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Uruguay: Latest Country to Reel Under Latin American Crisis



by Andrs GaudinLatin America Press
August 19th, 2002

Buenos Aires, Argentina -- Uruguay, once the Southern Cone's financial paradise, found itself in the eye of a new political and economic storm stemming from the crisis that has rocked Argentina since December.

As economists and politicians warn that the economic problems could spread further, some are calling for the Southern Common Market (MERCOSUR) to take a stronger stand. On July 30, for the first time in the country's history, the government of President Jorge Batlle announced a bank holiday in an attempt to stem capital flight. In the past seven months, bank deposits in Uruguay have dropped by 37 percent and foreign currency reserves by 79 percent, while the currency has lost 41 percent of its value against the US dollar.

Residents of low-income neighborhoods of Montevideo looted businesses in search of food. Workers without steady jobs and those in the informal sector were hardest hit when the banks were closed. For some economists in Southern Cone countries, the region's economic crisis marks the breakdown of the market-driven economic model imposed by the United States and international lenders over the past two decades.

But while analysts are more concerned about the trends in economic indicators than daily ups and downs, the region's people feel the crisis in their food budgets. Increased unemployment, inflation and cuts in social programs are becoming the norm throughout the Southern Cone.

"The case of Uruguay is added to the crisis in Argentina and Brazil, and as in the case of the 'Asian tigers' in the late 1990s, there's a danger that the turbulence could continue to spread from country to country, causing a chain reaction that could end with the collapse of the liberal model," Argentine economist Claudio Zlotnik said.

The crisis is already being felt in the MERCOSUR countries - Argentina, Brazil, Paraguay and Uruguay - as well associate members Chile and Bolivia.

"Uruguay is the country most affected, because in the first four months of this year, its exports to Argentina fell by 70 percent in comparison to the same period in 2001," according to a study by the UN Economic Commission for Latin America and the Caribbean (ECLAC) of the cost of the Argentine crisis.

Although Brazil's markets are fairly diversified and its economy is nearly three times the size of Argentina's, the sharp drop in exports to the country's southern neighbor led to a decrease of nearly 6 percent in overall exports. Manufactured goods, which are the most difficult to redirect quickly to new markets, were most affected.

According to ECLAC, Paraguay's exports to Argentina decreased by 60 percent in the first four months of this year, while Chile's economy was affected by drops in bilateral trade, tourism and profits of businesses located in Argentina.

Foreign investment in the region has also fallen off since the Argentine crisis began. So far this year, investment is down by 46.1 percent in Argentina, 34 percent in Uruguay, 8.4 percent in Brazil and 2 percent in Chile. Bolivia and Paraguay have registered virtually no foreign investment in the past two years, according to ECLAC.

One result of the crisis that has received little study, the ECLAC report said, is the decrease in remittances from immigrants working in Argentina. The impact is likely to be especially great in Bolivia, where remittances represent 5 percent of the country's gross domestic product, and Paraguay, where they represent 2 percent.

Some economists criticize MERCOSUR for not dealing with the crisis as a bloc."The region is going through a critical moment, and each country is facing the situation on its own, as though international factors weren't acting in unison. There's a hard-line, right-wing government in the United States and the IMF keeps proposing recessive policies that worsen the region's social and economic crisis, but the responses are isolated," said Uruguayan Sen. Alberto Couriel, an economist.

"For the region and all of Latin America, dealing with international relations requires greater unity, political cooperation and, especially, common proposals," Couriel added.

"To change the situation, it is necessary to change the model and act jointly with the other countries in the region."Government officials, meanwhile, insist that the problems will end when the IMF grants new loans. While international lenders hold up new credit, insisting on stronger economic measures, officials wait "without daring to say that the time has come to act as a bloc against pressure from the United States and lenders," Argentine economist Ral Dellatorre said.

Uruguayan banks reopened on Aug. 5, after the country received a US$1.5-billion bridge loan from the United States. By the end of the year, it will have recieved a total of $3.8 billion from the IMF, World Bank and Inter-American Development Bank. On Aug. 7, the IMF approved $30 billion in loans for Brazil.

Some observers worry about effects besides the ballooning external debt."Along with interest payments, these loans have a price that is measured in terms of sovereignty," said Paulo Nogueira Batista, an economist at Brazil's Getulio Vargas Foundation.

Among the conditions of the additional credit are privatization of Brazil's state-run oil company, Petrobrs, and Uruguay's state-run banks. Although Uruguayan banks reopened, some fixed-term deposits in the state-run Banco de la Repblica and Banco Hipotecario were frozen for three years.

"It's a way of devaluing the two banks, which capture about 80 percent of the money of small savers so they can lend it at low cost. Foreign banks have always had their eye on those banks, and now the government has agreed to sell them off," Uruguayan economist Walter Cancela said.

In Brazil, opposition presidential candidate Ciro Gomes, who some polls show virtually tied with Workers Party candidate Luiz Incio Lula da Silva as the Oct. 6 elections approach, said, "We can't tie the future of our policies to a model that hasn't shown lasting results in eight years."

Gomes called for MERCOSUR to further consolidate "in order to negotiate bloc to bloc.""In the midst of the crisis, Argentina, Brazil and Uruguay keep looking to the United States instead of seeing how they can work together to get out of the hole," Dellatorre said.

"The governments don't want to see that the door of integration is open and an independent MERCOSUR is the only way out, now that the neoliberal model has collapsed and there's no remedy in sight for our economies."

In early August, ECLAC warned that the magnitude of the Argentine crisis and the fragility of the region's economies could cause the turbulence to spread to other countries.Economists and political leaders say that although Argentina is suffering most and each country has its own peculiarities, the crisis will force MERCOSUR countries to give up unilateral negotiations and act as a bloc.

"The current crisis, which has spread from Argentina to all the MERCOSUR countries, is the crisis of the model. We propose handling the crisis through a more commercially aggressive MERCOSUR diplomacy," said Brazilian Congressman Aloisio Mercadante of the Workers Party.

"MERCOSUR must be refounded so it can negotiate as a bloc with the United States and the European Union."





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