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Quiet Success in South America

Jaime Daremblum

With a combined population of only 10 million, and a combined GDP roughly equivalent to that of Ecuador, Uruguay and Paraguay don’t get much attention from foreign journalists or policymakers. Yet the two South American countries, though dwarfed in size and influence by their two massive neighbors (Brazil and Argentina), have quietly been growing at very fast rates, improving their economic stability, and boosting their credit ratings.

A year ago, Financial Times correspondent Jude Webber dubbed them “Latin America’s impressive little guys,” noting that both were “punching above their weight.” Uruguay is by far the richer and more developed nation. Its economy expanded by 8.5 percent last year, and it received 29 percent more foreign direct investment (FDI) in 2010 than in 2009, with total FDI surging to $1.6 billion. In January, a joint Chilean-Finnish venture announced that it would be constructing a $1.9 billion pulp mill in Uruguay, the single biggest private investment project in the country’s history. Unemployment has fallen to historic lows, and Uruguay is also experiencing a real-estate boom.

“Uruguay is likely to be viewed as one of the best-run countries in Latin America,” investment strategist Jim Barrineau told Reuters this past summer. “What debt it does have is not very actively traded because the fundamentals are so good that most managers buy and hold.” Within the last year, each of the Big Three credit-rating agencies  Moody’s, Fitch, and Standard & Poor’s  upgraded Uruguay’s status. “Uruguay’s external and fiscal vulnerabilities have reduced owing to improvements in its external and fiscal solvency ratios, strengthened external liquidity as well as better currency composition and maturity structure of government debt,” Fitch declared in July. “High GDP per capita income, strong social indicators, and a solid institutional framework underpin Uruguay’s creditworthiness.” As Bloomberg News recently reported, investors believe that Uruguay “is heading toward its first investment-grade rating since 2002.”

The Uruguayan economy depends heavily on exports which grew by nearly 24 percent between 2009 and 2010 particularly beef, grain, and soybean exports. Back in May, the U.S. agribusiness giant Archer Daniels Midland announced that it was building a new facility in the South American country: a massive grain export terminal with a storage capacity of 180,000 tons and an initial loading capacity of 2.8 million tons. Uruguay may also become one of the Western Hemisphere’s biggest gas exporters: The U.S. Energy Information Administration has projected that it is sitting on 20,580 billion cubic feet of natural-gas reserves.

Yet booming commodity exports explain only part of Uruguay’s economic success. Its chief advantages are strong economic fundamentals, political stability, a relatively large middle class, and a relatively good education system. The 2011 Wall Street Journal/Heritage Foundation Index of Economic Freedom gives Uruguay the third-highest score in Latin America and the Caribbean. For that matter, Uruguay boasts the top ranking in the first-ever Latin Education Index produced by the Latin Business Chronicle, and it is also the highest-ranked Latin American country in the 2011 Legatum Prosperity Index.

Whereas Uruguay is a middle-class nation that ranks 48th out of 187 countries and territories in the 2011 United Nations Human Development Index, Paraguay is a much poorer nation that ranks 107th. Last year, however, it posted the second-fastest economic growth rate in the entire world (15 percent), behind only oil-rich Qatar, thanks to a record soybean crop. According to the World Bank, Paraguayan exports increased by 43 percent between 2009 and 2010, with soybean exports jumping by a remarkable 102 percent and meat exports growing by 59 percent. But as with Uruguay, farm exports aren’t the sole explanation of its recent economic achievements: The International Monetary Fund has determined that Paraguay’s 2010 growth “was driven by a broad-based economic expansion and not only by the historically large agricultural sector boom.” Standard & Poor’s upgraded its credit status a few months ago, following the completion of a key bilateral energy deal with Brazil. (It received a rating boost from Moody’s in late 2010.) The U.S. Agency for International Development affirms that Paraguay “has improved the management of the economy, reduced the domestic debt, strengthened the customs service, and improved the tax system.”

To be sure, the country still suffers from rampant corruption, fragile public institutions, and severe social inequalities, and its southern border region near Argentina and Brazil (part of the the so-called Triple Frontier) is a lawless, Wild Westtype area that serves as a magnet for terrorists and other criminal organizations. As the WikiLeaks cables showed, Washington is worried that Islamic militants and Iranian agents are operating in Paraguay. Meanwhile, on the economic front, there are concerns that both Paraguay and Uruguay are overheating. Policymakers will have to address rising inflation before it becomes a serious problem.

Here is perhaps the most interesting aspect of the story: For their entire modern history, Uruguay and Paraguay were ruled by either non-leftist democratic governments or right-wing military dictatorships, yet their recent economic success has come under social democrats. Uruguay has had a social-democratic president since 2005, and Paraguay has had one since 2008. These leaders Tabaré Vázquez and José Mujica in Uruguay, and Fernando Lugo in Paraguay have demonstrated that there is more than one brand of leftist in Latin America. Presidents Vázquez, Mujica, and Lugo have all governed in a moderate, pragmatic manner, without any of the radicalism we have seen in Venezuela. They provide firm evidence that, as I have written elsewhere (here and here, for example), Hugo Chávez is losing the ideological war in the Western Hemisphere.

(Spanish translation of this article can be found here.)

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