Photo: AP Photo/Matilde Campodonico

Uruguay better known as the “Swtzerland of South America” is at the top of the most successful countries in the world. Nominated as the country of the year by The Economist 2014, Uruguay’s reforms concerning same sex marriage, abortion, and marihuana legalization make Uruguay an exceptional nation. Additionally, Uruguay is the number one country in the Americas according to the Social Inclusion Index, 26th of the world in the Social Progress Index, and 30th in the Legatum Prosperity Index. These rankings show Uruguay’s outstanding performance in improving social mobility, governance, personal freedom, safety, and security, among other variables. This sets the country ahead from many European and American countries including Chile, Italy, Greece, Mexico and others that have larger Gross Domestic Products (GDP’s).

Uruguay, a democracy that does not allow reelection in a consecutive term, elected former president Tabaré Vazquez, in November 30th, 2014. Vazquez was President from 2005 to 2010 who earned greater than 60 percent of approval at the end of his mandate, according to CIFRA, a private consulting firm.[1] Vazquez belongs to Broad Front, (FA) a political party which has been in power since 2005 and unifies different political perspectives, including extreme left communist parties, social democrats, and center Christians.

Three Trends Shaping Uruguay’s Policies after the Elections:

1) Progressive policies continue, but priorities change:

Uruguay’s most important political party Broad Front (FA) has passed progressive laws including same sex marriage, abortion, and marijuana regulation. This will continue during Tabaré Vasquez’s government (2015-2020) due to the party discipline developed by the FA, and the political foundations approved for the next five years.[2] Nevertheless, the new President brings different priorities to the table regarding current economic and political constraints that will shift attention to other policy areas.

Laws passed by the Uruguayan congress include the “Equal Marriage” law, enacted in May 2013, which allows same sex marriages, giving them the ability to adopt children, and the same benefits as heterosexual couples. Legal abortion was enacted with the law of “Voluntary Pregnancy Interruption” passed in October 2012. According to the World Health Organization (WHO), Uruguay reduced maternal deaths by more than half in 2013.[3] A law regulating the cannabis market was approved in December 2013. This law generated strong opposition by the second largest party National Party (PN). The PN intended to promote a referendum to obstruct the law, but according to Uruguay’s Constitution this initiative can only be made before the first year of passing the law. [4]

These progressive laws place Uruguay at the level of many developed countries and have been possible in some extent because of FA’s party discipline. FA has been in power for the third time since 2005 when Vazquez won the presidency for first time. FA was created in 1971 as a coalition of a wide variety of political movements including the communist party, socialist party and democratic Christian party.[5]  These different factions of the FA generate debate and coalitions to reach consensus. But when consensus is not possible, the party calls on vote and the decisions of the majority are followed and supported by all the members. This democratic process within the party generates strong support in the congress, passing bills faster.

Therefore, unifying the party is critical to maintaining power. This can be observed in the recently nominated cabinet which includes members from different inclinations within the FA. For instance, Danilo Astori from the social democratic branch of the FA was appointed Minister of Economics and Finance. The future Minister of Social Development, Marina Arismendi, is from the communist party, and the designated Minister of Foreign Affairs, Rodolfo Nin Novoa, comes from FA´s social Christian segment. They have a certain level of independence in managing their ministries, but have to work as a team to move forward as a united government starting in March first 2015.

The nomination of a diverse cabinet and the programmatic party foundations are an important tool to give stability and continuity to the government. Nevertheless, current issues including increasing levels of inflation, and a rise in homicide rates, represent major challenges for the elected government which will have to focus on other areas. Economic stability stands out as one of the primary concerns; therefore the nomination of Astori shows an inclination for more conservative measures. Those include moving forward for a better macroeconomic stability and a contractionary monetary policy characterized of reducing money supply to confront the inflationary trend.

Another challenge is the 31 percent increase of homicides from 2010 to November 2014.[6] This issue was highlighted by a study made by Fundapro an organization affiliated to the Colorado Party and was part of the criticism of FA’s policies towards security. This problem has generated a lot of dissent regarding the confirmation of the current Minister of Interior, Eduardo Bonomi, for the next presidential term, which in the eyes of many Uruguayans means continuity of existing inefficient policies.

Consequently, the current panorama generates a shift in the government priorities rearranging the political agenda, prioritizing economic and security measures, leaving aside further progressive policies that include an antidiscrimination law against LGTBI. Other laws regarding people with disabilities, women, and Afro-Uruguayans represent social policy challenges for the government, but they might have to wait until there are more clear solutions to economic and security matters.

2) Shift to China and MERCOSUR’s crisis:

Due to the crisis at MERCOSUR, Uruguay has opted to expand its trade partners with an emphasis on China. Bilateral trade between China and Uruguay has increased in 47 percent in the past year, making China Uruguay’s largest trade partner, even surpassing Brazil in the first half of 2014. [7] China has become a strategic trade partner to Latin America, while regional trade agreements loose impact. China is Brazil’s, and Chile’s first partner and second for Argentina, Colombia, Mexico, and Peru. For Uruguay, Chinese investment and trade is more relevant today, regarding MERCOSUR’s crisis caused by Argentina’s obstruction to free trade, deeply affecting Uruguay and Brazil.

Exports to China have increased in the past years about seven times, passing from $121 million in 2005 to $959 million in 2012. The products exported are mainly soybeans, beef, wool and fabrics, reaching 85 percent of the exports. In contrast, imports from China are mostly vehicles for transport of passengers, and technological goods. China covers 22.1 percent of Uruguay’s total imports followed by Brazil with 17.1 percent, Argentina with 15.1 percent and United States with 9.1 percent.[8]

In addition, Uruguay seeks to attract further Chinese investments not only in the automotive sector, but in renewable energy, services, and manufactures. In 2013, Greely International, the biggest Chinese vehicle company has already invested in a plant to ensemble automobiles in cooperation with Nordex Uruguay. Although, this process will be slow due not only to cultural barriers, but to Chinese long time perspective. In the meantime, Uruguay is seeking further investment in greenfield projects (these are projects that need to start from the beginning or an older one that should be changed completely) sponsored not only from China, but other countries such as Japan and India.

In contrast, trade within MERCOSUR is declining essentially due to Argentina’s measures to restrict imports. Uruguay’s exports to Argentina have decreased in more than 16 percent in the past year, breaking MERCOSUR’s purpose of commercial integration.[9] In addition, high depreciation of the Argentinian peso is bringing further consequences for the neighboring country. Thousands of Uruguayans cross the border every day to buy products and take advantage of the exchange rate. This has started to affect local businesses generating big losses. In consequence, the government has taken measures to control the influx of products by creating a policy called “Cero Kilo.”

These measures are short term, and it is expected that with the incoming Argentinian government in 2015, policies within MERCOSUR will be transformed substantially. Besides, Uruguay in partnership with Paraguay is seeking to make more flexible policies to allow negotiations of trade agreements outside MERCOSUR. Also, both countries are looking forward to produce further linkages with the Pacific Alliance.

3) Great investment destination:

Uruguay has established itself as a very favorable country towards direct investment. With policies that give equal benefits to national and international investors, and favorable macroeconomic policies, Uruguay is in the top ten recipients of direct investment of Latin America. When comparing the relevance of direct investment in the country’s GDP, Uruguay gets second place after Chile with 5 percent of its GDP. With a policy that allows flexibility to increase benefits to selected projects, Uruguay becomes even more attractive to foreign investment.

Uruguay’s main investors are Argentina, Brazil, Spain, United States, Canada, Holland and Belgium.[10] These countries benefit from the Law No 16.906 “National Interest, Promotion and Protection” proclaimed in 1998. This regulation gives fiscal benefits to investors including the exemption of property taxes. Argentina and Brazil have further benefits for being exonerated of tariff taxes under MERCOSUR.[11]

Additionally, investment law creates a Commission for the Application of the Investment Law (COMAP) integrated by five ministries and the Planning and Budget Office, allowing them to approve further fiscal benefits to activities selected under COMAP. Between 2008 and 2012 there was an increasing trend in the number of projects approved and the amounts of benefited investments. Those projects were in their majority directed to promote renewable energy, by the installation of wind energy fields to reduce Uruguay’s oil dependence.[12] Other projects with further benefits included cement fabrication, and agro industrial projects.

Next step for Uruguay is to evaluate the impact of the current direct investment projects, and keep promoting policies with a longer term perspective. But this can only be achieved if Uruguayan economy maintains the stability that investors need to bring their assets to the country. Therefore, Tabaré Vazquez is going in a good path by appointing Daniel Astori, a conservative person with a lot of experience in charge of the economic and finance ministry. Astori was Vazquez former minister of economy who was in favor of a bilateral trade agreement with the United States.

[1] En el quinto año de mandato, Mujica está 8 puntos por debajo de Vázquez. El País. Abril 3, 2014. Available: http://www.elpais.com.uy/informacion/encuesta-cifra-mujica-vazquez-aprobacion.html

[2] Bases Programáticas Tercer Gobierno Nacional del Frente Amplio 2015-2020. Available: http://www.frenteamplio.org.uy/sites/frenteamplio.org.uy/files/Programa%20nacional%20FA%202014-2020.pdf

[3] World Health Organization (WHO) Global Health Observatory (GHO) Maternal Mortality Country Profiles 1990-2013. Available: http://www.who.int/gho/maternal_health/countries/ury.pdf?ua=1

[4] Constitución de la República de Uruguay.  Caítulo III. Available: http://www.parlamento.gub.uy/constituciones/const004.htm

[5] Declaración Constitutiva del Frente Amplio. Pg. 10 Available: http://www.frenteamplio.org.uy/files/DOCUMENTO%201.pdf

[6] Consolidado el Deterioro de la Seguridad. El número de homicidios se mantiene elevado respecto del promedio máximo históricos. Observatorio Fundapro de la Seguridad, Fundación Propuestas. Noviembre 2014. Available: http://seguridad.observatoriofundapro.com/wp-content/uploads/2012/09/Consolidado-el-deterioro-de-la-seguridad2.pdf

[7] Las Relaciones Comerciales entre Uruguay y China, Informe Semestral Julio-Diciembre 2013 Año 2 No 4, Febrero de 2014. Departamento de Negocios Internacionales e Integración Facultad de Ciencias Empresariales. Universidad Católica de Uruguay. Available: http://www.ucu.edu.uy/sites/default/files/facultad/fce/dnii/informe_relacionescomerciales_uruguaychina_2sem2013.pdf

[8] Informe de Comercio Exterior, Exportaciones e Importaciones de Uruguay, Noviembre 2014. Uruguay XXI Instituto de Promoción de Inversiones y Exportaciones. Available: http://www.uruguayxxi.gub.uy/exportaciones/wp-content/uploads/sites/2/2014/09/Informe-de-Comercio-Exterior-Nov-2014.pdf

[9] Informe de Comercio Exterior, Exportaciones e Importaciones de Uruguay, Noviembre 2014. Uruguay XXI Instituto de Promoción de Inversiones y Exportaciones. Available: http://www.uruguayxxi.gub.uy/exportaciones/wp-content/uploads/sites/2/2014/09/Informe-de-Comercio-Exterior-Nov-2014.pdf

[10] Inversión Extranjera Directa en Uruguay, Abril 2014. Uruguay XXI Promoción de Inversiones y Exportaciones. Available: http://www.uruguayxxi.gub.uy/es/wp-content/uploads/sites/6/2014/11/Informe-IED-en-Uruguay-Abril-2014-Uruguay-XXI.pdf

[11] Ley No 16.906 Interes Nacional, Promoción y Protección. Available: http://www.parlamento.gub.uy/leyes/AccesoTextoLey.asp?Ley=16906&Anchor=

[12] Avances en el Regimen de Promoción de Inversiones (COMAP) Anuario OPYPA 2013. Available: http://www.mgap.gub.uy/opypapublicaciones/ANUARIOS/Anuario2013/material/pdf/36.pdf