1. NS4540 Winter Term 2016 Uruguay Diversification

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 2

3. Uruguay: Overview II 3

4. Uruguay: Overview III 4

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 5

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 6

7. Uruguay: Diversification III 7

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 8

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% 9

10. Uruguay: Diversification VI 10

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% 11

12. Uruguay: Diversification VIII 12

13. Uruguay: Diversification IX 13

14. Uruguay: Diversification X 14

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 15

16. Uruguay: Diversification XII 16

17. Uruguay: Diversification XIII 17

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% 18

19. Issues: Regional Decoupling II 19

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 20

21. Uruguay: Structural Reforms II 21

22. Uruguay: Structural Reforms III 22

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 23

24. Uruguay: Structural Reforms V 24

25. Uruguay: Structural Reforms VI 25

26. Uruguay: Structural Reforms VII 26

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 27

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 28

29. Education III 29

30. Education IV 30

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. 31

32. Labor Markets II 32

33. Labor Markets III 33

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 34

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. 35