1. NS4540 Winter Term 2017 Uruguay Diversification
Europa brazil economy

2. Uruguay: Overview I
IMF, “Uruguay: Boosting Growth through Diversification” February 2016
Background
Uruguay has achieved high growth and made significant progress in its global integration in last 10 years
Average growth 4.8% between 2003 and 2015
Income per capita almost doubled during this period, becoming the highest in region
As small open economy based largely on exports and tourism, country exposed to
Volatility of commodity prices, and
Broader external environment
Country closely linked to Argentina and Brazil
Has had high growth volatility due to commodities and regional linkages

3. Uruguay: Overview II

4. Uruguay: Overview III

5. Uruguay: Diversification I
Against this background, Uruguay has recognized the need to diversify its sources of growth
Even more important
when global commodity prices appear to be in a secular downturn in coming years,
subdued outlook for neighbors and region
Going forward given limited scope for achieving significant economies of scale Uruguay has to rely on
exports of goods and services with higher levels of value of value added and
a diversified export market

6. Uruguay: Diversification II
What to Diversify?
Diversification has several dimensions:
Export diversification,
Output diversification, and
Quality upgrading
Empirically – pattern whereby diversification into
New products
Trading partners, as well as increases in quality of existing products
Has been conducive to faster growth.
Conversely limited economic diversification has also been linked to longstanding difficulties in achieving resilient growth

7. Uruguay: Diversification III

8. Uruguay: Diversification IV
As a small open economy without significant economics of scale, Uruguay can gain more from
quality up-grading (higher value added), and
export diversification
Than from further sectoral diversification
Simply cannot diversify economy to the extent of larger countries like China, Korea or Brazil

9. Uruguay: Diversification V
Uruguay has made progress in diversifying its export markets
Exporting to around 150 countries
Between 2004 and 2015 export to China increased from 3.5% to 13.3%
At same time export to “other countries” excluding China, EU and its neighbors increased from 31.7% of total to 42.7%
Weight of exports to EU and North America have decreased as a percentage of total exports
Exports to Brazil have remained significant at around 20%

10. Uruguay: Diversification VI

11. Uruguay: Diversification VII
Country has also made progress diversifying its export products
Based on the Product Concentration Index, Uruguay more diversified than other countries in the region
Exports of commodities have increased significantly both in value and as a share of total exports over last decade
Driven by export of
Animal products (mainly beef), and
Vegetable products (largely soy beans
Tourism a major sector remains largely dependent on neighbors
Argentina main source of tourism revenue 55%
Brazil, Paraguay and Chile around 22%

12. Uruguay: Diversification VIII

13. Uruguay: Diversification IX

14. Uruguay: Diversification X

15. Uruguay: Diversification XI
Upgrading quality of Export Products
Based on IMF Product Quality Upgrading Index, quality of food, live animals has improved close to key competitors, Australia and New Zealand
Much more scope in other areas of the economy
Economic complexity
Uruguay has also increased its economic complexity as revealed in the Economic Complexity Index.
Index reflects not only the breath of a country’s exports, but also how knowledge intensive they are
Uruguay’s position on the global ranking of economic complexity index suggests still untapped potential for further progress

16. Uruguay: Diversification XII

17. Uruguay: Diversification XIII

18. Issues: Regional Decoupling I
Regional Growth Linkage: Has Uruguay Decoupled?
While growth linkages with Argentina have been diminishing in recent years, it remains and important source of tourism and FDI
Statistical estimates show a diminishing sensitivity of Uruguay's growth to growth in Argentina
Could be explained by
Brazil’s increasing share in tourism and investment, and
Emerging economies outside of Latin America such as China are becoming a more important source of demand
Still empirical tests suggest a 1% point growth reduction in Argentina could still reduce Uruguay’s growth by 0.4%

19. Issues: Regional Decoupling II

20. Uruguay: Structural Reforms I
Key reforms could support further diversification in and higher value added content
Literature suggests reforms for
Improving infrastructure and trade networks,
Investing in human capital and
Reducing barriers to entry for new products
Country comparison suggests Uruguay has lagged in
Improving secondary education,
Enhancing labor market efficiency, and
Upgrading infrastructure to meet rising demand of its growing economy
Existing solid institutional foundations should provide key opportunity to implement reforms for further diversification

21. Uruguay: Structural Reforms II

22. Uruguay: Structural Reforms III

23. Uruguay: Structural Reforms IV
Considerable scope for upgrading transport and logistic infrastructure to help enhance diversification and trade
Strong growth in last decade placed greater stress on transport infrastructure
Quality of port and road infrastructure has not kept up with demand
Uruguay’s logistic performance also offers scope for substantial improvement – country lags regional peers and international competitors in a number of areas

24. Uruguay: Structural Reforms V

25. Uruguay: Structural Reforms VI

26. Uruguay: Structural Reforms VII

27. Education I Education and skills
Improving education and upgrading skills will help diversification and innovations to enhance value added
Skilled work force is crucial for moving up the value chain and for capturing knowledge spillovers from FDI
A better-educate workforce also more likely to spawn successful entrepreneurs seeking to
Branch out into improving existing products, and
Absorb and adopt new technologies

28. Education II
Declined quality of secondary education is a major constraint on Uruguay’s productivity growth and diversification effort – especially with an ageing labor force.
Uruguay has strong performance in provision of basic education and literacy
However achievements at more advanced levels of education are weaker than peers at similar income level
Dropout rates in secondary schools are high
For the future the country must improve
Coverage and quality of secondary schools
Vocational training

29. Education III

30. Education IV

31. Labor Markets I
Labor market efficiency could be enhanced as it has decreased over the past decade
WEF ranks labor market efficiency as the weakest aspect of doing business in Uruguay
Key elements such as
Cooperation in labor-employer relations,
Link between pay and productivity, and
Wage determination flexibility
Have lagged behind other countries of similar income level.
Need to evaluate labor markey regulations and wage determination mechanism to see they strike a balance between efficiency and protection for workers.

32. Labor Markets II

33. Labor Markets III

34. Assessment I IMF feels:
Structural reforms can help Uruguay achieve another phase of growth in the context of a less favorable external environment
Country should pursue
Further diversification of export markets and
Upgrading the quality of its products and services
Greater diversification of markets would also help to reduce exposure to adverse external shocks and thus reduce growth volatility

35. Assessment II To enhance diversification the country should:
Upgrade the country’s transport and logistics infrastructure
Improve the quality and enrollment in secondary education
Expand vocational training programs and
Increase labor market efficiency to better tie wages to productivity.