Neighbors Pose Threat to Uruguay’s Thriftiness : Tiny Nation Tries to Steer Sensible Course in a Region of Ruined Economies

After resolving a tormented debate on its past, Uruguay is again looking forward and is confronting choices on how to build on its comparative well-being in a region of economic basket cases.

With traditional prudence, tiny Uruguay has largely avoided the crippling inflation and costly overindulgence of its huge neighbors, Argentina and Brazil. Indeed, it has long capitalized on its neighbors’ failings, attracting hundreds of millions of their dollars into its stable banking system.

In part by maintaining realistic exchange rates and consistent commercial rules in recent years, Uruguay managed largely to contain inflation, dramatically raise its exports and become a regional finance center.

Now, however, some of the problems of Brazil and Argentina threaten to spill over into Uruguay. Moreover, the country is reaping the consequences of some of its own neglected structural problems of past decades and mulling over potentially painful solutions.

For more than two years, this prairie country of 3.1 million people was consumed by the question of whether to punish or forgive military officers accused of human rights abuses during the 1973-85 military dictatorship. The nation voted in a referendum April 16 to uphold a 1986 amnesty law.

Isaac Umansky, the government comptroller, said Uruguay returned to democratic rule in 1985 facing the risk of “not being able to manage our past. It has taken us four years to put behind the preceding 12 hard years.

“The message of all sides now is that we must go forward,” he added.

Uruguay created an extensive social security system under former President Jose Batlle y Ordonez in the early years of the century. But competition and trade barriers torpedoed Uruguay’s traditional beef and hide exports, and general decline took hold in the 1950s and 1960s, generating hardship and a fierce guerrilla movement, the Tupamaros, whose terror campaign sparked repressive military intervention.

The military government restored free-market policies, helping attract branches of 20 foreign banks, while borrowing heavily from abroad to reignite export-led growth on the strength of forcibly repressed wages.

President Julio M. Sanguinetti and his Colorado Party, which took over the restored democracy in 1985, have largely continued those policies. And after initial showdowns with relegalized trade unions, labor peace has for the most part returned.

Exports have risen far faster than expected, up 17% in 1988 and another 14% in the first quarter this year.

Sanguinetti told reporters this week that since his government took office, it had reversed the military government’s legacy of economic malaise and a dramatic decline in growth. Unemployment has fallen from 14% to below 9% and infant mortality from 45 to 30 per 1,000, he said, while real salaries have risen 30%. “This country,” he said, “has social indicators that are frankly positive.”

Uruguay now has a foreign debt of $6.7 billion--small compared to its neighbors but probably the highest per capita in Latin America. Still, it is one of the very few countries that meets its interest payments, financed largely by a growing trade surplus--about $250 million last year.

Umansky said private investment has been a key problem in the 1980s, adding: “We are working hard to build confidence, but we need more years and long-term economic-political stability.

“The disequilibrium of Brazil and Argentina promotes smuggling and disrupts stability,” he said. “We have very little faith that Argentina and Brazil are going to right themselves very soon. We face factors of destabilization from our neighbors.”

By contrast, he added with pride: “The Uruguayan knows how to live very discreetly. This is a very frugal citizen, because he always had very little and learned to manage with dignity.”

Economic growth stagnated last year after rising 6% to 7% in the first two years under Sanguinetti’s government. To offset the lack of private investment, the government has embarked on many public capital projects. But Montevideo, the pretty capital on the River Plate estuary, has the feel of a place gone a bit to seed, with little private construction and few repairs made to once-elegant homes and office buildings.

Recent Argentine economic troubles in some ways have proved a windfall for Uruguay. An artificially cheap dollar in Argentina until February produced a record tourist year for Uruguay’s beach resorts and its banks, which filled with Argentine dollar deposits.

Yet structural problems persist. While nothing like the 1,000%-plus inflation rates of bordering countries, Uruguay’s inflation rose to 77% in the 12 months ending in March, up from 54% for the 12 months before March, 1988.

Some of the nation’s economic issues are being addressed, if haltingly. The government ceased its money-losing passenger rail service last year, although the employees were simply transferred to other state jobs. A new digital telephone system serves some parts of the capital now, for example, replacing one of South America’s more dilapidated and ancient networks.

That kind of modernization will be vital to attract sophisticated foreign investment. Uruguay already has the human resources; its population is one of the best educated on the continent.

“There’s the beginning of a recognition--and the beginning of talk--of serious solutions,” a foreign diplomat said. “Not even the (leftist) Broad Front coalition talks about a return to the old ways. Uruguayans are very prudent. They know they are a small country, and know they are surrounded by big countries that always do spectacularly stupid things.”