruguay could consider. This strategy comprises a
number of reforms and government actions that needed to bring about a sufficient transformation
of the economy so the private sector can play a more vital role in the economic development of
the country. Of course the extent and the pace of reforms will depend on political realities, the
commitment of the policymakers to change, and on the private sector itself--which will have to
assume a more competitive and dynamic role than in the past. An agenda derived from these
reforms and measures is presented in the Executive Summary and Reform Agenda.
Macroeconomic Policies
11.2 The issues identified in Chapter 3 suggest that a number of reforms need to be undertaken
to maintain macroeconomic stability and promote a greater private sector role in the economy,
as follows:
11.3 Short-Term Stability. The most important near-term macroeconomic policy measure the
government should undertake is bringing domestic inflation under control. While the inflation
rate has come down in the last three years, it still remains high and stands in the way of
reaching macroeconomic stability on a more permanent basis. The indexation of wages has been
a factor that has helped the country adjust to a high level of inflation. But since the economy
has to reduce the distortions arising from inflation, and must become competitive as the trade
regime is being opened, there is a need to reduce inflation to a more manageable level. An IMF
standby arrangement is addressing this issue now. It is hoped that inflation and targets can be
met to put the economy on a more permanent path of stability. Reduction of the fiscal deficit
has helped; however, the medium-term challenge (as described below) is to secure a permanent
fiscal balance.
11.4 Not much can be done about the short-term macroeconomic instability arising from the
economic interdependency with Argentina and Brazil. Attempts to smooth the shocks through
relative price changes could prove to more problematic than attempts to ride out the shocks with
a more flexible economy in the medium-term. This flexibility will come about from the labor
market and regulatory reforms identified below. The principal need is to finance transitory
shocks and to adjust relative prices for the permanent shocks. The former is now being
undertaken by the private sector through arbitration of financial assets with the rest of the world.
The latter requires precisely those reforms needed to improve the economic competitiveness.
36 Developing the Private Sector: The World Bank's Experience and Approach, World Bank. Washington
D.C., 1991



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Flexible real wages, prices, and interest rates, along with building macroeconomic credibility
will go a long way to address the issue of long-term macroeconomic stability. Even though
MERCOSUR should increase competition, it could induce instability in the economy by
increasing exposure to Uruguay's two large trading partners, especially Brazil.
11.5 The complementarity between macroeconomic and microeconomic reform in Uruguay
should guide the reforms. The government will need to manage shocks in a way that is
predictable to the private sector. This could be achieved by avoiding the imposition of
restrictive trade and regulatory measures as a way to deal with macroeconomic problems. As
an open economy, Uruguay must ensure that public policy does not become the root of
uncertainty. The reduced demand for domestic currency and the corollary dollarization of the
economy tend to magnify external shocks.  With a consistent style of macroeconomic
management, the demand for peso assets could increase and ease the problems of stabilization.
11.6 Social Security System. Social security reform is the most important factor in putting
the economy on a more permanent growth path. The objective should be to reduce the excess
burden on the government, reduce the cost structure of firms, and remove the rationale for a
highly inequitable inflation tax on the population. The demographic situation is such that
without social sector reform, public finances will continue to undermine the financial viability
of the state, as well as the prospects for increasing the competitiveness of the economy. A
thorough reform of the social security system is needed, including moving to a fully funded
system that is at least partly funded instead of a largely publicly run, pay-as-you-go system.
That, however, will require much larger public surplus to maintain macroeconomic balance.
In late 1992, a numbeir of measures were adopted (as described in Chapters 3 and 7) that will
ease the burden of the social security system to some extent; however, it is not sufficient to
increase the credibility of public financial policies in the medium and the long term. Private
sector contributions and payments are in equilibrium with the exception of pensions of low-
income retirees, representing about a third of the system's deficit. The other two-thirds comes
from underfunding payments to public employees. Consequently, most of what is treated as a
social security deficit is actually the hidden cost of public sector employment. The current
system creates incentives for both the private and public sector that are incompatible with the
objective of financial viability. In essence, the burden of financing social security is shifted
from the beneficiaries to the general population, thus creating an intractable macroeconomic
problem. There is now an opportunity for the system to undergo fundamental reform by
following up on a similar attempt made in late 1992. As agreed with the Inter-American
Development Bank, measures could aim at eventually making the system fully fundable. In the
short and the medium term, recent changes such as using the average of the salary of the last
five years (instead of three years) to determine benefits and raising the retirement age are steps
in the right direction. [t is clear that any reform will very much depend on the commitment of
the Congress to specific far-reaching changes. These include the manner in which social
security liabilities are estimated, how beneficiaries are treated in all categories, and how the
system is funded. These represent the basic decisions that will ultimately determine whether
Uruguay can make the transition to a more competitive, modern, and dynamic economy.



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11.7 Fiscal Reform. The need to reform the tax system constitutes a complementary measure
to social security reform. It would mean reducing the overall tax burden and putting taxes on
a permanent basis. Temporary tax increases introduced to finance additional costs of the social
security system lapsed at the end of 1992. The private sector must be convinced that their tax
liabilities will not be increased in an ad hoc way in the future. This should encourage the
necessary private investment and stimulate more private sector participation in a new competitive
environment. There is scope to do this by restoring the principles of the tax system that were
put in place during the 1973 tax reform. The present efforts to widen the tax base at lower
rates, to combat evasion, and make the tax system more rational should continue. In the
medium-term, a rational tax system that is neutral among activities is essential to make the
economy more competitive. Fiscal reform should place more emphasis on reducing expenditures
instead of raising revenues.  The permanent reduction of the fiscal deficit will require
expenditure cuts based on a thorough review of returns on expenditures. There is scope for this
reform if it is done using at least a notional zero-based budget approach that examines the
benefits a particular expenditure item secures for society--and whether that function can be better
performed by the private sector. Many of the public services currently financed by the central
budget can be privatized and a better return on that expenditure realized. Moreover, the size
of the government could be streamlined and crucial functions improved. Deregulating a large
part of the current trade, finance, and industrial regulation regimes can provide reasonable cost
savings to the government. This measure by itself will increase government credibility when
it formulates macroeconomic policy, as well as make the private sector tax burden more
predictable.
11.8 Investment and Savings. There was a significant recovery in investment in 1992. It only
affected construction and tourism. There is no evidence of any permanent shift in the investment
function in the economy. Uruguay faces the challenge of emerging from a pattern of low
growth, low investment, and high inflation.  The clear medium-term  challenge is for
macroeconomic and incentive policies to help raise the level of investment in the economy.
Investment rates in Uruguay are lower than in the past, lower than in neighboring countries as
well as among countries whose comparators resemble Uruguay's (e.g., New Zealand).
Underestimating of investment in the economy occurs because of current methods of estimating
investment in the national accounts; even so, there is evidence that the economy has become
decapitalized in some areas. Long years of protection that provided high rents on existing
capital stock had a deleterious effect on new capital formation. Added to this was the
macroeconomic uncertainty prevailing after the 1982 economic collapse. The aftermath to this
included uncertainty with respect to the status of existing commercial bank debts carried in the
balance sheets of many firms. In addition, there is uncertainty regarding tax liability and the
economic rules of the game.
11.9 These uncertainties must be reduced before investment demand will increase. On the
other hand, incentives to save must be increased by reducing inflation, eliminating laws that act
against equity over debt, and reforming and privatizing state-owned financial institutions.
Growth and productivity studies suggest that productivity must be increased, which will depend
on incentive reforms. Along with the restoration of stability and the incentive reforms discussed



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below, private investment can be stimulated by capital market reforms and the restoration of
greater efficiency in the use of the infrastructure to reduce private sector costs of production and
increase competitiveness in the economy.
Foreign Trade Reform
11.10 Under the Lacalle Administration the scope and pace of trade reforms expanded. and
intensified to a larger extent than under previous trade liberalization attempts. The development
of private sector competitiveness in the world markets, however, will require a r1ajor
restructuring of current domestic productive capacity. Investment would reed to shift .'rom
inefficient import-competing production to exportable production. Economic reforms will need
to be sustained to demonstrate the profitability of exportables, including trading services. The
maintenance of current trade reforms over the next two years will be an important benchmark,
since it would break Uruguay's historic cycle of gradual liberalization followed by trade policy
reversals. In this context, MERCOSUR provides an important opportunity for intensifying trade
reforms in Uruguay. However, regional markets should not be used to expand investment and
production of exports that may have limited comparative advantage in non-MERCOSUR
markets. Instead, Uruguay should use MERCOSUR to improve the international competitiveness
of its private sector.
11.11 There are three areas in which Uruguay could make further progress in trade reform.
The first is to increase reliance on price mechanisms and reduce the scope of discretionary
actions. In this regard, the early elimination of the remaining reference prices in estimating
tariffs should be considered. Uruguay could continue with tariff reforms to reduce tariff
dispersion. Moreover, exporters need to operate in a regime close to international prices.
Uruguay could also increase discipline in the use of non-tariff measures. Uruguay must maintain
a policy stance to prevent anti-dumping and countervailing measures themselves becoming
protectionist. There is thus a need to put the administration of the trade system on a more
neutral institutional basis that would consider interests of both producers and consumers when
determining changes in trade policy as well as in further negotiations of trade agreements within
and outside MERCOSUR.
11.12 The second area is the continuation of PLADES in rationalizing administrative processes
and deregulating trading in services and in the area of customs reform. Also, the role of BROU
should be rationalized relative to import and trade facilitation at customs offices as well as ports
of merchandise entry and exit. If the reforms recommended by PLADES are implemented, a
significant part of the non-tariff barriers would be eliminated. This will not only reduce costs
but also help to establish a direct relationship between relative prices at home and abroad,
which, in turn, will improve resource use and make economic adjustment less painful.
11.13 A third area is revamping infrastructure to facilitate trade following the deregulation of
port services and instituting customs reform. Exporters need ready access to purchases of raw
materials, spare parts, technical services, marketing skills, freight, insurance, and transport



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services.  The reforms should center on improving port services by additional private
concessions and increasing port capacity to handle a larger volume of trade.
The Financial System Reforms
11.14 Uruguay poses a paradox of having substantial financial depth although its financial
system is relatively underdeveloped given the limited availability of financial instruments and
the small size of the equity market in relation to GDP--which is only 0.5%. In fact, Uruguay
series as a financial intermediary for some countries in the region while playing only a modest
role in its domestic financial market. The reform program underway, supported by the World
Bank and the Inter-American Development Bank, is thus geared to: (a) strengthen the banking
sector through better regulation and supervision; (b) restructure public banks; and (c) create
conditions for the development of a securities and equities market. The remaining reform
agenda should include the following elements:
*  Reduce the Intermediation Role of Public Sector Banks. This should include
reducing and rationalizing the financial intermediation roles of BROU and BHU.
BROU could be partitioned into several banks and eventually privatized. As long
as public banks are allowed to lend directly, the problems of the subsidization and
rationing of credit will continue (as well as high arrears). The monopoly of BHU
on housing finance has to be eliminated. Also, laws that impede the securitization
of mortgage loans need to be revised.
*  Repudiation of Forced Refinancing and Restriction of Implicit Deposit Insurance.
Lenders and borrowers will need to be convinced that forced refinancing will not
be used again.  Moreover, the implicit deposit insurance provided by the
government which has been reduced by the new Financial Intermediation Law
should be altogether eliminated. Along with strengthening bank supervision and
control, mechanisms should be developed to ensure that depositors make decisions
based on assessment of risks and return on their investments. This requires an
efficient system to make available reliable and comparable data about the financial
health of the banks.
* Clean-up Refinanced Firms. The trend of decreased credit to the private sector in
a country that is an international financial center suggests a problem of credit
demand as well as of supply. BROU should permit firms subject to refinancing to
declare bankruptcy and thus eliminate bad loans from its portfolio.
*  Provide for Private Insurance Companies. The government has already prepared
and submitted to Parliament the necessary legislation to carry out this reform. No
decision has been taken as of January 1993. To speed the process, the government
should prepare appropriate regulatory measures as well.



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*   Provision of Mortgages. The government should demonopolize the mortgage
sector, allowing private provision of mortgages, and prepare appropriate regulatory
measures.
Regulatory Enviromnent Reform
11.15  The regulatory system in Uruguay leads to high costs for the private sector. Firms now
have to spend from  1%  to 3.5%  of sales on direct and, especially, indirect regulatory
requirements. Significant progress in reducing regulations has been achieved by PRONADE in
eliminating unnecessary procedures for commercial and industrial activities. The rationale for
the regulations should continue to be reevaluated and streamlined to reduce their number. At
present, regulations p]ay a dual role as a protectionist mechanism and as an inefficient revenue-
seeking device. The latter should be eliminated since there are more efficient ways to collect
revenue.
11.16 There are nurnber of restrictions that constrain private firms in making their output and
investment decisions. While the new Ley de Sociodades Anonimas has eliminated many of the
earlier constraints, some still remain. The public character of the law makes corporate decision-
making difficult, since many decisions need a 51% majority, even in internal decisions of the
management of the corporation. Then there are limitations on the issue of debt: in some cases,
there is a one-to-one requirement with equity. Similarly, there are barriers to exit from an
industry in the abuse of the concordato (contractual requirement) which delays exit, awards
seniority claims to labor over other shareholders, and insufficiently protects patents and
copyrights. While the latter deficiencies are being addressed, there is scope for a reform that
explicitly addresses the problems of the firm to provide efficient incentives in the law, giving
better rights to investors and the managers of a firm's daily operations.
11. 17 Privatization and Demonopolization. The passage of the Public Enterprise Law allowed
private sector participation in a number of state-run sectors. While the December 1992
referendum slowed the process, it has not legally or otherwise ended the process. The success
of the port reform is an example of the benefits that could be captured. It will be necessary to
divest ANCAP from peripheral operations such as cement, alcohol, and sugar. Since the sale
of ANCAP might be a long-term goal, the sector should be demonopolized. This could be done
through performance contracts and private sector concessions to raise the efficiency of water and
sewage services (OSE), electricity (UTE), and railroads (ATE). Moreover, prospective natural
gas distribution and transportation could be open to the private sector. The state should divest
all peripheral operations, such as cement factories, hotels, print shops, and automobile repair
shops.
The Labor Market and the Social Security System
11.18 Labor costs are high in Uruguay in part due to the state of labor relations and the nature
of the Social Security System. Labor conflict is incessant and pervasive. Improvements in labor
practices and relations with management should increase employment, labor productivity, and



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private enterprise growth. Also, given the cost, the frequency of collective agreements should
be reduced once inflation is under control. To address the issue and consequences of
labor/management conflict environment, efforts should be placed towards institutionalizing
mechanisms to resolve disputes, such as arbitration, mediation, conciliation and private conflict
resolution. These are cheaper and faster means to resolve dispute than going through the court
system.
11.19 Vocational. Technical, and Business Training. Uruguay's comparative advantage in
educational attainment should be exploited by concentrating on training and education at all
levels. Curricula and concentrations need to be modernized, particularly in colleges and
technical schools. Also, incentives to facilitate acquisition of labor force skills ought to be
considered, since the role of human capital in enhancing output growth is axiomatic. To this
end, educational and training expenditures should increase.
11.20 The Social Security system has other cost implications for the allocation of resources
above and beyond those discussed above under the macroeconomic implications of the system.
In addition to the recent reforms introduced in the system, a host of other reforms can be
considered with the aim of making the system fully funded after an initial period of adjustment.
The retirement age could be further increased from the present 55 to 65 years. The salary base
for estimating benefits could be increased from the new 5-year average to beyond the 10-year
average that has been recently adopted for implementation in another five years. All the
privileges that are now granted to civil servants, political functionaries, the Armed Forces, and
teachers could be eliminated and the system can be made more equitable. In addition, salary
replacements can be reduced to about 60%, ceilings on pensions reintroduced, and adjustment
of pensions to cost-of-living increases could be limited. Moreover, the administration of the
system can be improved to reduce costs. Some estimates show that the same benefits could be
paid by lower contributions based on improvements in administration and opportunities to invest
the contributions outside government paper. Without bold reforms, the system will continue to
raise costs and detract from the credibility of public policy. This policy should aim at meeting
government obligations and at the same time provide an equitable and efficient system of social
security for a population that has one of the highest life expectancies in the hemisphere.
Tax Reforms
11.21 The private sector believes the level of taxes and the uncertainty of tax liabilities a major
problem (chapter 8). In addition, the impact of taxes on vital parts of the economy and the
presence of temporary taxes are also important issues. The ad hoc nature of the system is
reflected in the numerous exonerations, exemptions, and discrimination of tax liabilities by
activity, size of firm, ownership, and by financial instrument. These departures from neutrality
give tax officials enormous discretion, encourage evasion, and raise the cost of tax
adrninistration.
11.22 The tax reform of 1973 was a step in the right direction. The problems outlined above
arose largely from not following the principles of that reform, especially in the areas of



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neutrality and reduction of discretionary powers. This would improve allocative efficiency and
also reduce uncertainty for private enterprises. Moreover, collections would increase with the
adoption of lower and more homogeneous taxes and with the elimination of tax exonerations and
stricter enforcement. At a very low cost, significant improvements in deterring tax evasion
could be obtained. Increased remuneration of tax inspectors linked to performance and stiffer
penalties for infractions can have a high payoff for tax collection. Success will facilitate
lowering taxes and overall fiscal reform. A tax reform with these objectives would have to be
part of a comprehensive effort to reduce government expenditures, and should include the
following taxes and measures.
* Value-added Tax (IVAJ. IVA should be reformed to make it neutral and increase
its collections. Measures should include adopting one tax rate, eliminating all IVA
exonerations, and streamlining IVA reimbursement to exporters to avoid inflation
losses.
*   Taxes on Financial Transactions.  These should be reformed by eliminating
differential treatment of interest from bank credits and debentures in the calculation
of the wealth and income tax and by eliminating the tax on banking assets
(IMABA).
X Income Tax. Reforms should make this tax more neutral. This could be done by
applying the same rate to all profit-seeking activities, regardless of the size and
legal personality of the firm and type of activity or product.
*   Industria]L Promotion Law. All incentives should be phased out. In the short-term,
measures should be taken to make incentives more automatic than discretionary.
The could be done by adoption of transparent criteria for granting tax exemptions
or reduclions, clear limits on the length and extent of incentives, adoption of
control measures to ensure that investments materialize, and calculation of the
fiscal cost of all incentives.
*   Tax Administration and Control.  The objective should be to increase tax
collections through a more equitable tax system based on lower rates, which should
lead to increased compliance. Additional measures, as proposed by the IMF,
should include the expansion of the control system to include large taxpayers
(CEDE), i.e., at least 20,000 taxpayers, the improvement of control and
enforcement methods, including the application of sanctions to evaders, and
improvement in dissemination of tax information.
The Legal Framework
11.23 The legal framework in Uruguay is well established given its long period of democratic
evolution. Despite this history, the legal system is deficient in a number of respects that have
significant effects on the cost structure of the economy. These include high transactions costs,



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the difficulty of writing efficient contracts, and weak enforcement--all of which imply uncertainty
over property rights. In fact, any law passed by Congress can be rescinded based on a plebiscite
conducted for the purpose, which requires only 25% of the population. The defeat of five laws
relating to the privatization of ANTEL can be seen as a consequence of an unstable framework
for determining property rights.
11.24 A second deficiency is the weak judicial system. The limited capacity of the judicial
system to implement the law gives rise to the inadequate protection of transactions and contracts.
Delays in the resolution of disputes, breaches of contracts and the lack of confidence in the
professional capacity of the judicial system compound the problem of weak property rights.
Moreover, the private sector believes that the system of enforcement is biased against them in
labor disputes. This perception (valid or not) inhibits the private sector from entering into some
contracts because of their doubts about enforcement. Unoccupied property has a 50% higher
value than occupied property, which illustrates the difficulty of enforcing rental agreements.
The private sector maintains that the legal system should allow entering into contracts, since that
would increase the value of their sales by at least 10% above current levels. Moreover, as the
number of transactions grows with the increased division of labor, especially due to increased
trade, costs will begin to rise because of both the inability to enter into some types of contracts
as well as weak enforcement of existing contracts.
11.25 A third deficiency relates to foreign investment. In Uruguay there are no de facto
impediments to foreign investment. Indeed, it is an open economy where capital flows are
concerned. Many foreigners hold deposits in Uruguay as a safe haven for their short-term
capital away from the eyes of their own tax authorities given the very strictly enforced secrecy
laws followed by Uruguay. Old laws still in effect place many restrictions on the movement of
foreign investments, including de jure restrictions on the repatriation of dividends and capital;
moreover, there is a legal provision requiring permission from monetary authorities to take
capital out of Uruguay. The issue is one of rescinding anachronistic law and introducing those
that reflect the reality of the current environment. The government is already examining a draft
law that would provide a legal basis for the national treatment of foreign investment. Foreign
investment is low in Uruguay; however, this is related to the high transaction costs of the
economy and the narrowness of the market rather than the restrictions on the movement of
investment capital.
The above issues suggest a number of reforms.
*   Revise the company law to allow firms to exit from activities when they are unable
to succeed. This implies a revision of the bankruptcy law. At the same time, give
equal treatment of capital and labor by removing the abuse of the convention that
allows technically bankrupt firms to remain in business and which gives labor
priority in the settlement of disputes.
*   Revise the law to give boards of directors more leeway in making day-to-day
decisions while protecting the rights of minority shareholders. In the present



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corporate law, restrict the power of the board of directors to make decisions
regarding the daily operations of the company due to the "public good"
interpretation of the law. Make the new law compatible with similar laws in other
MERCOSUR countries.
*   Give equal status to the treatment of equity and debentures and enact a law to
permit mutual funds. Also clarify the law regarding the status of guarantees when
debentures are transferred from one party to another.
*   Remove the central power prerogative to appoint all judges by supreme court
approval and, in turn, provide incentives for well-trained lawyers to take up
judicial positions by simplifying the career path for judges. Continue training new
judges, especially in the areas of commercial and corporate law.
*   Amend lhe law with respect to movable property, permitting its use as collateral,
and improve the legal process for recovery of debt and the enforcement of
contracts by better recordkeeping, registries, and speeding up the hearing process,
as embodied in the current recognition of oral arguments by courts.
e   Revise the foreign investment law to give legal status to current practice and thus
de jure recognition of good practice and equal rights to foreign as well as domestic
investors.
e   Enact antitrust and consumer protection legislation, using as a benchmark similar
laws enacted in Argentina and Brazil.
Infrastructure
11.26 The PSAS folnd one-third of the firms surveyed indicated infrastructure prevented them
from filling orders orn schedule. Most problems arise with state-owned enterprises and on the
operational side rather than from system deficiencies. Constraints relate to ports, highways,
railroads, power, telecommunications, and the airline.
11.27 Port services have been privatized, with dramatic gains in productivity and port waiting
has been cut in half. What remains is to provide norms for port services, use of infrastructure,
and for expansion and investment by the private sector operators. The port authority (ANP)
should consider limiting its role to regulator and relinquish its port service function.
11.28 In the short-term, highway system maintenance standards need to be raised. Current
expenditures for this Ipurpose seem inadequate, given the age of the road system and the likely
increased use following the expansion of trade within MERCOSUR. In the long-run, upgrading
the highway system will be required by increasing the number of lanes of single-lane roads,
adopting proper pricing policies to facilitate better use of road infrastructure and to generate
revenues for expansion of the system by soliciting private sector participation for toll roads. In



- 79 -
this context, any large investment on road transport--such as the proposed bridge over the Rio
de la Plata to link Uruguay with Argentina--must be subjected to a rigorous cost/benefit analysis.
11.29 The power sector is operated by UTE, which also operates a cement factory. The main
issues are increasing power supply reliability and adopting pricing policies that lead to better
allocation of power use and lead to private operators using additional generation capacity of the
national grid. The short-term issue of increasing the reliability of supply is being addressed with
World Bank support by shoring-up the two thermal plants and raising their generating capacity
by nearly 1,000 megawatts.
11.30 The Telecommunications system is operated by ANTEL. The recent defeat of the
privatization of telecommunications services has cast a shadow over the prospects for the sector.
The main issue is service reliability: even though Uruguay has the highest telephone density in
Latin America, the waiting time for telephones is over one year in Montevideo and longer
outside the capital. The short-term agenda includes catering to peripheral markets, such as faxes
and cellular services, and improving the price structure, which cross-subsidizes domestic at the
expense of international services. The latter is crucial for increasing trade within MERCOSUR
and the rest of the world.
Meeting the Challenge
11.31 The above elements of a private sector development strategy involves short-, medium-
and long-term measures. In a fundamental sense, the phasing of these measures will depend on
the political factors. This is why there is a need to reach an early consensus on a private sector
development strategy and implement the strategy in a well-phased manner. The private sector
personnel who were interviewed in connection with this report expressed their willingness to face
up to the inevitable challenge of living with more competition than in the past and undertaking
the crucial investment decisions that go with it. With a well-established strategy, Uruguay can
become a more dynamic and high growth economy during the rest of this decade. It is a
challenge that is worth taking.






ANNEX 1






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Uruguay: Private Sector Assessment Survey
Survey Objectives
Firm-level surveys are used as part of private sector assessments to understand the
experience of private entrepreneurs with a country's business environment. Such surveys add a
unique firm perspective to traditional information sources on PSD. They also provide insights on
how institutions and policies work in practice, and facilitate the measurement of costs incurred by
firms from regulations and other constraints. As the World Bank expands its use of standard survey
questions in more countries, a basis for imaldng international comparisons will emerge about the
relative effects of constraints on PSD and actual costs to these businesses.
The Sample
The survey, administered co 154 firms, was designed to highlight constraints on the operation
and growth of Uruguayan private enterprises. The original sample design was stratified into four
sectoral and three size categories. Within each size/sector stratum, firms were selected randomly.
Overall, the sample was to be proportional to the distribution of firms in the entire population,
subject to a minimum of 17 firms in each size/sector stratum, with at least that many firms in the
population. In reality, this distribution could not be obtained given (a) the absence of a sufficient
number of firms in the population for some strata, (b) differential rejection rates across strata, and
(c) logistical difficulties in arranging interviews. The World Bank/CERES' sample,'on which this
analysis is based, includes 147 enterprises (see figure 1), of which about 20% are large (having 200
or more full time employees), with the remainder divided almost evenly between medium-size firms
(with 50-199 full time employees) and small firms (fewer than 50 employees). In the survey,
Manufacturing comprises the largest sub-sample (48.3%), followed by Commerce (25.2%), Services
(13.6%), and Transportation and Warehousing (12.9%). About three-quarters of the interviews
Figure 1 Composition of Uruguayan Private Sector Sample
Breakdown by Size
Breakdown by Sector                           (by number of fuDl-time employees)
Swvio  13.6t                                                           LwtmMq
IhA& a                A      _4J
25.34-                             _                        -%
were conducted in Montevideo (where the preponderance of non-agricultural economic activity takes
place), while the remainder were conducted in the interior. Nineteen of the responding firms
I The survey, conducted in September 1992 by CERES, was designed jointly by LATTF and CECPS, and
modified by CERES. Sample design and pretesting was carried out by CE3RES with Bank cooperation. The survey
contained 91 questions (some multi-part and took about 1'h hours to complete. The analysis and annex was
prepared by Andrew Stone, PSDEP.



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identified themselves as being engaged in agro-industry, although not all were in manufacturing.
The high average age of firms in the sample (36 years, see Table 1) suggests either rather limited
economic dynamism with substantial barriers to entry or a biased sample, based as it was, on
official business census dlata.2
Table 1: Characteristics of Uruguay Sample, Overall and By Size
Size        Age         Full time         Part-time        Casuals           % of Firms in
Employees        Employees         Workers           Agro-Industry
Large              52           399.93             0.83          56.25               21
Medium              36            81.97             1.85           8.19               12
Small               27            22.72             2.35           5.53                8
Overall             36           121.86             1.85          16.38               12
General Constraints
Macroeconomic policy dominates the concerns of private businesses. The high level of taxes
and policy instability overshadow other concerns in firms' identification of obstacles to operation
and growth (see figure 2). Inflation is perceived as a moderate constraint by all classes of firms.3
Issues pertaining to procurement and sales, finance, the judicial system4 and general regulations
form a separate tier. Finally, issues pertaining to the regulation and cost of labor, infrastructure,
technology and production, and business services appear to be minor concerns of the sample,
although there are distinct sub-samples and for whom these comprise more important constraints.
Furthermore, responses to constraints suggest that the continuity of costly labor regulations may
have muted responses, as the constraint scores indicate: labor regulations are identified as a
significant constraint to flexibility of firms (in the context of retrenchment) and as a substantial basis
for informal competition. Large firms generally saw their problems as more serious than did other
firms, and they put macroeconomic constraints (including inflation) well ahead of others. Despite
lower overall constraint responses, small- and medium-size firms reported lower levels of capacity
utilization than large firms (54.4%, 62.8%, and 72.5% for small, medium and large, respectively).
Small firms, in particular, attributed current problems to lack of demand (see procurement and
sales, below). Of the four sectors, transport and storage firms identify themselves as the most
constrained, and identify three leading constraints as high taxes, instability, and inflation. By
location, firms in the interior find themselves substantially more constrained by regulations and
finance (both cost and availability) than those in Montevideo--these constraints outrank inflation as a
2 This avera e is influenced by the presence of a number of very old firms included in the sample (some dating
back to the mid-1800s). Even so, only 15% of the sample began operations after 1982.
3 Uruguayan responses were relatively muted, avoiding extremes in the range of response compared to other
countries. xs could be interpreted as either a cultural difference in interpretation of the ranking descriptions (e.g.
'moderate,' "major," or "severe" obstacle), or an objectively superior environment for business. In either case,
in relative terms, a mean swore of "3" reflects a major concern, and is surprisingly rare among the responses.
4 The survey did not lpose detailed questions about the effect of the legal environment or conflict-resolution
mechanisms. A separate legal study, camed out under the supervision of CERES, is discussed in the main report.



-85-
concern (see figure 3). Finally, exporting firms rank a broad variety of constraints higher than
other firms, led by inflation.
Figure 2 Uruguay General Constraints to Operations and Growth
Uguay- GaEd CwuxulMa to Opm*m &Wd  Cowdh
mprebJ*u~ ~~~             finns)li
1                   2                    3                   4                    5
High laval of taxe
+                       II
Policy lI-tabilityj
Inflai
Pfowmawand sale
Jucicial =
-s'a~~lAot  
Tedmtology & P-o]duce
Bwiusia sv,cf
(by size)
2                         3                         4
High level Of taxe
Polcy 1-tabiliy
Bnfal =i= 
P & C ~~~~~~~~................  ...                                    ......,S  
PrOCtiuu.t & sales 
Judicia System 
Regulatio
Labor
Technology & production
Busines Sav~ices
U   Large    F1mediumE IlsSmal



-86-
Figure 3: General Constraints to PSD by Location
High level of taxe
Policy   Uncer ai t 1 . _ _ _1 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _1_i_ _ _. _ _ _ _ _ _ _ _
Inflation 
Procuremen   &Sa  __ _  _   _ _   _   _   _  _  _   _   _   _   _   _ _   _   _
Judical Systam
Reglton 
Labor Union Relations
& Prducton
Busins services
l                        I            I        II
o 0.5            1       1.5      2       2.5      3       3.5       4
*  Motevideo C:  dior
Table 2: Constraints to Procurement and Sales (by size)
Demand       Export         Raw           Raw       Licenses    Customs          Raw
Permits      Material      Material    to Sell                   Material
Availability     Price      Imports                  Delivery
Large        2.93         1.72           1.72        2.21         1.17          1.84        1.62
Medium         2.80         1.45            1.54        2.24        1.28          1.60        1.49
Small        3.36        1.26            1.34        2.02         1.08         1.49         1.61
Overall       3.05         1.43            1.50        2.14        1.18          1.61        1.57
Procurement. Sales. and International Trade
Firms generally identified modest constraints in procurement and sales, led by concern about
inadequate demand (see Table 2). Small firms, in particular, felt the pinch of inadequate demand.
Large firms identified themselves as somewhat more constrained than other firms by lack of export
market information, inadequate energy supply and lack of qualified technicians and workers than
small and medium-size firms, however, the average score of their responses was only 2.3--a minor
constraint.



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Table 3: Origins of Inputs and Duties
Inputs:    Inputs:  Inputs: Rest Inputs: Duty as % oflDuty + other Markup as %
Domestic  Argentina   of Latin   Rest of   Cost of   Costs as %   of Cost of
Market   & Brazil   America   World   Principal   of Import   Principal
Import       Cost       Import
Large         62.6      25.7        2.9      9.0         9.6        13.2         2.6
Medium        61.0      20.9         2.8    15.4        13.6        19.6         6.0
Small         60.1      16.2        4.1    20.3         13.4        22.0         8.6
Overall       61.0      20.2        3.3    16.0         12.4        18.4         6.0
The sampled firms import an average of 40% of their inputs and export about 21% of their
outputs. Interestingly, while firms trade heavily with Argentina and Brazil and other non-Latin
American countries (such as the US and Western Europe), there is relatively little trade between
Uruguay and the rest of Latin America. While imports from Argentina and Brazil increase with
firm size, imports from outside Latin America decline (see Table 3). Yet, on the export side (see
Table 4), large firms are clearly first in all export categories (32% of production). The net effect is
that while small firms import some 20% of inputs from outside Latin America, only 2% of their
production is exported there. The tendency of small firms to import from beyond their immediate
locale may contribute to the finding that the incidence of duties is regressive with regard to firm
size. Perhaps due to trade agreements with Brazil and Argentina, small firms pay a higher
percentage of import costs in duty (22% for small versus 20% for medium-size and 13% for large
firms). This effect may also be indicative of certain economies of scale in dealing with customs and
importation. Nonetheless, small firms identify import and export regulations as no more than minor
constraints.
Table 4: Destination of Production
% of Total     Output Sold in      Exports to     Exports to Rest  Exports to Rest of
Output      Domestic Market    Argentina and    of Latin America      World
Brazil
Large                   68.41            11.25             0.63             19.59
Medium                  77.63             6.38             0.20             16.02
Small                   84.91             4.07             1.95              8.91
Overall                 78.71             6.41             0.99             13.85



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Table 5: Finance Constraints, by Firm Size
Guarantee  Documents  Interest  Deposit  Contacts  Investment    Other    Access to
Access   Requirements  Supplier
Credit
Large           2.12       1.81    2.86    1.69      1.52       1.76       1.52       1.24
Medium          2.21      1.52    2.96    1.57       1.66       1.41       1.19       1.31
Small           2.29      1.40    3.13    1.68       1.46      1.31        1.25       1.08
Overall         2.22      1.53    3.01    1.64       1.55      1.44        1.28       1.21
Finance
Respondents rank financial constraints as no more than a moderate obstacle to growth, led by
(globally recurring) objecition to the level of interest rates. The interest rate and collateral
constraints (see table 5), which led all others in the finance category, show no dramatic variation by
firm size, suggesting that even small firms have reasonable access to commercial credit. This is
confirmed by examining the sources of credit relied on by firms: each size class of firms relies
heavily on commercial banks for new investment and working capital (see table 6).



Table 6: Sources of Finance by Size
(percent)
Financial       Internal    Commercial     Other       Foreign     Friends &    Suppliers      Other    Other Sources
Structure       Sources      Banks       Financial     Sources      Family                  Businesses
Institutions
Large             56.3         23.9          1.4          3.6          0.0         11.3           i.8          1.8
Medium            67.1         19.9          0.2          2.6          2.1          6.3          0.7           1.0
Small             78.2         11.2          1.1          3.1          1.5          3.5          0.9          0.4
Overall           69.5         17.1          0.8          3.0          1.4          6.2           1.0         0.9
Investment      Internal    Commercial     Other       Foreign     Informal     Suppliers      Other    Other Sources
Sources      Banks       Financial    Sources      Sources                  Businesses
Institutions
Large             30.9         38.7          2.8         11.5          2.8          6.0          0.5          6.9 
00
Medium            44.0         40.5          3.0          8.5          1.3          1.8          1.0          0.0 
Small             45.9         39.1          4.5          3.1          1.2          6.4          0.0          0.0
Overall           42.0         39.5          3.6          6.9          1.5          4.5          0.5           1.4
Working         Internal   Commercial      Other       Foreign     Friends &    Suppliers      Other    Other Sources
Capital         Sources      Banks       Financial     Sources      Family                   Businesses
Institutions
Large             31.0         51.2          2.5          0.5          1.0          9.9          3.9          0.0
Medium            44.4         40.9          2.3          1.6          5.2          5.6          0.0          0.0
Small             46.9         36.9          1.9          3.9          1.4          5.8          3.2          0.0
Overall           42.9         41.3          2.2          2.3          2.1          6.5          2.1          0.0
Note: Figures are unreconciled averages of midpoint of respoonse interval, hence, figures may not add up to 100%. Informal
sources is the sum of the categories: "Friends and Family" and "Moneylenders."



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Nonetheless, small and medium-size firms rely more heavily on internal sources of finance
(retained earnings) for both investment and working capital, while larger firms can turn more to
external sources. As firms grow, they are able to rely more on foreign sources for investment
capital total finance for large firms--up toll .5%  of total finance.5 For working capital, large firms
anticipate drawing much more heavily on commercial banks and suppliers than do their smaller
peers.6
TaLble 7: General Regulatory Constraints by Sector
Number Cost of Obtaining   Import    Export    Labor   Union      Tax    Investment Competition
of  Permits Licenses/ Regulation Regulation Regulation Regulation  Regulation  Regulation    Law
Permits      l'ermits
Manufacturing 2.32  2.09    1.52      1.86      1.63      2.29       2.32      2.76      1.91      1.30
Transport!   2.79  2.42     1.84      2.11      2.05      3.00       1.95      3.42      2.32      1.00
Warehousing
Services    1.83  1.30      1.45      1.75      1.20      1.55       1.05      2.73       1.50     1.30
Commerce    2.35  2.05      1.78      1.76      1.41      2.28       1.92      2.96      2.16      1.47
Overall     2.32  2.01      1.62      1.85      1.57      2.28       2.00      2.89       1.97     1.30
Regulations: General Constraints
Regulatory constraints suggest that tax regulations are the most prominent of the constraints
faced by firms, regarded as a moderate constraint by each size class and sector (see figure 4 and
table 7). Yet, entrepreneurs and senior managers, particularly those in large firms, are spending a
substantial amount, an average of 9%, dealing with government regulations. This compares
favorably with Brazil where around 14% of entrepreneurial time is spent on these activities, but
unfavorably to Chile where the average is only 7%. Firms are also modestly bothered by the
number of permits required to do business. Though it is only transport firms and those that export
more than 20% of their production, that regard this as a moderate constrain (see discussion of
exporters, below). These firms are also more constrained by the cost of licenses. Overall, this
suggests that licenses associated with international trade are burdensome. While firms in the interior
identify regulations as generally more constraining than firms in Montevideo, their specific
constraint responses are quite similar. However, interior firms appear to have to spend substantially
more time (40%  more per license) and money (totalling 21%  more) obtaining business licenses than
those in Montevideo.
5 A similar connection exists between exports and reliance on foreign sources of finance -- so this may simply
reflect the correlation between size and propensity to export: larger firms access foreign sources of finance through
their trading relationships. There is some indication, however, that larger firms have greater access to foreign
finance independent of their trading practices. This may demand econometric examination.
6 If one compares these data to a similar study of Mexican firms, one might conclude that equity capital
markets function poorly or interest rates are repressed or subsidized in Uruguay. Mexican large firms rely more
on 'internal finance'. due to the cost advantage of eauitv over bank finance.



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Table 8: Constraints to Closing an Enterprise by Size
% Ever Close an EnterpriseGovt. Regulations Legal Process,   Problems    Cost of
on Asset Trans.  Bankruptcy or  with Labor  Laying off
Liquidation    Unions     Workers
Large                                  15              3.32           3.17        3.46        3.46
Medium                                 12              2.38           2.36        2.44        3.23
Small                                  14              2.35           2.12        2.61        3.27
Overall                                14             2.57            2.44        2.71        3.29
Figure 4 General Regulatory Constraints to PSD
Compedtion law
Expot regula.ions
Obtaning licenses
Import regulafions
Jinvestnmt reguladons
Union  restricitions  ._............ ..l                             l   l ...............
Cot of peraits          
Labor regul s   ..io
Number of permits 
Tax Reguladons  _  _ 
0        0.5        1        1.5       2        2.5        3        3.5
X Large   U  Medium  rO  Small         Overall
Licenses and Permits: Entry and Operation
Both the cost and number of licenses required by businesses to start and to continue
operations appear substantial. Data on new entrants were thin but suggest that new businesses
require multiple licenses, that take an average of about 30 weeks to obtain, and formal costs are in
excess of US$2,000 to register. (This compares to a time of six weeks and a cost of US$640 for
garnnent firms in neighboring Brazil, which has a relatively complex formal regulatory environment
but efficient informal mechanisms for coping with it.) This suggests substantial barriers to entry,
hence, protection to incumbent firms from domestic competition. Annual licensing costs vary
substantially within firm size and sectoral categories - suggesting that similar firms may not be
treated alike. However, both formal licensing costs and the number of regular licenses required of
firms correlate positively and significantly with the percentage of a firm's sales that are exported,



-92-
(respectively, r = 0.20 and r = 0.31, significant at the 1% level)." Surprisingly, neither correlates
to firm size (as measured lby fulltime employees).
Labor Regulation
Although labor regulation appears as no more than a minor constraint overall (Figure 4),
labor regulation and union restrictions are distinctly constraining to large firms and in the context of
flexibility and exit. First, large firms find both labor regulations and union restriction as
constraining as tax regulations - the leading regulatory constrain for all firns (Figure 4). Second,
all firms regard the high cost of laying off a worker a moderate to major constrain to temporarily
reducing their labor force or permanently closing their enterprises (see figure 5 and Table 8). These
high costs may be interpreted not only as constraints to reduction and exit but symmetrically as
disincentives to growth and entry. Large firms also identify labor union restrictions as a moderate
constraint both to retrenchment and closure. A third indication of the costs of labor regulation
appears in constraints concerning informal competition.
Regulation and Informal                            Figure 5 Uruguay: Labor Regulations
Competition                                          Problems of Temporary Reduction
Fully 73 % of firms face
some difficulty with informal
competition (see Table 9). Firms
regard competitors' evasion of           High f  cost of
taxes as a leading problem in this          layoffs
regard, indicating the burden
imposed by taxes and tax
bureaucracy (as well as the
competitive disadvantages of full           Government
compliance).' Yet, evasion of
labor regulations and social
security payments rank equally as
major constraints. Hence,                      .
although firms do not strongly              Uni ue
object to the day to day costs of
labor regulation, they are terribly
concerned about the advantage                          0   0.5    1   1.5   2   2.5   3   3.5   4
accruing to competitors who evade                              Medum  U  Sma          Oveal
them. 9                                             ILargc
' Correlation analysis suggests that his is a function of export regulation,not imports. In fact, the perception
of import licensing as a constrain is negatively correlated with film exports (r=.14 significant at the 5% level).
s According to CERES data, Uruguay, with the highest tax rate in Latin America, suffers from substantial tax
evasion. Leading among the evaded taxes are contributions to social security where evasion amounts to as much
as 30 % of collection and the value added tax where estimates indicate a similar evasion rate. Needless to say, high
marginal tax rates and evasion can create a vicious circle that erodes the tax base and poses an untenable burden
on law-abiding firms.
' This could reflect either the fact that they are accustomed to these costs, or, that they believe these costs are
entirely legitimate and would simply like them imposed on their informal competitors.



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Table 9: Constraints of Informal Competition
% With     Evasion of   Don't pay    Sell below    Sell below   Evade labor
Problems of      taxes       duties,    international    costs      regulations
Informal                 observe trade    prices                 social security
Competition                regulations
Large              69             3.92         2.84          2.18          2.28         3.95
Medium             78             3.74         2.89          2.02          2.58         3.79
Small              70             3.56         3.28          2.16          2.18         3.39
Overall            73             3.70         3.03          2.10          2.37         3.67
Exporters
Exporters form a group of special interest, due to their vital role in economic growth and
generation of foreign exchange. the group of firms that export at least 20% of their sales were
compared to lesser exporters to identify their special needs. This sample of 39 firms average twice
the size of their counterparts (in full time employees) and export an average of over 70% of their
production, versus just over 2 % for the other group. They appear to be suffering from global
downturn: they are operating at a mean capacity utilization rate"0 of 57.6% , compared to 62.3 %
for their domestically-oriented counterparts.
Exporters identify themselves as substantially more constrained by inflation and somewhat
more constrained by the level of taxes, by finance and by policy uncertainty that other firms. In one
important aspect of regulation, exporters appear more constrained that other firms. Disproportionate
to their size, they require nearly seven times as many permits and bear annual costs far in excess of
other firms. Hence, their proprietors spend 11 % of their time contending with regulation, versus
8% for other firms (although they expend less of their employees' time on regulatory compliance
than other firms). Thus, it is not surprising that they identify both the number of permits required
and their cost as moderate constraints, just behind tax regulations. Exporters find problems of
electric power supply a moderate constraint (2.59% versus 2.16%  for non-exporters).  While
exporters consider ports a minor constraint they still consider them substantially more constraining
than do non-exporters (2.26% versus 1.64%)".
Infrastructure
Infrastructure constraints, led by electric power supply, pose no more than moderate
constraints for the full sample and for each size class (Table 10). Nonetheless, one third of firms
report that infrastructure problems impede their meeting orders on time. By sector, manufacturing
firms identify shortages of electricity as a moderate constraint - 2.64%, but all other constraints
rank as minor. Transport firms assign a higher, although still minor, score to reads and ports than
do other firms and fully 44% reported difficulties in meeting commitments due to infrastructure
0 Not weighted by value of production.
1 The port of Montevideo might appear as a more serious constraint were there not readily available substitutes
including the port of Buenos Aires and land transit through Argentina and Brazil.



-94-
problems. Firms in the interior identify substantially higher problems with roads than those in
Montevideo - 2.49% versus 1.50%. Other survey data indicate that firms in the interior wait three
times as long for a new phone connection, 90 vs 29 weeks, suffer twice the weeks without telephone
service, 3.5 weeks per year, and are more likely to find themselves lacking in desired
telecommunications services 32% of interior firms vs 14% of firms in Montevideo.
Table 10: Infrastructure Constraints by Size
Access to Electricity   Voltage   Telecom  Water Sewage &   Solid   External Quality of Railroad  Ports
Land   shortages  Fluctuation  Problem  Supply   Waste   Wastel  Transport  Roads
Water  Garbage  Services
Large        1.52      2.38       2.02     1.90   1.76     1.69     1.90     1.34    1.83     1.41   2.10
Medium       1.55      2.17       2.13    1.53   1.24      1.28    1.52      1.21    1.91     1.31   1.91
Small        2.05      2.33       1.63    1.48   1.22      1.29     1.21     1.34    1.54     1.50   1.55
Overall      1.74      2.28       1.91    1.58    1.34     1.37     1.47     1.29    1.74     1.41   1.80
Conclusions
The survey demonstrates that businesses place lowering taxes and assuring policy stability at
the forefront of the reform agenda.'2 High tax rates impose direct costs, added compliance costs
associated with their regulatory requirements, and place a severe burden on firms facing growing
informal competition. Marginal rates may have already reached a point where they are reducing
compliance, hence where ;Lower rates could well broaden the formal tax base.  Evidently, total tax
receipts cannot responsibly be reduced without commensurate reductions in public expenditures.
Policy instability and inflation which can reduce the security of property rights and contracts
especially constrain exporters - a group critical to Uruguay's future prosperity. While much of this
instability is imported from Uruguay's immediate neighbors, macropolicy must still give these
concerns top priority. Permits related to trade appear to be at the heart of a regulatory structure that
further penalizes exporters, in particular those reaching markets outside on the MERCOSUR
group."3 At a time when dependency on neighboring markets appears to increase economic
instability, such strong disincentives towards trade diversification appear especially inappropriate.
As more general macro-constraints are relieved, secondary constraints will come to the fore.
For example, while the sample firms identified finance constraints overall as minor, the interest rate
was perceived as relatively strong, particularly for small firms. As the climate for growth
improves, it will be important to determine if this ranking reflects some structural flaw in credit
markets, or merely the reflection of risk in well functioning markets. In addition, under conditions
12 In neighboring Brazil businesses surveyed in two sectors, garment and machine toll manufacturing, place
similar emphasis on the macro-constraints of political and policy uncertainty and high taxes. Not surprismgly,
inflation as rated as a stronger constraint than in Uruguay, as did labor regulations. However, constraints relating
to legal proceedings (e.g. contract renegotiation, payment arrears) ranked at the bottom in Brazil, yet, were in the
middle m Uruguay. Perhaps due to a greater sense of urgency, perhaps to cultural differences, Brazilian
entrepreneurs were far more ready to rank a constraint as severe or major than were their Uruguayan counterparts,
hence average scores were ligher.
1" CERES analysis indlicates that licensing costs for those exporting with MERCOSUR (including Brazil,
Argentina and Paraguay) are actually lower than for producers for the domestic market, while those exporting
beyond the immediate region face costs of five to six times higher.



-95-
of an improved macro-environment, perceived limitations on entry, flexibility of operation (e.g.
through retrenchment), or exit (as well as the absence of control of anti-competitive practices) will
undoubtedly emerge as far from serious. Finally, relatively moderate infrastructure constraints are
likely to intensify unless adequate attention is given to ensuring a stable power supply for all, and
improved roads and telecommunications services to the interior.






ADDITIONAL SURVEY TABLES






-99-
Registration
No. of permits        Cost of permits
to begin              to begin           Weeks to begin       Total Cost to begin
7.50                 3428.33                29.56                2165.00
15                     10                    18                     11
No. of permits             Cost of permits         Weeks to     Total cost to
to begin                   to begin              register      register
Small             7.00                      7194.38               34.68         2295.00
(Adequate data available only for small firms - note high age of sample firms.)
Regulatory Costs of Operation-Permits
Regular      Special      Cost of      Hours/     % Using an  Total annual
permits     permits      Permits      permit   intermediary cost of permits
Large               82.52       113.22   167,997.50    90.45         26        278,928.57
Medium            287.11       264.72    11,311.33     33.00         46         60,368.38
Small              115.66       28.62      1,868.51    25.95         31          5,003.06
Overall            176.50       131.95    44290.45     42.44         36         91,762.80
Cost of Regulation: Outside Help, Inside Time
% of
% Using   Cost of auditor   % Using               proprietor's   Employees
auditor                  lawyer   Cost of lawyer    time         time
Large              63         4735.29        78         2916.67        12.70       212.35
Medium             71         2086.33        61          764.52        10.32        44.74
Small              68          988.50        52          461.04         5.58        23.12
Overall            68         2098.11         1.40      1322.04         8.92        68.43



-100-
Constraints to Closing an Enterprise
Legal proc.,
% Ever close     Govt. regs.    bankruptcy or    Problems with   Cost of laying off
an enterprise    on asset transfer    liquidation    labor syndicates  workers
Large            15             3.32            3.17             3.46            3.46
Medium           12             2.38            2.36             2.44            3.23
Small            14             2.35            2.12             2.61            3.27
Overall          14             2.57            2.44             2.71            3.29
Labor Regulations: Problems of Temproary Reduction
Syndicate rules'        Government rules'    High financial cost of layoffs
Large                    3.34                      2.21                     3.21
Medium                   2.58                      2.36                     3.58
Small                    2.02                      2.35                     3.36
Overall                  2.50                      2.33                     3.42
Informal Competition: Constraints
% with
problems of                Don't pay     Sell below                Evade labor
informal    Evasion of  duties, observe  international   Sell below    regulations,
competition     taxes      trade regs.    prices         cost     social security
Large          69           3.92          2.84         2.18          2.28         3.95
Medium         78           3.74          2.89         2.02          2.58         3.79
Small          70           3.56          3.28         2.16          2.18         3.39
Overall        63           3.70          3.03         2.10          2.37         3.67



-101-
Overall Regulatory Constraints
Cost of  Obtaining   Import  Labor  Export  Union    Tax   Investment Competition
No. of permits permits   licenses   regs.    Regs   regs.   regs.   regs.    regs.       regs.
Large           2.66     2.38        1.93      2.45   3.05    2.14    3.05    3.07        2.21      1.61
Medium          2.36     2.16        1.64      1.71   2.22    1.47    2.09    2.97        2.16      1.25
Small           2.13     1.71        1.46      1.71   1.97    1.40     1.42    2.74       1.68      1.22
Overall         2.32     2.01        1.62      1.85   2.28    1.57    2.00    2.89        1.97      1.30
Infrastructure Constraints
Sewage &  Solid  External
Access to Electricity  Voltage  Telecom   Water   waste   waste/ transport Quality
land    shortages fluctuations problems  supply   water  garbage services of Roads Trains  Port
Large          1.52      2.38     2.02      1.90    1.76     1.69    1.90    1.34    1.83    1.41   2.10
Medium         1.55      2.17     2.13      1.53    1.24     1.28    1.52    1.21    1.91    1.31   1.91
Small          2.05      2.33     1.48     1.22     1.29     1.29    1.21    1.34    1.54    1.50   1.55
Overall        1.74      1.91     1.58     1.34     1.37     1.37    1.47    1.29    1.74    1.41   1.80
Finance Constraints
Access to
Investment   Other     supplier
Guarantee    Documents   Interest    Deposit   Contacts   access  requirements   credit
Large                 2.12        1.81       2.86        1.69     1.52      1.76        1.52       1.24
Medium               2.21         1.52       2.96        1.57     1.66      1.41        1.19       1.31
Small                2.29         1.40       3.13        1.68     1.46      1.31        1.25       1.08
Overall              2.22         1.53       3.01        1.64     1.55      1.44        1.28       1.21



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Technology and Production Constraints
Repair &       Energy      Lack of      Meeting     Conflict of    Filling   Qualified
maintenance      supply     technical    quality      quality     orders on technicans/
services      shortage   information   standards    standards     time     workers
Large                  1.7:3         2.31         1.69        2.15          1.88        2.13      2.31
Medium                 1.54           1.95        1.43        2.16          1.53        1.84      2.30
Small                  1.517         1.90         1.36         1.67         1.24        1.67      2.05
Overall                1.59          2.01         1.46        1.98          1.50        1.84      2.21
Business Services
(A) keeping       % using          % having                     % w/ medical    % w/ workers'
balance     external assistance  accounts          9i wl    insurance, pension   accident
sheets         for (A)           certified      insurance     for employees     insurance
Large           100           19                60             100             64               12
Medium          100           40                71             100             42               14
Small           97            47                68              95             32               05
Overall         99            39                68              98             42               10
Business Services Constraints
Lack of
Lack of quality   Lack of        Lack of        Lack of      Lack of       Lack of     qualified
control and    management  domestic market export market info on suitable  insurance   accounting
measurement     consultant        info          info         inputs      services     services
Large        1.78           1.59           1.87           2.30          1.37         1.52        1.15
Medium       1.71           1.46           1.65           1.89          1.48         1.57        1.07
Small        1.58           1.20           1.75           1.33          1.36         1.40        1.04
Overall      1.67           1.38           1.73           1.75          1.41         1.49        1.07
General Constraints
High
Technology                                                                    level
Procurement     &                             Business                      Policy  Judicial of
& sales    production Finance Regulation Labor services Infrastructure Inflation instability system taxes
Large          2.89       2.50    2.64      2.14  2.46   1.61        2.32    3.16      3.38  2.14  3.93
Medium         2.66       1.81    2.42      2.11  2.00   1.54        1.75    2.82      3.57  2.50  3.71
Small          2.38       1.52    2.34      2.34  1.39   1.38        1.69    2.84      3.45  2.15  3.76
Overall        2.59       1.83    2.43      2.21  1.84   1.49         1.84    2.90     3.48  2.29  3.77



APPENDIX TABLES






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TABLE Al.l: URUGUAY: NATIONAL ACCOUNTS SUMMARY AT CONSTANT 1983 PRICES
1980-1992
(Percent of GDP)
1980    1981    1982    1983    1984    1985    1986    1987    1988    1989    1990    1991   1992"
Imports of GNFS        27.8    27.7    26.5    23.6    20.4    19.9    23.7    25.4    25.4    25.4    25.5    29.2   33.4
Exports of GNFS        19.3    20.1    20.0    25.7    25.5    26.7    27.3    23.2    25.3    27.6    30.8    29.7   28.9
Resource balance       -8.6    -7.5    -6.5      2.1      5.1     6.8      3.7    -2.2    -0.1     2.1      5.3     0.5    4.4
Total Expenditures    108.6   107.5   106.5    97.9    94.9    93.2    96.3   102.2   100.1    97.9    94.7    99.5  104.4
Total consumrrption, etc.    83.8    85.3    86.4    83.7    82.9    82.6    84.9    89.7    88.5    87.4    84.4    87.2   91.8
General government     11.7    12.4    13.4    14.5    14.7    14.7    14.7    14.4    14.0    14.1    14.2    14.0   13.7
Private, etc.          72.0    72.9    72.9    69.1    68.2    67.9    70.2    75.3    74.4    73.4    70.1    73.2   78.1
Gross domestic
investment             24.8    22.3    20.2    14.2    12.0    10.6    11.4    12.5    11.6    10.4    10.4    12.3   12.6
GDFI                   24.2    22.6    20.8    13.7    10.7       8.4     8.7    10.3    10.8    10.6       9.3    10.6   11.5
Private Sector         18.7    17.4    13.5      8.6      6.2     5.2     5.2      6.4     6.8     6.4      6.6     7.0    9.0
Changes in Stocks       0.6    -0.3    -0.6      0.5      1.3     2.2     2.7      2.2     0.9    -0.1      1.0     1.7    1.1
Gross domestic saving  17.5    16.7    15.6    16.3    17.0    15.9    18.4    15.8    17.8    18.8    18.0    16.7   12.9
Net factor income      -1.0    -0.7    -2.1    -5.6    -0.7    -6.5    -5.8    -6.1    -6.3    -6.7    -5.9    -4.1   -3.1
Gross national saving  16.5    16.0      NA       NA      NA      NA       NA      9.6    11.5    12.1    12.2    12.6    9.8
Net Indirect Taxes     14.1    13.9    13.2       NA      NA      NA       NA      NA      NA       NA      NA      NA    NA
Gross natiomld product    99.0    99.3    97.9    94.4    99.3    93.5    94.2    93.9    93.7    93.4    94.3    96.6   94.8
Capacity to i,mpost    20.5    22.1    21.9    25.7    25.4    25.3    30.6    28.6    31.6    33.8    33.2    33.6   33.7
Terms of trade
adjustment              1.3      2.0     2.0     0.0    -0.1    -1.4      3.3      5.4     6.3     6.2      2.4     3.9    4.7
Gross domestic income    101.3   102.0   102.0   100.0    99.9    98.6   103.3   105.4   106.3   106.2   102.4   103.9  104.7
Gross national income    100.2   101.3    99.9    94.3    99.1    92.1    97.5    99.3   100.0    99.5    96.5    99.8  101.6
1/      Preliminary.
NA      Not Available.
Note:   Net Factor Income in USS was taken from BOP and transformed into Current NUS using the average exchange rate calculated by the Central
Bank.
Source:  Central Bank of Uruguay.



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TABLE A1.2: URUGUAY: NATIONAL ACCOUNTS SUMMARY AT CURRENT PRICES
1980-1992
(Pect of GDP)
1980    1981    1982   1983   1984   1985    1986   1987   1988   1989    1990    1991    19921:
Imports of GNFS           21.1    19.0   17.3   23.6   21.4   21.1    20.3    19.2   19.2   19.2   20.1    20.2    21.3
Exports of GNFS            15.6   15.2    14.3   25.7   26.6   26.8    26.2   21.6   23.8   25.4   26.2    23.2    21.5
Resource balance          -5.5    -3.8    -3.0    2.1    5.2    5.7        5.9    2.4    4.7    6.3        6.0     3.0     0.2
Total Expenditures        105.5   103.8   103.0   97.9   94.8   94.4   94.1   97.6   95.3   93.7   94.0    97.0    99.8
Total consumption, etc.    81.3    82.4   83.2   83.6   82.7   83.0   82.9   83.3   82.1   82.4   83.0   84.2    87.0
General government         12.7    14.4   15.7   14.5   13.6   14.4    14.3   13.2   13.2   13.4   13.9    13.8    13.7
Private, etc.             68.6    68.0   67.5   69.1   69.1   68.5    68.5   70.0   69.0   69.1   69.1    70.4    73.3
Gross domestic investment  24.2   21.4    19.8   14.3   12.1    11.4    11.2   14.3   13.2   11.3    11.0   12.8    12.8
GDFI                      23.6   21.7   20.4   13.7   11.0    9.6          9.9    11.4   11.9   11.6   10.8    11.3    12.1
Nonfinancial Pub. Sector   5.5     5.2    7.3    5.1    4.5    3.5         3.7    4.0    4.0    4.3        3.1     3.8     2.8
Private Sector             18.1    16.6    13.2    8.6    6.5    6.1       6.2    7.4    7.9    7.2        7.7     7.5     9.3
Changes in Stocks          0.6    -0.3    -0.6    0.6    1.2    1.7        1.3    2.9    1.3   -0.3        0.2     1.5     0.7
Gross domestic saving     18.7    17.6    16.8   16.4   17.3    17.0   17.1    16.7   17.9   17.6    17.0   15.8    13.0
Net factor income          -1.0   -0.7    -2.0   -5.6   -7.5   -7.4    -5.1    -3.8   -4.0   -4.4   -3.8   -2.4    -1.6
Gross national saving     17.7    16.9      NA     NA      NA      NA      NA    12.9   13.8   13.2   13.2   13.4    11.4
Net Indirect Taxes        14.1    13.9    13.2     NA      NA      NA      NA      NA      NA      NA      NA      NA       NA
Gross national product    99.0   99.3    98.0   94.4   92.5   92.6   94.9   96.2   96.0   95.6   96.2   97.6    98.4
i/      Preliminary.
NA      Not Available.
Note:   Net Factor Income in USS was taken from BOP and transformed into Current NUS using the average exchange rate calculated by the Centra Bank.
Source:  Central Bank of Uruguay.



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TABLE A1.3: URUGUAY: CHANGES IN GDP BY SECTOR
19801992
(Percentage per annum)
1980    1981    1982      1983    1984    1985    1986        1987    19S8      1989    1990      1991    1992"
GDP at market prices     5.8      1.6    -9.8   -10.3    -1.1        1.5      8.9      7.9      0.4      1.3      0.9      2.9      7.4
Net Indirect Taxes       7.0    -0.2   -14.4        NA       NA       NA      NA        NA       NA      NA       NA       NA        NA
GDP at factor cost       5.7      1.9    -9.0       NA       NA       NA      NA       NA       NA       NA       NA       NA       NA
Agriculturr             16.2     5.5    -7.3       2.1   -12.8    12.6    -2.5         4.6    -1.6       3.5      0.3      2.3     10.5
Industry                 3.0    -2.8   -13.4   -10.1         1.5    -4.2    10.3      11.3      0.6    -1.0    -1.5        0.9      4.7
Services, etc.           5.9      3.7    -7.9   -13.1        0.2     2.6    10.7       6.7      0.0      2.2      2.4      4.1      8.3
1/       Preliminary.
NA       Not Available.
Source:  Central Bank of Uruguay.
TABLE A2.1: SUMMARY CONSTRAINTS
BY SECTOR, 1992
Procurement    Production    Finance    Regulation   Labor   Business    Infra-    lilation   Policy    Judicial   High
ad Sales         and                                        Serviees   structure            Instability   System    Level
Technology                                                                                           of
Taxes
Mmnufactunng       2.97           2.07         2.24        1.97      1.93      1.48       1.90       2.95      3.69       2.09      3.85
Trsport&           2.11           1.89         2.89        2.95      2.00      1.47       1.68      3.29       4.21       2.89      4.21
Warehouse
Services           1.95           1.42         2.16        2.16      1.37      1.32       1.89      2.63       2.53        1.68     3.42
Commerce           2.44           1.51         2.7.        2.31      1.84      1.60       1.77      2.71       3.19       2.67      3.57
Source: Uruguay Private Sector Assessment, September 1992.



TABLE A3.1: URUGUAY: BALANCE OF PAYMENTS SUMMARY
1980-1992
(in millions of US dollars)
1980      1981      1982      1983       1984     1985      1986      1987      1988     1989      1990     1991    199211
Exports of GNFS                   1526.0    1700.7    1537.3    1411.4    1289.4   1252.8   1499.6   1595.0   1788.0   1996.8   2132.3   2155.6   2450.3
Merchandise (FOB)                 1058.5    1229.7    1256.4    1156.4      924.6    853.6    1087.8   1182.3   1404.5   1599.0   1692.9   1604.7   1702.5
Non-factor services                467.5     471.0      280.9     255.0     364.8    399.2    411.8    412.7    383.5    397.8    439.4    550.9    747.8
Inports of GNFS                   2143.7    2098.0    1585.5    1194.4    1066.9    1032.8    1179.7   1429.9   1444.5   1500.6   1582.3   1857.8   2426.7
Merchandise (FOB)                 1668.2    1592.1    1038.4      739.7     732.2    675.4    814.5   1079.9   1112.2   1136.2   1267.0   1543.7   1941.2
Non-factor services                475.5     505.9      547.1     454.7     334.7    357.4    365.2    350.0    332.3    364.4    315.3    314.1    485.5
Resource balance                  -617.7    -397.3      -48.2     217.0     222.5    220.0    319.9    165.1    343.5    496.2    550.0    297.8          23.6
Net factor income                 -100.1     -73.8    -196.8    -287.8    -361.6   -350.9   -300.6   -307.1   -330.6   -349.1   -321.7   -232.8   -187.2
Factor receipts                     67.7     145.8      147.2      62.5      87.2      77.4      92.7    103.6    114.7    203.0    257.9    234.3    224.9
Factor payments                    167.8     219.6      344.0     350.3     448.8    428.3    393.3    410.7    445.3    552.1    579.6    467.1    412.1
Total interest due                 169.3     195.6      221.5     273.9     350.6    365.8    346.6    357.9    353.8    352.1    417.9    278.8    265.1            00
Other Factor Payments & disc.       -1.5      24.0      122.5      76.4      98.2      62.5      46.7     26.1      66.6    200.0    161.7    188.3    147.0
Net current transfers                2.0       2.9       0.0        0.0       0.0       0.0       0.0      0.0       0.0       0.0      0.0      0.0       0.0
Currnt Receipts                      2.5       3.5        NA        NA        NA        NA        NA        NA       NA        NA        NA       NA       NA
Other curr. transfers                2.5       3.5        NA        NA        NA        NA        NA        NA       NA        NA       NA        NA       NA
Current Payments                     0.5       0.6        NA        NA        NA        NA        NA        NA       NA        NA       NA        NA       NA
Curr.AiC Bal before Off. Grants   -715.8    -468.2    -245.0      -70.8    -139.1    -130.9      19.3   -142.0      12.9    147.1    228.3      65.0   -163.6
Off. Capital Grants 1/               6.7       6.8       10.4      11.0      10.0      10.8      25.3       8.0     21.3       8.0      8.1     40.1      28.6
Curr.A/C Bal after Off. Grants    -709.1    -461.4    -234.6      -59.8    -129.1    -120.1      44.6   -134.0      34.2    155.1    236.4    105.1   -135.0
LT Capital nflaws                  404.3     345.6      515.1     626.3      35.1      59.5     174.3    263.5    387.9   -415.0   -247.8   -239.5        15.9
Direct investment                  289.5      48.6     -13.7       -5.6       3.4      -7.9      32.5     55.0      44.5       0.0      0.0      0.0       5.0
Net LT Borrowing (DRS)             226.3     353.3      241.7     381.3      39.5      27.0     102.3    237.5    -29.6       83.2    -53.0    213.6    372.6
Disbursements                      356.2     456.0      533.2     502.0     189.4    220.0    207.9    390.6    282.9    295.3    420.0    805.6    629.6
Repayments due                     129.9     102.7      291.5     120.7     149.9    193.0    105.6    153.1    312.5    212.1    473.0    592.0    257.0
Other LT Inflows (net)            -111.5     -56.3      287.1     250.6      -7.8      40.4      39.5    -26.2    372.6   -500.1   -207.2   -455.8   -435.5



1980      1981     1982      1983      1984      1985     1986      1! t7    1988     1989     1990    1991    199211
Other Capital Flows (Net)        423.0      149.7    -696.5    -632.2      9.6    127.0      68.6    -58.2   -432.7    388.8    312.7   283.2    380.2
Net short-termcapital            333.5      311.2     568.0   -376.9    130.8   -133.8   -155.7        58.9   -175.9    451.2    197.8  -114.0    112.3
Errors and omissions              89.5    -161.5   -1264.5    -255.3    -121.2    260.8    224.3   -117.1   -256.8    -62.4    114.9   397.2    267.9
Changes in net rerves            -118.2     -33.9     416.0     65.7      84.4    -66.4   -287.5    -74.1       11.0   -127.0   -288.9  -150.3   -187.3
Net credit from IMF                 NA        NA      95.7     141.7    -15.1    127.6       45.3     -2.8    -83.3   -107.5   -100.8   -42.9       23.5
Reserve changes n.e.i.           -118.2     -33.9     320.2    -75.9      99.5   -194.0   -332.8    -71.3       94.3    -19.5   -188.1   -107.4   -210.9
Net hIt. Reserves (mill US)      383.8      430.0     116.3    206.9    134.4    174.2    481.6    530.0    532.0    501.3    544.4   345.8    530.5
Gross Resrves (ncl. Gold)        2401.1    1778.3    1422.1    1199.6    941.5   1030.6   1499.8   1793.0   1602.3   1547.6   1466.5   1146.0   1206.3
Nom Off. Exch. Rate (Avg.)(rt)     9.1       10.8     13.9      34.5      56.1    101.4    152.0    226.7    359.4    605.5   1171.1  2018.8   3026.9
Nom. Off. (End-of-year)(ae)        10.0      11.6     33.8      43.3      74.3    125.0    181.0    281.0    451.0    805.0   1594.0  2489.0   3480.0
MUV-Manuf. (% change)              9.7       0.4       -1.5     -2.3      -2.1      0.8      17.9      9.8       7.3     -0.7      5.7      2.1      4.3
Index Rest Eff.(MF)               100.0     119.3     124.8     76.7      73.5     70.9      69.9     68.3      64.3     67.2     60.7    69.0      74.0
1/      Pteliminary.
NA      Not Available.
Source: IMF, World Bank.



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TABLE A3.2: URUGUAY: INTERNATIONAL RESERVES AND EXTERNAL DEBT
1980-1992
([JS$ Million)
Gross intl. reserves (yr.-end):                   Extemal debt (year-end)
Total    Foreign     Gold                  Public,
(gold at   exchange  (Mn. Troy              guaran-   Non-guar-              Short-
world   ('US$mn.)    ozs.)       Total      teed      anteed      IMF        term
price)                       L
1980        2225.7      383.8    1841.9      1659.8     1126.9      210.9        0.0      322.0
1981        1821.0      430.0    1391.0      2174.4    '348.2       326.2        0.0      500.0
1982        1386.7      116.3    1270.4      2646.8     1700.2      205.8       95.8      645.0
1983        1217.4      206.9    1010.5      3292.0    2510.3       158.3      237.4      386.0
1984         972.6      134.4     838.2      3271.3     2527.8      129.2      222.3      392.0
1985        1016.8      174.2     842.6      3919.4    2695.1        60.4      349.9      814.0
1986        1499.9      481.6    1018.3      3906.1     2895.3       42.6      395.2      573.0
1987        1798.6      530.0    1268.6      4270.8     3098.4      144.0      392.4      636.0
1988        1626.3      532.0    1094.3      3820.7     2950.5       86.2      309.0      475.0
1989        1570.3      501.3    1069.0      4205.3     2977.9      104.9      201.5      921.0
1990        1446.6      544.4     902.1      4334.9     3009.2      110.0      100.7      1115.0
1991        1163.9      345.8     818.1      4189.1     2843.2      285.1       57.8      1003.0
1992"        1059.0     383.0      676.0      3875.9     2798.0      43.2        31.7     1003.0
11    Preliminary.
Source: Intemnational Monetary Fund, World Bank.



TABLE A33: URUGUAY: PUBLIC-SECTOR ACCOUNTS: CENTRAL ADMINISTRATION, PUBLIC ENTERPRISES
1980-1992
Non-Financial Public-Sector
Central Adninistration                                                             Public Enterprises
Current                                       Capital          Current           Current                               Net    Capital
Current  Current Expendi-         Soc. Sec.                   Forma-           Operating Operating Expendi-                           Tnfers  Forma-
Surplus   Saving  Revenue  ture   Personnel Transfer  Interest    Other    tion  Surplus  Income   Income    ture   Peronnel  Inputs  Interest and Taxes  tion
(Percent of GDP)
1980        0.1      2.0     16.2   -14.2    -7.7       -2.6    -0.4      -3.6    -2.0       1.0      1.3     13.1    -11.8      -1.7     -7.3     -0.1     -2.7     -0.3
1981       -0.1      2.0     17.4   -15.4    -4.0    -3.2    -0.3         -3.9    -2.1       0.2      1.0     12.9    -11.8      -1.9     -6.8     -0.2     -3.0     -0.8
1982      -4.7    -6.2       15.2   -21.4    -10.2    -6.6       -0.6     -4.0    -2.5      -0.1      0.4     13.3    -12.9    -2.2       -7.9     -0.1     -2.8     -0.S
1983       -4.2    -2.1      16.8   -18.9    -9.1       -4.9     -1.3     -3.6    -2.1       0.0      1.4     15.1    -13.7      -1.8    -8.5      -1.2     -2.2     -1.5
1984       -5.8     -4.0     14.7   -18.7      -6.7     -4.9     -2.0     -5.1    -1.8       1.3      2.6     18.9    -16.2      -1.8     -9.5     -1.9     -3.0     -1.3
1985       -3.1     -1.4     16.0   -17.5      -7.0     -4.3     -2.2     -4.0    -1.6       1.7      2.8     16.9    -14.1      -2.4     -7.1     -0.9     -3.7     -1.1
1986       -1.3      0.3     16.8   -16.5      -7.1     -3.3     -1.9     -4.1    -1.6       0.2      2.4     14.3    -11.9    -2.3       -4.7     -1.4     -3.5     -2.2
1987       -1.3      0.5     16.3   -15.8    -6.5       -3.5     -1.5     -4.2    -1.9       0.1      1.5     12.5    -11.0    -2.3       -4.7     -1.0     -3.0     -1.4
1988       -2.0      0.1     16.8   -16.7    -6.8       -4.0     -1.6     -4.2    -2.1       0.1      1.9     13.1    -11.2    -2.1       -4.9     -0.9     -3.3     -1.7
1989       -3.4     -1.1     15.6   -16.7    -5.6       -5.2    -2.0      -3.9    -2.3      -0.2      1.;     12.6    -11.5    -2.0       -5.5     -1.0     -3.0     -1.2
1990       -0.1      1.9     17.8   -15.9    -5.3       4.5      -1.9      4.2    -1.9       0.5      2.4     14.5    -12.1      -1.8    -5.7      -1.1     -3.6     -1.9
1991        0.4      2.1     18.8   -16.6    -5.2       -5.2     -1.7     4.5    -1.7        0.7      3.0     14.0    -11.0      -1.9     4.7     -0.5      4.0      -2.2
1992u        0.3      2.1     19.6   -17.5    -5.0       -6.2    -1.5      -4.9    -1.8       0.8      2.9     13.3    -10.4      -1.7    -4.1      -0.9     -3.6     -2.1
1/       Preliminary.
Source: Central Bank of Uruguay.



- 112 -
TABLE A3.4: URUGUAY: FINANCING OF THE CENTRAL ADhMNISTRATION DEFICIT
1980-1992
Combined                                                    Financing:
deficit
of the    Central
central   adninis-   Net                                                Net       Net       Net
adminis-  trationl    credit   ECU                           BROU      place-    place-    external    Other
tamtion,   defic:    from the          Account-  Revalu-              ment of   ment of    loans      (net)
Central              BCU,              ing flows    ation              bonds      bills
Bank               BROU
II               =11                               (Percent of GDP)
1980            NA       -0.9      -0.2      -0.1      -0.1        0.0      -0.1      -0.1      -0.2      -0.1        0.4
1981            NA       -0.8       0.3       0.4       0.4        0.0      -0.1       0.0       0.0      -0.1       -0.2
1982            NA        7.4       7.0       6.3       6.2        0.1       0.7       0.1       1.2       0.2        0.2
1983            NA        3.0       3.3       3.2       3.2        0.0       0.0      -0.4       1.3       0.3       -0.2
1984            8.5       4.9        2.7      2.S       2.9        0.0      -0.1       0.4       3.1       0.3       -0.8
1985            4.6       2.5        0.2      0.8        1.0      -0.1      -0.7       1.9       1.5       0.4       -0.9
1986            5.0       0.9      -0.8       -0.5      -1.0       0.4      -0.3       1.3       1.1       0.2       -0.4
1987            4.0       1.1      -0.8        1.1      0.3        0.8      -1.9       0.2       1.7       0.1        0.1
1988            4.7       1.7      -1.5       -0.4      -1.4       1.0      -1.1       1.0       2.3       0.1        0.1
1989            7.2       3.2        1.4       1.7      -0.4       2.0      -0.2       0.1       1.8       0.1        0.0
1990            3.5      -0.1      -1.4       0.3       -1.7       2.0      -1.6       0.0       1.5       0.0        0.0
1991            1.3      -0.6      -1.3       -1.0     -2.3        1.3      -0.2       1.5      -0.5      -0.1       -0.1
1992"            0.3      -0.6       -0.4       0.2      -0.5       0.8      -0.7       1.6       -1.4     -0.1       0.0
1/      Preliminary.
NA      Not Available.
Source:  Central Bank of Uruguay.



- 113 -
TABLE A4.1: URUGUAY'S TRADE IN GOODS AND NON-FACTOR SERVICES
1980-1991
(in millions of dollars)
1980    1981    1982      1983      1984      1985      1986     1987      1988     1989      1990     1991
Exports of goods
and nfs             1526.0  1700.7   1537.3    1411.4   1289.4   1252.8   1499.6   1595.0   1788.0   1996.8   2132.3  2155.6
Expods of goods     1058.5  1229.7   1256.4   1156.4    924.6    853.6   1087.8   1182.3   1404.5   1599.0   1692.9  1604.7
Exports of nfs       467.5   471.0    280.9    255.0    364.8    399.2    422.8    412.7    383.5    397.8    439.4   550.9
Shipments             17.0    11.2      16.9      11.3      14.8     10.7      12.0     22.3      26.7     29.9      41.2    58.4
Transport             71.6    80.5      64.3     60.0      54.5      56.9      59.3     80.4      71.0     58.4      66.7    72.8
Travel               298.0  283.0    106.0       89.7    210.0    235.2    257.8    207.5    202.8    227.9    238.2   332.5
Government services    18,5    14.7    23.3      23.3      21.2      28.0    NA        NA        NA       NA
Other                 62.4    81.6      70.4     70.7      64.3      68.4     82.7    102.5       83.0     81.6      93.3    87.2
Imports of goods
and nfs             2143.7  2098.0   1585.5    1194.4   1066.9   1032.8   1179.9   1429.9  14444.4   1500.6   1582.4  1857.8
Imports of goods    1668.2  1592.1   1038.4    739.7    732.2    675.4    814.5   1079.9   1112.2   1136.2   1266.9  1543.7
Imports of nfs       475.5  505.9    547.1    454.7    334.7    357.4    365,2    350.0    332.3    364.4    315.5   314.1
Shipments            101.6  103.6       48.4     30.6      30.8      25.2     45.4      46.6      47.3     47.8      54.0    68.9
Transport.            59.8   70.6       67.2     54.0      49.1      63.4      54.2     66.7      54.7     56.0      56.0    54.3
Travel               202.7  203.0    304.0    259.1        153.9    162.1    173.8    128.9    138.3    166.5    111.4    99.7
Government services    41.9    31.0     17.6      17.6     16.0      18.8    NA        NA        NA       NA        NA      NA
Other                 69.5    97.7    109.9      93.4      84.9      87.9     91.8    107.8       92.0     94.1      94.1    91.2
NA       Not Available.
Source:  Estimates based on ANDREX, January 1993.



- 114 -
TABLE A4.28: TOTAL MERCHANDISE IMPORTS OF URUGUAY BY Th1ADING PARTNER
1965-1991
1965      1970       1975        1980       1985        1990        1991
World (mill $)"'       151        231        556        1680        708        1318        1623
(Percentage of total imports)
Main Trading           78.9       76.1       69.7       78.5        91.5        91.1       94.5
Partners
BRAZIL                 9.0       15.1       13.0        17.3       17.8        23.3        24.0
ARGENTINA              5.9       12.2        9.1        10.5       12.2        15.5        17.5
USA                   13.6       12.9       10.4        9.8         7.6         9.9         9.9
NIGERIA                0.0        3.8        2.5        8.1         9.8         0.7         5.4
IRAN                   0.0        0.1        0.4        0.0        14.6         4.0         3.8
JAPAN                  0.9        1.5        2.4         4.1        2.2         3.2         3.8
FRANCE                 3.9        1.9        1.9         1.8        1.7         2.9         3.3
ITALY                  4.0        2.5        2.5        2.8         2.2         3.5         2.9
UNITED KINGDOM         9.8        6.9        5.0        4.2         2.5         3.0         2.4
VENEZUELA              8.6        0.4        2.0        4.4         0.2         0.5         2.3
MEXICO                 1.7        1.1        2.7        0.7         2.2         3.5         1.9
SPAIN                  0.6        1.8        1.1        i.2         1.5         1.7         1.9
SWITZERLAND            2.1        1.7        1.7         1.0        1.8         1.6         1.7
CHILE                  1.4        1.2        1.5         1.2        1.3         1.4         1.7
CYPRUS                 0.0        0.0        0.0        0.0         0.0         0.0         1.3
KOREA, REP. OF         0.0        0.2        0.1        0.3         0.1         0.9         1.2
TAIWAN                 0.0        0.0        0.1         0.7        0.4         0.8         1.0
HONG KONG              0.1        0.1        0.1        0.4         0.3         0.5         0.9
NETHERLANDS            2.4        1.4        1.7         0.9        1.0         0.9         0.8
PANAMA                 0.0        0.0        0.1         0.4        0.2         0.5         0.7
PARAGUAY               1.9        1.6        0.7         1.2        1.2         0.8         0.7
CANADA                 2.4        2.0        2.4         0.8        0.6         0.9         0.7
BELGIUM-LUX            2.6        1.0        1.8         0.5        G.6         0.5         0.5
FINLAND                0.6        0.2        Q.53       0.1         0.1         0.2         0.5
CHINA                  0.0        0.0        0.0         0.2        0.1         0.4         0.4
ISRAEL                 0.1        0.0        0.0         0.1        0.1         0.4         0.4
AUSTRIA                0.3        0.4        0.5         0.3        0.3         0.3         0.4



- 115 -
1965       1970       1975       1980        1985        1990        1991
World (mill $)11        151        231        556        1680        708         1318       1623
(Percentage of total imports)
SINGAPORE               0.2        0.2        0.0        0.2         0.2         0.4         0.3
DENMARK                 0.4        0.4        0.2        0.9         0.3         0.3         0.:3
SWEDEN                  1.7        1.8        1.0        0.5         0.6         0.3         0.3
SOUTH AFRICA            0.2        0.1        0.1        0.5         0.4         0.2         0.2
USSR                    0.2        0.5        0.3        0.2         5.9         3.0         0.2
CZECHOSLOVAKIA          0.7        0.8        0.3        0.6         0.1         0.1         0.2
PERU                    1.2        0.4        0.4        0.7         0.3         0.3         0.2
BANGLADESH              0.0        0.0        0.6        0.1         0.2         0.2         0.1
TUNISIA                 0.3        0.4        0.3        0.1         0.0         0.0         0.1
MALAYSIA                0.0        0.7        0.5        0.4         0.2         0.2         0.1
POLAND                  0.1        0.2        0.9        0.6         0.1         0.1         0.1
HUNGARY                0.1         0.0        0.1        0.1         0.1         0.1         0.1
TURKEY                  0.0        0.0        0.0        0.0         0.0         0.3         0.1
AUSTRALIA               0.8        0.1        0.4        0.1         0.3         0.1         0.1
COLOMBIA                0.2        0.1        0.1        0.1         0.0         3.3         0.1
INDIA                   1.1        0.3        0.2        0.4         0.0         0.1         0.1
GREECE                  0.0        0.0        0.1        0.0         0.1         0.0         0.1
Memo items:
MERCOSUR               16.7       28.9       22.8       29.1        31.1        39.6        42.2
Argentina             5.9       12.2        9.1        10.5       12.2         15.5       17.5
Brazil                9.0       15.1       13.0        17.3       17.8         23.3       24.0
Paraguay              1.9        1.6        0.7         1.2        1.2          0.8        0.7
1/    IFS merchandise imports.
Sources: TARS and ANDREX January 1993.



- 116 -
TABLE A4.30: TOFAL MERCHANDISE EXPORTS OF URUGUAY BY TRADING PARTNER
1965-1991
1965      1970       1975         1980        1985         1990        1991
World (mil $)"                   191       233        384         1059          909         1693       1594
(Percentage of total exports)
Main trading partners
84.7      79.0       83.3         80.6        89.8         89.8        90.7
BRAZIL                          2.8       5.3        17.1        18.0         16.8        29.9        24.4
ARGENTINA                       1.6       2.7        7.4         13.4          7.4         4.8        10.4
USA                            16.8       8.6        6.8          7.8         15.2         9.5        10.1
CHINA                           0.1       0.0        0.0          0.1          5.1         3.9         6.4
ITALY                           7.6       9.8        5.1          4.4          2.6         4.4         3.9
UNITED KINGDOM                 16.1       8.4        4.7          3.5          4.2         4.2         3.8
USSR                            2.3       0.2        3.6          4.6          5.0         5.2         3.2
NETHERLANDS                     9.2       8.6        7.3          4.3          3.2         3.3         3.0
FRANCE                          5.8       2.6        2.7          1.4          1.7         3.1         2.6
ISRAEL                          0.4       2.6        3.9          0.3          1.7          1.6        2.4
HONG KONG                       1.5       3.2        1.1          0.6          1.1         1.0         1.9
MEXICO                          0.1       0.4        0.6          0.5          0.8         2.0         1.S
SPAIN    *                      7.7       3.1        3.1          0.7          0.8         0.8         1.5
CHILE                           0.5       0.9        0.6          2.2          0.5         1.0         1.4
SAUDI ARABIA                    0.0       0.0        0.0          1.0          1.7         1.3         1.3
JAPAN                           0.5       0.7        1.5          0.9          2.1          1.2        1.3
CANADA                          0.2       0.1        0.3          0.7          0.8         0.8         1.1
KOREA, REP. OF                  0.0       0.0        0.1          0.0          0.4         0.4         0.7
POLAND                          0.6       0.8        1.0          0.6          0.2         0.5         0.7
CUBA                            0.0       0.0        0.0          0.0          0.0         0.8         0.7
PARAGUAY                        0.1       0.7        0.8          1.4          0.7         0.4         0.7
BELGIUM-LUX                     2.2       2.5        2.0          1.7         0.6          0.7         0.7



- 117 -
1965      1970      1975        1980         1985        1990       1991
World (mil $)                   191       233       384        1059         909         1693       1594
(Percentage of total exports)
Main trading partners
84.7      79.0      83.3        80.6         89.8        89.8       90.7
PERU                           0.5       0.9       0.6          0.8         0.2         0.5        0.5
IRAN                           0.0       0.5       1.9          3.5         7.2         2.1        0.5
COLOMBIA                      2.4        1.3       0.8         0.3          0.8         0.7        0.5
SWEDEN                         0.6       0.8       0.1          0.5         0.1         0.3        0.4
SWITZERLAND                    0.8       0.4       1.0          0.5         0.7         0.4        0.4
TAIWAN                         0.0       0.0       0.6          0.8         1.8         0.2        0.3
VENEZUELA                      0.0       0.1       0.1          0.3         0.4         0.1        0.3
SINGAPORE                      0.0       0.0       0.0          0.0         0.3         0.3        0.3
AUSTRALIA                      0.0       0.1       0.0          0.0         0.3         0.1        0.3
ALGERIA                        0.0       0.0       0.0         0.1          0.0         0.6        0.2
FINLAND                        0.0       0.1       0.0          0.1         0.5         0.0        0.2
BOLIVIA                        0.2       0.1       0.7          0.2         0.1         0.1        0.2
PORTUGAL                       0.1       0.2       1.3         0.4          0.8         0.4        0.2
DENMARK                       0.1        0.4       0.2         0.2          0.0         0.1        0.2
DOMINICAN REP.                0.0        0.0       0.0         0.0          0.0         0.1        0.2
CZECHOSLOVAKIA                 1.1       5.2       1.9          1.4         1.4         0.7        0.1
GREECE                        4.1        5.8       3.3          1.6         0.4         0.2        0.1
AUSTRIA                       0.1        0.1       0.4         0.3          0.1         0.2        0.1
LEBANON                       0.0        0.2       0.0         0.0          0.0         0.0        0.1
THAILAND                      0.0        0.0       0.0         0.0          0.0         0.1        0.1
SOUTH AFRICA                  0.6        0.9       0.8          1.1         0.6         0.2        0.1
MALTA                          0.0       0.0       0.0         0.0          0.1         0.1        0.1
NORWAY                         0.0       0.0       0.0         0.0          0.0         0.0        0.1
ECUADOR                        0.0       0.0       0.1         0.1          0.2         0.1        0.1



- 118 -
1965      1970       1975         1980         1985         1990        1991
World (mil $)"                   191        233        384         1059          909         1693       1594
(Percentage of total exports)
Main trading partners
84.7       79.0      83.3         80.6         89.8         89.8        90.7
MOROCCO                         0.0        0.0        0.0          0.0          0.0          0.0        0.1
INDIA                           0.1        0.0        0.0          0.0          0.0          0.0        0.1
HUNGARY                         0.3        0.3        0.0          0.3          0.9          0.2        0.1
COSTA RICA                      0.0        0.0        0.0          0.0          0.0         0.0         0.1
Memo items:
MERCOSUR                        4.5        8.8       25.2         32.9         24.9        35.1        35.4
Argentina                       1.6        2.7        7.4         13.4          7.4         4.8        10.4
Brazil                          2.8        5.3       17.1         18.0         16.8        29.9        24.4
Paraguay                        0.1        0.7        0.8          1.4          0.7         0.4         0.7
1/     IFS merchandise exports.
Sources: TARS and ANDREX January 1993.



- 119 -
TABLE A4.40: URUGUAY'S MAIN EXPORTS TO MERCOSUTR BY COMMODITY
1965-1991
SITC                                     1965    1970    1975    1980    1985    1990    1991
Code
Total share in exports to:
The World                  1      16        8      12      13       16       17
MERCOSUR                   9      22       25      31      40       34       40
Non-MERCOSUR               1      15        2       2       4        5       4
(As percentage of exports to MERCOSUR)
048        CEREAL ETC                        4       0        6       5       7        4        7
PREPARATIONS
732        ROAD MOTOR VEHICLES               0       0        4       6        1       2        4
022        MILK AND CREAM                    0       0        0       1        2       2        4
581        PLASTIC MATERIALS ETC             0       0        0       2       4        3        4
641        PAPER AND PAPERBOARD              0       0        1       3        3       1        3
024        CHEESE AND CURD                   0       4        1       2       2        2        3
599        CHEMICALS NES                     0        1       0       1        1       4        2
533        PIGMENTS,PAINTS,ETC               0       0        0       1        3       5        2
629        RUBBER ARTICLES NES               0       5        6       3        1       3        2
541        MEDICINAL ETC PRODUCTS            0       2        0       0        0       0        2
651        TEXTILE YARN AND                  4       4        5       2        3       2        2
THREAD
554        SOAPS,CLEANING ETC                0       0        0       1        1       1        2
PREPS
023        BUTTER                            0       0        0       1       3        1        1
621        MATERIALS OF RUBBER               0       0        0       0       0        1        1
512        ORGANIC CHEMICALS                 0       0        1       1        3       2        1
043        BARLEY UNM1:LLED                  0       6        1       1       5        1        1
Source,:   Estimates based on TARS January 1993.



- 120 -
TABLE A4.50: URUGUAY'S MAN EXPORTS BY COMMODITY
1965-1991
srrc                                          1965      1970      1975       1980      1985       1990      1991
Code
Total share in exports to:
The World                  86        79        84         82        86         86        88
MERCOSUR                   81        43        65         69        69         77        79
Non-MERCOSUR               86        82        91         88        92         91        93
(As a percentage of total exports)
262       WOOL AND ANIMAL HAIR                   47         20        24        21         20         19        16
011       MEAT FRESH,CHILLD,FROZEN               27         39        22        17         14         16        11
841       CLOTHING NO  OF FUR                     0          0         5         7          S         7          8
042       RICE                                     1         2         9         6         10         6          7
611       LEATHER                                 3          0         4         4          7         7          7
031       FISH FRESH,SIMPLY PRESVD                0          0         1         5          6         4          6
653       WOVENTEXTICES                            1         0         1         2          3         3          4
NONCOTTON
842       FUR ETC CLOrHES,PROD                    0         0          2         5          2         2          3
048       CEREAL ETC PREPARATIONS                 0          0         1         2          2         2          2
013       MEAT T1NNED NIES OR PREPD               3          0         1         0          1         2          2
051       FRUrr FRSH NUTS FRSH DRY                0          0         1         1          3          1         2
022       MILK AND CREAM                          0          0         0         0          0         1          2
732       ROAD MOTOR VEHICLES                     0          0         1         2          0         1          2
024       CHEESE AND CURD                         0          0         0         1          1         1          1
581       PLASTIC MATERIALS ETC                   0          0         0         1          1          1         1
599       CHEMICALS NES                           0          0         0         0          1         2          1
851       FOOrWEAR                                0          1         2         1          1         1          1
641       PAPER AND PAPERBOARD                    0          0         0         1          1         1          1
541       MEDICINALETC IPRODUCTS                  0          0         0         0          0         0          1
612       LEATHER ETC                             0          1         0         1          1          1         1
MANUFACTURES
001       LIVE ANIMALS                             1         0         1         1          0         1          1
291       CRUDE ANIMAL MATTER NES                 0          0         1         1          1          1         1
533       PIGMEN1S,PAIN';,ETC                     0          0         0         0          1         2          1



- 121 -
srrc                                          1965       1970      1975       1980      1985       1990       1991
Code
041        WHEAT EATCUNMELLED                      2          0         3         0          0          1          1
662        CLAYXEFRACTORY BLDG PRD                 0          0         0          1         0          1          1
629       RUBBER ARTICLES NES                      0          0         1          1         0          1          1
651       TEXTILEYARN ANDTHREAD                    1         13         2          1          1         1          1
554        SOAPS,CLEANING ETC PREPS                0          0         0         0           0         0          1
061        SUGARAND HONEY                          0          0         0         0           1         1          1
621        MATERIALSOFRUBBER                       0          0         0         0          0          0          1
Source:        Estimates based on TARS January 1993.



- 122 -
TABLE, AS.1: URUGUAY: DEMAND FOR FINANCIAL ASSETS
BY THE PRIVATE SECTOR AT END OF PERIOD
1980-1992
(percent)
Period              (1)               (2)                (3)                (4)
1980              4.65               0.06              75.02              66.05
1981              4.29               0.00              67.84              56.23
1982              12.64              0.56              44.96              33.37
1983              15.42              0.24              45.46              34.37
1984              18.35              1.92              40.34              31.98
1985              24.37              1.91              35.78              29.18
1986              24.09              6.04              35.12              28.69
1987              27.22              6.16              32.64              26.64
1988              30.88              7.38              29.43              23.07
1989              29.91              5.42              23.82               17.38
1990              28.88              4.00              21.04               15.18
1991              25.42              2.65              21.87               15.92
1992*             25.63              3.03               21.11              15.49
(1)   Public securities held by the private sector as a percentage of financial assets.
(2)   Public securities in pesos as a percentage of all securities held by the private
sector.
(3)   Financial assets in local currency (M2 + public securities in pesos) as a
percentage of financial assets.
(4)   Financial assets in local currency as a percentage of total financial assets.
Where: Total financial assets = M4 + public securities held by the private sector.
Sources:      1980-1989; J.A. De Nigris and public securities L. Machinea 'Un
Esquema para la Reforma del Sector Financiero', IDB
1990-1992; author's calculations based on BCU Statistical Bulletin
No. 141, 'Tables 1.6.1 and L.6.2.
* Apnrl 1992



- 123 -
TABLE A5.2: URUGUAY: PARTICIPATION OF PUBLIC BANKS IN RESIDENT'S DEPOSITS
AT END OF PERIOD
1977-1991
Period          (1)          (2)         (3)          (4)          (5)       (6)
1977          0.278        0.204       0.385         0.238       0.171      0.171
1978          0.262        0.201       0.310        0.203        0.199      0.199
1979          0.233        0.184       0.248         0.170       0.207      0.207
1980          0.242        0.187       0.231         0.153       0.270      0.270
1981          0.258        0.192       0.264         0.162       0.248      0.244
1982          0.297        0.218       0.306        0.216        0.290      0.220
1983          0.332        0.234       0.343        0.225        0.322      0.242
1984          0.392        0.280       0.377        0.252        0.402      0.300
1985          0.441        0.335       0.374        0.276        0.485      0.373
1986          0.452        0.341       0.461        0.333        0.447      0.346
1987          0.489        0.373       0.513        0.364        0.477      0.378
1988          0.527        0.389       0.572        0.357        0.505      0.404
1989          0.548        0.404       0.596        0.365        0.531      0.417
1990          0.565        0.421       0.615        0.389        0.551      0.431
1991          0.601        0.446       0.616         0.299       0.597      0.482
(1)   Total deposits in public banks divided by total deposits.
(2)   Total deposits in BROU divided by total deposits.
(3)   Total deposits in pesos in public banks divided by total deposits in pesos.
(4)   Deposits in pesos in BROU divided by total deposits in pesos.
(5)  Total deposits in foreign currency in public banks divided by total deposits in foreign currency.
(6)  Deposits in foreign currency in BROU divided by total deposits in foreign currency.
Note: In the case of BHU figures include titles and bonds issues.
Source:  A. De Nigris and J.L. Machinea; "Un Esquema para la Reforma del Sector Financiero'.



- 124 -
TABLE A5.3: URUGUAY: SHARE OF PUBLIC BANKS IN CREDIT
TO THE LOCAL PRIVATE SECTOR
(END OF PERIOD, 1977-1992)
Period           (1)           (2)            (3)           (4)            (5)
1977           0.528         0.435          0.679          0.567         0.265
1978           0.475         0.387          0.592         0.468          0.290
1979           0.383         0.300          0.472          0.345         0.242
1980           0.374         0.267          0.427         0.252          0.286
1981           0.387         0.256          0.472          0.261         0.250
1982           0.368         0.269          0.556         0.307          0.255
1983           0.464         0.339          0.669         0.409          0.309
1984           0.503         0.373          0.657         0.366          0.376
1985           0.572         0.432          0.764         0.492          0.408
1986           0.574         0.427          0.762         0.506          0.389
1987           0.597         0.449          0.784         0.532          0.411
1988           0.613         0.471          0.811         0.594          0.413
1989           0.652         0.523          0.850         0.653          0.471
1990           0.671         0.548          0.869         0.678          0.503
1991           0.692         0.535          0.866         0.589          0.516
1992           0.710         0.539          0.875          0.581         0.536
(1)   Public bank credit divided by total credit.
(2)   BROU credit divided by total commercial credit.
(3)   Public bank credit in local currency divided by total credit in local currency.
(4)   BROU credit in local currency divided by commercial credit in local currency.
(5)   Public bank credit in foreign exchange divided by credit in foreign exchange.
Note: Since BHU does not lend in foreign exchange, BROU's credit equals public bank credit.
Source:      1980-1989; A. De Nigris and public securities J.L. Machinea; 'Un Esquema pars la Reforma del
Sector Financiero", IDB
1990-1992; author's calculations based on BCU Statistical Bulletin No. 141.



- 125 -
TABLE A5.4: URUGUAY: INTERMEDIATION MARGINS
(FIRST QUARTER OF EACH YEAR, 1985-1990)
In US$ Dollars                     In Pesos
Period                    (1)                    (2)                 (3)
1985:1                    7.68                  3.58                -5.00
1986:1                   7.73                  14.90                3.29
1987:1                   5.66                  23.02                9.71
1988:1                   5.21                  22.26                9.11
1989:1                   6.00                   18.12               5.70
1990:1                   6.53                  24.40                5.34
(1)   Normal rate.
(2)   Normal rate.
(3)   Preferential rate.
Source:     A. De Nigris and J.L. Machinea; "Un Esquema para la Reforma del Sector Financieron.



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