1 ga>1(.4.4 A World Bank The Political Comparative StudyThPoica Economy of Poverty, Equity, and Growth Costa Rica and Uruguay Edited by Simon Rottenberg Country shWis by Alberto Deud&n VictorCspede Edgardo Favam Claudio GonAlez-Vega 5 ;i. ; :}. .[FX ' f:' i' h |~~~~~~~~~~~~ - IlL < 0:pY The Political Economy of Poverty, Equity, and Growth Series editors Deepak Lal and Hla Myint The Political Economy of Poverty, Equity, and Growth Costa Rica and Uruguay Edited by Simon Rottenberg Country studies by Alberto Bensi6n Victor C6spedes Edgardo Favaro Claudio Gonzalez-Vega Published for the World Bank Oxford University Press Oxford University Press OXFORD NEW YORK TORONTO DELHI BOMBAY CALCUTrA MADRAS KARACHI KUALA LUMPUR SINGAPORE HONG KONG TOKYO NAIROBI DAR ES SALAAM CAPE TOWN MELBOURNE AUCKLAND and associated companies in BERLIN IBADAN © 1993 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. Published by Oxford University Press, Inc. 200 Madison Avenue, New York, N.Y. 10016 Oxford is a registered trademark of Oxford University Press All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Manufactured in the United States of America First printing January 1993 The findings, interpretations, and conclusions expressed in this study are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Library of Congress Cataloging-in Publication Data Costa Rica and Uruguay / edited by Simon Rottenberg; with contributions by Claudio Gonzalez-Vega ... [et al.l]. p. cm. - (A World Bank comparative study. The Political economy of poverty, equity, and growth) Includes bibliographical references and index. ISBN 0.19-520883-8 1. Costa Rica-Economic conditions-1948- 2. Income distribution- Costa Rica-History. 3. Poor-Costa Rica-History. 4. Uruguay- Economic conditions-1946- 5. Income distribution-Uruguay- History. 6. Poor-Uruguay-History. I. Rottenberg, Simon. II. Gonzrlez Vega, Claudio. III. Series: World Bank comparative study. Political economy of poverty, equity, and growth. HC143.C668 1993 339.2'097286-dc20 92-29890 CIP Foreword This volume is the fifth of several emerging from the comparative study "The Political Economy of Poverty, Equity and Growth" sponsored by the World Bank. The study was done to provide a critical evaluation of the economic history of selected developing countries in 1950-85. It explores the processes that yielded different levels of growth, poverty, and equity in these countries, depending on each country's initial resource endowment and economic structure, national institutions and forms of economic organization, and economic policies (including those that might have been undertaken). The Scope of the Comparative Study The basic building block of the project is a coherent story of the growth and income distribution experiences of each country, based on the methods of what may be termed "analytical economic history" (see Collier and Lal 1986) and "political economy." Each country study provides both a historical narrative and a deeper explanation of how and why things happened. Each study also seeks to identify the role of ideology and interest groups in shaping policy. Our comparative approach involved pairing countries whose initial conditions or policies seemed to be either significantly similar or signif- icantly different. Although initial impressions of similarity or difference may not have been borne out on closer inspection, this binary approach offered a novel and promising way of reconciling in-depth case studies with a broader comparative method of analysis. To provide this in-depth study of individual cases, a smaller number of countries was selected than is conventional in comparative statistical studies. We have serious doubts about the validity of inferences drawn from such cross-sectional regression studies about historical processes (see Hicks 1979). Therefore this project, by combining qualitative with quantitative analysis, has tried instead to interpret the nature and signif- icance of the usual quantifiable variables for each country in its historical and institutional context. V vi To provide some unifying elements to the project, we presented the authors of the country studies with several provisional hypotheses to be considered in the course of their work. These concern the determinant of growth, the importance of historical and organizational factors in determining alternative feasible paths of growth to redress poverty, and the relative roles of ideas, interests, and ideology in influencing decisionmaking. The following list of the country studies and their principal authors suggests the range of the overall comparative study: Malawi and Madagascar Frederic L. Pryor Egypt and Turkey Bent Hansen Sri Lanka and Malaysia Henry Bruton Indonesia and Nigeria David Bevan, Paul Coller, and Jan Gunning Thailand and Ghana Oey A. Meesook, Douglas Rimmer, and Gus Edgren Brazil and Mexico Angus Maddison and Associates Costa Rica and Uruguay Simon Rottenberg and others Colombia and Peru Antonio Urdinola, Mauricio Carrizosa Serrano, and Richard Webb Five Small Economies: Ronald Findlay and Stanislaw Wellisz Hong Kong, Singapore, Malta, Jamaica, and Mauritius Many of these volumes will be published in this series by Oxford University Press. In addition, a volume of special studies on related topics, edited by George Psacharopoulos, will also be published. This Volume This study of Uruguay and Costa Rica reveals two countries with strik- ing similarities in initial conditions, economic policies, and outcomes. Claudio Gonzalez-Vega and Victor Cespedes describe Costa Rica, Edgardo Favaro and Alberto Bensi6n describe Uruguay, and Simon Rottenberg compares the two countries. The book portrays two countries that have achieved relatively high per capita income through the export of primary products-coffee and bananas in Costa Rica, beef and live- stock in Uruguay. Both countries have also followed redistributive pol- icies and were among the earliest to establish welfare states. This occurred after World War II in Costa Rica and at the turn of the century in Uruguay. The result has been a high degree of equity inboth countries, both of which have democratic systems of govermment. vii Over time, however, as a result of growing urbanization and the interplay of interest group pressures in democratic politics, redistribu- tive policies have led to explicit and implicit taxation of their most productive source of revenue-the agricultural sector. Entitlements cre- ated by the welfare state have been underwritten by an increasing squeeze on the rural sector. This has come about as a result of the growth of public employment and parastatals, discriminatory exchange rate and agricultural price policies, growing trade protection, and inefficient industrialization. Incipient fiscal crises resulted in both countries. In Uruguay this manifested itself as a balance of payments crisis triggered by the large oil price increase of the early 1970s; Costa Rica's plight occurred a decade later, when voluntary lending to Latin America was brought to a halt by the world debt crisis and the rise in interest rates. The authors chart the twists and turns in subsequent policymaking in both countries. Both countries aimed to liberalize their economies- thereby raising their growth rates by increasing their responsiveness to a more turbulent world environment; both aimed to roll back redistribu- tive entitlements that had become unviable. Their success has been mnixed, although Uruguay's spectacular growth in the early 1970s, after initial liberalization, shows the potential for growth flowing from good policies that exists in both countries. These studies illustrate the feasibility of improving equity through state action; but they also reveal a corresponding danger that state action might produce long-term economic stagnation. This may arise if the policies that have been applied put brakes on the very sector whose surpluses support the redistributive entitlements. The studies also show that many such adverse effects may take a long time to appear, so that there is little incentive for politicians with relatively short time horizons to take the preemptive remedial action. They demonstrate, additionally, that a serious fiscal or balance of payments crisis can be the trigger for the radical change in policies needed to attain a viable long-run growth path. Deepak Lal and Hla Myint Series editors Contents Foreword v Preface xiii Part I. Costa Rica Claudio Gonzdlez-Vega and Victor Hugo Cespedes Introduction 3 1. Costa Rica: Basic Information 15 Geography and Resources 15 Population Growth 16 The Government and the Legal System 19 Political Parties 21 Private Sector Groups 24 Labor Unions 25 2. Growth and Structural Transformation 28 The Growth Record 28 Determinants of Growth 32 Openness and Aggregate Demand and Supply 33 Mobilization of Domestic Savings 36 Structural Transformation 37 Evolution of the Labor Force 38 Prices, Exchange Rates, and Wages 41 3. Income Distribution and Poverty 43 Distribution of Household Income in the 1960s 44 Distribution, Poverty, and Structural Transformation 45 Distribution of Household Income in the 1970s 48 Rural and Urban Household Income Distribution in the 1970s 49 ix x Distribution of Household Income in the 1980s 50 The Components of Earnings Inequality 52 The Effect of Taxation and Public Expenditures 53 Standards of Living and Access to Publicly Provided Services 54 Alleviation of Poverty 57 4. The Development of Costa Rica before 1950 59 The Colonial Legacy of Equality in Poverty 59 The Impact of Coffee 61 Coffee and Economic Development 62 The Coffee Social Contract 63 Bananas and Labor Conflicts 67 The Egalitarian Trend 68 Ideology, Institutions, and the Role of the State 70 The Social and Economic Reforms of the 1940s 72 5. The Modernization of the State, 1950-63 75 The Initial Conditions 75 The Nationalization of the Banking System 78 Financing Social Security 81 Toward Industrialization. 85 Joining the Central American Common Market 89 The Modernization of the State 92 6. Protectionism and the Regional Common Market, 1963-73 94 Initial Conditions for 1963-73 94 Development Strategy and Protectionism 96 Trade Policies 98 Financial Deepening 99 CODESA The State as Producer 100 Universal Social Security 101 7. External Shocks and Fiscal Crisis, 1973-85 106 Initial Conditions for 1973-85 106 External Shocks and Crisis 108 Determinants of the Crisis 110 Factor Market Interventions 111 Wage Policies 112 Credit Allocation Policies 114 Price Stabilization Policies 116 CODESA and the Politician-Entrepreneur 118 The Crisis and the Financial System 121 The Determinants of Economic Stagnation and the Crisis 123 xi 8. From Coffee Exports to State Enterprises 125 The Growth-with-Equity Outcomes 125 Determinants of Growth-with-Equity 126 The Formation and Role of Deeply Rooted Initial Conditions 128 The Legacy of the 1940s and the Change in Ideology 131 Costa Rica in the 1950s: A Larger Government 132 Costa Rica in the 1960s: Protectionism 136 Costa Rica in the 1970s: Redistribution 139 Costa Rica in the 1980s: Crisis 143 Statistical Appendix: Costa Rica 145. Part II. Uruguay Edgardo Favaro and Alberto Bension Introduction 187 9. Economic Growth and Income Distribution 190 Political Developments and Economic Outcomes 193 Crises and Reforms 193 Depression and Debt Problems 195 Household Income Distribution 197 Poverty 200 Social Indicators 200 10. Historical Background to 1955 204 Independence and Early Political Development 204 Demographic Changes 206 Economic Developments to 1890 207 Economic Developments to 1930 210 Electoral Politics and Social Policies 214 Initial Conditions, 1930-55 216 Summary 226 11. Economic Stagnation and Price Instability, 1955-73 228 The Political Situation 228 Population and Social Classes 229 Ideology and the Economy 231 Initial Conditions, 1955 232 Political Events, 1955-73 237 An Analysis of the Period 243 The Political Economy of the Period 250 xii 12. The Oil Shock and the Resumption of Economic Growth, 1973-84 263 The Military in Power 263 Demographic Change 265 Ideology and the Intellectuals 265 An Economnic Analysis of the Period 1974-82 266 13. Policy, Institutions, and Economic Performance 294 The Background of the 1874 Coup 294 From Military Rule to Modem Democracy 295 The Great Depression and Its Aftermath 298 Conclusions 304 Statistical Appendix: Uruguay 309 Part III. Costa Rica and Uruguay Simon Rottenberg A Comparison of Economic Experience and Policy in Costa Rica and Uruguay 365 14. Costa Rica 367 Political Developments and the Economy 368 The Public Sector 370 Landownership 371 Manufacturing and Diversification 371 15. Uruguay 373 Political Developments 375 The State and Redistribution 375 The Livestock Sector 376 State Intervention and Public Enterprises 379 Protectionism 381 16. The Comparison 382 Similarities 382 Differences 384 Findings 385 Bibliography 393 Index Preface Costa Rica and Uruguay exhibit striking similarities in their economic policies and make an interesting pair for a comparative examination. For much of its history the Costa Rican population has been settled in isolated subsistence farmsteads and villages, and it has experienced an equality of poverty. The growth of the coffee economy, beginning in the midnineteenth century, greatly improved the material standard of liv- ing. The country is still much less urbanized than Uruguay, but the San Jose Metropolitan Area has grown disproportionately in the twentieth century. As in Uruguay, the government is democratically elected. Uruguay's prospects were sufficiently promising to attract large num- bers of European immigrants in the late nineteenth and early twentieth centuries. Although livestock raising was the main activity, the popula- tion of Montevideo from the beginning constituted a large proportion of the population. The exercise of competitive private power in rural areas in the nineteenth century gave way in the early twentieth century to a process of accommodation and co-option by a centralized, democrati- cally elected state. In both countries-in Costa Rica since the late 1940s and in Uruguay since the early twentieth century-government has been instructed by a social democratic perspective. Both countries have developed reputa- tions as archetypal "welfare states." In both, policies adopted by an activist state have regulated economic activity, redistributed income, altered the composition of economic output, and opened opportunities for the privileged use of the state power to capture rents. Income is more equally distributed in Costa Rica and Uruguay than in much of the rest of Latin America. This has been achieved in part by the application of policies that were explicitly designed to transfer income or that had other purposes but also had income transfer effects. The main beneficiary of these policies has been the urban population. Economic policy has, however, distorted prices, diminished incen- tives, and had adverse effects on economic output. The Uruguayan economy has been stagnant since the 1950s. Costa Rica, which lagged xiii xiv behind Uruguay by some four decades in the active administration of redistributive policy, began to experience economic crisis in the early 1980s. In both countries social security, the protection of industrial activities, and the employment of large numbers of people in public sector institu- tions have been important policy instruments that have worked to the relative advantage of urban residents. In Uruguay policy has also sought to provide urban consumers with a cheap and abundant supply of beef-an important component of the Uruguayan consumption basket. Public policy in both countries has often had distorting and disadvan- tageous distributional effects that have introduced inefficiencies and diminished econornic output. Claudio Gonzdlez-Vega Vfctor Hugo C'spedes Costa Rica Introduction Compared with other developing countries of similar size and resource endowment, Costa Rica has been exceptional. In the long run this coun- try has been able to sustain an unusual combination of rapid economic growth, substantial improvements in standards of living, political sta- bility, and a strong concern with the wide distribution of the fruits of progress and with the alleviation of poverty. The sharp contrast to other countries makes it clear that these outcomes must have been the result of cumulative, long-term processes that reflect the different and complex historical evolution of Costa Rica. Economic and political development takes time. During the early 1980s, however, Costa Rica experienced major eco- nomic difficulties, including reduced rates of output growth, higher levels of inflation, devaluation, and unemployment, and increased pov- erty. A central argument of this part of the book is that key features of the historical evolution of the country-centered around dynamic inter- actions between economic constraints and political demands-explain, to a large extent, both the long-run successes in economic growth and social equity outcomes and the nature, evolution, and extent of the recent fiscal crisis. The purpose of this part of the book is, therefore, to bring out the unusual, but systematic, relations among political and economic factors that explain the comparatively favorable long-term results with respect to growth and equity and to examine the long-term sustainability of these outcomes. Successes Costa Rica's evolution during the 1950-85 period was marked by (a) a successful growth record, (b) unusually good performance of most socioeconomic indicators, (c) moderate income inequality, (d) substan- tial alleviation of poverty, and (e) sustained political stability and strong democratic institutions. 3 4 Costa Rica and Uruguay During the period Costa Rica enjoyed a rather satisfactory rate of economic growth. In real terns, gross domestic product (GDP) grew at an average annual rate of 5.0 percent. Since at the same time population was growing rapidly, at 3.2 percent a year, GDP per capita grew at 1.8 percent a year. By the end of the thirty-five-year period the population had tripled and GDP per capita had doubled. The record is even more im- pressive if the slower growth rates of the late 1950s and early 1980s- regarded by Costa Ricans as "crisis" periods and therefore as unusual-are ignored. Between 1961 and 1979 a GDP growth of 6.5 percent made possible a 3.4 percent annual increase in GDP per capita. Vulnerability to external shocks, as well as unstable output growth, was as much a part of the period's economic history as the compara- tively high average rates of growth. Economic growth was thus compat- ible with a high degree of externally induced instability. Although the prices and exportable supplies of the traditional crops (coffee and ba- nanas) fluctuated, significant improvements in crop yields contributed to the country's pronounced and sustained comparative advantages and its high returns from exports. Moreover, despite the fluctuations, high average rates of output growth validated Costa Ricans' expecta- tions of continued improvements in real income. The positive performance of all major socioeconomic indicators re- vealed a higher quality of life than would be predicted for countries at Costa Rica's level of GDP per capita. In particular, there was outstanding progress in all health indicators (mortality and infant mortality rates, life expectancy, and nutrition), and the already high educational standards improved. In addition, most Costa Ricans gained access to publidy provided services (running water, sewage disposal, electricity, schools, health cinics, and social security assistance), as well as to many modern conveniences (roads, telephones, newspapers, radio, television, movies, and refrigerators). By 1950 many of these indicators had already reached high levels, and they improved rapidly during the next decades, even within ranges in which marginal improvements became difficult. This reflected the rapid expansion of the country's physical and institutional infrastructure, high educational levels, and explicit public sector policies and expenditures.1 In addition to these measurable components of the standard of living, Costa Ricans enjoyed many of the less tangible determinants of the quality of life: freedom, in all its dimensions; social, political, and eco- nomic mobility; democratic participation; personal safety; tolerance and peaceful resolution of conflicts; institutional stability; and an efficient legal and judicial framework. Most of these features were already appar- ent by 1950, and they continued to improve throughout the period as traditions were preserved and institutions and the legal framework were strengthened. Others, however, were jeopardized by the larger size and growing complexity of society. Introduction 5 Inequality was moderate; the Gini coefficient for the distribution of household income was 0.44 in 1971. Income was more equally distrib- uted in 1971 than in the early 1960s, as wider segments of the population shared in the rapid income growth of the period, but the trend toward a more egalitarian distribution slowed somewhat during the late 1970s, and the crisis of the early 1980s led to some temporary deterioration. Income has not been excessively concentrated; the share of the richest 20 percent was only 51 percent of household income in 1971, and the distribution of land, by value, was moderately concentrated. The middle classes have thus enjoyed comparatively large shares of incomes and assets and have played a prominent role in the political arena. During 1950-85 there was a substantial reduction in absolute and relative poverty, complemented by the development of effective public sector assistance programs for the indigent and for children, old people, and women. Although poverty increased during the crisis of the early 1980s, by the middle of the decade it had returned to its earlier low levels. Costa Rica has been an example of growth with equity. Its history does not support the hypothesis of an inevitable tradeoff between these goals. On the contrary, there has been a strong positive association between rapid economic growth, a more egalitarian distribution, and the allevia- tion of poverty. The Costa Rican experience suggests that-given an appropriate political and institutional framework-when growth leads, equity follows. Costa Rica's sustained political stability, willingness to evolve without abrupt changes, and marked preference for a peaceful resolution of conflicts have characterized the country from its early years as an inde- pendent nation. Whereas between 1824 and 1842 in the other four Central American countries there was a total of 97 rulers, 143 battles, and 7,088 war dead, Costa Rica had only 4 presidents, 2 battles, and fewer than 50 war dead. Political stability continued during the twentieth century; only one president was overthrown (Gonzalez Flores in 1917). The two-month civil war in 1948 forced the incumbent administration to recognize the results of that year's presidential election and led to the disbandment of the army and the prohibition by the 1949 Constitution of its reestablishment. During 1950-85 scrupulously supervised elec- tions were held every four years, and, except on one occasion, political parties alternated in controlling the executive. The Crisis In the early 1980s Costa Rica experienced acute economic difficulties. What came to be called "the crisis" was marked by declining output, shrinking foreign trade, growing unemployment, falling real wages, rapid inflation, and the devaluation of the domestic currency (col6n), accompanied by a huge public sector deficit and public external debt. 6 Costa Rica and Uruguay These difficulties were in sharp contrast to the previous record of suc- cessful growth. Some dimensions of the crisis (the fiscal deficit, inflation, devaluation, and the external debt) were more acute in Costa Rica than in other Central American and Caribbean countries, although Costa Rica escaped the insurrections and political instability that have marred the recent history of the region. Indeed, social unrest was alnost nonexistent in Costa Rica despite the depth of the crisis and its impact on the standard of living of a people with high expectations of real income growth. The crisis was generated by both exogenous forces (sharp external shocks and the consequences of unrest elsewhere in Central America) and endogenous factors, including changes in relative factor endow- ments, the choice of development strategy, macroeconomic manage- ment responses to the exogenous shocks, growing institutional rigidities, fiscal inconsistencies, and political-economy confficts within Costa Rican society. Costa Rica's successful political and economic development, on the one hand, and the near collapse of the system during the recent crisis, on the other, were two predictable dimensions of the same political-econ- omy processes. Indeed, some of the same factors that explain the singular growth-with-equity outcomes also explain the magnitude and depth of the crisis. The strong investment in human capital and improved insti- tutional framework contributed to growth and equity, but at the same time fueled growing political-economy conflicts and directly unproduc- tive behavior. Importance of the Initial Conditions The country's initial conditions in 1950 play a key role in this political- economy story. These initial conditions include several characteristics that set Costa Rica apart from other developing countries and explain a large part of the growth-with-equity outcomes of the 1950-85 period. Six of these conditions deserve brief attention here. Four are related to features of the political system: (a) stability, (b) democratic institutions, (c) mechanisms to prevent or reduce the concentration of power, and (d) a great concern for equity. The other two are the country's small size and the ample availability of unexploited land. Chapter 4 discusses these initial political conditions. The country's political stability has reflected its long-term capacity for evolving without abrupt change (Dabene 1986). There have been no revolutions in Costa Rica. Major institutional transformations have taken place not violently but according to well-defined rules. This has been reflected in a long tradition of nonviolence and consensus and in a general attachment to legality. With a few notable exceptions, institutional development has come about by trial and error, through efforts to explore, in miniature, the Introduction 7 nature of potential reforms and arrive, on the basis of these experiments, at a consensus on their desirability. By the time ambitious programs and policies were adopted, their feasibility had already been tested. In the meantime substantial debate about the innovation had taken place on the basis of the results of the experiments, and the modifications required for its wide acceptance had been made. These experiments were often initiated by one administration and eventually adopted by the opposi- tion. In other instances, by the time the opposition gained power, it had become impossible to dismantle existing institutions. Other aspects of this tradition of peaceful evolution have been the abolition of the army, the uneventful transmission of power (frequently from one political party to another, as a result of dosely scrutinized elections), and the institutionalization of public dialogue and policy compromise. Costa Rica is the oldest continuously working democracy in Latin America. The country's institutions have guaranteed not only the or- derly transfer of power but also widespread popular participation in the definition of goals and the choice of means. There has always been an active opposition, with ample access to a free press, to question public policies, while a multitude of groups and organizations has represented the interests of almost every segment of society. Participation has been furthered by strong municipalities and a high educational level. Conflict has been freely expressed in Costa Rica, and both the process of conflict resolution and the actual solutions have frequently been institutionalized. In particular, economic conflicts have been resolved openly in the political arena, under the protection of a well-defined and strongly enforced legal system and efficient courts. Mechanisms for preventing or reducing the concentration of power have proliferated. Thus, after the 1948 civil war the military-whose influence had declined rapidly after the 1870s-were sent home, and the army was disbanded. The 1949 Constitution forbade the reestablishment of the army. The power of the Catholic Church was sharply curtailed after the liberal reforms of the 1880s, and Costa Rica became one of the most secular societies in Latin America. The 1949 Constitution was designed to check the concentration of political power, and there is a well-defined separation of the branches of government. The judiciary is particularly strong and independent. Reelection of presidents is prohib- ited, and there has been, in practice, an almost perfect alternation of opposing political parties in controlling the executive. Frequently, dif- ferent parties have controlled the executive and the legislative. An independent electoral board (Tribunal Supremo de Elecciones) is in charge of organizing and supervising elections. The centers of political decisionmaking are well dispersed. The multitude of autonomous insti- tutions created after 1948 is dear evidence of the efforts to decentralize power. When the commercial banks were nationalized, the four existing institutions were left as separate entities, to promote competition. 8 Costa Rica and Uruguay There has been a parallel multiplicity of organizations for the promo- tion of private sector interests. Numerous pressure groups, frequently not organized along dass lines, have represented product, sectoral, regional, or communal interests and have actively participated in policy debate. Multiple affiliations are widespread, giving rise to complex cross-associations among the principal actors in the political and eco- nomic arenas. During most of the 1950-85 period growth and stability led to the institutionalization of compromise and to the actual neutral- ization of interests. A stable equilibrium was increasingly solidified, only to be disturbed by the crisis. I Successive administrations of different persuasions have preserved and furthered a strong concern for equity. The preoccupation with equity grew out of a tradition of interdependence and reciprocity that had its roots in the colonial organization of society and was strengthened by the nineteenth-century social contract among coffee exporters, small coffee producers, and farm workers, as described in chapter 4. The organization of production in this small and vulnerable economy, and the social mechanisms for dealing with risk in a homogeneous society, eventually led to the development of a strong egalitarian ideology. Size was also important as an initial condition. Costa Rica has a small, homogeneous population that is highly concentrated in one small moun- tain valley. The limited size of the domestic market and a narrow resource base have been among the country's main economic constraints and have explained the high degree of openness of the economy, as well as Costa Rica's dilemmas in choosing a development strategy. Small size may have also had an important effect on the political system. Costa Ricans have lived in close contact with one another since colonial times. Before the twentieth century most of the population was concentrated in the inner part of the Central Valley, which covers only 8.3 percent of the territory. In 1980,58 percent of the population still lived there. The extensive road network further facilitated interactions among all segments of the population since, in most instances, travel from one part of the country to another takes only a few hours. All this facilitated domestic trade and the rapid elimination of subsis- tence agriculture (particularly in the Central Valley), promoted the integration of the labor market, and allowed the continuous exchange of political views. This intense interaction was furthered by the homogene- ity of the population and by the high level of education. The transaction costs of group organization and of political activism became very low. The common experiences of this homogeneous population thus led to a steady development of the common egalitarian ideology that has per- vaded most Costa Rican institutions. From an economic perspective, small size was a critical constraint on diversification and growth based on the domestic market. Growth and structural transformation inevitably led, in turn, to a more complex society, to less personal contact, and to a less commonly held ideology. Introduction 9 In particular, Costa Ricans have found it difficult to extend their earlier voluntary social contract beyond the coffee pact and replicate it in other sectors of economic activity. Instead, they have attempted to legislate institutional, less efficient replicas of the coffee pact, even though the circumstances have been different and the personal bonds have been absent. The resulting conflicts are a main theme of this part of the book. In 1950 Costa Rica's population occupied only one-fifth of the territory and faced a wide, unexploited agricultural frontier. Through the mid- 1970s the steady growth of agricultural output, both for export and for domestic consumption, was to a large extent a result of the expansion of the cultivated area (Cespedes and others 1983a). Rapid population growth during the following decades, however, quickly reduced this favorable land-labor ratio. This shift in the country's relative factor endowment modified its comparative advantages and worsened the politically sensitive problem of generating sufficient jobs for a rapidly growing labor force. The promotion of land-extensive cattle ranching in the new areas further reduced the opportunities to create employment in the agricultural sector, and protectionist policies discouraged the use of labor in the manufacturing sector. In sum, by 1950 Costa Rica's economic and political performance was already exceptional. On the basis of these initial conditions, the country's evolution during the following decades reflected the interaction of po- litical and economic phenomena. Political-Economic Interactions The interaction of the political and economic dimensions of develop- ment is at the core of the explanation of the Costa Rican growth-with- equity outcomes. Sustained political stability promoted economic growth in that it favored investment in physical and human capital, attracted foreign savings, and facilitated the consolidation of an institu- tional framework that stimulated trade and productive efforts. Political stability made long-gestation investment in infrastructure and human skills profitable. The comparatively low risks and transac- tion costs stemming from a peaceful environment and effective legal system also attracted substantial foreign savings that helped finance a relatively high rate of domestic investrnent. The strong institutional framework permitted a stable definition of property rights and efficient enforcement of contracts. The emphasis on equity reinforced a heavy investment in human capital (health, nutrition, and training and education), which further contributed to economic growth by creating a mobile and productive labor force. The low cost of the country's defense, in the absence of an army, made it possible to devote the substantial inflows of foreign savings and the available fiscal resources to higher-than-usual public 10 Costa Rica and Uruguay sector expenditures on human capital formation, equity-enhancing pro- grams, and development of infrastructure. The pursuit of these equity objectives and the availability of the means of enjoying the less tangible dimensions of the quality of life, such as freedom of speech through access to radio and television, were made possible by high rates of economic growth. Growth and inflows of foreign savings also financed the rapid expansion of the infrastructure, further reducing transaction costs and facilitating market integration. Subsistence agriculture rapidly disappeared. The fruits of growth and their widespread distribution helped to preserve political stability. Economic growth, increasing equality in distribution, and sustained political stability reinforced each other. The final outcome was more than the simple sum of their effects. In this cumulative and interdependent process of political and economic development, Costa Rica used a "technology" of institutional evolution characterized by important "economies of scope" in the joint "produc- tion" of economic growth, political stability, and social equity. The Political Economy of the Crisis Political and economic developments are an important part of the expla- nation for the recent crisis, as well. This crisis was not an isolated episode triggered entirely by exogenous forces (such as the unusually negative external shocks after 1973). It reflected, in addition, the consequences of the same political and economic interactions that explain the high stan- dard of living enjoyed by Costa Ricans. Widespread political and economic participation promoted the for- mation of a multitude of interest groups, while sustained stability con- tributed to their growing strength and their influence on policymaking. Education and social mobility, combined with high rates of economic growth and large inflows of foreign savings, fueled rising expectations and increasing demands for freely and publidy provided services, spe- cific subsidies, and a greater share in the national income. These de- mands, in combination with explicit concerns for equity, led to the institutionalization of numerous entitlements to future income streams and transfer payments. These entitlements were not always sustainable. Although the emphasis on equity was an important-but not the only-determinant of the increasing number of public institutions and employees, protectionism gave rise to substantial implicit taxes and subsidies that were not formally reported in the country's fiscal ac- counts. The increasing size of the public sector, coupled with the conse- quences of a highly protectionist governmental intervention in the economy, was at the root of the fiscal disequilibriums that led to the crisis. Rent seeking, opportunism, the rigidity in policy management brought about by the need for compromise and consensus, a deadlock Introdaction 11 of interest group conflicts, and the high costs of the entitlements and equity programs eventually contributed to the stagnation of output and to the fiscal imbalances that led to the crisis. Although the unusual strength of the middle dasses guaranteed political stability and in- creased the level of domestic demand, their low propensity to save and the few entrepreneurial interests of the growing public sector bureau- cracy contributed little to economic growth. Purely redistributive efforts that disregarded economic efficiency eventually jeopardized the pursuit of equity. Organization This study analyzes the transformation of the initial conditions already present by 1950 through the crisis of the first half of the 1980s. During this period Costa Rica evolved from a system of liberal political and economic institutions, softened by strong voluntary solidarity, toward an interventionist state characterized by protectionism and paternalistic welfarism. The main turning point occurred at about the beginning of the period, when a social-democratic ideology began to replace the earlier local version of a liberal ideology. Political change was accelerated by external forces, particularly by changes in coffee prices, and by the conflicts arising from the more diversified and complex society that evolved as the relative importance of coffee declined. These economic changes modified the balance of power, gave rise to questions about the earlier policies, promoted the reorganization of coalitions, and reshaped polit- ical and economic institutions. Before 1950 income and wealth came from the exploitation of Ricard- ian rents and from exports of a "vent-for-surplus" produced by Costa Rica's comparative advantage in coffee and bananas.2 The technological and economic features of coffee production, combined with the structure of society inherited from colonial times, fostered voluntary solidarism and interdependence in the society that evolved during the century and a half prior to 1950. The foreign banana enclave had little impact on the fabric of society. By the 1980s the old coffee alliance had been replaced by a coalition of new state-dependent groups whose income and wealth arose from the rent-seeking manipulation of interventionist policies and public sector activities. Many of the new groups were located in state-owned produc- tive enterprises and in highly protected private sector endaves. Equity concems had been institutionalized, and bureaucratic enforcement of entitlements had replaced the earlier voluntary reciprocity. These enti- tlements, which were financed by inflows of foreign savings, became increasingly unsustainable. Whereas in the past the distribution of rents and of the fruits of trade and development had been mostly governed by market forces and 12 Costa Rica and Uruguay technological and economic circumstances, the distribution of the newly created rents of the post-1950 era took place mainly in the political arena, through both explicit and implicit taxes and subsidies. The new defini- tion of property rights eventually contributed to slower rates of eco- nomic growth. When international and domestic circumstances led to the crisis of the 1980s, this unsustainable system was severely tested. This part consists of chapters 1-8. (A statistical appendix on Costa Rica is at the end of the section.) Chapter 1 presents basic information about Costa Rica. It describes the country's geography and resources, legal system, and government and identifies the political parties, labor unions, and private sector associations that are the principal actors in the story. Chapter 2, on growth and structural transformation, surveys the main economic outcomes for the period. It describes the evolution of the components of aggregate demand and supply and highlights changes in the degree of openness of the economy. The economy's structural trans- formation is explored by analyzing the changes in the importance of different sectors of economic activity and in their shares in employment. The chapter includes discussions of population growth, with its im- plications for demands for employment generation, and of the reduction of real wages, which illustrates the magnitude of the crisis. Chapter 3 presents outcomes for distribution and the alleviation of poverty. It examines the distribution of household income, functional factor shares, and the effect of taxation and government expenditures on distribution. Available evidence about the characteristics of poverty, fulfillment of basic needs, and other indicators of the quality of life is reviewed. Chapter 4 explores in detail the formation of the initial political conditions that obtained in 1950. These features were the result of long historical processes with roots in the colonial and postindependence periods. The chapter examines the development of the Costa Rican nationality and its major attributes. It deals with the colonial legacy of equality in poverty and explores the consequences of the introduction of coffee and the establishment of the banana plantations. The egalitarian trend that underlies the country's history is highlighted, and the chang- ing role of the state is discussed. Chapters 5-8 examine the political economy of growth, distribution, and poverty alleviation in Costa Rica during three subperiods. Chapter 5 deals with the first subperiod (1950-63), which began with the after- math of the crucial events of 1948 and ended with Costa Rica's entry into the Central American Common Market (CACM). The main themes are the modernization of the state and the earlier attempts at industrialization. Highlights include the initial problems with the implementation of the social security system adopted in the 1940s and the nationalization of the banking system. Fluctuations in the country's international terms of trade were a significant influence on the evolution of events during this subperiod, but as the country's productive structure became diversified, the overwhelming dominance of coffee and banana exports declined. Introduction 13 The second subperiod (1963-73) began with Costa Rica's attempt at import-substituting industrialization within the CACM and ended with the first oil shock (chapter 6). Debate during this subperiod centered on the choice of policy instruments for protecting specific sectors of the economy. Output expansion brought about an improved distribution of income and substantial alleviation of poverty. The third subperiod (1973-85) began with the country's first inflation- ary experience, at the time of the international oil shock, and ended with the attempts to stabilize prices and the exchange rate, after a deep fiscal crisis. Chapter 7 describes the country's adjustment to two oil shocks, the coffee boom, and the international interest rate fluctuations. Major questions concerned the appropriate size and role of the state, the tools for macroeconomic management, and the nature and extent of the social welfare system. This division of the 1950-85 period into three subperiods not only corresponds to important turning points in the choice of development strategy and in policy management but also facilitates the analysis, since the sets of available census data correspond to 1963,1973, and 1984. The duration of each subperiod (about a decade) makes it possible to describe medium-term trends in the economy. Chapter 8 presents the conclusions derived from the political-econ- omy story of Costa Rica. From a quasi oligarchy of coffee growers, with ample popular participation in the distribution of the fruits of develop- ment and in the political process, the country evolved toward a factional state controlled by a coalition of rent-seekers located in state enterprises and in highly protected private sector activities. In the process the set of liberal economic policies that had promoted output growth for more than a century were replaced by social-democratic protectionist inter- ventionism, and the voluntary interdependence of the coffee social contract was replaced by the compulsory entitlements of a highly devel- oped welfare state. On the basis of the initial conditions already estab- lished by 1950, the country continued to experience growth with equity during most of the 1950-85 period. The risk of collapse during the recent crisis raised serious questions, however, about the sustainability of the new version of Costa Rica's successful model of political and economic development. Notes This study is the result of several years of collaboration between Claudio Gonzalez-Vega and Victor Hugo Cespedes concerning Costa Rica's economic and social problems. It incorporates materials published elsewhere by the au- thors, as yet unpublished results from earlier research efforts, and new explora- tions. The authors considered this study, initiated in the 1980s, one more stage in their efforts to better understand the reality of their country. Several colleagues have been close partners in these efforts, to the point that it is difficult to separate their ideas from those of the authors. In particular, we wish to mention friends at the Academia de Centroam6rica, including Eduardo 14 Costa Rica and Uruguay Lizano, Ronulfo Jim6nez, Alberto Di Mare, Miguel Angel Rodriguez, Thelmo Vargas, Jorge Corrales, and many others. Given the scope of the effort and the multiplicity of the topics explored, the authors drew on many sources, rather heavily at times. It would be impossible to acknowledge all of them, but among major influences were Gary S. Fields (income distribution); Jorge Rovira Mas (economic policies); Jose Luis Vega Carballo (the formation of the Costa Rican nationality); Mitchell Seligson, Caro- lyn Hall, and Samuel Stone (colonial economic history and the impact of coffee); Mark Rosenberg (social security); and Lorin Weisenfeld (industrialization law). Some of their ideas were accepted and others were rejected, but in all cases their work was an indispensable source of information for the authors. The authors are grateful to the World Bank for its support of the project on the Political Economy of Poverty, Equity, and Growth; to the directors of the project for their guidance and patience; and to Simon Rottenberg for his useful sugges- tions at various stages of the effort. 1. Costa Rica's health and education indicators, which by 1950 were already high in comparison with those in other developing countries, are reported in Ross and others 1988. 2. Hla Myint used the term "vent-for-surplus" to denote the gain to a hitherto isolated developing country on obtaining a "vent" for its surplus productive capacity (Myint 1971, p. 120). Costa Rica: Basic Information This chapter provides information about Costa Rica's geography, pop- ulation, resources, legal system, and government organization. It also describes the political parties, private sector organizations, and labor unions that have served as vehicles for the expression of particular political-economy interests. Geography and Resources Costa Rica is located in the southern part of the Central American isthmus, the only region in the world that is both interoceanic and intercontinental. With an area of 50,900 square kilometers, this small country contains a complex ecological mosaic and a wide range of natural resources. Its topography is marked by three high mountain ranges flanked by coastal swamps and lowlands (Hall 1985, p.11). Most economic activity is concentrated in the Central Valley (Meseta Central), an area of 4,218 square kilometers, where the capital city, San Jose, is located. Rugged mountains modify temperature and vegetation to produce a complex succession of microdlimates. Bleak mountain summits and cool montane climates contrast with hot, humid coastal lowlands. As a result, Costa Rica has a diversity of land use uncommon for a country of such limited area. In the Central Valley rainfall is moderate, whereas in the humid Caribbean and Southern Pacific regions rain is abundant and farmers must adapt to excess water rather than to shortages. These tropical zones were successfully inhabited by the Indians, but they presented difficulties to settlers of European descent and were not colonized until recently. The Northern Pacific area (Guanacaste) is less humid and has a prolonged dry season. There, high temperatures cause heavy evaporation, and many crops require irrigation (Hall 1985, p. 27). Most of Costa Rica has relatively infertile soils that are subject to rapid depletion if poorly managed. Fertile alluvial and volcanic soils are found in less than one-fifth of the territory, mostly the mountains around the Central Valley (Holdridge and others 1971, p. 578). 15 16 Costa Rica and Uruguay Costa Rica's large number of ecological zones permits the cultivation of a wide range of crops. The better soils and gently sloping land in the wet lower montane zones can be used for dairy farming and horticulture. Subtropical crops-coffee, tobacco, and pineapples-are cultivated in the premontane zone. The tropical dry zone is well suited to beef cattle ranching. Its most fertile soils can be sown in cotton, sugarcane, rice, corn, sorghum, and cashews. The tropical wet zones are ideal for rice and for tree crops such as bananas, cocoa, coconuts, rubber, and African oil palm (Hunter 1976). Pre-Columbian Indians created a niche for themselves in the tropical forest ecosystem, living by hunting, fishing, gathering, and primitive cultivation. The native economy was unable to support dense popula- tions, urban centers, or complex political systems. The Indians put up prolonged resistance to European rule, but once they had been subdued, their smaL numbers and primitive culture doomed them to assimilation into colonial society. High mortality rates, miscegenation, and accultur- ation reduced the Indian population to an ethnic minority. By the early nineteenth century Indians accounted for less than one-fifth of the population, and today they make up less than 1 percent (Hal 1985, p. 40). Costa Rica possesses few resources except for its fertile soiL There are no important mineral resources and no oil deposits, but the abundance of water and the topography of the country have allowed the production of hydroelectric power. An extensive power generation, transmission, and distribution network has provided relatively inexpensive electricity. An efficient telecommunication system has also been installed. Until recently, agricultural expansion was facilitated by the availabil- ity of uncultivated land. Increases in the cultivated area were made possible by the well-developed road network. Access to the coastal areas was made easier by the elimination of malaria and by the provision of potable water, sewerage, and electricity, as well as public services in education, health, and nutrition. Provincial towns became important market and service centers that have supported agricultural production in their respective regions. This expansion of infrastructure promoted market integration and the growth of an exportable vent-for-surplus. The agricultural frontier has been rapidly disappearing, however, and has recently been expanded only at the cost of deforestation and the loss of some water resources. Whereas earlier output had been expanded by bringing new areas under cultivation, now increased yields are needed. Population Growth In 1985 the population of Costa Rica was 2,562,000. With more than 50 inhabitants per square kilometer, it was the third most densely popu- lated continental country in the Western hemnisphere. The population was highly concentrated in a small area; in 1980, 58 percent lived in the inner part of the Central Valley, which covers only 8 percent of the Costa Rica: Basic Infonnation 17 territory, and 28 percent of the total was in the San Jose Metropolitan Area. The average density was 306 inhabitants a square kilometer in the inner part of the valley and only 20 inhabitants a square kilometer elsewhere (Zumbado and Raabe 1976). Because of its temperate climate and fertile soil, the Central Valley has been the political and economic center of the country since colonial times. In 1800 the population of Costa Rica was about 53,000. Few Indians were left. Population growth accelerated in the nineteenth century, partly because of immigration but mainly because of the decline in the death rate. The population reached 300,000 inhabitants by the beginning of the twentieth century and surpassed 2 million in 1976. During the first half of this century the population doubled in thirty-three years, but after 1950 the doubling time was only twenty-one years, as shown in table 1-1. International migration (Spanish, German, Italian, Chinese, and Ja- maican) made only a minor contribution to population growth during the second half of the nineteenth century, and after 1925 its contribution was negligible. In 1927 foreigners made up 9.4 percent of the total population; in 1973 they were only 1.9 percent. During this century the banana plantations attracted large numbers of temporary workers from other Central American countries, and in the 1980s about 200,000 refu- gees from these nations came to Costa Rica to escape political and economic instability. These refugees have been a problem for the coun- try; most are poor, uneducated, malnourished, and sick, and they have not grown up sharing the traditions of respect for the law and peaceful resolution of conflict that characterize the Costa Rican social contract. Migration-from rural areas to the cities and, in particular, between rural areas-was important, especially after 1950. Formerly, the most important migration was from the rural areas of the Central Valley toward the coasts and other lowlands. The availability of uncultivated Table 1-1. Costa Rica: Population Growth, 1892-1985 Population Annual percentage change Year (thousands) (period average) 1892a 255.4 n.a. 1927a 489.0 1.87 1950a 858.2 2.48 1955 1,023.9 3.59 1963a 1,379.8 3.80 1973a 1,871.8 3.10 1976 2,017.9 2.54 1980 2,245.4 2.71 1985 2,562.0 2.67 n.a. Not applicable. a. Census years. Source Academnia de Centroamerica 1981. 18 Costa Rica and Uruguay government-owned land that could be daimed as private property was an important incentive for this migration, which increased as basic infrastructure was developed. The expansion of the banana plantations, on both the Caribbean and Pacific coasts, also attracted important mi- gration. More recently, however, migration has led to further concentra- tion of the population in the Central Valley, mostly in the San Jos6 Metropolitan Area. Because of the country's small size and high popu- lation density, there has been much interaction between the rural and urban populations, particularly in the Central Valley. An extended road network has allowed any rural household access to a relatively impor- tant urban center in a matter of minutes. Rurality has thus been a relative rather than an absolute condition. The demographic transition started in the second half of the nine- teenth century with a sustained decine in mortality that accelerated in this century. Birthrates, however, remained high and even increased in the 1950s, when the population growth rate reached 4.2 percent a year, among the highest in the world. Since 1960, as a result of dramatic reductions in fertility, the rate of population growth has generally de- cined, but the mid-1 980s rate of 2.6 percent a year was still far from low. Birthrates declined to 31 per 1,000 by 1980; they had been 48 per 1,000 two decades earlier. This decline was the result of changes in reproduc- tive behavior. By the late 1970s average family size was slightly less than four children, whereas up to the early 1960s the average was more than seven. The change took place in less than one generation. This decline in fertility, unprecedented in Latin America, affected all sectors of society. In 1960 families with a higher level of education and the urban population in general showed significantly lower fertility than the rest of the population. These were the groups responsible for the earlier reductions in fertility. In 1960 the average number of children per rural family was between nine and ten; the figure was about four for the middle- and upper-income urban families and six for urban families in general. During the second half of the 1960s the rural population, as well as groups with lower levels of education, also experienced important reductions in fertility. By the late 1970s there were no significant differ- ences among social groups in contraceptive use, reproductive goals, or fertility (Behm and Guzman 1979). The decline in mortality meant that whereas in 1866 the life expectancy of a Costa Rican was 30 years, by 1959 it was 56 years and by 1980 it was 72 years. The largest gains took place during the 1930s and 1940s. Marginal gains became increasingly difficult as the country neared the biological limit of 75 years. Despite this dramatic gain in life expectancy, until 1960 the Costa Rican population was young. At that time 48 percent of the population was 15 years old or less, and only 3 percent was above 65 years of age. The high proportion of young people in the population created a grow- ing demand for public services (education, health, and so on), while the Costa Rica: Basic Information 19 high rates of population increase led to growing demands for jobs two decades later. Both effects had significant fiscal implications. The decline in birthrates that took place during the following two decades reduced the proportion of children and young people in the total population, but it did not significantly increase the relative number of old people. Whereas the proportion of people 15 years old or less declined to 38 percent by 1980, the proportion of those 65 years old and older had increased to only 3.6 percent. The Government and the Legal System Costa Rica was discovered by Columbus in 1502 and was subsequently governed as a Spanish colony. In 1821 it declared independence from Spain and, after a short period as part of the Unified Provinces of Central America, it became an independent republic. Its population is mainly of Spanish and other European descent. The language is Spanish, and the religion of the majority is Catholicism. The 1949 Constitution provides for separation of powers among the legislative, executive, and judiciary. The Legislative Assembly consists of fifty-seven congressmen (diputados) elected as provincial representa- tives every four years. The president is elected by universal suffrage for a four-year term and is not eligible for reelection. Together with his ministers, whom he freely appoints and removes, the president is vested with all executive power. Judicial authority is exercised by the Supreme Court of Justice and the lower courts. There is a fourth, independent power in charge of the electoral process, the Tribunal Supremo de Elecciones. The country is divided into 7 provinces, which in turn are subdivided into 81 cantones (counties) and 415 districts. Each cant6n has a municipal government elected by popular vote for a four-year term. There are also many decentralized public sector entities. The most important autono- mous institutions are listed in table 1-2. The state enterprises include the oil refinery, the railroads, and CODEsA, a holding firm for subsidiaries engaged in production in competition with the private sector. The financial system consists of the National Banking System: the Central Bank, four state-owned commercial banks, and several private commercial banks, as well as nonbank institutions and a large number of unregulated intermediaries. There is a stock exchange, where a large volume of government paper is traded. The Central Bank, an autonomous institution created in 1950, per- forms conventional monetary functions and coordinates the activities of the commercial banks. It lends directly to the central government and the state-owned commercial banks, and through the 1980s it lent to some autonomous institutions. It can set reserve requirements, rediscounting criteria, and interest rates and commnissions on loans and deposits. Since the mid-1980s it has allowed interest rates to be determined by the 20 Costa Rica and Uruguay Table 1-2. Costa Rica: Main Autonomous Institutions Organization Function and date established Caja Costarricense de Seguro Social Social security, health, and pensions (ccss) (1943) Instituto Costarricense de Electricity and telecommunications Electricidad (ICE) (1949) Instituto Nacional de Vivienda y Housing and urban development Urbanismo (INvu) (1954) Consejo Nacional de Producci6n Stabilization of basic grain prices and (CNP) consumer protection (1943,1948) Instituto Costarricense de Water supplies and sewerage Acueductos y Alcantarillados systems (1961) (ICAA) Instituto Nacional de Aprendizaje Vocational training (1965) (INA) Instituto Costarricense de Turismo Tourism (1955) (ICT) Instituto Nacional de Seguros (INs) Monopoly of insurance (1925) Instituto Mixto de Ayuda Social Social welfare programs for the (IMAS) poorest (1971) Instituto de Desarrollo Agricola (IDA) Agrarian reform and rural development (1961) Instituto de Asesorfa y Fomento Municipal development (1970) Municipal (IFAM) Instituto Nacional de Fomento Cooperatives (1973) Cooperativo (INFOCOOP) Patronato Nacional de la Infancia Welfare of children and mothers (1940) Consejo de Investigaciones Science and technology (1972) Cientificas y Tecnol6gicas (CONIcrr) junta Administrativa para el Development of the Caribbean Desarrollo de la Vertiente region (1963) Atlantica (APDEvA) market. For a long time it fixed limits on the volume of credit for each economic activity, but this practice was abandoned in the late 1980s. It sets the exchange rate and manages the country's foreign exchange system, as well. The state-owned banks, which were nationalized in 1948, act as both commercial and development banks. Only they are allowed to accept demand and savings deposits from the public, and only they have access to Central Bank rediscounting. Private banks, which numbered sixteen in 1985, are small institutions that mobilize funds from equity capital, term deposits, bonds, and borrowing abroad. Their relative importance increased during the 1980s as a result of strong support from the U.S. Agency for International Development (UsAID). During the second half of the nineteenth century Costa Rica developed a legal system that carefully defined contracts and the mechanisms for Costa Rica: Basic Infonration 21 their enforcement and efficiently protected property rights. Coffee ex- ports made possible a significant degree of institutional consolidation. Trade brought new goods and services, new ideas, new migrants, and new opportunities to the inhabitants of the Central Valley. The Consti- tution of 1871 represented the first mature attempt at government orga- nization, and it lasted for sixty-seven years. This golden age of liberal rule in Costa Rica saw intense legal activity. New criminal, civil, and civil procedures codes that followed Spanish and French models were en- acted, as were laws regarding notaries, courts, and the registries for recording contracts and land titles and transactions. A new constitution was enacted in 1949, after the 1948 civil war. It was a compromise between the two ideologies-liberal and social demo- cratic-that would influence policymaking during 1950-85, and it rep- resented a renewed attempt to limit the concentration of power. The autonomous institutions, created by the constitution as decentralized agencies for specific tasks, multiplied rapidly. The ideological conflicts that characterized the 1950-85 period were reflected in two contrasting statements in the 1949 Constitution. Artide 46 protects freedom of commerce, agriculture, and industry by forbid- ding any restrictions on them, even restrictions enacted as law, while artide 50 authorizes the state to organize and promote production and the most appropriate distribution of wealth. In practice, a flexible interpretation of the constitution has facilitated the development of an interventionist welfare state. Economic and social legislation has been created ad hoc, making for a large body of disparate laws. These laws, frequently issued under the pressure of current circumstances to solve a conflict or avoid a threat, have not been coordinated into the rest of the legal structure. They have usually reflected a political compromise rather than a dear principle (Guti6rrez 1979). Political Parties There are two main political parties: the Partido Liberaci6n Nacional (PLN), which has a social-democratic orientation, and the Partido Unidad Social Cristiana. Before the 1980s the Partido Unidad was an unstable coalition of heterogeneous groups that united under different names in their opposition to the PLN. It has recently been organized as a permanent party with a Christian-democratic orientation. In addition, several very small socialist and communist parties have existed under different names. Since the enactment of the 1949 Constitution there have been eleven successive, regularly elected administrations, in addition to the eighteen- month government of the Figueres junta that took power after the 1948 civil war (table 1-3). Seven of these twelve governments were under the PLN, and five were under the control of groups associated with Unidad. 22 Costa Rica and Uruguay Table 1-3. Costa Rica: Presidential Administrations Percentaye Year President Party of votes 1948-49 Jose Figueres Liberaci6n (Junta) n.a. 1949-53 Otfijo Ulate Uni6n Nacionaib 55 1953-58 Jose Figueres Liberaci6n 65 1958-62 Mario Echandi Uni6n Naciona 46 1962-66 Francisco Orlich Liberaci6n 50 1966-70 Jose J. Trejos Unificaci6nNacionalb 51 1970-74 Jose Figueres Liberaci6n 55 1974-78 Daniel Oduber Liberaci6n 43 1978-82 Rodrigo Carazo Unidad 51 1982-86 Luis A. Monge Liberaci6n 59 1986-90 Oscar Arias Liberaci6n 51 1990-94 Rafael A. Calder6n, Jr. Unidad 53 n.a. Not applicable. a. Percentage of valid votes in presidential election. b. Party related to Unidad. Source- Jimenez Castro 1986. Before the mid-1970s the two major political parties alternated in the control of the executive. Perfect alternation was broken in 1974 and in 1986, when the PLN was reelected. The PLN has also enjoyed a majority in the Legislative Assembly since 1953 (with the exception of 1978-82), and it had effective control of the autonomous institutions and of most civil service employees throughout the period. As a result, the PLN agenda moved forward steadily. Its progress was moderated every alternate four years, when the opposition controlled the executive, but since this opposition did not possess sufficient power, there was no turning back. The Communist party (Partido Comunista) was founded in 1931 and in 1934 elected two diputados. The communist vote reached a peak of 16 percent in the 1942 elections for diputados. Support came mostly from the banana plantations and SanJose. President Rafael Angel Calder6n Guar- dia (1940-44) sought the support of the Communists in 1942, when his unstable administration faced much opposition. To take advantage of the opportunity, the Communists disbanded their party and created the Vanguardia Popular. They also requested Archbishop Victor Sanabria to state that Catholics would be allowed to join the new party. The affirmative answer sealed the alliance between Calder6n Guardia, the Church, and the Communists. Together they contributed to the election of Teodoro Picado as president in 1944. His weak administration left him, however, with almost no support except that of the Communists (Rojas Bolafios 1986, p. 19). In the tense elections of February 1948 Calder6n Guardia received 44,438 votes and Otilio Ulate received 54,931 votes. Although Ulate was declared president by the electoral tribunal, the Congress, where Costa Rica: Basic Infonnation 23 Calder6n Guardia and the Communists had a majority of diputados, nullified the results of the presidential election. The consequence was the two-month civil war of 1948. The Communists represented the majority of the forces of the incumbent government that fought against Jose Figueres, the victorious leader of the rebels. Figueres headed a junta that governed by decree from May 1948 through November 1949, when the government was finally turned over to Ulate. The events of 1948 marked the defeat of the coalition of forces that had been in power for eight years (1940-48) and led to the banning until the 1960s of the Communist party, which was declared "contrary to the democratic system." The PLN arose from a coalition of new, smaller entrepreneurs and urban intellectuals led by Jose Figueres. Its agenda included the political, social, and economic modernization of the country and the diversifica- tion of its productive structure, particularly the promotion of industri- alization through import substitution. The PLN has represented the interests of the industrial groups, the growers of food for the domestic market and of new export crops, and the rural and urban middle class, which was swollen by the rapid growth of the public sector (Rovira Mas 1987, p. 18). An important component of the PLN's explicit agenda has been to diversify the country's productive structure through industrialization and the development of new crops for export and for the expanding domestic market. Protectionist instruments have been preferred for this purpose. Redistributive measures aimed at increasing domestic demand and enlarging the party's electoral base have also been important. To foster political stability, it has been considered essential to strengthen the middle classes, and this has required the widening of the social security system introduced in the 1940s, the modernization of the state, and the strengthening of political institutions-in particular, the institutionaliza- tion of the electoral process. All this has implied an increasing govern- ment presence in all dimensions of life including, notably, a growing state intervention in economic activities, which has characterized the PLN agenda. This agenda was gradually implemented by the party through seven administrations until it completely dominated the design of eco- nomic and social policies in Costa Rica-although compromises were required and some resistance had to be overcome (Rovira Mas 1987, p. 19). The opposition to the PLN consisted of different parties and coalitions that represented mainly the traditional exporting, commercial, and im- porting groups as well as other businessmen unhappy with the PLN's interventionist tendencies. Professionals and intellectuals of conserva- tive and libertarian persuasion associated with the Asociaci6n Nacional de Fomento Econ6mico (ANFE) gained increasing influence in Unidad. In addition, the opposition to the PLN enjoyed the electoral support of a large segment of the low-income working class. The opposition's agenda has emphasized political and economic lib- eralism and the defense of private enterprise and has opposed the rapid 24 Costa Rica and Uruguay growth of the public sector and of fiscal deficits. Beginning with the Trejos administration, the liberal agenda was complemented by a Chris- tian-democratic (social cristiano) emphasis that attacked the "state pater- nalism" promoted by the PLN and recognized the Catholic Church's "principle of subsidiarity." ("Man is the master of his own destiny, and state action, in attempting to improve welfare, must only be subsidiary and complementary to that of man or his community, in order to achieve his own progress"; Trejos Fernandez 1973, vol. 1, p. 18). Until recently, therefore, the identity profile of the opposition to the PLN had been mostly negative: the main interest was in slowing the progress of the PLN agenda. A more aggressive economic liberalization program has been pursued in the late 1980s and early 1990s. Four communist parties and a coalition of three of them, Pueblo Unido, have operated since 1970, and in 1978-86 their representation reached its high point of four diputados. Their proportion of the electorate has recently declined from 6 percent to an even more marginal 2 per- cent-a loss that many observers have attributed to a reaction to the Sandinista regime in Nicaragua. Private Sector Groups Numerous organizations created to represent the interests of their mem- bers have had a great influence on policymaking. The usual means of influence had been personal contact between business leaders and gov- ernment officials, but as society became more complex and these associ- ations grew larger and represented a wider range of interests, the groups incorporated more educated businessmen and used less personal, more modem means of communication. The Chamber of Industry (Camara de Industrias) has been the most influential private sector organization. Founded in 1943, by the late 1970s it represented more than 90 percent of all medium-size and large indus- trial firms. The chamber was deeply involved in Costa Rica's entry into the Central American Common Market (cAcM) in 1963, and its members obtained important benefits from regional economic integration. It has been the most sophisticated business association, and it has been active in all issues in which its interests are at stake. Its leaders have been selected on the basis of their reputation and their ability to maintain direct contact with top government officials (Ramfrez Arango 1985). The Chamber of Commerce (Camara de Comercio) is the oldest pri- vate sector association. Its influence declined when the import-substitut- ing strategy for industrialization was adopted, but it gained strength during the crisis of the 1980s. It opposed the high level of import tariffs put into effect as part of the industrialization strategy, and in recent years it has argued with considerable influence against protectionism for either the manufacturing or the agricultural sector and against fiscal disequilibriums. Costa Rica: Basic Infonnation 25 The Chamber of Agriculture (Cimara de Agricultura), established in 1947, initially represented the interests of the most important producers and was regarded as very influential. As a result of internal divisions, however, it became fragmented during the 1960s and 1970s and lost its previous stature. At the end of the 1970s its organizational basis was weak; its administrative activity was carried on under the sponsorship of the Ministry of Agriculture, which provided it with office space and personnel. Not until 1983 was it able to establish its own offices and to hire its own staff. By then it was composed of eleven chambers of agricultural producers that represented more than 30,000 farmers and 150 agricultural firms of intermediate to large size. There are many organizations of agricultural producers, by crop and by region. The Camara Nacional de Cafetaleros brings together coffee producers, processors, exporters, and roasters. Many of its members also grow sugarcane and belong to the powerful Camnara de Azucareros. Also influential is the Cooperativa de Productores de Leche, which by the mid-1 960s already included 470 dairy producers. There are at least eight regional chambers of beef ranchers. The Camara Nacional de Granos Basicos has been effective in influencing basic grain policies and in attracting subsidies, particularly for rice. The Asociaci6n Bananera Nacional has been equally influential on behalf of banana producers. The relatively weak Union of Chambers (Uni6n de Camaras) was established in 1975 by six of the most important private sector associa- tions as the formal top private sector association in Costa Rica. In the following five years it grew to represent about thirty associations. Its resource base has been limited, and it has become involved only in issues of interest to all of its members. All issues have been decided by consensus. Labor Unions The degree of unionization in Costa Rica has been low, and until recently labor unions played a minor role. Unions flourished briefly in the 1940s but then became largely inactive. In the late 1970s they were again very active, particularly in the public sector, but they never regained the degree of influence that they had in the 1940s. The Partido Comunista, created in 1931, organized the General Work- ers Union (Uni6n General de Trabajadores). The union's most important activity was the organization of the 1934 strike in the banana plantations, in which about 10,000 workers participated. This success against the fruit company was not replicated elsewhere. Two important confederations were created in 1943: the Confederaci6n de Trabajadores Costarricenses, which included 125 communist unions, and the Confederaci6n Costarricense de Trabajadores Rerum Novarum, which was promoted by the Catholic Church as an alternative to the communist confederation and which established strong links with the 26 Costa Rica and Uruguay American Federation of Labor. In the 1940s all unions were forced to affiliate with one of the two confederations. Through their alliance with the Calder6n Guardia and Picado administrations, the Communists gained access to the decisiomnaking process. With the defeat of the incumbent governrment during the 1948 civil war, however, they lost this influence. Communist unions were banned and did not operate openly until the late 1960s. Of the 809 labor unions created between 1943 and 1970, only 235 were still active by 1970; 524 had been disbanded, and 50 were totally inactive. Between 1970 and 1976,239 new unions were created, but many never operated in a regular fashion. In the late 1970s only about 10 percent of Costa Rican workers were members of any labor union, including unions of technicians and professionals. Increasingly, govermnent employees represented a large proportion-dose to half-of union membership. Thus, in the mid-I 970s only one in four union members was an unskilled laborer or a farm worker. Most unions were very small; almost one-half of them had fewer than 50 members, about 65 percent had fewer than 100, and only 14 had more than 1,000 (Cuelar and Quevedo 1981, p. 63). In sum, the level of unionization has been particularly low for workers in agriculture and manufacturing and high for government employees, technicians, and professionals. In the mid-1970s 43 percent of all public sector employees belonged to labor unions, as against only 5 percent of private sector workers. Today, there is no profession or trade without an association, and there is no ministry or autonomous institution without an association or labor union. Workers in the agricultural and manufac- turing sectors have found fewer opportunities to use labor unions in defense of their interests, whereas the middle classes, organized in the white-collar unions of the modem sector, have made effective use of this tool. With the growing importance of the public sector, Costa Rica has experienced the unionization of its middle class. The low degree of unionization of private sector workers may be explained by a weak demand for union services, in view of the relatively large importance of agriculture and the widespread ownership of land. Only the workers in the banana plantations represent a true rural prole- tariat. In the Central Valley even the rural population has a middle-dass mentality. Also, because of the active intervention of the government, negotiations take place between the authorities and the employers, bypassing the unions. The extensive social security system makes de- mands for fringe benefits less urgent (Backer 1978, p.25). In addition, the supply of union-organizing services is hampered by provisions of the Labor Code-for example, employers are able to fire union organizers, and although a large proportion of manufacturing firms has fewer than twenty employees, a minimum of twenty workers is required to organize a union. Private sector organizations and labor unions have maintained close links with the political parties. Thus, ANFE has had a special relationship Costa Rica: Basic Information 27 with Unidad, and the Chamber of Industry has been a major source of support for the PLN. Several labor unions have been affiliated with the Communist party. These organizations have thus exercised influence not only directly but also indirectly, through their connection with the parties. In turn, they have represented different segments of society and their interests. There has been a trend, however, for both major political parties to include a wide spectrum of groups among their following. Growth and Structural Transformation Comparatively high rates of output growth were among the outstand- ing economic development outcomes in Costa Rica during 1950-85. Income per capita increased substantially despite rapid population growth. This chapter reports on these rates of growth, their increasing variability, and the economy's medium-term trend toward stagnation. The effect of international terms of trade movements and of other exter- nal shocks is highlighted. Changes in consumption and imports per capita illustrate the impact of the crisis of the early 1980s on standards of living, while the sharp contraction of investment reflects its effect on potential future growth. The dramatic decline in real wages and in- creased unemployment suggest some implications of the crisis for income distribution. Growth was accompanied by substantial structural transformation: a sharp reduction in the relative importance of agriculture, a dramatic increase in government activity, and a lesser increase in the relative importance of manufacturing. Despite the import-substituting strategy for industrialization, the openness of the Costa Rican economy in- creased, in both the current and the capital accounts. Trade and capital flows have been of paramount importance for this small country. The external debt represented, however, a significant constraint on growth during the 1980s. The Growth Record Costa Rica's economy grew at a satisfactory pace during most of 1950-85. Growth was not even, however; rates were lower in the earlier part of the period (the late 1950s) and toward the end (the early 1980s). Real GDP grew at 5.0 percent a year for the whole period, but for 1961-79 it grew at a comparatively high 6.5 percent a year.1 Exceptionally rapid GDP growth in the early 1950s, mostly fueled by traditional exports to a dynamic world market, was interrupted after the mid-1950s when the international market became less favorable, coffee 28 Growth and Structural Transfonnation 29 prices declined, and floods caused a drop in banana production. Growth accelerated again after the formation of the Central American Common Market (CACM) in the early 1960s and as banana production expanded at the end of the decade with the introduction of new disease-resistant varieties. It remained rapid until the mid-1970s, when it was again interrupted by the first oil shock. The coffee boom of 1976 and 1977 generated another burst of growth, which was followed by a sharp decline in output in the early 1980s and by a comparatively poor recov- ery after the crisis (table 2-1 and figure 2-1). Since the 1960s there has been a medium-term trend toward a decline in the rate of growth of output. The causes have induded diminishing opportunities for import substitution within the CACM, distortions intro- duced by the protectionist strategy of development, the institutionaliza- tion of rent seeking, the excessive growth of the public sector, and changes in relative factor endowments. The annual rate of growth of GDP was 7.0 percent for 1965-70 and 6.0 percent for 1970-75 but only 5.2 percent for 1975-80 and 0.3 percent for 1980-85. Because of a rapid increase of payments to factors of production abroad, GNP did not grow as fast as did GDP. Its contraction during the first half of the 1980s reflected the increasing burden of interest payments on the external debt; these payments were not sufficiently compensated for by growing unilateral transfers from abroad. Gross national income (GNI), which measures the purchasing power abroad of GNP (after adjust- ing it for changes in the country's international terms of trade), is an important indicator because foreign goods and services represent a high proportion of aggregate supply. The coffee boom (1976-77) made GNI grow more rapidly than GNP for a while, but later GNI declined sharply. For the whole period GNI grew less rapidly than GNP, as a result of the Table 2-1. Costa Rica: Growth Rates of Real GDP, Population, and Real GDP per Capita, 1950-85 (annual average percentage change) GDP (constant GDP per capita Period 1966 prices) Population (constant 1966 prices) 1950-85 5.0 3.2 1.8 1961-79 6.5 3.0 3.4 1950-63 5.3 3.7 1.5 1963-73 7.2 3.1 3.9 197345 2.9 2.7 0.3 1950-54 8.9 3.5 5.1 1954-61 3.0 3.9 -0.8 1961-74 6.9 3.1 3.7 1974-79 5.5 2.6 2.8 1980-85 0.3 2.7 -2.3 Source. Statistical appendix tables A-2, A-11, and A-12, based on Central Bank figures. 30 Costa Rica and Uruguay Table 2-2. Costa Rica: Growth Rates of GDP, GNP, and Gross National Income (GNI) in Constant 1966 Prices, 1966-84 (average annual percentage change) GDP per GNP per GNI per Period GDP GNP GNI capita capita capita 1966-84 4.6 4.2 3.8 1.8 1.4 1.0 1966-74 6.9 6.9 5.7 4.0 4.0 2.8 1974-79 5.5 4.9 6.3 2.8 2.3 3.6 1979-84 0.2 -0.7 -1.5 -2.5 -3.4 -3.4 Note The periods do not coincide with those in table 2-1 because of the lack of data before 1966. Source Statistical appendix tables A-11, A-12, and A-13, based on Central Bank figures. long-term deterioration of the country's international terms of trade (table 2-2). Manufacturing output grew more rapidly than agricultural output, particularly in the 1960s (figure 2-1). During 1957-85 the rate of growth of manufacturing was 6.4 percent a year, compared with 3.9 percent for agriculture. This reflected changes in factor endowments, as well as the protection of industry and the penalization of agriculture implicit in the strategy of development that was adopted. Before Costa Rica's participation in the CACM, the rates of growth of agriculture and of industry were very similar (see table 2-3), but subse- Figure 2-1. Costa Rica: Change in GDP, by Sector, 1958-86 Annual percentage change 25 20 - -15 -10- -15 1958 1963 1968 1973 1978 1983 - Manufacturing - - - Agriculture Source: Statistical appendix table A-14, based on Central Bank figures. Growth and Structural Transfornation 31 quently manufacturing grew almost twice as rapidly as agriculture, particularly in the early years of the customs union. This situation was reversed in the early 1980s. Agriculture suffered less from the crisis than manufacturing, which experienced a dramatic decline in growth rate. High rates of output growth during 1950-85 allowed a GDP per capita growth of 1.8 percent a year (see table 2-1), despite a population growth rate of 3.2 percent. Growth of GDP per capita was slow and even negative in the late 1950s as a result of slow output expansion and rapid popula- tion growth, but it accelerated during the first decade of Costa Rica's participation in the CACM. GDP per capita continued growing through the late 1970s, thanks to the coffee boom and to a decline in the rate of population increase that offset the slower growth in output. High pop- ulation growth rates combined with declining output, however, to bring about a substantial reduction in GDP per capita in the early 1980s (see figure 2-2). In real terms, in 1982 GDP per capita was lower than in 1973, GNP per capita was lower than in 1971, and GNI per capita was equivalent to its 1969 level. This impoverishment reflected lower growth rates for output, a continued deterioration of the country's international terms of trade, and the need to devote a higher proportion of GDP to servicing the large external debt. The reduction in standards of living during the crisis was indicated by a sharp reduction in private consumption per capita and imnports per Figure 2-2. Costa Rica: Change in Real GDP and GDP per Capita, Constant Prices, 1951-85 Annual percentage change 15 1: _0 I l,,Z,' llVII \f -10 1951 1956 1961 1966 1971 1976 1981 1986 - GDP - - - GDP per capita Source: Statistical appendix tables A-11 and A-12, based on Central Bank figures. 32 Costa Rica and Uruguay Table 2-3. Costa Rica: Growth Rates of GDP, by Sector, in Constant 1966 Prices, 1957-85 (annual average percentage change) Sector 1957-63 1963-74 1974-79 1979-85 1957-85 Total GDP 4.5 7.0 5.5 0.4 4.8 Agriculture 4.6 5.5 2.5 1.6 3.9 Industry 4.7 10.8 6.5 0.4 6.4 Construction 6.3 6.8 10.9 -4.8 4.8 Electricity and water 6.5 12.3 6.6 8.1 8.9 Transport 4.1 9.7 9.6 1.5 6.7 Commerce 3.9 6.2 5.9 -1.8 3.9 Finance 6.9 9.0 8.1 2.5 7.0 Real estate 4.2 3.9 3.5 1.6 3A General government 2.7 6.3 4.6 0.4 3.9 Other services 6.4 5.5 3.3 0.1 4.1 Source Statistical appendix table A-14, based on Central Bank figures. capita. The 1982 level of real consumption per capita was the same as in 1968, and imports per capita were lower than in 1969. Determinants of Growth Between 1950 and 1980 the labor force increased three times, enlarging the domestic market and the availability of human resources for eco- ntomic development. Rapid population growth, combined with the de- mands of a younger population, fueled pressures to provide health, education, and other services, thereby contributing to the accelerated expansion of the public sector that has taken place since the 1950s. The increase in the labor force has also made the creation of new jobs an important political-economy issue. Substantial investment in human capital formation has led to rapid growth in labor productivity and to increasing demands for highly paid jobs. In 1950 the population occupied only one-fifth of the national territory and faced a wide, unexploited agricultural frontier. From 1950 to the mid-1970s agricultural output grew mostly through the expansion of cultivated land. By 1973 farms already accounted for three-fourths of the territory, and since then, growth in agricultural output has been mostly the result of increases in productivity. The expansion of cultivated land promoted both growth and the absorption of the growing labor force. In turn, exhaustion of the agricultural frontier exacerbated the problem of generating jobs. The steady reduction in unexploited land was compensated by sub- stantial increases in physical yields as a result of intense technological change. Since the early 1950s Costa Rica has experienced a true "green revolution," particularly in coffee and banana production but also in general agricultural practices. Fertilizers and agrochemicals were widely Growth and Structural Transformation 33 introduced, and there was a major replacement of coffee plants with new varieties. Banana production exploded with the development of vari- eties resistant to traditional diseases. Output growth was associated with increasing investment efforts. Between 1966 and 1979 real gross fixed investment increased 10A per- cent a year, twice as rapidly as private consumption. The ratio of fixed investment to GDP increased from 17 percent in the 1960s to 28 percent during the coffee boom of the 1970s. These high levels of investment were increasingly financed with foreign savings. Between 1973 and 1981 net foreign savings amounted to 12 percent of GDP. Rapid productivity growth was a result of heavy investments in human capital, more capital per worker, major technological innova- tions, and the transfer of workers from rural low-productivity occupa- tions to jobs in the modem sector. There was, in addition, a high degree of market integration. Even in rural areas subsistence agriculture was negligible. Self-consumption represented only 1.6 percent of household income in the early 1980s, and most farmers sold something in the market. Because of a similar integration of labor markets, salaried work- ers represented more than three-quarters of the labor force. Openness and Aggregate Demand and Supply Two main characteristics of the Costa Rican economy have been its small size and its high degree of openness. With a population of fewer than 2.6 million inhabitants in 1985 and a GNP per capita of CR$45,669 in 1983 (about us$1,000), the economy is very small. Costa Rica has perceived that, given the country's narrow resource base and limiting domestic market, trade with other countries must act as the economy's engine of growth. Much of the impulse for growth during this century has come from the export of agricultural commodities. The development for ex- port of coffee, bananas, cacao, sugar, and beef raised the levels of domestic output and income, increased the country's capacity to import, and yielded many of the dynamic benefits of specialization for this land-abundant country. Exports accounted for between one-fifth and one-third of GDP during the past three decades. The trend was for this proportion to increase, and it reached almost one-half during the early 1980s. Imports represented between one-quarter and two-fifths of GDP. Their share reached 48 percent in 1974 (during the first oil shock) and in 1981 but dropped to 27 percent in 1982, when imports were severely restricted. A consequence of this high degree of openness has been extreme vulnerability to exter- nal shocks. Costa Rica has exported mainly primary products. About two-thirds of agricultural output was exported in recent times, and these exports contributed about two-thirds of the country's export earnings. Trade also played an important role in the development of the manufacturing sector. In 1963 Costa Rica joined the CACM and adopted a strategy of 34 Costa Rica and Uruguay regional import substitution. Manufactured goods, which represented only 4 percent of exports in 1963, grew to 29 percent of the total in 1979. About four-fifths of these exports of manufactured goods were sold in the protected markets of the partner countries of the CACM. After growing 5.8 percent a year in the 1970s, real imports declined at an average rate of 7.3 percent a year in the early 1980s as the country's importing capacity was severely curtailed by the loss of access to foreign savings. Exports grew faster than any other component of aggregate supply and demand-the average rate for 1966-84 was 7.0 percent (figure 2-3). The growth of exports was particularly rapid in the early years of the CACM (15.3 percent a year for 1966-70). During the crisis exports declined or stagnated. One reason was that CACM trade was interrupted because of the refusal of the other governments to pay accumulated deficit balances in the Central American Clearing House, the recurrent border dosures, and measures restricting trade. Another was the effects on nontraditional products of the antiexport bias that characterized the prevailing development strategy (table 24). Through 1979 government consumption grew more rapidly than private consumption, and it declined less during the crisis (see figure 2-4). By 1982 private consumption was 81 percent of its 1979 level, whereas government consumption had only declined to 93 percent of its 1979 value. This reflected, among other things, political-economy pres- sures that increased the size of government. Unfortunately, marginal Figure 2-3. Costa Rica: Change in Real Imports and Exports, 1967-86 (trade figures measured in constant 1966 colones) Annual percentage change 40 30 - 0 -10 -20- -30 1967 1972 1977 1982 1987 Imports -- - Exports Source. Statistical appendix table A-18. Growth and Structural Transformation 35 Table 24. Costa Rica: Growth Rates of the Components of Aggregate Demand and Supply, in Constant 1966 Prices, 1966-84 (annual average percentage change) Aggregate Private Government Period supply Imports consumption consumption Investment Exports 1966-84 4.5 4.6 3.4 4.4 4.7 7.0 1966-74 7.6 9.7 5.1 6.8 9.4 12.7 1974-79 6.3 8.3 6.1 6.7 9.0 4.9 1979-84 -1.8 -6.6 -1.6 -1.4 -6.4 0.5 Source. Statistical appendix table A-18, based on Central Bank figures. social returns to public sector activities were lower than returns to displaced investment in the private sector. The greatest contraction was in real fixed investment. After growing at 9.3 percent a year during the 1970s-a growth that reflected substan- tial inflows of foreign savings, since domestic savings did not grow as fast-real fixed investment declined dramatically, during the early 1980s, at an average rate of 9.4 percent a year. As a result, by 1982 gross domestic investment stood at only 50 percent of its 1979 value. Figure 2-4. Costa Rica: Change in Real Private and Government Consumption and in Investment, 1967-86 Annual percentage change 40 30 - 20 _-'> 10 -=g 0 -10 -20 - -30- -40 1967 1972 1977 1982 1987 - Private --- Government Investment consumption consumption Source: Statistical appendix table A-18; based on Central Bank figures. 36 Costa Rica and Uruguay Mobilization of Domestic Savings Abundant access to foreign savings may in part explain Costa Rica's relatively unsuccessful effort to mobilize domestic savings. High reli- ance on foreign savings also explains a good portion of the relatively high rate of capital accumulation and the associated high rates of output growth, despite the poor performance of domestic savings. It may be argued, moreover, that substantial expenditures on education and health, although accounted as government current expenditures, were actually investment in human capital formation and contributed im- portantly to the growth record. Clearly, inflows of foreign capital, to- gether with human capital formation, made possible domestic investment well above the rate of domestic savings. The ratio of gross (fixed) domestic investment to GDP increased steadi- ly, from 18 percent for 1960-64 to 26 percent for 1975-79, at the time of the coffee boom. This reflected the growth of real investment, which was 9.1 percent a year between 1966 and 1980. During the 1960s about three-quarters of this investment effort came from the private sector, but the proportion declined to about two-thirds by the late 1970s as public sector involvement in production and investment increased (see table A-18 in statistical appendix). Domestic savings contributed a higher proportion of gross domestic investment during the 1960s than during the 1970s. In effect, the ratio of domestic savings to gross domestic investment declined from 82 percent in 1958 to 29 percent in 1980. Even during the coffee boom, the contribu- tion of domestic savings was lower than in the late 1950s and early 1960s. Foreign savings were particularly important during the first oil crisis (1974), when they financed 78 percent of gross domestic investment, and during the second oil crisis (1979-81), when they contributed two-thirds of investment. The reasons for the comparatively poor domestic savings performance have not been explored sufficiently. Relatively easy access to foreign savings may have weakened the need and willingness to make a stronger domestic effort, and the ample provision of social security services may have diminished the precautionary motives for accumulat- ing reserves. The financial policies of the nationalized banking system may have been partly responsible for the comparatively weak savings performance, which may have also reflected the rapid expansion of the middle dasses and, in particular, the growth in the number of public sector employees. These bureaucratic middle classes have been con- sumption oriented, more interested in the stability of their jobs than in entrepreneurship, and more concerned with wages than with profits. Lacking the desire to engage in productive activities, they were not attracted by potentially high returns in entrepreneurship, and the finan- cial system did not offer them sufficiently attractive rewards. Instead, they tried to copy the consumption patterns of the upper classes. Highly Growth and StructurarTransformation 37 protected by social security and with ample access to all kinds of social services (including education), they did not need to be much concerned with savings (Lizano Fait 1975). Structural Transformation Because of changes in relative factor endowments, the growth of pro- ductivity in agriculture, and the protectionist strategy of industrializa- tion, Costa Rica's economy experienced important structural changes. The contribution of agriculture declined substantially, whereas that of other sectors, with the exception of commerce, increased. Most dynamic were manufacturing, personal services, and general govermnent. The most significant transformation took place before the 1960s. In current prices, the share of agriculture in GDP declined from 41 percent in 1950 to 26 percent in 1960. This reduction was slower in the 1960s- agriculture's share stood at 23 percent of GDP in 1970-but accelerated during the 1970s. By 1980 the share of agriculture in GDP was only 18 percent. The share of manufacturing in GDP only increased from 13.4 percent in 1950 to 14.2 percent in 1960, despite efforts to promote industrializa- tion. Thus, the decline in importance of agriculture during the 1950s was the result not of the expansion of industry but rather of the growth of other activities, particularly the public sector-general government, public utilities, transport, and banking and finance. The expansion of these other sectors reflected the consolidation of the organizational framework for economic and political activity. The share of general government grew from 5 percent in 1950 to 9 percent in 1960. The share of manufacturing increased most rapidly in the 1960s during the early, easy stages of import substitution, after Costa Rica joined the CACM. Between 1960 and 1970 this share increased from 14 to around 19 percent. Once the early gains from replacing imports of final consumer goods had been obtained, however, manufacturing only managed to maintain a constant share of GDP. Again, most of the decline of agricul- ture during the 1970s was the result not of the expansion of industry but rather of an increase in the share of general government, from about 11 percent in 1970 to 15 percent in 1980 (see table A-15 in statistical appen- dix). When these shares are measured in real terms, a somewhat different picture emerges. The share of agriculture in real GDP declined slightly, from 24.4 percent in 1957 to 24.1 percent in 1970. Thus, while this share, measured in current prices, kept diminishing, it was fairly constant in real terms during the 1960s. The nominal decline was mostly caused by the deterioration of the domestic terms of trade of agriculture, particu- larly as a consequence of the adoption of the protectionist strategy of industrialization. Whereas the prices of agricultural products were 11 38 Costa Rica and Uruguay percent lower in 1971 than they had been in 1957, the prices of manufac- tured goods were 38 percent higher. The index of the terms of trade of agriculture with respect to industry declined 36 percent between 1957 and 1971, the early period of the CACM. As a result, during the 1960s in real terms there was a smaller degree of structural transformation than the nominal figures suggest. A significant reduction in the importance of agriculture, in real terms, took place during the 1970s, when the share of agriculture in GDP declined from 24 to 18 percent and the share of manufacturing increased from 19 to 22 percent. Thus, the important periods for structural trans- formation in Costa Rica were the 1950s and the 1970s, not the 1960s. Although the domestic terms of trade of agricultural products with respect to manufactured goods improved in the second part of the 1970s as a result of the coffee boom and of policies that increased the price of specific domestic crops (such as rice), the contracting share of agricul- ture also reflected the urban bias of the protectionist strategy of industrialization. The most conspicuous improvement was in the domestic terms of trade of general government, which increased two and a half times between 1957 and 1979. This explains why the share of general govern- ment in GDP in real terms declined from 12 percent in 1957 to 10 percent in 1980 whereas, when measured in current prices, it increased from 7.5 percent in 1957 to 15 percent in 1980. Although during the three decades the contribution in real terms of general government to the GDP remained fairly constant, the expenditures required were almost three times larger. The growth of this sector reflected increases in the wages paid to general-govermment employees. Moreover, the total expansion of the public sector was not fully captured in the share of general government in GDP, given the increasing importance of the autonomous institutions, where wages were comparatively higher. The deterioration of the terms of trade of agriculture, therefore, worked to the benefit of the govern- ment bureaucracy more than of industry. Evolution of the Labor Force The age profile of Costa Rica's population is changing. In 1960 people of working age accounted for 50 percent of the total population; by 1985 the proportion had increased to 60 percent. The rate of growth of the labor force accelerated from 2.8 percent (1950-63) to 3.7 percent (1963- 73) and to more than 4 percent a year in the late 1970s. This reflected the increased participation of women, which more than compensated for reductions in male participation. Between 1963 and 1980 the annual rate of growth of the female labor force was 6.8 percent, more than twice the 3.2 percent rate of growth of the male labor force. Changes in participation rates were in part the result of expanding educational opportunities at the high school and university levels. They also reflected increasing incomes, which helped to keep family members Growth and Structural Transfornation 39 in school and delayed their entry into the labor force. The increasing incomes and the expansion of social welfare and the pension system also allowed earlier retirement from the labor force. Modernization of the economy and changing attitudes toward female employment opened up employment opportunities for women, and the reduction in the number of children per family increased women's interest in taking advantage of these new options. The urban population grew more rapidly than the national popula- tion. The proportion of urban dwellers in the total population increased from 34 percent in 1950 to 49 percent in 1984. The reduced availability of uncultivated land, the increasing urban-rural wage differentials, and the decline in the importance of agriculture were reflected in growing rural-urban migration and the declining share of agriculture in employ- ment. Whereas 55 percent of employed persons worked in agriculture in 1950, only 27 percent did so in 1980. Moreover, between 1963 and 1973 agriculture generated only 11 percent of the new jobs in the economy, as against 35 percent between 1950 and 1963, and in the late 1970s absolute employment in agriculture actually declined. By 1980 the reduction in employment in agriculture was greater than the increase in employment elsewhere in the economy. This trend was reversed with the crisis. Those who could not find jobs in urban areas returned to their families in rural areas, and the share of agriculture in total employment increased (table 2-5). A decade after Costa Rica joined the CACM, the share of manufacturing in total employment had increased little-from 12 percent in 1963 to 13 percent in 1973. It then grew faster, to 17 percent in 1983. The other large employer in addition to agriculture was the personal services sector, the share of which increased from 18 percent in 1950 to 24 percent by 1980. But it was commerce that grew most rapidly as a share of employment- from 8 to 18 percent between 1950 and 1980. The growth of employment in services reflected the expansion of the public sector. The share of public sector workers in the labor force increased from 6 percent in 1950 to 20 percent in 1980, and most of the expansion took place in the autonomous institutions. The share of central government employment increased only from 7.3 percent (1973) to 8.7 percent (1980), while that of the autonomous institutions increased from 7.9 to 11.0 percent. The expansion of employment in the public sector was one of the implicit policies for preventing the rise of unemployment-particularly that of skilled and professional workers-in the presence of commercial and factor price policies that reduced the incentives to hire workers in the modern private sector. This expansion, however, helped to bring about the fiscal deficit that was at the root of the financial crisis of the 1980s. The importance of wages in total government expenditures made it politically difficult to reduce public spending, and the concentration of workers in large public institutions facilitated unionization. Almost one-half of public sector workers were unionized in the mid-1970s, compared with a national average of just above 10 percent. These public 40 Costa Rica and Uruguay Table 2-5. Costa Rica: Employment of the Labor Force, by Sector, 1950-83 (percent) Item 1950 1963 1973 1976 1978 1980 1983 Composition of employment Agriculture 54.7 49.7 38.2 34.8 30.3 27.4 28.3 Manufacturing 11.3 11.7 12.9 14.6 15.2 16.3 16.7 Construction 4.3 5.5 6.9 6.5 7.4 7.8 5.1 Basic servicesa 4.0 4.8 5.5 5.6 6.1 6.6 5.6 Commerceb 7.9 9.9 14.7 16.3 17.8 18.1 18.2 Personal 17.8 18.4 21.8 22.2 23.2 23.8 26.0 servicesC Annual growth rate (period average) Agriculture n.a. 1.8 0.9 -1.2 -1.1 -2.9 3.4 Manufacturing n.a. 2.8 4.6 8.8 8.1 5.7 3.0 Construction n.a. 4.5 6.0 2.4 13.1 4.8 -11.1 Basic servicesa n.a. 4.0 5.0 5.1 10.6 6.2 -3.0 Commerceb n.a. 4.3 7.8 8.1 10.7 3.0 2.4 Personal servicesC n.a. 2.8 5.4 5.1 8.3 3.4 5.3 Total n.a. 2.5 3.6 4.4 6.0 2.1 2.2 n.a. Not applicable. a. Includes electricity, water, gas, transport, communications, and storage. b. Indudes wholesale and retail trade, restaurants, hotels, and financial institutions. c. Includes personal services and general govermment. Source:. Cspedes and others 1983a, 1984a. sector unions have been the strongest in the country and have kept wages in the public sector above private sector wages for similar occu- pations (see table A-29 in statistical appendix). They have also opposed reduction of the size of the public sector. As a consequence of the fiscal constraint caused by the crisis, the capacity of the public sector to create employment dedined. In combi- nation with the slower growth of private sector employment, this led to increasing rates of unemployment. In 1978, thanks to the coffee boom, the rate was a comparatively low 4.5 percent, but the crisis drove it to 8.7 percent in 1981 and to 9.4 percent in 1982. Subsequently, unemployment declined slightly. When visible underemployment-which reflects the unemployment equivalent for those persons who are looking for full- time jobs but can only find part-time work-is added, the unemploy- ment rate increased from 7.5 percent of the labor force in 1977 to 16.4 percent in 1982. Prices, Exchange Rates, and Wages Before the 1970s inflation was practically unknown in Costa Rica. The annual rate of change in the wholesale price index (wPi) between 1950 Growth and Structural Transformation 41 and 1970 was 1 percent. During the same period the consumer price index grew 2 percent, and the GDP deflator increased 1.8 percent a year. Double-digit inflation did not appear until 1973, with the onset of the first oil shock. As a consequence of increased fuel costs and rapid credit expansion, the wPI increased 38 percent in 1974-the first inflationary experience for several generations of Costa Ricans. The coffee boom and the use of ample international monetary reserves, however, made it possible to reduce the rate of price increase, although inflationary pres- sures continued to accumulate during the second half of the 1970s and exploded in 1981. In 1978 and 1979 Costa Rica lost us$147 million in reserves and borrowed an additional us$564 million to avoid inflation and devaluation. In 1981 however, access to international borrowing was lost, and thewPI increased 117 percent. In 1982 it grew another 79 percent (figure 2-5). After fiscal control was regained, in 1983, and the expansion of domestic credit slowed, the rate of inflation was brought under control. The exchange rate followed a simnilar evolution, governed by the availability of international monetary reserves and access to foreign borrowing. Abundant reserves made possible a uniform, fixed exchange rate, which was modified only in 1961 and in 1974. Inflationary pressures caused by lack of fiscal discipline and rapid expansion of domestic credit, Figure 2-5. Costa Rica: Changes in Wholesale Price Index and in Total Liquidity-M2--Percentages) and Weighted Average Exchange Rate (Colones per U.S. Dollar), 1951-85 Percent Colones per dollar 120 120 100 _ i 100 80 - - 80 60 - y8\ 60 20 - ,'^_,¢ 0 20 0 ~~~~~~~~~~~~~~~~0 -201 -20 1951 1956 1961 1966 1971 1976 1981 1986 Exchange rate - - - Wholesale price index - -- -M2 Note: WPI (1978:100). Source: Banco Central de Costa Rica, Credito y Cuentas Monetarias. 42 Costa Rica and Uruguay however, led to the collapse of the exchange system in the early 1980s. Although the official rate was set at CR$8.60 per U.S. dollar, the free- market rate increased from cR$19.30 in June 1981 to CR$62.40 a year later. After June 1982 the two rates converged, and the Central Bank began a new system of slowly devaluing the col6n along a passive crawling path. As a consequence of declining output and accelerating inflation, real wages declined dramatically. The real wage in July 1982 was only 46 percent of its March 1979 level. It increased slowly afterward, but by November 1984 it was still only 67 percent of the March 1979 level. Thus, for 1978-84 real wages declined at a rate of 6.3 percent a year (see table A-30 in statistical appendix). The loss of purchasing power was propor- tionately larger-6.5 percent a year-for public sector wages than for private sector wages, which decined at a rate of 4.5 percent a year. Thus, whereas during the 1970s Costa Ricans spent more than their incomes, in the early 1980s they were forced to "endure about as much austerity as most other peoples are willing to endure" (Adler 1981). Note 1. It has been daimed that between the end of World War H and 1980 the trend rate of growth of GDP for Costa Rica was 6.8 percent a year. This rate was surpassed only by Brazil among the Latin American countries (Ground 1986, table 5). The figure confirms Costa Rica's exceptional growth record. Income Distribution and Poverty Throughout 1950-85 income inequality in Costa Rica was moderate, and substantial progress was made toward alleviating poverty and its con- sequences. The Gini coefficient of 0.44 for the distribution of household income in 1971 was at about the midpoint for developing countries as a whole, but it was low by Latin American standards (Fields 1980, p. 185). The share of household income going to the richest 20 percent was only 51 percent. Thus, the rich did not capture too large a share of income, the middle dasses enjoyed a much larger share than in most developing countries, and the proportion of the population below a given poverty line was lower than elsewhere in Latin America. Although the surveys that provide information about the distribution of household income are not strictly comparable and suffer from several deficiencies, all show that substantial improvements in the distribution of income and in the redress of poverty took place during the 1960s but that some worsening may have occurred between the early 1970s and the early 1980s (Cespedes and Jimenez 1988). Between 1961 and 1971 the economy grew at an exceptionally high rate, and social and occupational mobility led to absolute income im- provements for large segments of the population and to a more egalitar- ian distribution. By the late 1970s, however-even before the crisis began-there were signs that inequality was no longer diminishing. When the crisis finally struck, income distribution apparently became more unequal. In comparison with the mid-1970s, poverty increased sharply during 1982-85. By 1986, however, the macroeconomic stabili- zation program and efforts to alleviate the impact of the adjustments on the poorest had already reversed the negative trend, and the proportion of the poor in the total population had declined to traditional levels. The effects on income distribution of the crisis and of the associated adjust- ments have not yet been well documented. Between 1961 and 1971 households with intermediate incomes in- creased their share in the total, mainly at the expense of the share of those with the highest incomes. The result was a less concentrated distribution. 43 44 Costa Rica and Uruguay Moreover, among Latin American countries Costa Rica had the highest rate of growth of employment in modern nonagricultural activities and the highest rate of labor force absorption, despite very rapid population growth. Labor markets thus served as vehicles for distributing widely the fruits of growth. The alleviation of poverty followed a similar evolution. The propor- tion of the poor in the total population declined from approximately 50 percent in 1961 to between 20 and 25 percent in the mid-1970s. In about a decade and a half, therefore, poverty was substantially reduced. This successful performance was reversed after 1979. During the worst three years of the crisis, output per capita declined 17 percent, unemployment rates doubled, and inflation rates reached three digits. Between 1980 and 1982 real wages dedined at least 40 percent, and consumption per capita dropped 27 percent. Thus, in the middle of the crisis the proportion of poor in the population increased to about 30 percent. This increase, however, was not long-lasting. Between 1971 and 1983 real average household incomes increased much more in rural than in urban areas. The rural areas may have benefited more from the coffee boom and the programs for self- sufficiency in agricultural products that were implemented in the second half of the decade, while the urban areas were hurt more by the oil crises and the breakdown of the CACM. In the early 1980s real incomes in rural areas declined for only the poorest 10 percent of all households, whereas in urban areas all but the 10 percent richest urban households suffered declines. This suggests a generalized urban impoverishment as a conse- quence of the crisis but a less negative impact in the countryside. Not surprisingly, the direction of rural-urban migration was reversed, and the share of agriculture in GDP increased. Distribution of Household Income in the 1960s The distribution of household income changed significantly during the 1960s. The available evidence suggests that concentration-and, in par- ticular, the share of the richest 10 percent-declined during the decade. If it is assumed that the surveys for different years are comparable, in 1961 the 10 percent richest households received 46 percent of total income, but in 1971 they received only 34 percent. This large change may reflect both measurement errors and an actual improvement in the distribution. The 1971 survey was specifically designed to measure income distribution and is the most reliable source for the whole period; the 1961 estimates are much weaker.' The share of urban, as compared with rural, households may have been overestimated in 1961, and such a bias would increase the degree of concentration shown by the distri- bution. What seems more plausible, however, is that income distribution was indeed more concentrated in 1961 than ten years later but that the extent of the implied improvement was less than these figures suggest. Income Distribution and Poverty 45 As one would expect, in 1961 inequality was already comparatively moderate in Costa Rica. As table 3-1 shows, while the share of the poorest 10 percent remained unchanged, in 1971 the intermediate households (those in the fifth through the ninth deciles) accounted for 51 percent rather than 40 percent of total household income. During the 1960s the middle portion of the distribution was consider- ably strengthened. As shown in table 3-2, the difference between average household income at the top 10 percent of the distribution and at the bottom 10 percent diminished. Households with intermediate incomes increased their participation mainly at the expense of those with the highest and, to a much lesser degree, of those with the lowest incomes. The result was a less concentrated distribution of household income in 1971, as reflected in the reduction of the Gini coefficient from 0.52 to 0.44, as well as in the Lorenz curves for 1961 and 1971, shown in figure 3-1. Distribution, Poverty, and Structural Transformation In addition to improvements in income distribution,the 1960s saw a substantial reduction in poverty. The proportion of families below an absolute poverty line of 250 constant colones (about us$50) a month fell from about 20 to 10 percent between the early 1960s and the early 1970s. If the poverty line is drawn at 500 constant colones (about us$100), the decline is even more marked, from approximately 65 to 30 percent. Thus, absolute poverty was alleviated, and alleviated rapidly (Fields 1980, p. 189; Pifiera 1978). Table 3-1. Costa Rica: Distribution of Monthly Household Income, 1961 and 1971 Household characteristic 1961 1971 Number of households 223,621 313,144 Household size (average number of persons) 5.8 5.6 Household income share Top 10 percent 0.460 0.344 Middle (5th-9th) deciles 0.402 0.509 Bottom 10 percent 0.026 0.021 Bottom 40 percent 0.138 0.147 Household income (1971 colones) Average 855 1,175 Bottom 10 percent 222 248 Top 10 percent 3,933 4,104 Top 10/bottom 10 percent 17.7 16.5 Top 10 percent/average 4.6 3.5 Bottom 10 percent/average 0.260 0.211 Source: Pifiera 1979; Cespedes 1973. 46 Costa Rica and Uruguay Table 3-2. Costa Rica: Changes in the Distribution of Monthly Household Income, 1961-71 Share of income, Share of income, Increase in real Households, by decile 1961 1971 income, 1961-71 Poorest 2.6 2.1 11.6 2nd 3.4 3.3 32.1 3rd 3.8 4.2 50.8 4th 4.0 5.1 76.3 5th 4.4 6.2 94.0 6th 5.5 7.5 91.2 7th 7.1 9.3 78.7 8th 9.3 11.7 73.3 9th 14.0 16.2 58.3 Richest 46.0 34.4 4.3 Source. Cspedes 1973; Economic Commission for Latin America 1970. According to Chenery and others (1974, p. 12), 10.8 percent of the population of Latin America had incomes below us$50 a year in 1969. Figures for seventeen countries ranged from a low of 2.3 percent of the population, for Costa Rica, to a high of 37.0 percent. Only in Uruguay was the proportion (2.5 percent) close to Costa Rica's. When the poverty line was raised to us$75, the proportion of the Latin American popula- tion below that threshold increased to 17.4 percent, ranging between 5.5 percent (Uruguay) and 58.5 percent. Costa Rica ranked second, with only 8.5 percent of the population below this poverty line. According to Fields (1980, p. 194), the poor benefit from economic growth by becoming employed in higher-income activities in the mod- em sector. There is evidence of considerable enlargement of the modem sector in Costa Rica. Most of the poor still live in rural areas, but between the early 1960s and the early 1970s, when the labor force grew by 48 percent, the number of farmers and cattlemen grew by only 11 percent. The share of the labor force employed in agriculture fell from 50 to 38 percent during this period. The workers released from agriculture did not become unemployed or underemployed but went into better-paying sectors of the economy (Fields 1988, p.1495). In effect, the highest-paying sectors were those that exhibited the highest rates of increase in employ- ment. The number of professional and technical workers increased by 126 percent, the number of managers by 88 percent, and the number of office staff by 62 percent. All nonfarming occupational groups showed above-average gains in employment. "Because these are better-paying occupations, this provides one piece of evidence that the Costa Rican economy grew by expanding the share of modem sector workers in total employment, the essence of modem sector enlargement growth" (Fields 1980, p. 194). During the 1950s and 1960s labor productivity in agriculture increased substantially. The contribution of agriculture to real GDP fell only Income Distribution and Poverty 47 Figure 3-1. Costa Rica: Lorenz Curves, 1961 and 1971 Percentage of income 90 - 80 - 70 - q / .~~~~~~~~~~~~~~~~~~~~~~~ 60 - 1 50 - 40 - 1971 30 - 20--- ,- 10 0 - 10 20 30 40 50 60 70 80 90 100 Percentage of households, by income level Source: CUspedes 1973. slightly, from 24.4 percent in 1957 to 24.1 percent in 1970, but the proportion of the labor force in agriculture declined from 54.7 percent in 1950 to 38.2 percent in 1973. This mainly reflected increased yields. During the 1960s Costa Rica emphasized investments in infrastructure and agricultural extension, and although participation in the cACM promoted industrialization, there was a rapid expansion and diversifi- cation of agricultural exports. Coffee, bananas, sugar, and beef exports grew at rates that were among the highest for the postwar period. During 1965-69 the volume of exports grew by 9 percent a year for coffee, 22 percent for bananas, 12 percent for beef, 13 percent for sugar, and 25 percent for other exports, both agricultural and nonagricultural (Cespedes, Di Mare, and Jimenez 1985, p. 175). 48 Costa Rica and Uruguay Among Latin American countries Costa Rica had the highest rate of growth of employment in modem nonagricultural activities. During 1950-80 such employment increased, on average, 4.1 percent a year for Latin America but 5.5 percent a year for Costa Rica. For 1950-70 these rates were 3.7 percent for Latin America and 5.1 percent for Costa Rica. Thus, whereas in 1950 the formal nonagricultural labor force was 29.7 percent of the total in Costa Rica and 30.6 percent in Latin America, by 1980 this proportion had increased to 54.2 percent in Costa Rica but only to 47.7 percent in Latin America. The two countries that had the greatest reduction in underemployment and in the total subuflization of the labor force were Costa Rica and Venezuela-the countries that, at the same time, experienced the largest increases in their aggregate and urban labor forces. In Costa Rica the labor force increased at an annual rate of 3.4 percent during 1950-80, compared with 2.5 percent for Latin America (Garcia and Tockman 1985, pp. 49-65). The share of wage earners in total employment increased from 66 to 74 percent, with equal declines in the proportions of nonremunerated family workers and of the self-employed. While the number of workers with no education declined from 15 to 10 percent of the labor force between 1963 and 1973, the number of those with four to six years of education increased by 88 percent, the number of secondary school graduates by 166 percent, and the number of university graduates by 185 percent. "In short, the Costa Rican economy grew, creating more modern sector job opportunities and educating the skilled labor force needed" (Fields 1980, p. 194). The share of labor in factor payments increased from 57 percent in 1960 to 63 percent in 1971 and to 68 percent in 1980. There was a dose relationship in the 1960s between the steady increase in the share of labor in factor payments and the increase in the share of household income accruing to the middle groups of the distribution-the deciles that induded most wage earners. Since this improvement took place during a period when the government did not have an explicit wage policy, it was mainly the result of the general growth of the economy, the process of modernization and integration of the labor market, and the structural transformation that occurred during the period (Lederman and others 1979). Distribution of Household Income in the 1970s Although problems of data comparability are more acute for this period, the evidence suggests that concentration actually increased during the 1970s. The share of the richest 60 percent of households improved, and the position of the poorest 40 percent deteriorated (table 3-3). These changes were not as pronounced, however, as those experienced during the 1960s. Income Distribution and Poverty 49 Table 3-3. Costa Rica: Distribution of Monthly Household Income, 1971 and 1977 Household characteristic 1971 1977 Number of households 312,830 411,530 Household size (number of persons) 5.7 5.0 Household income share (percent) Top 10 percent 34.4 37.4 Top 20 percent 50.6 54.7 Middle (5th-9th deciles) 50.9 51.7 Bottom 40 percent 14.7 10.9 Bottom 10 percent 2.1 0.7 Source. Cespedes 1973,1979. The share of income going to the 10 percent richest households in- creased slightly, from 34.4 percent in 1971 to 37.4 percent in 1977, while the share of the poorest 10 percent declined from 2.1 to 0.7 percent. This result may reflect measurement errors, as the 1977 survey did not report the imputed rents from housing and farm self-consumption, which are important for low-income households. Between 1973 and 1980,180,600 new jobs were created. Of these, 47,800 were in the industrial sector and 59,300 in the public sector, mostly in the growing autonomous institutions. All were relatively well-paying jobs. In the meantime, agriculture, the lowest-paying sector, lost 9,100 jobs. Unemployment and underemployment declined substantially through the end of the decade. Real wages fell by 13 percent during 1972-75 as a result of the oil shock and inflation, but they grew by 30 percent during the rest of the decade in response to the coffee boom (Fields 1988, p.1998). Rural and Urban Household Income Distribution in the 1970s In the early 1970s there was a more egalitarian distribution of income among rural than among urban households. The Gini coefficient was 0.43 for urban households but 0.37 for rural households. For households in the San Jose Metropolitan Area, which comprised 24 percent of the total population, concentration was even greater; the Gini coefficient was 0.44 for this area, whereas for the other urban areas it was 0.39 (table 34). Household income in the San Jos6 Metropolitan Area was 2.3 times the rural average. For the poorest 10 percent of households, income was only 1.8 times greater than the comparable rural figure; for the richest 10 percent it was 2.9 times greater. Households with monthly incomes of cR$200 or less (us$30) accounted for 37 percent of urban households and 77 percent of rural households. Per capita income was cR$318 (us$50) a month in urban areas and less than half of that-CR$138, or US$22-in rural areas (C6spedes 1979). 50 Costa Rica and Uruguay Table 3-4. Costa Rica: Distribution of Monthly Household Income in Urban and Rural Areas, 1971 Urban San Jose Households, Metropolitan by decile a National Total Area Other urban Rural Poorest 2.1 2.1 2.1 2.3 2.8 2nd 3.3 3.4 3.2 3.9 4.1 3rd 4.2 4.3 4.2 4.8 5.1 4th 5.1 5.3 5.2 5.7 6.1 5th 6.2 6.4 6.4 6.6 7.2 6th 7.5 7.8 7.6 8.2 8.4 7th 9.3 9.5 9.4 9.6 10.1 8th 11.7 11.9 11.6 12.5 12.3 9th 16.2 16.4 15.8 17.2 15.8 Richest 34.4 32.9 34.7 29.1 28.2 Bottom 20 percent 5.4 5.5 5.3 6.2 6.9 Next 30 percent 15.5 16.0 15.8 17.1 18.4 Next 30 percent 28.5 29.2 28.6 30.3 30.8 Top 20 percent 50.6 49.3 50.5 46.3 44.0 Gini coefficient 0.44 0.43 0.44 0.39 0.37 a. Ranked according to total household income, independently for each region. Source Cespedes 1973,1979. Distribution of Household Income in the 1980s A comparison of household income distributions for 1971 and 1983 reveals an increasing inequality; the Gini coefficient rose from 0.44 to 0.47. The change was more pronounced in urban areas, particularly in the San Jos6 Metropolitan Area. The Gini coefficient increased from 0.44 to 0.49 in that area, from 0.39 to 0.44 in other urban areas, and from 0.37 to 0.40 in the rural areas (table 3-5). The increased concentration seems to have been particularly associated with the larger share of the 10 percent richest households in the urban areas (Trejos and Elizalde 1985). Household income for the poorest 10 percent was less than 15 percent of the national average in 1983, as against 21 percent in 1971 and 26 percent in 1961. Household income for the richest 10 percent was 3.7 times the national average and almost 25 times the income of the 10 percent poorest households. (It had been 16.5 times the income of the poorest 10 percent in 1971.) Whereas 66 percent of the households in the bottom 10 percent of the distribution lived in rural areas, only 46 percent of all households were rural, and only 12 percent of those in the top 10 percent lived in the countryside. The San Jos6 Metropolitan Area was the place of residence for 19 percent of the households in the bottom 10 percent, for 31 percent of all households, and for 55 percent of those in the top 10 percent. Income Distribution and Poverty 51 Table 3-5. Costa Rica: Distribution of Monthly Household Income in Urban and Rural Areas, 1983 (percentage of income) San Jos6 Percentage of Metropolitan Other householdsa Total Urban Area urban Rural 10.0 1.5 1.5 1.4 1.6 1.9 10.0 3.0 3.0 2.8 3.4 3.6 10.0 4.1 4.1 4.0 4.4 4.7 10.0 5.2 5.0 4.8 5.3 5.9 10.0 6.3 6.1 5.6 6.7 7.3 10.0 7.5 7.5 6.9 8.2 8.7 10.0 9.2 9.0 8.6 9.5 10.3 10.0 11.4 11.4 11.1 11.9 12.2 10.0 15.1 15.3 15.7 15.0 15.9 10.0 36.7 37.1 39.1 34.0 29.5 Bottom 20 percent 4.5 4.5 4.2 5.0 5.5 Next 30 peTcent 15.6 15.2 14.4 16.4 17.9 Next 30 percent 28.1 27.9 26.6 29.6 31.2 Top 20 percent 51.8 52.4 54.8 49.0 45.4 Gini coefficient 0.47 0.47 0.49 0.44 0.40 a. Households ranked according to total household income, independently for each region. Source* Trejos and Elizalde 1985. Sixteen percent of the poorest, 24 percent of the total, and 33 percent of the richest lived in urban areas outside the San Jos6 Metropolitan Area. It appears that households in rural areas were better able to adapt to the crisis. The domestic terms of trade of agriculture improved, the agricultural-nonagricultural wage differential decreased, and rural un- employment rose less than did urban unemployment. In 1981 and 1982 open unemployment remained stable in rural areas. Thus, the rapid increase in unemployment took place entirely in the urban centers, particularly in the San Jose Metropolitan Area. Nonagricultural wages were 65 percent above agricultural wages in 1979 and only 54 percent higher in 1982. The terms of trade of agriculture increased from 98.9 in 1980 to 122.0 in 1982. Urban areas, in contrast, experienced a generalized impoverishment, except for the households at the top of the distribution. The reduction in real income was particu- larly acute for urban households in the bottom 20 percent of the distri- bution, especially in the San Jose Metropolitan Area. The concentration of most social programs for the indigent in urban areas, however, has helped to relieve the distress there. The crisis also led to increased poverty. Open unemployment more than doubled, from 3.0 percent in November 1979 to 8.7 percent in November 1981. The corresponding figures for March were 4.6 percent 52 Costa Rica and Uruguay in 1980 and 9.5 percent in 1982. Whereas in 1979 job losers accounted for only 66 percent of unemployment, by 1982 this proportion was 86 percent. Moreover, between 1979 and 1982 real wages fell by 40 percent. "It is a tribute to the democratic tradition of Costa Rica that the political system remained intact after so severe and widespread an economic deterioration among the masses" (Fields 1988, p. 1500). The Components of Earntings Inequality Bourguignon's (1986, p. 22) decomposition analysis of earnings inequal- ity by sector of employment suggests interesting conclusions. A compar- ison of the distribution of earnings according to the 1963 and the 1973 censuses showed an equalizing trend over the period, whereas a reversal of this trend was observed by the early 1980s. The part of total inequality explained by intersectoral differences in mean earnings decreased from 20 percent in 1973, as measured by the Theil coefficient, to only 10 percent by 1980. The main reason was the reduction in the differentials between mean earnings, when agriculture was compared with the rest of the economy. Inequality between these two sectors, as measured by the Theil coefficient, fell from 0.046 in 1973 to 0.020 in 1985. Occupational status did not explain much of the total inequality. For 1980 differences in mean earnings among wage earners, the self- employed, and employers explained 8 percent of total inequality, as measured by the Theil coefficient. Isolating the govermnent from the rest of the service sector led to a significant gain in explanatory power. The public sector employed almost 20 percent of the labor force, at wages 50 percent above the national average. This contributed substantially to the overall dispersion of earnings. The difference was largely attributable to the educational levels of public sector employees but also reflected the monopoly power of public sector labor unions and the fact that govern- ment agencies were not profit maximizers but conflict mininiizers. Bourguignon (1986, p. 25) ran regressions on eighty-four groups in the labor force, classified by sector of economic activity and occupational status. Education was an important determinant of overall income in- equality. It accounted for approximately one-half of the variance among groups, which itself represented a little more than one-third of total inequality, and it explained a substantial part of the inequality within those groups. In terms of the coefficient of variation, education explained a little more than 50 percent of the average inequality within sector of activity and occupational group. Such a contribution is large in compar- ison with other countries, especially taking into account the high average educational level of Costa Ricans, by developing country standards. The influence of education may also reflect low levels of inequality in the distribution of nonlabor factors of production. Baldares (1985) reported education as the most important determinant of inequality of earnings among Costa Rican workers. Income Distribution and Poverty 53 At least 75 percent of the labor force was salaried and was covered by the social security system-an exceptional proportion for a developing country. Land distribution did not have a major effect on income in- equality, but there was a pronounced income difference between land- less agricultural workers and owners of land. The data indicate a relatively high concentration of landownership, but this inequality was not reflected in the distribution of income-perhaps because landed property rights do not accurately represent income potentials. The con- centration of land was particularly important in banana production, but in this case the largest part of the profit was taken by foreign companies and was not reflected in the domestic earnings distribution. The distri- bution of valuable land, such as coffee plots, was only moderately concentrated. The substantial difference between workers and employers in the nonagricultural sector, after controlling for education, may have re- flected the distribution of capital in this sector. Agricultural workers earned additional income from the cultivation of small parcels of land, which improved the rural distribution. Education did not entirely ex- plain the higher earnings of the service sector, which is dominated by the government. This suggests the possibility of noncompetitive behav- ior in this portion of the labor market. All in all, Bourguignon concluded that the distribution of earnings in Costa Rica resembled that in high- income countries. Given the atypically high proportion of wage earners and salaried workers, the main determinant of inequality seemed to be the distribution of skills within the labor force. Other factors of produc- tion had a much smaller effect, partly because only a minor proportion of income originated in the agricultural sector. The reduction of the proportion of the labor force in this sector over the period was a major equalizing factor. Another important characteristic was the great im- portance of the public sector (Bourguignon 1986, p. 27). The Effect of Taxation and Public Expenditures Herschell (1977) presented tentative estimates of the effect of taxation on the 1974 income distribution. His main finding was that whereas the tax burden was strongly regressive, the incidence of public expenditures was strongly progressive. Low-income groups, with monthly household incomes below CR$1,750, accounted for 52 percent of all households and received 21 percent of total income. Their share of total tax payments was larger than their share of income, but so was their benefit from public expenditures; their benefits (55 percent of public expenditures) were about twice as large as their taxes (27 percent of total tax payments). This had a favorable redistributive impact. Middle-income households, with monthly incomes between CR$1,750 and CR$5,000, made up 39 percent of the total number and received 43 percent of total income. Although their share of tax payments (41 per- 54 Costa Rica and Uruguay cent) was similar to their share in income, their share in the benefits from public expenditures (29 percent) was much lower. High-income house- holds (monthly incomes above cR$5,000) represented 8 percent of the total number but received 36 percent of total income. They paid taxes in a smaller proportion (32 percent) than their share in income and received an even smaller proportion (17 percent) of the benefits from public expenditures (Herschell 1977). Whereas tax payments represented 32 percent of household income for the low-income groups, the benefits from public expenditures repre- sented 74 percent. Taxes of middle-income households represented 24 percent of household income and benefits represented 19 percent; for high-income households the corresponding figures were 22 percent for taxes and 14 percent for benefits. Tax payments were regressive, but benefits from public expenditures were progressive. After adjustment for taxes and public expenditures, the total income of the low-income groups increased by 43 percent, whereas total income declined by 4.5 percent for middle-income groups and by 8.3 percent for high-income groups. This meant that the share in total income of low- income groups increased from 21 to 29 percent, while the share of middle-income groups declined from 43 to 39 percent and the share of high-income groups declined from 36 to 32 percent. Herschell (1977) conduded that income redistribution efforts by the state have made possible a transfer from high-income groups to low-income groups. Standards of Living and Access to Publicly Provided Services The evolution of most socioeconomic indicators during 1950-85 con- firms the trend toward increased equality in income distribution and substantial redress of poverty. Most salient among the indicators in table 3-6 is the reduction in infant mortality rates from 67 per 1,000 live births in 1970 to 21 per 1,000 a decade later. This gain was the result of better control of infections, through sanitation, immunization, and other im- provements in child care, prenatal care, and family planning services (Rosero Bixby 1985, p. 129). The table reports equally dramatic im- provements in access to water and sewerage, electricity, telephones, and other determinants of the quality of life. Since the early days of the republic, education has had a high priority. In 1869 education was dedared free of charge, compulsory, and a main responsibility of the state. Free education was expanded to the secondary level in 1949. The illiteracy rate was reduced from 69 percent of the population ten years old and older in 1892 to 30 percent in 1912-a proportion that is low for a developing country even by today's stan- dards. The illiteracy rate declined to 21 percent in 1950 and to 10 percent in 1973 (table 3-7). Differences in literacy between the sexes have been practically nonexistent, and the gap between the rural and urban popu- lations was rapidly dosed. Enrollment in primary school is universal, Income Distribution and Poverty 55 Table 3-6. Costa Rica: Social and Economic Indicators, 1950-80 Indicator 1950 1960 1970 1980 Population with water supply (percent) 53 65 75 84 Population with sewage disposal (percent) 48 69 86 93 Households with electricity (percent) 40 51 65 79 Households with a radio (percent) - 47 70 95 Households with a television (percent) 0 0 20 79 Telephones (per 1,000 population) 11 12 23 70 Automobiles (per 1,000 population) 9 22 43 63 Life expectancy (years) 56 63 65 73 Infant mortality rate (per 1,000 live births) 95 80 67 21 Physicians (per 1,000 population) 3.1 2.8 5.6 7.8 Births in hospital (percent) 20 49 70 91 Population with health insurance (percent) 8 15 39 79 -Not available. Source. Rosero Bixby 1985. Table 3-7. Costa Rica: Education Indicators, 1950-73 Indicator 1950 1963 1973 Illiteracy rate Total population 10 years old and older 21.2 14.3 10.2 Males 20.9 14.1 10.2 Females 21.6 14.5 10.3 Urban 8.1 5.2 4.4 Rural 28.5 19.7 14.7 Urban male 6.5 4.0 3.7 Urban female 9.4 6.2 5.1 Rural male 27.8 19.2 14.6 Rural female 29.2 20.1 14.8 Women 15-59 years of age in school 7.9 19.9 36.4 Women 20-24 years of age in school 1.5 5.2 14.9 Source. Gonzalez-Vega 1985. 56 Costa Rica and Uruguay with no significant differences between the sexes. The enrollment rate for secondary school (number enrolled as a proportion of the relevant age group) rose from 21 percent in 1960 to 48 percent in 1980, and the enrollment rate for higher education increased from 5 to 26 percent during the same period. Trejos and Elizalde (1985) attempted to estimate the degree of access of various groups of the population in 1983 to several publicly provided services: education, health and social security, water and electricity, home loans, and food and nutrition. Education has been the most im- portant component of expenditures on social programs. The result is a high degree of access by all segments of the population (see table 3-8). Of children 7 to 12 years old, 92 percent were attending school in 1983, as were 59 percent of those 13 to 17 years old and 23 percent of those 18 to 24 years old. More than 95 percent of primary and high school students and at least 90 percent of those at the preprimary and college levels were registered in public institutions. Access to and demand for education were lower in rural areas: of children 7 to 12 years old, 88 percent were in school; among those 13 to 17 years old, 59 percent were attending high school; and of those 18 to 24 years old, only 10 percent were in college. Evidence was found for a regressive effect at the university level: 72 percent of the students came from the richest 40 percent of the house- holds, and 42 percent were from the 20 percent richest households. Access to health services through social security programs was high in 1983. On average, 75 percent of the population had access to these services, without important rural-urban differences. Those in the bottom 20 percent of the distribution, however, had less access than the rest of the population. Access to hospitalization did not show significant differences. Home ownership is important in Costa Rica: 58 percent of urban and 54 percent of rural households owned their homes in 1983. Ownership was common only among middle- and upper-income groups in urban Table 3-8. Costa Rica: Distribution of Those with Access to Education, Health, and Social Security, by Household Income Group, 1983 (percentage of those with access) Education Socil Income class Basic Middle University Health security Bottom 20 percent 34.7 18.6 4.1 30.0 9.3 Next 20 percent 27.3 26.7 13.3 18.9 9.5 Next 20 percent 19.1 20.8 10.6 21.0 15.7 Next 20 percent 11.7 22.5 30.3 16.9 33.1 Top 20 percent 7.2 11.4 41.7 13.2 32.4 Total 100.0 100.0 100.0 100.0 100.0 Source: Trejos and Elizalde 1985. Income Distribution and Poverty 57 areas but was widely distributed among income classes in rural areas. Whereas 87 percent of home owners in urban areas received credit to buy their homes, this was the case for only 45 percent of rural home owners. Those with access to home loans in urban areas belonged to the middle and upper dasses. Public sector financing was available to 81 percent of the borrowers in the metropolitan area, whereas elsewhere private sources of financing were most important. Thus, the subsidy implicit in state financing of housing was concentrated in the middle- and upper-income groups in urban areas. Subsidized housing programs have had a regressive effect on income distribution. Access to water and electricity was widespread and homogeneous. About 99 percent of urban households and 81 percent of rural house- holds had access to potable water, which was provided by the public sector in 100 percent of the cases in urban areas and in 60 percent of the cases in rural areas. Access to electricity was universal in urban areas; electricity reached 78 percent of the rural households and 90 percent of all households. Access to these services was similar and was indepen- dent of income level. Food and nutrition were provided by the public sector through school lunches and through distribution of food to households. School lunches benefited the poorest, in both urban and rural areas; most of the benefi- ciaries were from rural areas. These food programs were perhaps the most progressive of the social programs, but although they were de- signed for the poorest, members of more affluent households also bene- fited from them. Alleviation of Poverty About 1961, close to 50 percent of the population was thought to live in poverty (Pifiera 1979). This proportion had declined to between 20 and 25 percent by the mid-1970s (Cespedes and others 1977; Fields 1980; Pifiera 1979; and Trejos 1983). Over a decade and a half there was a substantial reduction in poverty. In 1982, during the crisis, poverty increased to touch about 30 percent of the population (Altimir 1984), but by 1986 this proportion had declined to 25 percent. Poverty has been more prevalent among rural than among urban households. The proportions reported by several studies undertaken between 1967 and 1977 were about 32-34 percent for rural households and 14-17 percent for urban households. By 1982 urban poverty was estimated at 25 percent of the population (Pollack 1987). The crisis had a disproportionately negative effect on the urban population. A study by the Academia de Centroam6rica measured poverty on the basis of the 1973 population, housing, and agricultural censuses. The proportion of the poor in the urban population was less than that in the rural population. Three of four of the poor lived in rural areas. Among 58 Costa Rica and Uruguay the rural poor, the share of poverty among nonfarning households was twice that for farming households (C6spedes and others 1977). Whereas urban poverty appears to be dosely associated with such characteristics of the household as education, labor supply, illness, and old age, rural poverty also reflects the relationship between the house- hold and the environmnent. Lack of infrastructure and communications, limited markets, poor land quality, and other deficiencies of the environ- ment led to pockets of generalized poverty. The dispersion of the population characteristic of poor districts means that the provision of infrastructure and of public sector services is expensive, and transaction costs reduce the net returns to producers. Distances to any important urban center are substantial. Markets are small, and little division of labor is possible. Most of these poor districts are areas of recent colonization. In the 1980s one-third of the number of farms and 45 percent of the area of farms in Costa Rica were located in these poor districts. Average farm size was larger than elsewhere: 40 hectares in the poor districts as against 19 hectares in the nonpoor districts and 30 hectares for the country as a whole. Only 4.3 percent of the farm area was devoted to permanent crops in the poor districts, as against 10.5 percent in the nonpoor areas. In the poor districts only 64 percent of the value of agricultural production was related to export crops, whereas in nonpoor districts 83 percent of output was export crops. With a few exceptions, the areas devoted to export crop production were not classified as poor. These observations bear out the strong connection that seems to exist between the alleviation of poverty and production for the international market. Note 1. The methodology for estimating the 1961 distribution is described in Eco- nomic Comnission for Latin America (1987). The methodology for the 1971 survey is described in Cespedes (1973). The Development of Costa Rica before 1950 By 1950 Costa Rica presented an unusual constellation of initial condi- tions, particularly in comparison with other developing countries of similar size and resource endowment, such as those in Central America and the Caribbean. Prominent among these conditions were Costa Rica's social structure, political system, and strong concern for equity. These features were key determinants of the growth-with-equity outcomes of the 1950-85 period. They gave shape and color to the ideologies and expectations of the various segments of society. They both created opportunities for and imposed limits on the attempts by different groups to influence the adoption and implementation of policies. These characteristics, already well established by 1950, were the result of long historical processes with deep roots in the colonial period and in the early decades after independence from Spain in 1821. The Colonial Legacy of Equality in Poverty The roots of Costa Rica's political stability and democratic traditions go back to colonial times, when the isolated farmers of the Central Valley- lacking Indians to enserf or a surplus of precious metals to export- worked their own land (Wesson 1984, p. 213). Almost all sources agree that throughout the colonial period social divisions in Costa Rica were minimal. This feature has been associated with the crushing poverty of colonial society. When the Spaniards arrived, there may have been between 17,000 and 80,000 Indians (Stone 1976, p. 33; MacLeod 1973, p. 332). The Indian population dropped sharply during the early years of colonization as a result of epidemics and relocation. The colony's isolation from the outside world added to the problem of population decline. The Central Valley was cut off from the Atlantic and Pacific oceans by high moun- tains, and there were few roads and no ports. The lack of gold, a small and shrinking Indian population, and geographic isolation led to the development of what Seligson calls a strong yeomanry. 59 60 Costa Rica and Uruguay Given the realities of poverty, the colonists turned their attention to farming. Each new settler found himself a plot of land and began to work it. The colonists did not settle in villages. Rather, they preferred to set up homesteads which were isolated from the other settlers. Each homestead gave birth to a yeoman farmer, independent, self-sufficient, and poor. (Seligson 1980, p. 6.) As a result of a dispersed pattern of colonization and limited trade with the outside world, farms developed as self-sufficient units. "In such isolation the colonial economy completely disintegrated, and it became in the fullest sense of the term a subsistence economy" (Saenz Pacheco 1969, p. 16). During several periods food was acutely scarce because of low-yield technologies, the small scale of operation of the farm house- holds, a limited division of labor, and high risks. Production was at the mercy of natural events (Gonzalez Garcia 1984, p. 143). Little trade, little division of labor, and low productivity also characterized the Indian economy, which did not generate a surplus beyond the Indians' own subsistence for feeding the Spaniards. By 1720 the Spanish population was liffle more than 3,000, and the Indians in the Central Valley numbered fewer than 1,000 (MacLeod 1973, p. 332). Since African slaves were expensive and there was no activity profitable enough to justify their use, there were fewer than 200 of them in the colony. Even the black slaves who worked in the cacao plantations on the Atlantic coast had to be granted special incentives: they were scarce, expensive, and relatively independent, isolated in a dangerous area, subject to pirate attacks, and distant from their absentee landlords in the capital, Cartago (Churnside 1985, p. 80). Because of the shortage of Indians, land was not very valuable. The small farm was the dominant form of land tenure; the settlers had no incentive to acquire more land than they could cultivate, as that would have subjected them to taxation. Traditional Spanish law recognized the right of peaceful, continuing possession as a means of gaining title to a parcel of land (Salas Marrero and Barahona Israel 1973, p. 200). Land was viewed as essentially limitless in supply, while the demand for it made by the tiny colonial population was almost nonexistent. As a result, there was simply no market for agricultural land, and posses- sion was denied to no one. (Seligson 1980, p. 8.) In summary, the scarcity of labor, the abundance of land, and the limited opportunities for trade led to the prevalence of family units, to self-sufficiency, to independence, and to the dispersion of economic decisionmaking, despite mercantilistic regulations. Because of the dom- inance of the farm household, the society of 1600-1800 has been de- scribed as a rural democracy, with no class distinctions of any kind (Monge Alfaro 1980, p. 169). The Development of Costa Rica before 1950 61 Costa Rican society thus developed differently from that in neighbor- ing countries. Not even the colonial authorities in Cartago were immune to poverty. In 1719 the governor reported that he had to do his own sowing and reaping and that, with no produce markets of any kind, it was not possible to buy anything. The little trade that did exist was conducted under the barter system, and cacao beans were the only accepted medium of exchange (Jones 1935, p. 56; Facio 1975, p. 47). In this generalized poverty, patterns of inequality existed only in miniature. The Impact of Coffee There has been much controversy about the effect of the introduction of coffee cultivation in Costa Rica in the early nineteenth century. For some authors, particularly those with a Marxist perspective, the introduction of coffee destroyed the egalitarian society of the colonial period. In their view coffee represented the first permanent capitalist mode of produc- tion and led to the concentration of landholdings, to the accumulation of surpluses and political power, and to social distinctions and the formation of a rural proletariat. In the 1940s this thesis was adopted by the ideologists of the new social democratic forces that brought about the formation of the Partido Liberaci6n Nacional (PLN) and challenged the political power of the coffee exporters (Facio 1975). The new forces justified their political platform as a return to the roots of the egalitarian colonial society, which had presumably been destroyed by coffee. Others have maintained that the economic circumstances surround- ing coffee cultivation had helped to consolidate the democratic institu- tions that characterized Costa Rica by 1950. In particular, coffee's technological requirement of labor intensity and its high profitability even on small plots of land were compatible with and consolidated the existing pattern of small landholdings. Having failed to find gold, the Spanish in the early days turned their attention to producing a cash crop with a high return that did not require large numbers of workers. Cacao was planted in the Atlantic region in the seventeenth century with the help of a few black slaves and Indians. The colonial government sought to stimulate cacao production by grant- ing land and dispensation from taxes to anybody who would start a plantation (Lindo Bennett 1970, p. 13). Cultivation reached a peak in the eighteenth century, with 200,000 trees planted, but constant pirate and Indian raids discouraged production. Eventually cacao plantations in Nicaragua began to produce large amounts at a lower price, and by 1790 the Costa Rican effort was in full decline. Tobacco represented another attempt to generate a surplus. Although the crop was first exported in 1638, it was difficult to increase production because of its labor intensity. Moreover, the Costa Rican leaf was of low quality. The lion's share of tobacco profits went to the Crown. In 1787 Spain granted Costa Rica a monopoly for tobacco cultivation, but in 1792 62 Costa Rica and Uruguay the Audiencia in Guatemala removed Costa Rica's tobacco export rights (Fallas 1972, p. 61). Costa Rica was the first Central American country to have a flourish- ing coffee production. Guatemala and El Salvador-more developed at the time than Costa Rica-did not begin growing coffee until fifty years later. Coffee production grew rapidly from the early days after indepen- dence from Spain in 1821 and became the engine of the country's economic growth. The timing of its introduction partly explains this positive effect. At independence, most of the country was uninhabited and its land unexploited. A population of about 50,000 people, concen- trated in the Central Valley, occupied about 2 percent of the territory (Hall 1982, p. 14). Coffee exports, which began only after independence, were not limited by mercantilist regulations or subject to heavy taxation. The efforts of the new nation were immediately devoted to creating a physical infrastructure and an institutional organization for promoting the new crop while preserving the existing social structure. By the middle of the nineteenth century coffee production had lifted the coun- try well above the misery of its colonial poverty, and it eventually allowed Costa Rica much greater economic prosperity than elsewhere in the isthmus. Timing and the crop's technological characteristics made it possible to build the country's sociopolitical system on the productive structure of the new crop. Coffee and Economic Development Before 1820 coffee production expanded slowly. Its cultivation was an unknown skill, no transport system existed, and there was no assured means of marketing the crop. Lack of capital made the required long- term investment difficult in an economy plagued by risk (Seligson 1980, p.14). In 1821 the San Jos6 town council offered free state land and coffee seedlings to anyone who agreed to plant coffee. This was the first in a long chain of steps taken by local authorities to stimulate coffee produc- tion (Soley Guell 1947, p. 40). The Central Valley turned out to be particularly favorable for coffee growing, and no other crop could compete with coffee in potential profitability (Hall 1982, p. 35). There was, however, no domestic market for the product, and the infrastructure required for exports was almost nonexistent. Few Costa Ricans had any experience with commercial agriculture, few had any foreign contacts, and almost none had credit. Coffee was therefore the key factor in the development of Costa Rica's infrastructure, institutional organization, and productive structure. Young Costa Ricans established small import-export houses, and regular exports direct to Liverpool began in 1844. As the first profits began to roll in, attention turned to making the improvements in the primitive road network that were necessary for processing and shipping (Seligson 1980, p. 17). In 1843 the largest coffee producers founded the The Development of Costa Rica before 1950 63 Sociedad Econ6mica Itineraria to promote road development. A tax of one real per 46 kilograms, levied in 1841, allowed the society to build a road from the Central Valley to the Pacific port of Puntarenas. The road, which was finished in 1846, ensured producers permanent access to the port and stimulated production in new areas along its length (Araya Pochet 1971, p. 80). Private interest, initiative, and participation in build- ing the country's infrastructure characterized most of the century. The main source of government revenues was the import duties levied on goods brought by the returning coffee ships. Iron stoves, windows, porcelain, steel hoes, plows, shovels, saws, axes, corn mills, new cloth- ing, books, medicines, and tools for agriculture and construction were rapidly introduced. With the cargo came a few immigrants-doctors, lawyers, engineers, and educators-seeking to share in the new wealth. Many children of prominent families were sentin the same ships to study in England. Both the returning students and the new migrants contrib- uted to the formation of Costa Rica's liberal ideology (Gonzalez Flores 1933, vol. 1, p. 30). The Coffee Social Contract A correct understanding of the impact of coffee is critical for the expla- nation of why Costa Rican society developed differently from that of neighboring countries. The debate has been intense. Stone (1976, p. 23), for example, daimed that commercial cultivation of coffee was initiated by a small group of farmers-descendants of the early Spanish aristo- crats (the hidalgos), to whom the Crown had granted exclusive access to political, judiciary, and administrative positions. The members of this group were closely linked by strong family connections and formed a political elite from the conquest to independence. In the generalized poverty of colonial times, these hidalgos had lost their economic suprem- acy but not their political power. According to Stone, the economic power obtained from exports allowed the coffee growers to become the most important among the descendants of the hidalgos and gradually to monopolize the political power that the whole class had enjoyed. Costa Rica's population at that time was very small, however, and because mnigration was limited, a large portion of the country's inhabitants were inevitably descendants of the founders or had become related to them through marriage. It is not surprising, therefore, to find that the first coffee growers were related to those earlier conquerors. Others have claimed that the rapid economic improvement of the earlier coffee growers gave them the opportunity to buy the lands most appropriate for the new crop. Seligson stresses that the increase in land prices was "a strong incentive for the peasant to sell his land. This was particularly true of young men, who had to choose between earning a good wage on the plantation and eking out a living on a small inherited plot" (Seligson 1980, p. 24). Many of what some Marxist authors have 64 Costa Rica and Uruguay called land "expropriations," however, were nothing more than volun- tary exchanges of land. Speculation fueled by the rapid increase of land prices in the best coffee areas led to sale of land there, but the seller then used the small fortune thus gained to purchase new plots on the agricul- tural periphery or to participate in the auctions of state lands and so to become a small entrepreneur (Vega Carballo 1982, p. 26). Since land in Costa Rica was divided among all the sons and daughters in a family, many parcels were small and nonviable. In these circum- stances, sales followed by purchases of new plots improved the welfare of the smallholder. Although plots in some of the best coffee areas were sold to larger growers, small landholders appropriated for themselves a portion of this rent, and a society of small rural proprietors was pre- served. "Smallholdings predominated in the Central Valley still in 1935, a century after the introduction of coffee" (Hall 1982, p. 83). Urbanization, population growth, and inheritance led to the subdivi- sion and fragmentation of already small farms, but it was possible for very small farmers to cultivate coffee profitably. It was not unusual for a coffee grower to cultivate several separate parcels. Many land transac- tions, therefore, represented consolidations that were agreed on among members of the elite as well as among smaller farmers, rather than a massive transfer of property from the peasants to the large coffee grow- ers. In any case, land was comparatively abundant and easily accessible for all in Costa Rica. By the time of independence, only a minuscule portion of Costa Rica's territory had been settled and cultivated. Churnside (1985, p. 76) reports that only about 89,614 hectares of land-1.5 percent of the country's territory-were legally appropriated between 1584 and 1821. Of this total, 77,487 hectares were purchased and 12,127 hectares were grants. Land had also been privately occupied without legal title in many cases, but it is clear that land was abundant in relation to the population. After independence, an important mechanism for the acquisition of land was the privatization of state or communal lands, rather than purchase of already private parcels-84,889 hectares of state lands were sold be- tween 1822 and 1850. Coffee cultivation facilitated these transactions. Gudmundson (1983) claims that rather than being a repressive influ- ence, the introduction of coffee created a mass of small, independent farmer-proprietors that had not existed in colonial times. After indepen- dence, coffee production accelerated the privatization of land and con- solidated the country's rural democracy. In the pre-coffee era access to land was restricted by communal rights, which were controlled by the aristocracy. The search for new lands for coffee production actually increased social mobility and contributed to a more egalitarian economic development. Because of coffee, land became valuable, and in an egali- tarian society this early definition of individual property rights contrib- uted to both growth and equity. A national land registry was established in 1867, and the speed with which thousands of Central Valley peasants The Development of Costa Rica before 1950 65 daimed legal rights over their small farms indicated their eagerness to protect their titles (Gudmundson 1983). Stone recognizes that the smallholders survived side by side with large growers and were strengthened through their connection with them. The formation of the large exploitations did not destroy the small property. The members of the elite, on the basis of their relative economic predominance and political power, managed to gradually absorb many small plots and create the large plantations. Family links made possible the self-financing of the purchases, an indispensable requirement in a plantation community without banks. Side by side with the haciendas, however, coexisted the minifundia, owned by those who did not belong to the ruling class. They managed to survive because their crop was indispensable for the large grower to be able to satisfy the increasing demand in the British market. The beneficio (the hullery where coffee is washed, dried, and packaged for export) became the link between the small and the large farms. Only the larger plantations owned a beneficio, given its very high investment, cost. (Stone 1976, p. 102.) In 1843, to satisfy the first important demand for direct exports to the British market, Santiago Fermindez, an important coffee producer, had to buy more than one-sixth of the country's total annual crop from other producers. At that time, coffee was still cultivated mainly by small producers, several of whom possessed primitive beneficios. As the Lon- don demand for Costa Rican coffee rapidly increased, the first exporters were forced to buy coffee from the smallholders. They mixed the pur- chased coffee with their own to obtain a standard quality for export (Stone 1976, p. 107). Although the mechanization of the beneficio freed a portion of the labor force for coffee picking, labor shortages remained a serious problem at harvest time. To some extent, foreign credit helped to alleviate this problem. London buyers paid the exporters in advance for their crop to guarantee delivery the following year. The large growers in turn offered a portion of this credit to the small producers as adelantos-partial advance payments for their crop. The small producers used the advances to attract hired labor during the harvest "Since, however, the majority of peasants at this time were landed, few were available for picking. In order to encourage more people to enter the labor force of pickers, extraordinarily high wages were offered" (Seligson 1980, p. 20). Seligson adds that "the system of high wages, coming as a direct result of the mechanization of coffee production and the availability of foreign credit, was eventually responsible for a massive proletarianization of the Costa Rican peasantry" (Seligson 1980, p. 23). High wages reflected, however, the country's abundant land supply and labor scarcity and actually contributed to a more equitable distribution of the value from coffee exports. Even today, many workers on coffee plantations grow 66 Costa Rica and Uruguay the export crop on small plots of their own. Moreover, coffee harvesting, which requires additional manpower, has been a seasonal activity that occupies landed peasants and, in particular, other members (women and children) of their families and allows them to complement their farm income. The beneficio system, as it developed in Costa Rica, enabled exporters to realize important economies of scale in preparing for export a large volume of high-quality coffee and also made it possible for both large and small producers to sell all their coffee in the same markets, at the same price. The system provided opportunities for risk sharing, as well. As a result of these technological and economic constraints, a strong mutual interdependence developed in the coffee economy (Stone 1976, p. 108). The small producer depended for the processing and sale of his coffee on the large grower, who owned the beneficio and exported the crop, while the large producer depended on the small landholders not only to satisfy demand but also to achieve a better-quality product by mixing the beans. This technological-marketing interdependence was reinforced by the financial connection. A similar kind of interdependence developed between the wage la- borers and the owners of the coffee plantations. The workers lived on the plantation, in housing provided by the employer, and earned their living there. The owner depended on them for their labor, since even today it has proved impossible to mechanize coffee cultivation. The hacienda owner has always been aware of the implications of this tech- nological constraint, which makes substantial labor inputs essential during the coffee cycle. For all of the participants, therefore, the success of their enterprises, large and small, has depended on cordial and respectful relationships among the various participants. The coffee social contract developed from the voluntary contracts among large exporters, small growers, and farm laborers. As explained below, it led to the formation of a strong, common egalitarian ideology. By the time of the Great Depression of the 1930s, however, the economy had become very vulnerable to the fortunes of coffee exports. Coffee accounted for more than half of total export earnings; the other half was from bananas. The 25,000 farms that cultivated coffee represented 25 percent of the country's population. The National Association of Coffee Growers, created in 1930 mainly by larger producers who did not own beneficios, pressured for government intervention in the relationship between producers and exporters. It achieved success in 1933, when the government for the first time decided to intervene in the coffee industry. The Junta de Liquidadores (Settlement Board) was established to fix the price that each beneficio was to pay the producer, on the basis of the quality of the coffee. The board set the maximum profit for the beneficio at 12 percent of sales (Seligson 1980, p. 36). The voluntary social contract of the coffee pact was thus institutionalized. The Development of Costa Rica before 1950 67 Bananas and Labor Conflicts The evolution of coffee exports and the development of the banana industry show many contrasts. Whereas coffee was fully integrated into the domestic economy, banana cultivation developed as an enclave. Whereas coffee was completely in the hands of Costa Ricans and of a few foreigners who settled permanently, banana plantations were owned by multinational finns. Landless workers, including a substantial number from other Central American countries and Jamaicans brought to build the railroad, were hired by the capital-intensive banana complex to work in isolated regions of the country. Rather than giving rise to a social compact, the banana plantation was the scene of the most important labor conflicts in the country's history. "Bananas are a historical by-product of the coffee industry in Costa Rica" (Seligson 1980, p.49). During most of the nineteenth century coffee was carted to the Pacific port of Puntarenas and shipped around Cape Horn. A route to the Atlantic would reduce the time of the trip to England by almost three months. In 1871 Henry Meiggs Keith contracted to build a railroad, financed with loans from London, from the Central Valley to the Caribbean port of Lim6n. Constructing this railroad was not an easy task, and the project was not completed until 1890. The work was interrupted several times for lack of financing. Of 3.4 million pounds raised in London, only 1.3 million reached Costa Rica, and of these 400,000 were spent in lawyers' fees to obtain the rest (Seligson 1980, p. 51). In 1884 Minor C. Keith absorbed the English debt and promised to finish the remaining 52 miles of the railroad's 142 miles. In return Keith was granted a ninety-nine-year lease on the railroad, 800,000 acres in state lands (where Keith planned to grow bananas, already a promising crop), exemption from taxes on the land for twenty years, and exemption from import duties on all construction materials used to build and maintain the railroad (Seligson 1980, p. 52). Hundreds of Italian and, later, Jamaican and Chinese workers were hired to build the line. Most foreign workers stayed afterward, but Jamaicans and Chinese were not permitted to migrate to the Central Valley. Between 1881 and 1891 nearly 10,000 Jamaican Negroes arrived in Costa Rica. By 1927 there were 19,136, representing 4.1 percent of the total population, at work in the banana plantations and on the docks (Hall 1982, p. 67). In 1879 Keith exported the first bunches of Costa Rican bananas. His Tropical Trading and Transport Company and the Boston Fruit Com- pany merged operations in 1899, and the United Fruit Company was born (Stewart 1964, p. 144). The operation was successful, and banana exports skyrocketed. Until 1910 banana exports paid no taxes. Except for providing employment and stimulating the development of the regional infrastructure, banana cultivation had little effect on the rest of the economy. National debate over the issue was intense. President Ricardo 68 Costa Rica and Uruguay Jimenez, in particular, fought a continuing battle to tax the company (Seligson 1980, p. 60). Since 1925, the company had been losing its battle against the Sigatoka and Panama diseases of bananas. With the Great Depression, exports fell sharply. By 1933 the company had only 870 hectares under cultivation, as against the 20,000 it had cultivated in 1913. Production dropped even lower in 1934, large numbers of workers lost their jobs, and labor discontent reached new heights (Seligson 1980, p. 68). The Communist party had been founded in 1931, and one of its members, Carlos Luis Fallas, set out to organize the banana workers. After several petitions for improved labor conditions were rejected, a strike was declared on Au- gust 9, 1934. Within a few days more than 10,000 workers had walked off the job. When the strike was in its third week, the government intervened, and an agreement was signed. Over the years a long series of strikes characterized the banana enclave, where nothing equivalent to the coffee social pact existed. In 1938 the company, defeated by the banana diseases, abandoned its plantations on the Atlantic coast and moved to the Pacific side. The black workers, prohibited from moving to the new area, were left behind to fend for themselves and took up cacao cultivation. The departure of the company destroyed the economy of the region (Melendez and Duncan 1985, p. 74). One year after the move, the first strike on the Pacific coast was called, and labor conflicts continued into the 1980s (Seligson 1980, p. 73). The company began to shift to the cultivation of African oil palm and pineapples, which were less labor intensive and less vulnerable to prolonged strikes, and in the 1980s it abandoned banana cultivation on the Pacific coast. The Egalitarian Trend An important constant in the history of Costa Rica is a sustained egali- tarian trend. This trend was more than a reflection of the ethnic homo- geneity emphasized by several observers, and it even included the assimilation of minority ethnic groups. Thus, the black population of the Atlantic coast has enjoyed, since the 1950s, a noticeable improvement of its access to the benefits from the country's economic and social devel- opment. All of this took place through a generalized process of integra- tion of the labor market, in the presence of a high demand for labor and a steady widening of the channels for political participation (Vega Carballo 1982, p. 21). The introduction of coffee in a system of small farms created a delicate equilibrium that imposed norms of reciprocity among the various social groups. The actors in this balancing act were the firms that combined farming, processing, and exporting (the beneficios) and the small and medium-size proprietorships based on family labor. In exchange for stability, protection, and employment, the campesino provided loyalty, The Development of Costa Rica before 1950 69 labor, his production surpluses, and a degree of political subordination (Vega Carballo 1982, p. 25). All this facilitated the consolidation by the middle of the nineteenth century of the coffee pact-the implicit contract developed by the large exporters and smaller producers. In part, this pact was feasible because Costa Rica had a small territory with a small population concentrated in the Central Valley, where economic units were in close contact with one another and all faced the same adversities and risks. The implicit contract was a social mechanism for dealing with these risks and overcoming the shortcomings of small size. By working part time in the large hacienda and in the beneficio, the small farmer reduced the risks associated with cultivating his own land. The large exporter provided the credit and marketing services to which the small farmer had little access because of high transaction costs. The development of the implicit contract, in turn, guaranteed a politically stable distribution of export revenues. This contract reflected high reser- vation wages that were the consequence of the relative scarcity of labor, the relative abundance of land, and the prevailing system of small property holdings. It also reflected the economic dominance of inter- linked markets that characterized the coffee pact. The beneficios gave adelantos to the smaller producers, who agreed to sell the crop to that particular exporter. The British merchants provided links to London financing and to international marketing. This model of interdependence was institutionalized in 1933, and the same relationships were formally regulated by the state, at a time when the tensions introduced by the Great Depression threatened the destruc- tion of the delicate balance. This institutionalization of social and eco- nomic conflicts into apparently successful solutions, with the state as arbiter, became a model that would later be used in other areas of economic and political activity. These economic arrangements not only reduced transaction costs and risks but also had important implications for the development of Costa Rica's political system. From the beguining, both the large coffee pro- ducer-processor-exporter and the small producer-and-part-time-worker became indispensable partners. After the middle of the nineteenth cen- tury it became evident that the coalition in power could not completely exclude from political participation any of the important partners in this social division of labor. The power of the large coffee exporters thus required a continuous legitimization from below. The politically domi- nant group was always vulnerable to pressures from the other partners in the coffee pact, whose demands became particularly explicit after 1890. Eventually new social groups, in addition to the participants in the coffee complex, were added (Vega Carballo 1982, p. 28). As Vega Carballo (1982) explains, since the 1830s the rural middle class had imposed limits on the economic power of the ruling coffee export- ers, and particularly after 1890 they played a key role in democratization and the opening of the political arena to widespread participation. This 70 Costa Rica and Uruguay rural middle class continued to expand as economic diversification and structural transformation progressed, and it played a substantial politi- cal role after 1950. It established dose associations with the PLN. Starting in the last years of the nineteenth century a growing middle class made up of small trade and manufacturing entrepreneurs, artisans, professionals, teachers, technicians, white-collar employees, and man- agers began to participate actively in the political dialogue. As state interventionism increased after 1940, these middle dasses acquired an unprecedented amount of political power. Dependent on state employ- ment, they channeled in their favor most of the benefits of the social reforms and of the activities of the large number of government agencies created after 1950. Ideology, Institutions, and the Role of the State The social relationships implicit in the coffee pact gradually led to the emergence of a national ideology that validated the participation of the small producers and of the landless workers not only in the distribution of the economy's product but also in the political arena. This led to Costa Rica's version of the liberal state, which stemmed from the need to create a sphere of public activity in which the interests of the different sectors could be democratically expressed. As noted by Vega Carballo (1982), the ruling groups realized that in circumstances of relative equality, the direction of the system had to be delegated to an impersonal source of universally applicable rules. Management of the state was thus trans- ferred to a governing elite, specialized in educational and political affairs, which exercised power with dass neutrality and much formal rationality. This contributed to the establishment and the acceptance by all segments of society of an egalitarian ideology and to the generation of institutions and legal codes that promoted both the growth of eco- nomic activity and a democratic society. It is this widespread ideology that explains why even today Costa Ricans resist class differentiation and the concentration of power. The pyramidal structure of society has been permeated by the intricate web of negotiations that the dominant groups must undertake to pro- mote their interests, by the multitude of resistances and counterresistan- ces that have so much enriched political debate, by the internal fragmentation of the bureaucracy and the relative autonomy of the multitude of sectors and interest groups, and by the many pluralistic efforts to reduce the power and influence of dominant groups. Vega Carballo (1982) noted that struggles to control the public sector in the middle of the nineteenth century led to a loss of internal cohesion among the elite and threatened the orderly progress of economic activity. The country required what he called "structural pacification"-that is, an end to the political wars among the various economic factions and a concentration on the protection of national integrity, which was threat- The Development of Costa Rica before 1950 71 ened by the chaos and disorganization that prevailed in the rest of the isthmus. In 1856 Nicaragua was invaded by William Walker, an adventurer from the United States who sought to incorporate the Central American countries as slave states in a confederation with the American South. Walker became president of Nicaragua, causing great concern in Costa Rica. In March President Juan Rafael Mora led an army of Costa Rican farmers into Nicaragua and, two years later, to victory over Walker. The war, which consolidated nationalistic sentiment, was followed by a cholera epidemic that killed 9,000 of the country's 108,000 inhabitants. Both the war and the epidemic accentuated the labor shortage that characterized the cultivation of coffee and thus indirectly strengthened the coffee pact. The war, however, also strengthened the army and, consequently, the influence of the military. Military intervention in political affairs con- spired against the desired stability. The politically more mature society that developed by the end of the century managed to attenuate, if not destroy, this military intervention, transforming the state into a protec- tor of property rights and a manager of the basic social relations implicit in the coffee pact. By the end of the century the Costa Rican state had managed to guarantee a high degree of domestic security, order, and progress, which local politicians constantly compared with conditions prevailing elsewhere in Central America. The liberal governments carefully administered the resulting reciproc- ity and interdependence. At the same time, they created a legal frame- work that protected individual and property rights and guaranteed market freedom. Thus, the political consequence of the economic divi- sion of labor implicit in the coffee pact was a system of social coordina- tion with multiple limits and counterbalances which, in turn, consolidated the national state. These mutual agreements and balance of forces would provide, in the middle of the twentieth century, an exceptional springboard for launching the welfare state (Vega Carballo 1982, p. 46). A history of respect for elections and ample political participation began with the popular insurrection of 1889. The right to participate in elections, originally reserved to those who owned property, had grad- ually been granted to those with education and human capital. The aim was to allow the electoral market to operate freely without interference from the state. The role of the state was viewed as that of a guardian of the social contract, ready to guarantee that the relations of power pre- vailing in the civil society could be expressed through the elections. Confrontations were redirected toward the electoral arena and were subjected to institutional rules (Vega Carballo 1982, p. 61). The decisive influence of a new elite of educators, lawyers, writers, and journalists consolidated the liberal gains. Trained in the best schools of European liberalism, they gave the Costa Rican state a pluralistic 72 Costa Rica and Uruguay character as well as the paternalistic attitude that was a result of the unusual social contract. They were the architects of the democratic and politically stable institutions that characterize Costa Rica. The Social and Economic Reforms of the 1940s The 1950-85 period was characterized by the struggle between Costa Rica's liberal ideology of the preceding one hundred years and a new social-democratic ideology that became increasingly dominant after the 1948 civil war. The events of the 1940s were a turning point and had a significant effect on the outcomes of the period. New dimensions were added to the social contract, and important shifts in ideology began. Since then the political arena has been dominated by the actors and the struggles of the 1940s. Rafael Angel Calder6n Guardia, who was elected president in 1940 by a landslide, was one of the most controversial figures in Costa Rican history. On the one hand, he accomplished major reforms in only a few years; on the other, he made major mistakes that eventually led to the civil war of 1948 (Aguilar Bulgarelli 1983). Among his main achieve- ments was the establishment, in 1941, of the University of Costa Rica. The old Universidad de Santo Tomas had been dosed in 1888, and only a few professional schools (law, pharmacy, and agriculture) had oper- ated during the first part of the century. The president repealed the laws of 1884 and 1894, which prohibited religious instruction in schools and the presence of religious orders in Costa Rica, and accorded state recog- nition to private Catholic schools. This gave him the support of the Catholic Church. In 1941 Calder6n Guardia created the social security system (Caja Costarricense de Seguro Social). In 1943 a labor code was enacted and a chapter on social rights (garantfas sociales) was written into the Constitu- tion. This social legislation weakened Calder6n Guardia, and other actions brought him strong criticism from several quarters. The state monopoly on gasoline distribution was eliminated, opening the doors to foreign participation, and a contract with a foreign electric company was negotiated under terms and conditions that some considered unfa- vorable for Costa Rica. Several groups began to consider overthrowing the president. The Centro para el Estudio de los Problemas Nacionales (Center for the Study of National Problems), created in 1940 by a group of young professionals and intellectuals, was an important source of opposition to the Calder6n Guardia administration. Its members played key roles in the political events of the following decades, and their ideas were the seeds of a new ideology that would gradually replace the liberal legacy of the previous century. They were interested in finding scientific and pragmatic solutions to national problems. The group induded the first The Development of Costa Rica before 1950 73 graduates from the newly created university, who were eager to apply their knowledge to policymaking (Aguilar Bulgarelli 1983, p. 78). The Center defended the creation of the social security system but attempted to protect it from political interference. Other problems in which its members were interested included land-tenure patterns, agri- cultural credit, inflation and real wages, fiscal management, and the large external debt accumulated during World War II. Recommended policy reforms induded agricultural diversification, expansion of bank credit, scientific management of the government budget, and the cre- ation of a civil service. The Center was particularly concerned about the problems of monoculture and strongly promoted industrialization. It was extremely critical of foreign investment, represented by the United Fruit Company, the Standard Oil Company, and the electric company. Eventually the Center attempted to create a permanent ideological political party. Until then, elections had been fought around individual candidates who organized parties that were often disbanded after the elections. In 1945 the Center joined forces with Acci6n Dem6crata, a new party of small entrepreneurs and industrialists, to create the Partido Social Dem6crata. This party attempted "a combination of measures to raise the standard of living and to guarantee the rights of the workers and the pe6n, to strengthen the small proprietor and to create new ones, to defend the small industrialist, the small merchant, the professional, and the public employee, while at the same time promoting a general economic reactivation" (cited in Aguilar Bulgarelli 1983, p. 111). This enumeration of goals explicitly identified the new constituencies repre- sented by the social democrats, in potential conflict with the participants in the coffee complex. The social democrats' expanding power and presence became a major feature of the post-1950 political arena. In 1944 an alliance that induded the Communist party and the Cath- olic Church elected Calder6n Guardia's official candidate, Teodoro Pi- cado. The following years were characterized by extreme political instability that culminated in the civil war of March-April 1948, when the Picado government refused to recognize the election of Otilio Ulate as the new president. A new group of young politicians, mostly from the Centro para el Estudio de Problemas Nacionales and from the short- lived Partido Social Dem6crata, under the leadership of Jose Figueres, won the civil war. There followed the eighteen-month period of gover- nance by the Junta Fundadora de la Segunda Republica, led by Figueres. Significant economic and political reforms were introduced during this period. The army was abolished; the banking system was national- ized; a 10 percent tax on all forms of property was levied; the Instituto de Defensa del Cafe was nationalized; the United Fruit Company was required to pay a 15 percent income tax; land and inheritance taxes were sharply increased; a price stabilization institution was consolidated; a national power-generating parastatal was created; and the first steps 74 Costa Rica and Uruguay were taken toward import-substituting industrialization (Rovira Mas 1983, p. 47). A new social-democratic group of professionals, small rural and urban entrepreneurs, and white-collar employees of middle-dass origin came into power with Figueres's PLN. These groups adopted and strengthened the social reforms of the 1940s and so consolidated the welfare state. The 1950-85 period was the historical arena in which the new class attempted to use the power of the state to eliminate the economic power of the old coffee groups and to seek the rents implicit in the protectionist strategy of import-substituting industrialization and the paternalistic welfarism of the social security system. In the process Costa Rica began to abandon its liberal economic tradition and to replace it with an increasing protec- tionism. The political-economy dynamics thus generated led to a major fiscal crisis. In 1950 Costa Rica possessed unusual initial conditions, including a high degree of political stability and a strong democratic tradition. Participation by the state in economic activities was increasing, and the beginning of a welfare system was in place. A new constitution incorpo- rated conflicting liberal and social democratic rules concerning the role of the state and of private enterprise. The 1950-85 outcomes were signif- icantly influenced by these contradictions. The country's long-term historical evolution explains the dispersion of political power and of the decisionmaking centers, the neutralization of social dasses, and the development of a political system based on interdependence, reciprocity, and compromise. During 1950-85 no so- cial class exercised a marked hegemony, decisionmaking was frag- mented, and political parties were neutralized. This was facilitated by the free expression of conflict and its resolution in the electoral arena. The state accepted the role of arbiter of conflicts, within a system of highly formal legality, and eventually institutionalized the balance of forces implicit in the social pact. The Modernization of the State: 1950-63 In 1950 Costa Rica was a small, rural, very open economy that exported two crops, coffee and bananas. The public sector was still comparatively small, despite the reforms introduced in the 1940s. Social indicators (especially those concerning education) had already reached exceptional levels. Political stability was reaffirmed when, after ruling by decree for eighteen months, Figueres's junta turned over the government to Presi- dent Ulate, who had been elected in early 1948. Indeed, by 1950 Costa Rica still resembled the simple country of the first half of the twentieth century more than it did the complex nation of 1985. The 1950-63 period, which was strongly influenced by the consequences of the 1948 civil war and by the institutional innovations introduced by the 1949 Constitution and the new coalition in power, ended with Costa Rica's entry into the Central American Common Market (CACM), after a vigorous debate about the choice of development strategy. This chapter examines some of the principal debates and policy deci- sions of the period, including the nationalization of the banks, the early expansion of social security, the first efforts at industrialization, the conflicts surrounding adherence to the CACM, and the creation of numer- ous government agencies and autonomous institutions as part of the process of modernization of the Costa Rican state after 1949. The Initial Conditions Costa Rica has always been a very small economy. In 1950 its population numbered 858,200, GDP per capita was 1,685 colones (about us$250), and total GDP was 1,446 million colones (about Us$217 million). The country was experiencing rapid population growth, at a rate of 3.4 percent a year. The median age was 18 years and the growing numbers of young people had already created substantial demands for public services. This small population occupied only one-fifth of the country's territory. Indeed, a wide agricultural frontier was still unexploited by 1950, and the rural population had easy access to land, even to the most profitable lands 75 76 Costa Rica and Uruguay devoted to export crops such as coffee. By 1973, although farms ac- counted for three-quarters of the country's area, only two-fifths of the territory was being exploited. Although the distribution of privately held land was somewhat con- centrated, there was not a parallel concentration of the distribution of cultivated land or of land values. Whereas some of the largest holdings were in remote, inaccessible regions or belonged to the multinational banana companies, which cultivated only a small portion of their total holdings, ownership of small but very valuable coffee plots was wide- spread. A large part of the land was in government hands and would be colonized in later years on the basis of homestead legislation. The rural sector was large, and its influence pervaded Costa Rican society. The rural population accounted for two-thirds of the total, and rural workers were almost two-thirds of the labor force. Agriculture contributed 41 percent of GDP but employed 55 percent of the labor force-a difference that reflected the low productivity of labor in agri- culture. The sector included the prominent banana and coffee export activities, which would realize large increases in yield in the following decades, as well as a multitude of small farmers who produced low-yield food crops for domestic consumption. Manufacturing contributed only 13 percent of GDP and employed 11 percent of the labor force. The remaining 34 percent of the employed population worked in the public and private service sectors, which accounted for 46 percent of GDP. General government contributed 5.4 percent of GDP. Exports, valued at US$56 million, were one-quarter of GDP and imports, at US$46 million, were one-fifth of GDP. In 1950 there was a trade surplus of about 6 percent of GDP. This surplus survived through the first half of the 1950s but did not occur again until 1984, when Costa Rica was forced to generate a small surplus to service its external debt. Exports were highly concentrated; bananas accounted for almost two-thirds and cof- fee for almost one-third of total exports, whereas other products ac- counted for only 3 percent. Coffee and banana exports amounted to one-quarter of GDP and two-thirds of value added in the agricultural sector. The public external debt in 1950 was us$129 million. The central government collected revenues equivalent to 9.5 percent of GDP, and its expenditures were 8.8 percent of GDP. Only 6 percent of the employed worked in the public sector, which consisted essentially of the central government. Total employment represented 32 percent of the population, and the open unemployment rate was 4.2 percent of the labor force. The Ulate administration (1949-53) was preceded by the deep political and social changes of the 1940s. The Calder6n Guardia administration (1940-44) was marked by major social reforms, by fiscal difficulties, and by inadequate efforts to face the consequences of World War II. Under the Picado administration (1944-48) inflation, social unrest, and political instability accelerated, leading to the 1948 civil war. In contrast to Ulate's The Modernization of the State: 1950-63 77 conservative presidency, during 1948-49 the junta led by Figueres intro- duced numerous institutional reforms, induding the nationalization of the banks. Ulate's primary goals were to achieve fiscal balance and to maintain a constant external value of the col6n. His cautious policies easily reached these objectives, with the help of good coffee prices and the expansion of the international economy in the early 1950s. The institutional reforms introduced by the junta and by the 1949 Constitution slowly but steadily began to change the size, role, and organization of the government during the 1950s. This modernization of the state, which was prominent in the agenda of the Partido Liberaci6n Nacional (PLN), was an important feature of the period and was acceler- ated by the election of Figueres as president. His administration (1953- 58) was followed by that of the conservative Echandi (1958-62), who undertook major policy and institutional reforms, although he did not have control of the Legislative Assembly and had to deal with the deteriorating conditions produced by a sharp drop in coffee prices. By 1950 the illiteracy rate had been reduced to 21 percent of the population 10 years old and older, but 84 percent of this age group still had not completed primary school. As a consequence of its emphasis on education, Costa Rica already had a comparatively skilled labor force, and its investments in health had helped increase life expectancy to 56 years. (Infant mortality, however, remained high, at 90 per 1,000 live births.) About one-quarter of the labor force and one-eighth of the population were covered by social security. Infrastructural development and the provision of public sector ser- vices were heavily concentrated in the Central Valley, where population density was high. Except for the highway to Puntarenas, the railroad to the two main ports, and roads between the main towns in the Central Valley, there were only dirt roads, some of which were not passable year-round. The Caribbean lowlands could be reached only by train or by air: there was no road to Lim6n until 1968. Despite comparatively favorable social indicators, a high proportion of what Costa Ricans would today consider basic needs were not being satisfied in 1950. Most rural people did not wear shoes; it would be hard to find a person without shoes in Costa Rica today. Many rural houses were wood huts with palm roofs (ranchos), and many urban houses were made of adobe with tile roofs. Most rural transport was by horseback, and goods were moved by ox carts; hotels in most villages offered stables and blacksmith services. Malaria had not been eradicated from the lowlands. Many villages did not have a school building, and many teachers had finished only pri- mary school. Most villages lacked street lights, bank branches, and even running water. Milk, delivered every morning by milkmen on horse- back, was not pasteurized. Sugar water (agua dulce) was the most popular beverage. Markets would not have met today's hygienic standards and did not reflect the high degree of specialization of today's excellent 78 Costa Rica and Uruguay installations. Refrigeration was hardly available, but ice sales were sub- stantial. Newspapers reached only the principal towns. The 1950s and 1960s witnessed a great expansion of the infrastructural and organiza- tional framework needed for a modem economy. The characteristics of rural Costa Rica reflected a generalized poverty, by today's standards. Perceptions at the time were different, however, particularly when Costa Ricans compared their situation with that in the rest of Central America, where per capita incomes were less than one- half the Costa Rican level and where the distribution of the fruits of export-led development had not been as wide. During the following decades, massive public investment went into developing infrastructure that benefited most Costa Ricans. With large amounts of foreign assistance, the country built an impressive network of highways and feeder roads, electric power grids, and telecommuni- cations systems. Today there are high schools in all medium-size vil- lages. The lives of rural people were transformed by roads and buses; by water, electricity, and telephones; by agricultural extension, health, and sanitary services; by reliable mail delivery; and by newspapers, radio, and television, which steadily found their way into most rural homes. As shown in table 3-6, the proportion of the population with potable water at home increased from 53 percent in 1950 to 84 percent in 1980, and the proportion with sewage disposal rose from 48 to 93 percent. The percentage of homes with electricity grew from 40 to 79 percent, and by 1980, 95 percent of all households had a radio and 79 percent had a television set. During 1950-80 the number of telephones per 1,000 per- sons grew from 11 to 70, the number of automobiles per 1,000 population increased from 9 to 63, and daily newspaper circulation per 1,000 popu- lation rose from 85 to 118. Although the main beneficiaries were the swelling middle-income groups, the poor increasingly shared in these benefits of growth and development. The Nationalization of the Banking System The most important decision in the recent political-economy history of Costa Rica was the nationalization of the banking system in 1948. This interventionist choice represented a significant attempt by new social groups to take economic and political power away from the traditional exporting groups, which also controlled the banks, and to modify the country's economic policies and productive structure to the new groups' advantage. The 1948 civil war gave a new group of social-democratic leaders a chance to control the government under exceptional circumstances. The junta exercised both executive and legislative power, and it boldly took the opportunity to restructure the country's institutions. The national- ization of the banking system reflected the junta's dirigiste ideology. The Modernization of the State: 1950-63 79 Thus, the civil war allowed the representatives of the middle classes to gain power and reorient the country's economic and social policies in their favor (Rovira Mas 1983, p. 40). The junta included representatives of the Centro para el Estudio de los Problemas Nacionales, made up of young professionals and university professors, and of the short-lived Partido Social Dem6crata, a political party of small and medium-size entrepreneurs and professionals. The former, despite their university training, lacked direct connections with the country's productive structure, and they sought to create new eco- nomic opportunities for themselves. They had been trained at the newly created University of Costa Rica in disciplines for which the traditional export sector generated little demand. They were eager to use their new knowledge to influence policy. Costa Rican society, simple and narrow as it was, offered few opportunities for new entrepreneurial adventures. Rodrigo Facio, who was to become rector of the University of Costa Rica, summarized the Center's ideology. The objective of economic policy must be to increase and diversify the country's output; the preeminence of coffee must decline and so the nation's dependency on external markets. The new policies must take into account the structural characteristics of the country's political system; side by side with growth outcomes are necessary equity outcomes. The latter must reflect the minifundia that characterizes land tenure patterns, the nation's homogeneous ethnic composition, the individualism of its people, the liberal political tradition, and the material welfare of the majority of the population. Thus, the increase and diversification of the national output must be arrived at through the stimulus, defense, and organization of small property.... Small property must be promoted, defended, and strengthened through cooperative organizations and through scientific state intervention. (Facio 1982, p. 168.) The new ideology was also concerned with the need for strong gov- ernment intervention, particularly in the development of infrastructure (electricity and transport), and with the creation of autonomous institu- tions. These institutions were to be decentralized public agencies, pre- sumably free of the influence of political parties and placed in charge of specific services to promote economic development while avoiding the concentration of power. The 1948 civil war provided Figueres and his followers with a unique opportunity to gain early control of the government. Before 1948 they had not amassed any electoral support, and even after winning the civil war, their electoral power remained weak. In December 1948 they man- aged to elect only four of the forty-five delegates to the Constitutional Assembly. From the junta, however, they began to introduce major institutional reforms that, in time, would improve their own social and 80 Costa Rica and Uruguay economic position. Again and again they would look for the support of the middle groups-the urban middle classes and the small and me- dium-size farm owners-where the PLN message sank its deepest roots. On June 19,1948, the junta suspended constitutional guarantees. That same evening, in a radio speech, Figueres announced the surprising news that the junta had decreed a 10 percent tax on assets and was nationalizing the banking system. On June 21 the minister of finance ordered that 10 percent of all bank deposits be frozen, and Decrees 70 and 71 were published. Decree 70 stated: Considering: (1) that in the organization of a modem national econ- omy, all agricultural, industrial, and commercial activities depend on bank credit, the allocation of which determines the progress or stag- nation of the country; (2) that economic functions of such a magnitude should not be in private hands but represent, by their own nature, a public function; (3) that the private banking business not only lends the shareholders' own resources but mobilizes the national savings and the financial resources of the country, in the form of deposits from the public; (4) that it is not fair that the large profits of the banks, guaranteed by the state and the social order, be earned by the share- holders, who represent a minimal portion of the capital mobilized, but should become national savings and their investment should be di- rected by the state; therefore, the junta decrees: (1) Private banking is nationalized. Only the state will be authorized to mobilize, through its own institutions, the deposits of the public. (2) The shares of the Banco de Costa Rica, Banco Anglo Costarricense, and Banco Credito Agricola de Cartago are expropriated for reasons of public convenience. The state, through its Ministry of Economy, will take over the banks immediately. The form and conditions for payment of the shares will be regulated afterward. (3) The Mlinistry of Economy will provision- ally keep the present form of organization of the banks and will appoint the boards of directors and the managers. This measure attempted to take political and economic power from the traditional exporting groups. Since almost all the members of the new emerging groups lacked financial resources, "the banks would become, from then on, their most loyal friends" (Gil Pacheco as quoted in Rovira Mas 1983, p. 50). The decree was issued without prior debate and consultation, contrary to deeply rooted Costa Rican political traditions. Analysis and debate came after the fact and have not ceased even today. While the Confederaci6n de Trabajadores Rerum Novarum and university profes- sors and students applauded the measure, the private sector chambers did not oppose it. La Naci6n, the main conservative newspaper, opposed the measure, claiming that private enterprise, not nationalization, pro- moted development. It complained about the failure to consult public The Modernization of the State: 1950-63 81 opinion and feared that this nationalization would place in the hands of the state, and thus of those who controlled it, all the power of credit, which could at any time be used as a political tool. Victor Guardia, one of the lonely dissenting voices, asked why, if the nationalization of the banks was such a good idea, few other countries had attempted it. In his view the state was a poor credit manager and would allocate credit according to political, not economic, criteria. He feared thatbusinessmen who opposed the government would not have access to loans (Gil Pacheco 1985, p. 259). Gonzalo Facio, a member of the junta, responded to the critics of the decree: A reform that promotes private property cannot be a communist measure. The nationalization of the banks is not pro-Soviet, it does not go against private property, in its good sense, and it does not penalize private initiative; on the contrary, it promotes it. The nationalization of credit will enormously promote private initiative, since anyone willing to produce will have loans at very low interest rates. (Quoted in Gil Pacheco 1985, p. 249.) The purpose, according to Gonzalo Facio and other members of the junta, was to redistribute credit, to promote new businesses, to create new entrepreneurs, to stimulate private activity, and to avoid, through a careful allocation of funds, the concentration of resources in a few hands. After the nationalization the junta left the staff of the banks, who had been loyal to Figueres, in their old jobs. The banks were simply redirected toward new economic activities. In practice, there had merely been a change of owner: the banks continued to operate as private commercial institutions. Under the 1949 Constitution, the four banks became auton- omous institutions. In January 1950 the Central Bank was created, and it began to exercise a strict control over the nationalized banks. Financing Social Security The social security system, one of the boldest of the pre-1948 institutional innovations, was to become a permanent feature of Costa Rica's equity- oriented policy framework, despite the defeat of its original designers during the civil war. It was organized as a system of forced contributions by the state, the employers, and the workers, with the purpose of providing health and maternity care, old age pensions, and death bene- fits. A new agency, the Caja Costarricense de Seguro Social (Ccss), was created in 1941 to administer the system. The process of achieving universal coverage of the population was long and slow, expansion of services was poorly organized, and institutional innovations originated from the anticipatory initiatives of individuals rather than as responses to organized pressure (Rosenberg 1983). 82 Costa Rica and Uruguay Before the 1940s mechanisms for the protection of workers were limited and consisted of a few schemes for on-the-job accident insurance that benefited privileged urban workers, mostly in the public sector. Most protection efforts were related to ad hoc pension plans. The first to receive these benefits were teachers (1886) and the military (1888), fol- lowed by telegraph and telephone (1918), postal (1923), railroad (1935), judicial (1939), and customs (1940) workers. These plans provided di- verse benefits to specific groups, but there is no evidence that they were created in response to organized pressure. They reflected, instead, the political importance of the beneficiaries, as was dear in the case of the teachers and the military, or the patronage of prominent politicians. The plans were essentially a method used by the state to protect "its own"- groups of people working in the public sector, who were becoming increasingly dependent on their wages (Rosenberg 1983, p. 44). Calder6n Guardia had been influenced by the social doctrine of the Catholic Church during his training as a medical doctor in Belgium in the 1920s. Mario Lujin and Guillermo Padilla, who had also studied in Belgium, joined his administration in 1940. Padilla was quietly sent to Chile to study that country's social security system. After his return the president asked three prominent citizens to react to draft legislation, prepared by Padilla, for a social security system. Only one was against it-Tomas Soley, who wrote that "Costa Ricans value individual free- dom more than they value their wealth and health" and who also questioned the financial viability of the proposed system (Rosenberg 1983, p. 57). There were no basic objections to the project in Congress. The commission's report claimed that "nobody questions the importance, need, or urgency of the different social security services." The debate focused on three main issues: the financing of the system and the administration of its funds, the determination of the beneficiaries, and the nature of the services to be provided. Those with salaries above a ceiling of CR$300 would not be forced to join, but if they wished to participate, their contributions would be computed on the basis of cR$300. Low-wage workers were not given this choice, on the grounds that they needed the system the most. Since social security was a new tax, to be used for something that up to that time had been given away as charity or solved ad hoc through voluntary social solidarity mechanisms and the patriarchal benevolence of employers, the wage ceiling was a mechanism for reducing the incidence of the tax. Nevertheless, a large proportion of the labor force came under the plan. Rosenberg has shown that the introduction of social security was not a response to organized pressure. There was little interest among the masses in the project, and newspapers from that time show no evidence of public mobilization or explicit support. The Centro para el Estudio de los Problemas Nacionales reluctantly acknowledged that the innovation The Modernization of the State: 1950-63 83 was a good idea. The lack of interest may have stemmed partly from the climate of fear and uncertainty caused by World War II and partly from the efforts of the proponents of the new legislation to avoid a generalized debate. In fact, the administration did not want to appear overambitious, and many Costa Ricans may not have realized the scope of the reforms. The design of social security was the task of a few men rather than the effort of organized beneficiaries (Rosenberg 1983, p. 65). During the following decades the financing and coverage of the CCSS became a major policy issue. A permanent job was a requirement for eligibility for the system. Salaried workers were in a better position than the self-employed because of their employer's contribution. Thus, the system was designed for an urban, industrial economy characterized by salaried workers with permanent jobs. It offered no protection to the unemployed, and the expected benefits for the self-employed and for the rural population were limited. Furthermore, although the authorities justified the ceiling as a way of guaranteeing that services would be provided to the low-income population, the ceiling became an avoidance tool for higher-income groups. In 1942 Calder6n Guardia sent to Congress a bill to give the CCSS autonomy. No longer was the decision in the hands of a few, however. Organized groups, once they realized the scope of the institutional innovation, began to raise questions and to force an open debate. The Banco de Seguros, which had had a state monopoly on insurance since the 1920s, had become concerned about competition from the ccss. It now opposed increasing the ceiling wage because it feared losses for its private insurance program. Thus, two different state agencies were fighting for the same clientele. The Chamber of Industry opposed the reforms. It asserted that the new taxes designed to finance the contribu- tion of the state would be disastrous and that, in fact, firms were being asked to finance not only their own contribution as employers but also that of the state through the new taxes. The Chamber claimed that this would reduce Costa Rica's international competitiveness. Thus, for the first time a private business association stated that social security might be an obstacle to the country's economic development. In addition, the decision to establish a ccss pharmacy was seen as a governmental invasion of a field reserved for private enterprise and provoked strong protests. Doctors now realized that their profession was going to un- dergo a deep transformation, and some feared that these were the first steps toward the socialization of medicine in Costa Rica. Nevertheless, the ccss obtained its autonomy, and the wage ceiling was raised to CR$400. The ccss was authorized to decide the who, what, when, and how in providing its services (Rosenberg 1983, p. 77). Between 1946 and 1958 the ccss slowly expanded its services to meet the demands of a rapidly growing population. The number of workers included in the system increased rapidly at first as the urban populations of the Central Valley were easily incorporated into the program. After 84 Costa Rica and Uruguay that, the rate of expansion began to decline. A unilateral decision by the CCSS in 1946 to eliminate the ceiling, on the grounds that everyone had an obligation to contribute, was followed by a bitter political debate that culminated in a physicians' strike-the first in a long series of strikes by white-collar public sector employees. The ceiling was reintroduced and was not revised until 1958 (Rosenberg 1983, p. 103). Another critical problem was the state contribution, which had not been paid since 1946. Thejunta paid this debt, but it started to accumulate a new debt right away because it did not have an explicit policy regard- ing social security. By 1957 the state's debt, accumulated mostly during the Figueres administration, amounted to cR$16 million. Another reason for the slow expansion of ccss services was the wage ceiling, which had declined substantially in real terms. Faced with increasing costs, the Ccss had either to raise this ceiling or to increase the contribution from those already in the system. An increase in the wage ceiling, moreover, repre- sented an increase of about 50 percent in the amount of the state's contribution. The ccss claimed that the state should accept its share of social responsibility. Thus, the ccss was in the middle of a struggle for public funds and had to fight for its financial survival. The institution claimed that the Figueres administration was favoring other autono- mous institutions that had been created by the PLN. This was not surpris- ing, since the establishment of these new agencies was the PLNwar-horse for the coming elections. The ccss also faced serious threats from the powerful teachers' union, which wanted its members to be exempted from the ccss system so that it could establish its own, more attractive pension system. Despite strong pressure from the ccss, Congress, with the help of PLN leader Daniel Oduber, approved the teachers' request toward the end of 1958. The ccss was fighting too many battles, but raising the ceiling was crucial for its future. The Echandi administration sent to Congress a bill to raise the wage ceiling and another that would force the autonomous institutions to pay their part of the contributions, which had so far been covered by the central government. The new wage ceiling of CR$1,000 was approved, but Oduber opposed the second bill-since the PrLN wanted to protect its "own" institutions-and the bill was never approved (Rosenberg 1983, p. 125). The adoption of the new ceiling by the ccss was followed by public protests from both blue-collar and white-collar worker organizations. Employees of the nationalized banks and of other autonomous institu- tions organized a movement to request exemption from the system, claiming that their existing pension plans were adequate and more efficient. Oduber presented a resolution to Congress questioning the ccss's "violent" implementation of the new law. Minister of Labor Franklin Sol6rzano convinced Congress that the CCSS was correct in implementing the new ceiling immediately. Oduber withdrew his mo- tion for a revision of the law, and the request of the bank employees did not prosper. The ccss had won this battle. The Modernization of the State: 1950-63 85 Toward Industrialization Despite the traditionally negligible role of the industrial sector, there were some early efforts to encourage it. In 1940 the Calder6n Guardia administration secured passage of the New Industries Law, which granted limited tariff and tax benefits to new manufacturing endeavors. Its main inducement was a five-year privilege to import raw materials unavailable in Costa Rica free of duty, provided that they constituted no more than 25 percent of the raw materials used, and a five-year exemp- tion from duties on capital goods and oils and lubricants. The law was in effect for nineteen years and benefited about sixty firms. The main voice for manufacturing interests was the Chamber of Industry, organized in 1943. By 1953 it induded about one hundred entrepreneurs and was already very influential. The adoption of legisla- tion in Guatemala and El Salvador to promote industry and the initial proposal of the United Nations Economic Commission forLatin America (ECLA) regarding the formation of a Central American Common Market, which began to circulate in 1951, led the chamber in 1953 to submit to the Ministry of Agriculture and Industry a draft of an industrial promo- tion law. This proposal envisioned the encouragement of any processing industry, regardless of its dependence on domestic or foreign raw mate- rials. Benefits were restricted to a protective tariff, protection from dumping, and privileged access to credit from the nationalized banks. The executive sent the proposal to Congress, where the commission considered that beneficiaries should be restricted to industries that used at least 50 percent domestic raw materials (Weisenfeld 1969). Coffee prices were exceptionally high in 1953, and the bills were allowed to die in commission. In addition to the increase in agricultural exports during the early 1950s, other factors explained the lack of enthu- siasm for an industrialization law. These included attitudes that seem to have been characteristic of Costa Rica for generations. Foremost was the country's self-definition as an agricultural economy. By 1950 the major- ity of the population still owed their livelihood directly or indirectly to coffee, bananas, and a few other crops. Costa Ricans were proud to point out that the nation's agricultural production had provided them with the highest standard of living in Central America. The Chamber of Foreign Manufacturers' Representatives stated: Other Latin American countries, likewise predominantly agricultural, were subjected to industrialization and have been suffering serious economic crises for many years. This should serve as a warning to us. We are an eminently agricultural nation, and our strong economy has depended on agriculture throughout the years. Let us strengthen what we already have, and let us not try to create a fictitious economy based on industry. (Weisenfeld 1969, p. 8.) There was a marked sentiment that nothing of consequence could be produced in Costa Rica. Existing manufacturing enterprises were small, 86 Costa Rica and Uruguay family-owned, and concentrated in traditional consumer goods; food processing, beverages, tobacco, textiles, shoes, and clothing accounted for about 75 percent of industrial output. Local preferences favored imported goods, and Costa Ricans were quick to point to early attempts at industrialization that had failed conspicuously. In 1955 Rodrigo Madrigal Nieto, president of the Chamber of Indus- try, created a working group to prepare a draft proposal for a new law, considerably broader in scope than the 1953 bills, which deleted the requirement of 50 percent of domestic value added. The simplicity of the assembly process and the near monopoly of the local producers made import-intensive industries a low-risk, high-profit investment, in com- parison with those based on domestic raw materials. The distinction between high-value-added activities, which used domestic raw materi- als, and assembly plants, which used inported inputs, became an im- portant issue. The Chamber of Industry launched an active campaign to promote passage of the bill, but it was unable to generate sufficient interest. A new version, released in December, mobilized the importers for the first time. A letter to Congress from the Chamber of Commerce, the National Association of Foreign Manufacturers' Representatives, and the Union of Importing and Retailing Merchants predicted serious setbacks to the economy: "We cannot accept measures which, under the pretext of aid to the industrial sector, will undermine the country's economic structure, to the evident harm of the consumer." They warned that the bill would create a privileged class of industrial aristocrats at the expense of the working class and that higher wages in industry would draw needed farm labor from the countryside. Moreover, "due to the country's small population and the impossibility of competing with foreign production, industry will not make a substantial contribution to the national income. Too small plants will lead to expensive products or cheap products of low quality" (Weisenfeld 1969, p. 18). Despite constant pressure, however, President Figueres did not send the draft to Congress. Although his administration dearly favored an industrial promotion law and the president publicly supported it, according to Weisenfeld, "he never gave the bill concrete support and never pushed it in the legislature. He seemed to be afraid to take the steps necessary to have the bill translated into law." Figueres's hesitancy may have reflected his belief that one of the consequences of granting fiscal exemptions would be "to hand wealth on a silver platter to the great American trusts," which were prepared to swoop down and seize the benefits. His minister of finance also believed that it would be unwise to grant tax exemptions before the fiscal problem was solved (Weisenfeld 1969, p. 20). In 1958 Oduber introduced a new bill which reflected the idea that industrialization should be based on the use of domestic raw materials. Applicants were to be granted a full slate of incentives including, for the first time, exemption from income tax and from national and municipal taxes on invested capital. It became evident to the Echandi administra- The Modernization of the State: 1950-63 87 tion that support for some form of legislation to promote industrializa- tion was growing-stimulated by the continued downward trend of coffee prices, from us$68 in 1953 to us$43 in 1958 and us$38 in 1961. Under pressure to find an alternative to coffee, and fearful that Oduber might eventually win support for his industrialization bill and claim a PLN victory, Echandi elected to incorporate the bill into his program. The draft he sent to Congress was shaped into law six months later. This significant attempt to modify relative prices was prompted, therefore, by changing coffee prices. The campaign to place an industrial promotion bill before Congress had lasted more than six years. Between 1953 and 1959 seven different industrialization proposals were prepared, and three were formally introduced in the legislature. All three were based on a program of fiscal incentives. Presidents of political ideology as diverse as Figueres's state interventionism and Echandi's liberalism were equally reluctant to press for the passage of this legislation. On the issue of industrialization the emerging class of small-industry entrepreneurs were lined up against the established class of coffee growers and importers of finished goods. In time, the PLN became associated more and more with the new indus- trialists, while the traditional exporters opposed the increasing protec- tionism that the PLN promoted. The Chamber of Industry, as a main proponent of legislation to promote industry, drafted two of the proposals and was highly influen- tial in shaping four of the remaining five. It was no accident, therefore, that the Chamber's views prevailed on two key points: the law's benefits were to be offered to all industrial applicants, regardless of the extent of domestic value added, and the law would gradually replace the limited incentives offered under the old law with a complete set of customs and tax exemptions, the scope and duration of which increased with new drafts. It is doubtful that the Chamber would have been able to generate sufficient interest to bring this bill to the Legislative Assembly had it not been for the confluence of two fadors: the drastic decline in the world market price for coffee and the growing momentum of the Central American integration movement. With the help of ECLA, the Central American nations had been explor- ing the feasibility of a common market. The first concrete steps in this direction had been taken with the signing in 1958 of the Multilateral Treaty on Free Trade and Central American Economic Integration by Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. The countries were to begin intraregional trade liberalization immediately and to establish mechanisms leading to a common external tariff. The treaty went into effect for El Salvador, Guatemala, and Honduras in 1959. True to its tradition of aloofness, Costa Rica sent observers to the integration conferences and, although it signed the treaties and proto- cols, delayed formal ratification until much later. Most analysts, how- ever, believed that entry into the CACM was eventually inevitable (Weisenfeld 1969, p. 28). 88 Costa Rica and Uruguay During 1958 the question of industrialization had been discussed intensively in PLN caucuses and, at the urging of Oduber and Hernan Garr6n, the PLN voted to support the industrial promotion bill, although it had been sent to Congress by the Echandi administration. The bill was sent with the justification that there was a pressing need to create urban employment, given the high rate of population growth. Weisenfeld, in his analysis of the congressional approval of the law, claimed that the actual text of the bill that reached the Assembly floor was the work of very few men, acting as representatives of their professional or class interests. The legislative committee with which they met and which rendered the floor report was, consequently, mostly a conduit for the viewpoints of the emerging class of industrialists. The debates were characterized by a conspicuous lack of objective information and of original thought on both sides of the industrialization issue and, similarly, by a failure to bring forth from the generalized Prebisch or anti-Prebisch arguments specific focus on the particular problems of a nation such as Costa Rica.' In fact, there was little theoretical discus- sion of any kind. The bill was enacted partly because of the skill of the representatives of the Chamber of Industry and of its floor proponents and managers, but more importantly, because of two factors: the fall in coffee prices and the resultant pressure to find substitute income and foreign exchange sources, and Costa Rica's commitment to stay in the Central American Common Market. The passage of such a significant piece of legislation did not involve all the groups or inter- ests likely to be affected by it. For example, there was no participation of labor. Hence, no broadly based social dialogue took place, in spite of the openness of the Assembly debates and attendant newspaper coverage and publicity. At no time was there any in-depth evaluation of the likely effects of the key provisions of the bill. The bill was debated, but not analyzed. (Weisenfeld 1969, p. 104.) The Assembly never challenged the necessity for a complete slate of fiscal incentives. The assumption, strongly supported by the Chamber of Industry since 1955, that ample customs and tax exemptions had to be granted to encourage investment in Costa Rica's industrial sector was accepted without objection. On August 21, 1959, the bill was overwhelmingly approved. In the rather euphoric words of a key congressmen, "As of the time of enact- ment of this statute, Costa Rica is an industrial country." Joining the Central American Common Market In addition to the debate about industrial promotion, one of the most important policy conflicts of the period was the reluctance of the Echandi administration to sign the General Integration Treaty adopted by the other countries in 1960 and to join the CACM. The industrialists The Modernization of the State: 1950-63 89 had to wait for the victory of the PLN and the Orlich administration (1962-66) for Costa Rica to join the common market. For about seven years (1951-58) two administrations of different ideological persuasion had participated in the discussions promoted by ECLA concerning the need to foster industrialization at the regional level through a widening process of economic integration. During those years the different social groups that would be favored or hurt by the process did not devote much attention to the issue. Somehow, regional integra- tion seemed to be something remote and of slow gestation. The indus- trialists, in particular, were more immediately concerned with domestic legislation to promote their interests. The external shocks of the late 1950s, however, forced the country to consider explicitly the role of traditional exports and import substitution in its development strategy. The resulting debate and policy reforms provide a clear example of how changes in the country's terms of trade influenced the relative strength of different social groups in the political arena and of the effect that exogenous shocks have had on the design of policies and strategies. The sharp drop in the price of coffee when African producers entered the international market seriously hurt the Costa Rican economy. More- over, banana exports dropped sharply between 1957 and 1959. After the trade surpluses of the first half of the 1950s, the authorities had to face increasing trade deficits. In reaction, the Echandi administration sent to the Legislative Assembly a bill providing for a Plan de Fomento Econ6mico (Economic Promotion Plan), designed mostly by the minister of agriculture and industry, Jorge Borb6n, who was also the president of the board of directors of the Oficina del Caf6 (Coffee Office). The main components of the plan were the establishment of a fund through contributions from several state agencies, to be used by the nationalized banks for agricultural credit and the promotion of rural cooperatives; the creation in the nationalized banks of mortgage depart- ments, financed with bond issues, to lend to agricultural and industrial borrowers in financial distress; the establishment of credit lines for handcrafts and family industries; and the creation of the industrial sections of the nationalized banks. Although several of these measures attempted to promote industry, the Echandi administration devoted its greatest attention to agriculture, and particularly to coffee. This emphasis on promoting agriculture was reflected in Echandi's statement to Congress: The government has arranged for the rescheduling of agricultural loans owed to the banks, to make them correspond to the lower returns being obtained by the farmers. We cannot eliminate this important source of output for the sake of a total diversification of our economy. The government understands that diversification is necessary, but this will have to be achieved without, in the process, leading to bank- ruptcy or removing the protection of those who have for so many years been the main support of the national economy. 90 Costa Rica and Uruguay He also related how his administration planned to use, particularly for small farmer loans, funds to be borrowed from U.S. commercial banks; these were, at that time, the largest loans ever received by the government. The Chamber of Industry lobbied unsuccessfully for a change in the implicit allocation of funds. In their words, An economic promotion plan cannot successfully achieve its objec- tives if its incentives are denied to some basic sectors of economic activity. The disproportionate allocation of funds to small farmer credit is inappropriate. A similar treatment should be offered to man- ufacturing. Minister Borb6n responded: It is essentially the agricultural activities which face the greatest diffi- culties, and, therefore, they deserve the greatest attention from the central government. We are essentially a country of farmers, and only an agricultural boom can sustain a manufacturing boom. If the major- ity of Costa Ricans, who are farmers, are left to their fate, we cannot expect much from the opportunities for the industrialists. During the late 1950s Costa Ricans were thus engaged in an intense debate about the relative importance of agriculture and manufacturing for the country's economic development and about the appropriate policy instruments for promoting growth. It was in this context that the country had also to decide whether to join the CACM. Jorge Borb6n, by then minister of finance and economy, explained his position against participation at a roundtable organized by the Asociaci6n Nacional de Fomento Econ6mico (ANFE), one of the country's most influential orga- nizations. ANFE had been created in 1958 as an ideological association for the dissemination of liberal ideas, the promotion of private initiative, and opposition to interventionism. Its members induded prominent profes- sionals and intellectuals, in addition to businessmen. At the ANFE workshop in 1961 Borb6n indicated his opposition to participation in the CACM. He feared that the process of integration was going too fast, and he considered this acceleration dangerous. He be- lieved that a progressive reduction of the differences in the political, economic, and social structures of the Central American countries was needed in order to avoid too large a fiscal effort, and he therefore fa- vored a more gradual process of integration. He pointed out that the Central American economies were competitive, not complementary, and that few gains and many costs could be expected from free trade among the common market partners. In the end, he believed, few firms would be able to survive in the small market, and incipient entrepre- neurs would disappear. He insisted on the relative strength of the Salvadoran and Guatemalan businessmen and the weakness of Costa Rican manufacturers. He was concerned about the much higher level of wages in Costa Rica, as well as the much wider set of social security The Modernization of the State: 1950-63 91 benefits and their effect on production costs and the country's competi- tiveness. He perceived that Costa Rica would become increasingly de- pendent and subordinated to the economic interests of the other countries. He was particularly concerned about the fiscal losses implicit in the tax holidays and other exonerations to be granted to protected firms (Asociaci6n Nacional de Fomento Econ6mico 1968). Another participant in the roundtable, Manuel Jim6nez, president of the Chamber of Sugar Producers (himself an important coffee and sugar producer), expressed concern about competition from other Central American countries in agribusiness activities. These representatives of the traditional export sector understood that the process of industrial- ization and economic integration would create new centers of power and disturb the existing balance of influence on policymaking. The PLN representative at the workshop, Raul Hess, who had been minister of finance in the Figueres administration, argued in favor of an increasing diversification of the country's productive structure. He be- lieved that the old agroexporting model was exhausted, as reflected by the fall in coffee prices. Costa Rican agriculture was characterized, in his view, by low yields and was not competitive in international markets. New agricultural exports could not be counted on as a growth pole. The only path open to the country was industralization. But industrializa- tion would be extremely costly within the confines of the small Costa Rican market. Participation ire the CACM was thus a golden opportunity to overcome the constraints of small size (Asociaci6n Nacional de Fomento Econ6mico 1968). The Chamber of Industry, still under the leadership of Madrigal Nieto, joined forces with the PLN to lobby for participation in the CACM. Ratification of the treaties became one of the PLN's most important presidential campaign issues in late 1961. In July 1962 the new Orlich administration announced its commitment to integration. It took an- other year, however, for the Legislative Assembly to ratify the treaties. Costa Rica did not formally join the CACM until November 1963. Pressure from the United States, the urging of President John F. Kennedy in San Jose in March 1963, and accession being made a precondition for Alliance for Progress assistance contributed to this inevitable result. The Modernization of the State In 1950 the Costa Rican public sector was small and was basically restricted to the central govermnent. Except for the social security sys- tem, created in the early 1940s, its functions were limited to those of a traditional laissez-faire state. This situation changed drastically after the 1948 dvil war. Numerous institutions were created and were granted increasing interventionist powers. By the end of the nineteenth century there were fifty-six public insti- tutions, including numerous munidpalities. During the 1940s a few ministries were added to the executive branch, and the University of 92 Costa Rica and Uruguay Costa Rica and the ccss were founded. The process of institutional innovation accelerated after the civil war. Twenty-five new institutions were established in 1948-57, twenty-eight in 1958-67, and sixty-six in 1968-77. Two-thirds (seventy-four institutions) were created during PLN administrations. By 1980 there were 185 public institutions in the country (Jimenez Castro 1986, p. 16). The most important change, however, was not quantitative but qual- itative, and it involved a widening participation of the government in different activities. This enlargement of the public sector was facilitated by the 1949 Constitution. Whereas the traditional political groups fa- vored a revision of the 1871 Constitution, with its liberal, individualist, and presidentialist orientation, the social democrats of the junta wanted to modify the legal and institutional foundations of the state in order to increase the degree of state intervention in the economy. With this purpose in mind, the junta appointed a nine-member committee to prepare a draft for a new constitution. When the Constitutional Assem- bly was elected in December 1948, very few social democrats won a seat. The Assembly rejected the committee's draft, but numerous ideas incor- porated in it were adopted. The new constitution represented a major attempt to decentralize power. The greatest loss was suffered by the executive and, in particular, by the president, but the legislature was also subjected to constraints. Both lost their roles in the administration of elections, which was en- trusted to the Tribunal Supremo de Elecciones. The civil service was established, limiting the president's authority to appoint and dismiss officials. The Contraloria General de la Republica was created to oversee the legality of public administration. Most important, autonomous insti- tutions, with complete independence in their operations and manage- ment, were entrusted with multiple new public functions. The junta decreed significant institutional reforms. Most prominent was the nationalization of the banking system. The Instituto de Defensa del Cafe, created in the 1930s to regulate the relationships between the participants in the coffee pact, was nationalized and was transformed into the Oficina del Cafe. Its most important function has been to determine the price that the processor (beneficio) must pay the small producer. In addition, the beneficio has been required to devote a propor- tion of the credit received from the nationalized banks to finance the small producers, under terms and conditions regulated by law. The Consejo Nacional de Producci6n, created by the Calder6n Guar- dia administration as a department of the Banco Nacional, was trans- formed in 1948 into a semiautonomous institution that was to promote crops for domestic consumption. It became an autonomous institution in 1956. The Instituto Costarricense de Electricidad, created in 1949, was entrusted with power generation and telecommunications. The Central Bank was created in 1950 during the Ulate administration. Also in 1950, the Civil Service law, the Municipal Autonomy Law, the Organic Law The Modernization of the State: 1950-63 93 of the National Banking System, and the Organic Law of the Central Bank were enacted. The Instituto Nacional de Vivienda y Urbanismo was established as an autonomous institution in 1954 to expand the low-income housing programs initiated a decade before. The Instituto Costarricense de Turismo was created in 1955. The Ferrocarril Electrico al Pacifico, a public enterprise since the construction of the railroad at the end of the nineteenth century, was transformed into another auton- omous institution, and the Junta de Defensa del Tabaco (Tobacco Board) was established in 1956. The Instituto de Tierras y Colonizaci6n (1961), the last major institution created during this period, was entrusted with land tenure and colonization issues. Note 1. Rauil Prebisch (1901-86), at the time executive secretary of the Economic Commission for Latin America and later director-general of the United Nations Conference on Trade and Development (uNcTAD), argued that the terms of trade tend to shift to the disadvantage of agriculture and that it was in the interests of developing countries to industrialize behind protective tariffs. Protectionism and the Regional Common Market: 1963-73 In 1963 Costa Rica was still a small, rural, open economy. Exports, however, had been significantly diversified, and Costa Rica finally joined the Central American Common Market (CACM) that year. Sub- stantial structural transformations were taking place, and the public sector continued to grow rapidly. Political stability remained the country's most outstanding achievement. Social and economic indica- tors improved even beyond the relatively high levels attained by 1950. In many respects Costa Rica no longer resembled the simple country of the first half of the twentieth century. During the following decade the country enjoyed rapid economic growth and stability, until the first oil shock. Initial Conditions for 1963-73 By 1963 Costa Rica's population had increased to 1,379,800. The popu- lation growth rate, although still high, had declined to 3.7 percent a year from a peak of 4.0 percent a year in 1961. The population was even younger than it had been a decade before; the median age was 16 years. GDP amounted to CR$3,404 million (about US$514 million), and GDP per capita was CR$2,467 (us$373), about 1.5 times the 1950 nominal figure. In constant 1966 colones, GDP had almost doubled, from 1,773 million to 3,476 million, and GDP per capita had increased from 2,066 to 2,519. About two-thirds of the population was classified as rural, and 63 percent of the labor force was employed in rural areas. Despite the slow change in the urban-rural breakdown, structural transformation was rapid, and it modified the character of both urban and rural areas. The share of agriculture in employment declined to 50 percent. The share of agriculture in GDP, in current prices, declined 16 points, from 41 percent in 1950 to 25 percent in 1963. In real terms, however, this share did not 94 Protectionism and the Regional Common Market: 1963-73 95 change at all. Thus, the nominal reduction merely reflected a price effect, as the domestic terms of trade of agriculture deteriorated from 124 in 1957 to 99 in 1963. The sharp decline of the share of agriculture in employment and the stability of its share in real GDP reflected substantial improvements in the productivity of labor in agriculture. The importance of manufacturing did not change much between 1950 and 1963. Its share in GDP reached 14 percent, while its share in employ- ment remained at 12 percent. Rapid growth took place in the activities that reflected the expansion of the public sector. The share of general government in nominal GDP increased to 11 percent. In 1963 exports amounted to us$95 million, having increased 1.7 times since 1950. Imports amounted to us$124 million, about 2.7 times more than in 1950. The consequence was a trade deficit of about 6 percent of GDP, which contrasted with a surplus of about 6 percent of GDP in 1950. Bananas, which represented 65 percent of exports in 1950, accounted for only 23 percent in 1963. Coffee contributed 32 percent in 1950 but 48 percent in 1963. Both crops together accounted for 72 percent of exports, as against 97 percent in 1950. Beef and sugar had grown to 11 percent of the total. These figures reflected the significant process of agricultural diversification that took place in the late 1950s and early 1960s. An important stimulus was the reallocation-in part to Costa Rica-of the U.S. sugar quota after the Cuban revolution. Other exports had also grown, to 18 percent of the total. Government was much larger than in 1950. Central government rev- enues were about 3.4 times more than in 1950 and represented 13 percent of GDP, and central government expenditures were 5.2 times more than in 1950 and amounted to 14 percent of GDP. The consequence was a central government deficit of about 1.1 percent of GDP. Several autono- mous institutions, with separate budgets, had been created. Thus, the most important structural transformation was the substantial in- crease in the public sector, as employer and as a claimant of available resources. The labor force increased 1.4 times between 1950 and 1963, to 408,100; employment stood at 379,900 by 1963. Whereas employment in the private sector increased less than 1.3 times, employment in the public sector trebled, and the share of the public sector in employment grew from 6 to 13 percent. The proportion of the labor force covered by social security increased to 29 percent. Life expectancy gained 7.6 years, reaching 63.3 years. Infant mortality declined from 90 to 80 per 1,000 live births. The rate of illiteracy fell to 14 percent of the population 10 years old and older. The greatest gains took place in rural areas, where illiteracy dropped 8.8 points, to 20 percent; in urban areas illiteracy declined to a low 5 percent. The propor- tion of women 20 to 24 years old who were in school increased from 1.5 to 5.2 percent. 96 Costa Rica and Uruguay Development Strategy and Protectionism Two characteristics of the Costa Rican economy are its small size, with the limitations imposed by an insignificant domestic market, and a high degree of openness. In view of its specialized resource endowment and small domestic market, the country always understood that trade must serve as the economy's engine of growth. When Costa Rica joined the CACM at the end of 1963, it consolidated its choice of a protectionist strategy of industrialization through import substitution. This decision implied free trade among the customs union partners and a common, highly protective external tariff barrier for imports from all other coun- tries. Thus, Costa Rica chose simultaneously to increase its openness to Central America and reduce its openness to the rest of the world. In the early days, the consequent increased trade promoted growth, but even- tually the protectionist framework of the CACM contributed to stagna- tion. The customs union, therefore, had a mixed effect. Given the experience with dedining coffee prices just before the formation of the CACM, import substitution was justified mainly as a measure for reducing dependence on international markets and avoid- ing the fluctuations and uncertainty associated with concentration of exports on a few primary products. It was believed that the regional market offered a greater growth potential and was safer and more predictable than the international market. Manufactured goods, which represented only4 percent of exports in 1963, grew to 29 percent by 1979. About four-fifths of these exports went, however, to the protected mar- kets of the CACM partners. Industrialization was a key dimension of the PLN agenda of diversifi- cation of the country's productive structure as a means of widening the opportunities available to the emerging professional and small entrepre- neurial classes. Thus, blaming traditional exports for the country's insta- bility and stagnation in the late 1950s had the side effect of weakening the political power of the coffee growers and other exporting groups. Unfortunately, even the whole of Central America was never a suffi- ciently large market. Market size is a crucial determinant of the costs of industrialization; it determines the degree of viable specialization, the extent of competition, and the opportunities for exploiting economies of scale. Given the small size of the regional market, import substitution led to the establishment of many high-cost industries, substantial mo- nopoly power in domestic markets, and limited competitiveness abroad. In the earlier stages of the CACM, GDP growth rates were relatively high. In particular, the dramatic increase in Central American trade after entry into the customs union in 1963 led to high growth rates for manufactur- ing. Manufacturing output grew more rapidly than domestic consump- tion, which, in turn, was fueled by a renewed successful performance of the main agricultural exports. These rates of growth were not sustained into the 1970s, however. Eventually the easy stages of import substitu- Protectionism and the Regional Common Market: 1963-73 97 tion were exhausted, and the constraints imposed by the slow growth of domestic demand became binding. The distortions and inefficiencies brought about by protectionism became apparent in the structure of production and in the limited capacity of the manufacturing sector to compete outside the CACM High levels of effective protection were adopted for the production of final consumer goods, with low or negative rates of effective protection for raw materials, intermediate inputs, and capital goods. The degree of variation across rates of protection was very large. This reflected a permissive attitude toward the granting of rents and provided ample opportunities for arbitrariness in their distribution. Moreover, in several activities, the value added in the economy has been negative-a phe- nomenon of extreme waste. Protection was accentuated by favorable tax treatment, fiscal concessions, and other incentives for investment in the industrial sector, as well as by credit and foreign exchange policies that implicitly subsidized these activities. When all the determinants of effec- tive protection were taken into account, "Costa Rica had been the most highly protected country in the region" (Rapoport 1978, p. 705). The outcome of this structure of effective protection was a very import-intensive manufacturing sector and increasing dependence on imports of raw materials, fuels, intermediate inputs, and capital goods and on the foreign financing that made these imports possible. As a consequence, the share of final consumer goods in total imports steadily declined, to less than 20 percent in the late 1970s. Import constraints in these circumstances thus implied a reduction of activity and employ- ment in the manufacturing sector. This caused major political-economy problems and created strong incentives to borrow abroad in order to postpone balance of payments adjustments. The protectionist strategy distorted relative commodity prices, turn- ing the domestic terms of trade against agriculture, except during peri- ods of extraordinarily high international commodity prices such as the coffee boom of 1976-77. It also distorted relative factor prices, underpric- ing capital for privileged sectors and overpricing labor in the modern sectors. Substantial payroll taxes, introduced to finance social programs, raised the effective cost of labor, while several policies-including the tax treatment of investments, a fixed exchange rate that overvalued the domestic currency, tariff exemptions for imports of capital goods, and credit-rationing policies produced by underequilibrium interest rates- underpriced capital for preferred activities and accentuated the capital intensiveness of manufacturing. The reduced capacity of the private sector to absorb labor caused the public sector to become an active residual employer in order to avoid high open unemployment rates. The concentration of qualified workers in large public institutions then facil- itated their unionization. These strong unions managed to negotiate high public sector wages and opposed efforts to reduce the size of the gov- erinent when the fiscal deficit became unmanageable. 98 Costa Rica and Uruguay Trade Policies Until 1984 trade policies were closely related to the import-substituting strategy that was adopted and to Costa Rica's adherence to the General Treaty of Economic Integration. The cAcM consisted of a free trade zone for the five members, with a common external tariff. Several policy instruments were utilized. * A common external tariff designed to provide, in all the Central American countries, the same degree of nominal protection against extraregional imports. With few exceptions, it covered all imports from outside the region. * The San Jose Protocol, adopted in 1970 at a time of a balance of payments crisis. It allowed a tariff surcharge of 30 percent. * The Central American Agreement on Fiscal Incentives for Indus- trial Protection (REIFALDI), which provided new firms with incentives, including tariff exemptions on imports of inputs from outside the region and income tax exemptions for certain types of capital expen- ditures. These incentives were supposed to be valid for a limited period, but in practice they were always extended. * Other restrictions on extraregional imports that members were allowed to establish unilaterally in addition to the CACM instruments. Costa Rica utilized exchange rate surcharges to tax certain imports, as well as selective consumption taxes, with higher rates for products imported from outside the region. * Several export taxes, particularly on traditional commodities. e An exchange rate policy that lowered the import cost of indus- trial inputs and penalized exports. According to a World Bank esti- mate, from 1974 through the onset of the crisis in 1981 Costa Rica maintained an exchange rate that overvalued the col6n by about 18 percent, even before correcting for the effect of protection. This arbitrary and complex set of interventions, rather than scarcity and comparative advantages, became the basis for the allocation of resources. Protection, in turn, generated rents for specific activities and firms, which diverted managerial efforts from productive efforts to active lobbying. With the aim of encouraging exports of nontraditional goods to mar- kets beyond the CACM, the government introduced in the early 1970s the certificado de abono tributario (cAT), which consisted of a tax credit of 15 percent on the f.o.b. export value. It also introduced at a later date the CIEX, a tax credit subsidy based on the increment of exports over the previous year, as well as several duty-free provisions, including draw- back schemes. As almost no tariffs on these inputs were paid, even when they were used for other activities, the drawback schemes were not an effective instrument for export promotion. The CAT and CEX systems were not applied uniformly, and they involved cumbersome proce- Protectionism and the Regional Common Market: 1963-73 99 dures. These incentives did not overweigh the antiexport bias intro- duced by the import-substituting protectionist strategy. Financial Deepening In addition to being a small and open economy, until the rnid-1970s Costa Rica enjoyed remarkable price stability. Between 1950 and 1969 the annual rate of change of the consumer price index was less than 2 percent a year. The country did not experience double-digit inflation until 1973. Minimal inflation reflected the openness of the economy and an exchange rate that was fixed for long periods. The domestic price level was thus determined by international price movements, during a period when international inflation was also minimal. The fixed exchange rate reflected, in turn, a revealed preference for monetary stability. The country was willing to adopt the monetary and fiscal discipline that was necessary to sustain the exchange rate, a major objective of Central Bank policy. The official exchange rate re- mained at CR$5.60 per U.S. dollar from 1950 until 1961, when the col6n was devalued to CR$6.62 per dollar. The next devaluation did not take place until 1974, when the exchange rate increased to CR$8.54 per U.S. dollar. During the 1950s and 1960s the rate of monetary expansion was moderate. Between 1961 and 1971 the nominal money supply, narrowly defined (Ml), increased 12 percent a year. Since the rate of growth of real income, although high, was still slower than the growth of money balances, the absence of inflation was a result of the rapid increase in the demand for money. As a consequence of exchange rate stability, low inflation, and the relatively high rate of growth of real income during the 1960s and most of the 1970s, Costa Rica experienced a significant degree of financial deepening. The ratio of the money supply, in the broad sense of currency and demand, savings, and time deposits (M2), with respect to GDP rose from 19 percent in 1960 to 43 percent in 1978. These ratios reflected a comparatively high degree of money deepening in comparison with other developing countries-particularly those of Latin America, where high and erratic rates of inflation had been a main instrument of finan- cial repression. Most of the monetization of the economy and the provi- sion of a means of payment took place before the 1960s, since by then the ratio of the money supply narrowly defined (Ml) had reached contem- porary levels. Subsistence and nonmonetary transactions have been a minuscule proportion of the Costa Rican economy since the early 1950s, and banking habits were rapidly adopted. The largest portion of the financial deepening of the 1960s and 1970s was thus associated with nonmonetary deposits. The ratio of quasi-money to GDP increased from 4 percent in 1961 to 19 percent in 1978 as preferences for risk and return led to more diversified portfolios. 100 Costa Rica and Uruguay This increasing mobilization of funds through the banking system made possible the rapid expansion of domestic credit. Nevertheless, Costa Rica continued to rely heavily on foreign savings to finance domestic investment. In addition, numerous regulations and the admin- istrative allocation of credit fragmented financial markets and increased transaction costs for all market participants. These deficiencies were exacerbated in the late 1970s, as the crisis set in. CODESA: The State as Producer During the 1960s many Costa Ricans, particularly key leaders of the PLN, adopted ideas about protectionism, nationalism, and planning from the UN Economic Commission for Latin America (ECLA). According to Dan- iel Oduber, In March 1963 we [Costa Rican President Francisco Orlich, U.S. Pres- identJohn F. Kennedy, U.S. Secretary of State Dean Rusk, and Alliance for Progress experts] met in order to discuss the Alliance's program for Costa Rica. The American representatives insisted on the need to abandon classical economic models in order to modernize the country's productive structure, with emphasis on social justice and increasing independence of the national development process. It was necessary to promote larger firms and overcome the reluctance of Costa Rican capitalists toward investing in large enterprises. It was necessary to replace the foreign firms which were exploiting our resources. Foreign investment had to be rationalized and subjected to the same legal framework as domestic firms. All of this required planning, in order to start large projects that, once established, could then be sold and turned over to the domestic savers of the region. (La Naci6n, July 25 and 29, 1982.) Although a much larger public sector was one of the PLN's objectives, its original leaders had attempted to prevent the concentration of power by creating the autonomous institutions. The independence of the de- centralized agencies was, however, no longer compatible with the PLN's desire to increase the role of planning. By 1966 PLN leaders were already complaining that the Costa Rican state was not unitary and coordinated; it was more like a collection of islands in which each institution did what it wanted, while the central govermnent became weaker and weaker (Vargas 1987, p. 10). The 1949 Constitution gave the autonomous institutions indepen- dence with respect to both policy and management. The PLN leaders believed that the agencies' independence in policymaking had to be taken away. The PLN used its majority in the Legislative Assembly to pass a constitutional amendment that would restrict the independence of the autonomous institutions to matters of management Thus, not only was the public sector growing rapidly, but power had become more centralized. Protectionism and the Regional Common Market: 1963-73 101 During the 1960s the political ideology of the PLN underwent several transformations. From the concept of state intervention, it rapidly moved to emphasis on nationalism. According to Oduber, "while not opposing foreign investment, because it is necessary to promote our development, we believed that strategic industries must be entirely Costa Rican." Moreover, in his view, their evolution had to be planned. This was the ideological background for the creation, in November 1972, of the Costa Rican Development Corporation (CODEsA), after a decade of debate on its merits. The establishment of CODESA reflected the desire to promote not only infrastructure but also state productive activities. It was daimed that CODESA was a necessary complement to the nationalized banking sys- tem. There was a need for an agency willing to take the risks involved in large undertakings-risks which in the early stages could be very high. Once these risks were reduced and the firm was established in the market, it could be sold to private owners. During discussion in the Legislative Assembly in 1969, PLN leaders insisted that the new agency must be responsive to the economic policies of the executive and that it had to be a corporation, able to raise funds without legislative authorization. The project was finally approved in 1972, with thirty-seven votes in favor and only eight against. The new institution, a corporation (sociedad an6nima) with mixed capital, was to promote economic development by strengthening Costa Rican private enterprises within the mixed economy model. It was expected to mod- ernize, rationalize, and expand existing productive efforts and to de- velop new productive activities. CODEsA's equity was divided into 33 percent from the private sector and 67 percent from the public sector. The private sector, however, never subscribed its share, and CODESA has operated as a public institution managed by a board of directors of whom four represent the public sector and three the private sector. The private sector directors became, in practice, representatives of the chambers, chosen by the executive. CODESA's activities came to typify the marriage of government interven- tion and rent seeking that was at the root of the fiscal crisis of the early 1980s, as described in chapter 7. Universal Social Security Even after the wage ceiling for compulsory participation in the social security system was raised in 1958, services expanded only slowly, despite an increasing demand fueled by rapid population growth. More- over, the system was not reaching the weakest groups; rather, it covered many who had the means to pay for medical attention and did not need or want the services of the Caja Costarricense de Seguro Social (ccss). An important reason for this lack of dynamism was the accumulating government debt, which came about because the state did not pay its share with respect to every worker or its contribution as an employer. 102 Costa Rica and Uruguay Rosenberg describes the struggle to solve the problem of the government's inability to pay that took place between 1959 and 1961. In 1959 Enrique Obreg6n, a PLN diputado, proposed a constitutional reform to force the government to devote 10 percent of the national budget to the ccss. This proposal was attacked by the Central Bank on fiscal grounds and was rejected in committee. The finance minister, Alfredo Hernandez, proposed instead to allocate to the ccss the revenue from the cigarette tax. This, however, amounted to only cR$11 million, whereas the annual contribution was CR$15 million. The issue was a difficult one because of the severe fiscal disequilibrium, and the debate reflected political-economy conflicts-the struggle for funds among var- ious agencies within a rapidly growing pubLic sector in the presence of fiscal constraints and questions about the role of social security and its effect on economic growth. For the first time the CCss did not make proposals for its own expansion (Rosenberg 1983, p. 133). PLN politicians in the Legislative Assembly began to promote more ambitious plans to extend coverage to wide segments of the population, while the ccss had a cautious and modest program. Whereas the bureau- crats took a narrow view concerning the set of beneficiaries that the institution should serve, the politicians wanted the support of the large segments of the population not yet covered. The PLN also wanted to get credit for the financial consolidation of the CCsS. The tension between the aspirations of the politicians and financial reality grew. The more the ccss needed to rely on the Legislative Assembly for its financing, the more political rather than technical criteria guided the expansion of its services. Increasingly, the desires of the politicians dominated the cau- tion of the bureaucrats. In 1961 a constitutional amendment was proposed that would require the ccss to achieve universal coverage within ten years. The ccss pro- tested, claiming that as an autonomous institution it had the right to define the size and scope of its services and that it lacked the infrastruc- iure to make this goal feasible. The legislators were surprised by the bureaucratic resistance to a program that would justify a vigorous expansion and transform the institution into one of the most powerful agencies in the country. Moreover, such a constitutional mandate would facilitate the financial independence that the ccss desired (Rosenberg 1983, p. 144). At the time, this crucial reform was ignored by most other groups, which considered it merely a formal, legalistic statement that could not be implemented. Moreover, the innovation stemmed from the initiative of individual politicians, not from popular pressure. In May 1961 two constitutional amendments mandated universalization of coverage within ten years and guaranteed that the state would pay its contribu- tions. All forty-five diputados were in favor of the reforms, which prom- ised everything but actually gave nothing. Since the mandate had no immediate practical consequences, its redistributive nature was not Protectionism and the Regional Common Market: 1963-73 103 dearly understood by all. Furthermore, it represented an alternative to costly approaches that would require employers to pay the contributions so far covered by the state. Even the conservative newspaper La Nacion applauded the reforms, and most Costa Ricans, with their strong orien- tation toward equity, felt happy that social security had become univer- sal with no apparent immediate cost to anyone. Neither the executive nor the Legislative Assembly, however, ever included the allocations required by the reforms in their annual budgets. The cigarette tax became a protected source of funds for the CCSS, but by 1961 it covered only 63 percent of the contribution owed that year, and the share kept declining, to 19 percent by 1973. Whereas the state's contribution had grown eight times, the tax revenue only doubled. Moreover, the constitutional amendment on universal coverage gener- ated high expectations. A few months after the reforms, therefore, the managers of the ccss were back at the Legislative Assembly looking for help; unfortunately, funds were scarce (Rosenberg 1983, p. 147). In response to the constitutional mandate, social security services expanded substantially during the 1960s. The number of workers in- sured increased from 92,215 in 1959 to 194,942 in 1969, and the number of beneficiaries, including family members, grew from 148,480 to 779,768. Coverage increased from 26 to 38 percent of the labor force and from 15 to 46 percent of the total population. The most important change was the expansion of health and maternity services to family members, particularly in rural areas. The political decisions were complemented by a massive construction program. In 1968 the ccss inaugurated the Hospital Mexico, the largest in Central America. The main obstacle to further expansion became, once more, the wage ceiling, which was set at CR$1,000. Intense political debate on these issues took place between 1969 and 1971. As the end of the ten-year period set by the 1961 reforms for achieving universalization approached, the ccss was criticized for not facing the issue until the last minute. An early attempt in 1965 to eliminate the ceiling had been successfully blocked by the physicians, and more active debate had been prevented by the state's inability to pay its contributions. The ccss had been using resources from its pension funds to finance health services (although the two systems were sup- posed to be independent), and this threatened the financial health of the pension system. In 1969 a bill to eliminate the wage ceiling was introduced in the Legislative Assembly. It argued that the ceiling was unfair, since univer- salization by 1971 would imply that those who earned more would pay proportionately less. Already, 70 percent of those with salaries above CR$1,000 were beneficiaries but were paying a contribution that was computed on the basis of the ceiling only. The redistributive gain from elimination of the ceiling would reflect the reluctance of high-income families to use the social security facilities, and the new revenues would 104 Costa Rica and Uruguay allow services to be extended to poorer groups. (Expansion had been delayed by the CR$223 million debt owed by the state.) High-wage bank officials and other employees from autonomous institutions im- mediately began to lobby against the elimination of the ceiling. The ccss argued before the Legislative Assembly that unless the ceiling were eliminated, universalization would be impossible. A key issue in the debate was whether the mandate applied to salaried workers only or to self-employed and unemployed people as well. The commis- sion asked the advice of the physicians, who insisted that priority be given to coverage of the most needy and who feared that elimination of the ceiling would expand services at the top rather than at the bottom of the distribution. Also, the physicians complained that the ccss did not have the infrastructure to expand its services and that universalization would degrade the quality of treatment. Minister of Labor Danilo Jimenez Veiga defended universalization: The great changes that have occurred in Costa Rica in the areas of education, health, and social security have notwaited for the optimum circumstances. Social transformations have never been carried out on the basis of feasibility studies guaranteeing that all the necessary elements are in place. They have been the result of a political decision to designate an objective, which has then forced governments to achieve it. It was a question of principle, not of implementation (Rosenberg 1983, p. 156). The Asociaci6n Nacional de Fomento Econ6mico (ANFE) opposed both universalization and the elimination of the ceiling, asserting that the emphasis should be on reaching the poorest first and asking who was actually going to pay for the reforms. It argued that the new tax would have a negative incidence on wages and would put upward pressure on prices. In general, the labor unions did not openly support the changes. The Chamber of Commerce claimed that elimination of the ceiling would hurt the economy by levying an additional CR$200 million annu- ally in wage taxes. This tax on labor and the transfer of funds from the private to the public sector, it said, would reduce the country's compet- itiveness in international markets. The Chamber of Commerce recom- mended that the ceiling be raised to CR$2,000. The Chamber of Industry warned about the "inflationary" impact of the reform. A compromise was reached that would have provided for the elimination of the ceiling, but by gradual stages. This proposal was defeated in the Legislative Assembly. After much debate, however, the CCSS announced that it would increase the ceiling gradually on its own initiative, and this quieted the opposition from the Chamber of Commerce. The reforms were approved by a large congressional majority in March 1971. As a consequence, about 40,000 more workers and 134,700 family members were brought under the system in July. By October the Protectionism and the Regional Common Market: 1963-73 105 physicians were requesting salary increases of 85 percent and better working conditions. These wage demands represented CR$27 million, or about 31 percent of the new revenues generated by the elimination of the ceilings. The doctors went on strike for eleven days-the first time since the 1948 civil war that public servants had paralyzed the provision of vital services as a means of having their demands heard. This not only revealed the vulnerability of the ccss but also became a precedent for actions by the middle dass employed by the government. External Shocks and Fiscal Crisis: 1973-85 By 1973, as a result of rapid economic growth and modernization, Costa Rica had a more diversified economy and a more complex society than in 1950. Agriculture was no longer the most important sector of eco- nomic activity, manufactures had become an important share of total exports, and a multitude of new occupations that required higher skills had arisen. Higher labor productivity accompanied a more egalitarian distribution of household income, and poverty had been substantially reduced. The enlarged public sector would continue to grow rapidly during the remainder of the decade as social programs reached every corner of the country. Between 1970 and 1982 the country's economic difficulties grew inexorably and finaLly reached crisis proportions. Mac- roeconomic mismanagement, in response to major external shocks, and lack of fiscal control were at the root of the crisis, which was accompa- nied by the accumulation of a huge foreign debt. Initial Conditions for 1973-85 The population grew 2.2 times between 1950 and 1973, to 1,871,800. The rate of population growth declined, however, from 4.0 percent in 1961 to 2.5 percent a year in 1973, as a result of a drastic drop in fertility. The population was no longer as young as in 1963. The proportion of those twelve years old and older increased from 60 percent in 1963 to 65 percent in 1973, and the median age was eighteen years. GDP was cR$10,162 million (about us$1,500 million, between six and seven times its 1950 value in nominal dollars). In constant 1966 colones GDP was 6,934 million, almost two times the 1963 level and almost four times the 1950 leveL GDP per capita was CR$5,429 (about Us$820,3.3 times its nominal dollar value in 1950). In real terms GDP per capita was 3,705 constant 1966 colones, almost 1.5 times the 1963 level and almost 1.8 times the 1950 level. In summary, by 1973 the Costa Rican economy had more than twice the population it had in 1950, almost twice the income per capita, and at least four times the GDP. 106 External Shocks and Fiscal Crisis: 1973-85 107 Rapid urbanization had significantly changed the rural character of the country. Between 1963 and 1973 the proportion of the population living in rural areas declined from 67 to 59 percent. Given the country's small size and the development of an extensive road network, the "rurality" of those remaining in the countryside had been substantially reduced, and a large proportion of the rural population enjoyed rela- tively easy access to most urban services. Almost 58 percent of the population lived in the Central Valley, where density was particularly high, and 27 percent of the country's population, a larger share than in the past, resided in the San Jose Metropolitan Area. The structural transformation that began in the 1950s had continued. The share of agriculture in GDP, at current prices, declined to 19.3 percent, slightly higher than the share of manufacturing, 18.7 percent. The share of general government grew to 12 percent. In real terms this process was slower. By 1973 the share of agriculture in real GDP had declined to 22.6 percent, as against 24.4 percent in 1957, and the share of industry had increased to 19.7 percent, from 14.3 percent in 1963. During the first decade of participation in the CACM the easy stages of import substitution had contributed the most to the growth of manufacturing. In real terms general government's share had declined from 10.9 percent in 1963 to 9.8 percent in 1973. The domestic terms of trade of agriculture had deteriorated as a consequence of the protectionist strategy of industrialization. Whereas agricultural prices were 11.3 percent lower in 1970 than in 1957, the prices of manufactures were 37.7 percent higher. The labor force was increasing at more than 3.7 percent a year, and pressures for job creation accompanied this more rapid growth. During 1950-63 agriculture had generated 35 percent of new jobs, but in 1963-73 the figure was only 11 percent. This was in part a response to the reduced availability of uncultivated land and the increasing urban-rural wage differentials. The proportion of the labor force employed in agriculture had de- clined by 11.5 points since 1963, to 38 percent-evidence of a substantial improvement in the productivity of labor in agriculture. Employment in manufacturing had gained only 1.2 points, and its share, 13 percent of the total, reflected the limited capacity of the protected sector to generate employment. The remaining sectors absorbed the labor displaced from agricultural occupations; their share increased 10.3 points, to 49 percent of total employment. In 1973 Costa Rica was a more open economy than earlier as a result of increased trade with its CACM partners and the strong performance of traditional agricultural exports. Exports had been diversified beyond the traditional agricultural commodities (coffee, bananas, sugar, and beef) into manufactured goods for the CACM. The combined share of coffee (27 percent) and bananas (26 percent) was just over one-half of the total, as against 97 percent in 1950 and almost 75 percent in the early 1960s. The 108 Costa Rica and Uruguay share of beef and sugar had increased to 15 percent, and the share of new manufactured and agricultural exports had risen to 32 percent of the total. Total exports amounted to 26 percent of GDP, up from 19 percent in 1963. Total imports had grown more rapidly and amounted to 35 percent of GDP, as against 24 percent in 1963. The central government's revenues had increased to 20 percent of GDP, as against 13 percent in 1963, and its expenditures represented 18 percent of GDP (14 percent in 1963). The autonomous institutions and other decentralized agencies had become at least as large as the central gov- ernment. The labor force had doubled, to 584,900, and total employment had also doubled, to 542,200, since 1950. Whereas employment in the private sector had increased 1.8 times since 1950, in the public sector it had increased 4.9 times. Thus, public sector employees made up 15 percent of the total. Income distribution had become more egalitarian. The Gini coefficient for the distribution of household income declined from 0.52 in 1961 to 0.44 in 1971. A substantial reduction in poverty had also taken place. Life expectancy had increased by five years since 1963; a Costa Rican born in 1973 could expect to live 68 years. The illiteracy rate had declined to 10 percent of the population 10 years old and older, a gain of 4.1 points since 1963. The greatest gain took place in rural areas, where illiteracy was reduced to 15 percent, while urban illiteracy dropped to 4 percent. The social security system covered 50 percent of the labor force and 60 percent of the population. External Shocks and Crisis Like most small, open economies, Costa Rica has always been vulnerable to the influence of external forces. After 1973 it experienced several sizable external shocks that in a relatively short time substantially in- creased the instability of the economy and magnified its problems of adjustment. These shocks included the two international oil crises; the sharp increase in the international prices of its major exports at the time of the coffee boom and their decline during the world recession of the early 1980s; easy terms for external financing and then loss of access to international financial markets; and war, insurrection, and political in- stability in Central America. Between 1954 and 1960 Costa Rica's terms of trade declined sharply and then remained fairly stable (figure 7-1). The first oil crisis brought about a sudden and significant worsening of the terms of trade in 1974. Soon thereafter, however, the country's terms of trade improved greatly, and the value of its exports grew substantially. The 1975 freeze in Brazil's coffee-producing areas led to large increases in international coffee prices, and the prices of other traditional export crops increased as well. The end of the coffee boom and the second oil shock combined, in 1978, to worsen Costa Rica's terms of trade again. Since the index for the terms External Shocks and Fiscal Crisis: 1973-85 109 Figure 7-1. Costa Rica: Export Prices, Import Prices, and International Terms of Trade, 1950-86 Index (1966 = 100) 300 250 - . 200- 150 =, ' 100 50 - 0 I 1950 1955 1960 1965 1970 1975 1980 1985 Export prices - - - Import prices - - -- Terms of trade Source: Statistical appendix table A-19, based on Central Bank figures. of trade at the end of the 1980s was not particularly low by historical standards, Costa Rica's problems seem to have been related more to the magnitude of the fluctuation in terms of trade in a short period of time than to their secular deterioration. This sharp fluctuation in relative prices required a major macroeco- nomic adjustment, at a time when the country's economic structure had become more rigid and when strong political-economy forces discour- aged the required policy changes. These external shocks led to the fiscal crisis of 1980-82, but the deeper roots of the difficulties have to be sought elsewhere. Determinants of the Crisis In addition to these large external shocks, the crisis reflected the struc- tural consequences of the evolution of Costa Rica's political economy. Given the nature of these long-term trends, sooner or later the country 110 Costa Rica and Uruguay would inevitably have faced difficulties similar to those experienced in the early 1980s. The external shocks therefore determined mostly the timing and the magnitude of the required adjustments; they were not the deepest cause of the crisis. This chapter explores some determinants of the difficulties and attempts to establish their relationship with the same circumstances that help explain Costa Rica's favorable growth- with-equity outcomes. Although political stability and democratic participation contributed to economic growth and social equity, they also allowed the consolida- tion of a multitude of interest groups and led to an increasingly rigid deadlock of power shares in a highly contestable political system. Edu- cation and social mobility fueled expectations of rising incomes and growing demands for publicly provided goods and services. In combi- nation with the strong concern for equity, these demands led to the institutionalization of numerous growth-reducing fiscal entitlements and transfer payments. These "property rights" contributed to social peace and political stability, but they became a source of fiscal problems when circumstances changed and the implicit transfers were no longer sustainable. Over time, the nature of government intervention changed. Instead of infrastructural development and formation of human capital, direct redistribution was emphasized during the Figueres (1970-74) and Odu- ber (1974-78) administrations, through programs such as the Instituto Mixto de Ayuda Social and asignaciones familiares (family allowances). The bureaucracy required to manage these programs grew rapidly and demanded, through strong labor unions, privileges for the staffs of these public agencies. When the available resources became scarce, the bu- reaucracy was protected, at the expense of the beneficiaries of the pro- grams. In addition, the transfers of income implicit in the subsidy and price control schemes (discussed below) created increasing distortions in the country's productive structure and encouraged directly unpro- ductive rent-seeking activities. The political parties responded to these pressures by granting additional entitlements and creating new govem- ment agencies. The expansion of export earnings during the period of extraordinarily high coffee prices and increased foreign borrowing created new oppor- tunities for capturing rents and led to the rapid expansion of all catego- ries of expenditures, particularly in the public sector. The government, already an interventionist welfare state, became a major entrepreneur through the state-owned firms of the Costa Rican Development Corpo- ration (CODESA), and imports grew to constitute almost one-half of the country's aggregate supply of goods and services. When coffee prices dropped, the international terms of trade deteriorated, and the demand for exports declined with the world recession, import capacity fell. As the political and economic climate in Central America worsened, both domestic and foreign investment contracted. The growing fiscal incon- sistencies became a crisis. External Shocks and Fiscal Crisis: 1973-85 111 The administration of Rodrigo Carazo (1978-82) encountered serious difficulty in adjusting to the decline in real income. The powerful man- ufacturing sector was extremely dependent on imported inputs, and the political constraints on reducing public expenditures were severe. The authorities chose to postpone the adjustment by means of additional borrowing abroad. When foreign inflows dried up, the authorities ex- panded domestic credit, and when this was not sufficient, they crowded the private sector out of domestic loan portfolios. Increasing inflationary pressures led to the loss of the country's international monetary reserves (after foreign borrowing ceased to replenish them), to devaluation, and to three-digit inflation. The speed with which the economy deteriorated and the magnitude of the exchange rate and monetary collapse were dramatic. The Carazo administration's refusal to devalue and to achieve fiscal equilibrium in the late 1970s provided a good example of the political-economy forces at work. By then it was evident that the overvaluation of the col6n was responsible for declining export volumes and was subsidizing capital flight. Because everyone was convinced that devaluation was inevitable, speculation against the col6n was riskless and increasingly profitable. By choosing to defend the exchange rate through borrowing abroad beyond reasonable limits, the Carazo administration imposed heavy burdens on the country's future growth. Speculation increased the market-clearing exchange rate above equilibrium levels, augmenting instability and the magnitude of the adjustment. Controls, rationing schemes, and increasing interventions created new rents to be added to the gains from subsidized capital movements and led to sizable redistri- butions of income. Factor Market Interventions Government policies significantly affected factor utilization through their effect on the country's productive structure. The protectionist strategy of import substitution channeled investment toward the most capital-intensive sectors of the economy and toward the most capital- intensive activities within each sector. Factor price policies accentuated the inducements implicit in the trade interventions. The substantial payroll taxes that were imposed to finance welfare and social security programs meant that the effective cost of labor to employers was consid- erably higher than the cash wages actually received by workers. In effect, by the early 1980s social security and other charges levied at least a 26 percent surcharge on wages and salaries. These taxes had increased steadily since the 1950s. To the extent that the revenues col- lected went to provide direct subsidies or funded social services, they lessened the pressure for increased wages, but their net effect was to dampen the demand for labor. Payroll taxes were both contributed directly by the employer (18.5 percent of wages) and deducted from workers' salaries (7.5 percent). 112 Costa Rica and Uruguay At the same time, several policies worked to underprice capital for the modem sector. High tariffs on final consumer goods, coupled with low or no tariffs on imports of capital goods, gave incentives for the use of foreign equipment and inputs. Tax incentives for investment in physical capital, as well as reliance on indirect taxation to finance government expenditures, also made capital artificially cheap. An exchange rate that overvalued the col6n subsidized imports of capital equipment. Expecta- tions of devaluation, low interest rates on financial savings in colones, and the much higher interest rates on dollar deposits in Panama, Miami, and elsewhere encouraged the export of financial capital. Low interest rates were charged on long-term loans. Domestic capital formation was discouraged, while the use of capital in the modem sector was subsi- dized. At the same time, the country incurred a huge private and public sector foreign debt. These interventions, which overpriced labor and underpriced capital, increased the investment required to create a job, reduced the opportu- nities for generating new employment, and allocated resources away from the country's comparative advantages. The public sector was forced to become a residual employer to avoid open unemployment of a highly skilled labor force. The rapid expansion of the public sector and the income inelasticity of the tax system were among the main causes of the significant fiscal deficit that was at the root of the crisis. Wage Policies Legal minimum wages were first mandated in 1933. The Labor Code (1943) established in every province a mixed commnittee of employers and workers that set minimum wages. In 1949 the Consejo Nacional de Salarios (National Wage Council) was created to determine minimum wages nationwide. The legal minimum wages are binding for private firms only; salaries of public employees are determined through negoti- ations within each institution (Lom 1975). Before 1974 legal minimum wages were adjusted every two years; after that, as inflation accelerated, they were revised each year, and since 1980 they have been revised more than once a year. In earlier years the determinations were highly disaggregated; minimum wages were set for 1,143 different activities and occupational categories. Between 1950 and 1972 the mandated increments did not exceed 10 percent for each two-year period, except in 1958-60. Annual increments were, at most, 5 percent a year. On three different occasions the Consejo did not authorize any increase at all. Minimum wages were frozen from 1954 to 1957, from 1958 to 1962, and from 1964 to 1968-periods when inflation rates were very low. The annual increments became larger after 1972. The range among occupations was particularly wide in 1974, when the mandated changes varied between 10 and 41 percent. The available information about the actual evolution of wages for different occupations indicates that whereas for low-wage workers the External Shocks and Fiscal Crisis: 1973-85 113 adjustment of the legal minimum wage may have been one of the main determinants of actual wage increases, for the middle- and high-wage occupations actual wages increased beyond the established levels. This reflected the rapid growth of labor productivity. Since firms that paid wages above the legal minimum were not required to change them at the time of the adjustment, actual increases were more gradual than the discrete mandated changes. This lack of correlation between adjust- ments of the legal minimum wage and actual wage increases was evi- dent during the 1960s and the first half of the 1970s. Between 1964 and 1976 average wage levels in the manufacturing sector increased rapidly, even in years in which no adjustments were made in the legal minimum wage. During the economic expansion of the 1960s and early 1970s excess demands for specific labor skills (middle- and high-wage occupations) exerted an upward pressure on market wages. Another determinant of these wage increases might have been upward mobility toward higher-productivity occupations, induced by the modernization of the country's productive structure. These rapid wage increases in the modem sector were consistent with rapid eco- nomic growth and with the improvement in income distribution expe- rienced during the 1960s. They cannot be attributed to increased unionization and collective bargaining power because unions were weak during the 1960s and early 1970s. That average wages did not change substantially during the months inimediately after the adjustments suggests that only a small proportion of the labor force was being paid just the legal minimum and that the rest, particularly in urban areas, were receiving higher salaries. Evasion of the minimum wage regulations was easier in agricultural occupa- tions. Modem sector firms used the legal minimum only for unqualified new entrants. Before 1973 Costa Rica lacked a clearly defined or specific wage policy. Adjustments in legal minimum wages passively followed rapid eco- nomic growth, while average wages increased in real terms. Wage policies became more active in 1974, at the time of the first oil crisis, when specific distributional goals were adopted. Although in April 1974 the legal minimum wages increased by a weighted average of 28 percent, that average included a wide range of percentage adjustments that were inversely related to the existing wage levels for the different occupations. Whereas the lowest wages increased by 41 percent, the highest wages increased by only 10 percent. These discriminatory adjustments reflected the a priori adoption of an explicit government policy that, proceeding from the perception that the lowest-income groups had been most heavily affected by the accelera- tion of inflation, attempted to narrow the existing gaps in earnings. Similar objectives were reflected in the equal absolute increases for all wage levels in the public sector. This discriminatory policy was contin- ued, although to a lesser extent, in the following years. There is evidence of important reductions in wage differentials, as a consequence. 114 Costa Rica and Uruguay Some have claimed, however, that these wage policies had a limited distributional impact (Trejos 1983). A large proportion of the lowest- income households was concentrated in rural areas, where legal mini- mum wages were less effectively enforced, and wage policies were irrelevant for the significant portion of the poorest who were not wage earners. Artificial attempts to increase the lowest salaries may have induced replacement of unskilled labor by capital and caused unem- ployment. In the long run the groups with the greatest bargaining power, such as public sector workers, managed to use wage policies in their favor, but the poorest were not likely to be among these groups. Credit Allocation Policies Credit affects income distribution in several ways. Access to credit is an important determinant of the rates of growth of the wealth of different producers. The wealth of those who have access to loans increases in comparison with the assets of those without access. In addition, if credit is subsidized, the implicit transfer directly affects distribution, and if loans are not repaid, a transfer accrues to the defaulters. Basing access to credit on assets owned perpetuates differences in wealth; if access to credit discriminates in favor of the rich and against the poor, it accentuates existing wealth and income differences. If, in addition, the interest rates charged are less than the social opportunity cost of the claims on resources lent, the implicit subsidy has a regressive impact on distribution because it is necessary to become a borrower to be a beneficiary and because the amount of the grant transferred is directly proportional to the size of the loan. During the 1960s the interest rates charged on loans by the state- owned banks were positive in real terms and implied only a moderate subsidy. In the 1970s, however, the implicit subsidy was substantial, even under conservative assumptions about the opportunity cost of credit. Interest rates were negative during the mid-1970s and early 1980s. The amount of the subsidy transferred was particularly substan- tial in 1973,1974,1979,1981, and 1982, when savers received significantly negative rates, in real terms, on their deposits, and the inflation tax on all holders of financial assets was high. Under the conservative assump- tion that the social opportunity cost of the loans was 10 percent a year in real terms, the rate effectively charged on loans during 1974 was a negative 20 percent. Thus, the implicit rate of subsidy was 30 percent; of every col6n loaned, 30 cents was a free transfer to the borrower. Agricultural credit represented almost 60 percent of the value of gross agricultural output and more than one-half of the loan portfolios of the banks. This meant that in the important case of agriculture the grant transferred through subsidized credit represented the equivalent of 20 to 25 percent of the value of gross agricultural output. Only between 30 and 40 percent of all agricultural producers had access to bank credit, while the remaining 60 to 70 percent were ex- External Shocks and Fiscal Crisis: 1973-85 115 cluded from the subsidy. There was a high degree of portfolio concen- tration. In the case of the Banco Nacional de Costa Rica, which granted more than one-half of all agricultural credit in the country, less than 2 percent of all loans accounted for more than 60 percent of the amounts loaned for agriculture, and about 10 percent of all loans accounted for more than 83 percent of the amount of credit granted. This meant that about 1 percent of all agricultural producers in Costa Rica were receiving more than 65 percent of the agricultural credit granted by the banks and more than 65 percent of a substantial subsidy, equivalent to almost 25 percent of the value of agricultural output in 1974. As inflation rates declined during the second half of the 1970s and nominal interest rates increased, the subsidy declined in magnitude, but it remained important. It increased significantly again during the early 1980s, while the loan portfolio became even more concentrated. By the end of the decade, it was estimated, about 50 percent of the banks' loan portfolios represented defaulted loans. This meant a significant transfer to the few privileged, very large borrowers who did not repay their loans. Although specific information is not available, industrial credit ap- pears to have been equally concentrated. Despite the large number of small and medium-size establishments, Costa Rica's industrial structure has been highly concentrated, with a few firms generating the largest share of employment, output, and profits and receiving the largest share of industrial credit. For instance, in 1975 firms that employed 200 per- sons or more, which represented less than 2 percent of all manufacturing enterprises, employed about 33 percent of the labor force in manufactur- ing and generated about 44 percent of the sector's value added. At the other end of the distribution, firms that employed fewer than twenty persons, which accounted for more than 80 percent of all establishments, employed 20 percent of the labor force and produced only 10 percent of manufacturing value added. Moreover, the industrial subsectors that generated the largest share of value added were dominated by the activities of one or two firms. Most of these firms were family enterprises or were owned by a small group of dosely linked shareholders. Financial repression policies therefore had negative effects on both growth and equity. Price Stabilization Policies The most important government intervention in direct price determina- tion in Costa Rica has been in the market for staples (granos basicos)-rice, corn, beans, and sorghum. In recent years these crops have represented almost 10 percent of value added in agriculture. Rice and sorghum are produced by large farmers and corn and beans by small farmers. Large rice producers, who represent 10 percent of the total, produce 70 percent of rice output; small corn and beans producers (90 percent of the total) produce 80 percent of the output of those crops. Rice and sorghum are 116 Costa Rica and Uruguay highly mechanized; beans and corn are highly labor intensive. Labor input per hectare is about six times greater in corn and beans than in rice and sorghum. On the small farms about two-thirds of the labor is supplied by the household. Self-consumption is important in corn and beans (Cespedes and others 1984b). Policy regarding these staples can be divided into three stages: a simultaneous attempt to promote production and stabilize prices (1950- 74); an emphasis on stimulating production and exporting at a loss (1974-82); and attempts to achieve self-sufficiency without generating an exportable surplus (1982-85). Policies to encourage production included the establishment of a minimum price and the guaranteed purchase by the Consejo Nacional de Producci6n (CNP) of any quantity of output at that price. Stabilization policies attempted to smooth the domestic impact of variations in inter- national prices and to avoid increases in consumer prices. The two policies were contradictory, and the CNP did not succeed in preventing fluctuations. Setting a comparatively high minimum price for producers and a relatively low maximum price for consumers generated deficits that were financed with the profits from the state monopoly on liquor production and, in particular, with Central Bank credit. Self-sufficiency was a major objective of the Oduber administration (1974-78), in part as a reaction to the rise in international oil prices. According to the 1975-78 National Basic Grains Program, no problems were expected in achieving self-sufficiency in rice. In the case of beans, exceptional yield increases were required, and self-sufficiency in corn was to be achieved by 1978. Increased sorghum production was ex- pected to reduce corn imports. By 1976 several problems with these objectives became clear. That year the country produced a surplus of 60,000 tons of rice, at a domestic price well above the intemational price, and the minimum price for the next crop had to be reduced. Since self-sufficiency in corn and sorghum had already been achieved, price reductions were recommended for these crops as well. The Rural Devel- opment Program for 1977-79 insisted on the goal of self-sufficiency and predicted exportable surpluses. High prices, which induced exportable surpluses of rice, were kept through 1982, but increasing losses by the CNP led the authorities to revise this policy. After the crisis the Central Bank became an important lobbyist against protectionism, particularly in the case of rice. It stated that the "present price support and marketing systems eliminate economic rationality (minimum cost) at the producer level. This has to be changed, so that exports are undertaken by the producers themselves and not the CNP" (Lizano Fait and Sagot 1984). The CNP did not establish a support price for the 1985-86 rice crop and did not promise to buy the grain. Instead, it facilitated futures contracts between private producers and processors. This substantial change in policy was a response to the accumulated losses of the cNp and the monetary consequences of Central Bank financ- ing of those losses. External Shocks and Fiscal Crisis: 1973-85 117 According to experts, differences in support price policies have helped bring about major crop substitutions by making corn less profitable than rice. By 1983, however, the country was producing exportable surpluses of white corn at prices well above international prices, with the same implied losses. Cultivation of yellow rice and sorghum, which compete for the same land used for white corn, has become marginal, and imports of these crops have been required. Bean production has encountered severe difficulties. Most of the output has been produced with traditional low-yield techniques on the most marginal land. Rice and corn were sometimes sold domestically for less than the support price. The resulting losses, along with losses on exports, were financed by the Central Bank, which was legally required to do so until 1989, and by the profits from wheat sales by the CNP (Corrales 1985, p. 19). The CNP has a monopoly on imports and exports of these staples. To avoid the arbitrage that may result when the state sets both a minimum price for producers and a maximum price for consumers that is below the producer price, the CNP sells only through its own stores. In the 1980s, for example, the producer support price for beans was above the international price, and the consumer maximum price was below the in- ternational price. To prevent arbitrage, the CNP marketed imported beans (of different quality and characteristics) through private stores and sold the domestic beans only through its own stores. Consumers of sorghum and yellow corn have paid more than the international price. Discouragement of production has been clearer in the cases of sugar and coffee for domestic consumption, eggs, milk, and, at times, beef for domestic consumption. The domestic consumer has sometimes paid more than the international price for these products. Maximum domestic prices for sugar have been set below the international price to subsidize consumption. As a result, Costa Rica has one of the world's highest levels of per capita consumption of sugar, and illegal exports of sugar are significant. Increasing domestic demand and slow production have shifted sugar away from the international to the domestic market. Egg production has been similarly penalized, leading to the disappearance of the less efficient small producers. Large producers have not requested price increases, in hopes of further monopolizing the market. A maxi- mum domestic coffee price is set by law, but the input (coffee from the beneficios) has been sold at auction. The amounts available for the auction are the residuals from exports, which are managed by the Oficina del Cafe. Since there is no relation between the controlled domestic con- sumer price and the auction prices, which reflect the international price, processors of coffee for domestic consumption have a difficult time. The price set for milk declined in real terms in the 1980s because the nominal price changed only slowly in a highly inflationary environ- ment. Milk production did not decline as much, thanks to technological change; as the price of beef fell, dual-purpose cattle were diverted to milk production in new areas. Average yields, however, declined sub- stantially. Since the price of live cattle is freely set in the plaza (exchange), 118 Costa Rica and Uruguay the producer receives a good price, but the butcher has to be inventive to bypass the restrictions on the prices of certain cuts. CODESA and the Politician-Entrepreneur More than any other public sector institution, CODESA represented the new approach to state interventionism that characterized the Oduber administration (1974-78). Its purposes went beyond the modernization of the public sector that had been prominent in the agenda of the young politicians of the Centro para el Estudio de los Problemas Nacionales who joined Figueres in the junta after the 1948 civil war and in his first administration. With increasing impetus, the state promoted productive activity through the expansion of infrastructure, access to credit, and protectionist subsidies. Large investments in human capital formation were complemented by specific programs to train the labor force. In the late 1970s the role of the state expanded beyond its traditional functions into productive enterprises that competed directly with the private sector. The Refinadora Costarricense de Petr6leo (RECOPE) was established in 1963, with 15 percent state participation, to refine gasoline. In 1973 the state acquired control of 65 percent of the stock and by the end of 1974 was the sole owner. Although RECOPE was the object of much criticism, the purchase of its stock from a multinational corporation was not in itself perceived as a threat to the private sector, given the nature of the activity and the uncertainties brought about by the oil crisis. Major political-economy debates took place, however, regarding the use of RECOPE's "profits," which reflected a substantial gasoline tax. In 1976 RECOPE financed TRANSMESA, a subsidiary of CODESA that provided public transport in San Jose, and in 1978 it purchased 50 percent of the stock of FERTICA, a private fertilizer plant. CODESA, created in 1972, began to grow rapidly after 1975. Its subsid- iaries engaged in all kinds of productive activities-in railroads, fertil- izer, cement, aluminum smelting, sugar, cotton, agribusiness, forestry, aquaculture, ferries, maritime and urban transport, and drawback ex- port firms. In some cases CODESA took over bankrupt firms or partici- pated in mixed capital firms. It also initiated projects that failed. It cosigned numerous loans for private firms and provided financing for a few. Most of its energies and resources were devoted, however, to the establishment and promotion of fully owned subsidiaries (Vega 1982, p. 62). The productive activities developed by CODESA have not been profit- able. For all the years recently evaluated by Arthur D. Little, Inc., CODESA's losses were always more than 25 percent of sales. The accumu- lated losses for 1976-83 represented 35 percent of the 1983 value of all the assets of its subsidiaries. Not one of the twelve principal subsidiaries made a profit in any year of the period, and all had losses every year. External Shocks and Fiscal Crisis: 1973-85 119 These losses were not a coincidence; an examination of the feasibility studies for the projects showed serious deficiencies. Moreover, A detailed analysis of the evolution of the main macroeconomic variables has made it evident that, unfortunately, CODESA did not significantly contribute to the rapid economic growth experienced by Costa Rica during earlier periods, and that it clearly had a substantial weight in worsening the recent crisis. CODESA's unrestricted access to Central Bank credit, which in 1983 represented one-half of all domestic credit for the public sector and 18 percent of all credit from the banking system, and which was used to pay for operational expenses and to service CODESA's huge external debt, acquired in connection with the creation of the corporation's largest subsidiaries, has been a major force in the deterioration of public sector finances and in the crowding out of credit for the private sector. (Cited in Vargas 1987, p. 16.) An evaluation by the Chamber of Industry claimed that in 1983 CODESA's enterprises contributed 1.8 percent of GDP, employed between 0.3 and 0.9 percent of the labor force, used 18 percent of all domestic credit, and had losses equivalent to 57 percent of their assets. Total sales in 1984 amounted to CR$2,283 million, but total losses were CR$1,487 million. All of CODESA's subsidiaries were technically bankrupt. The corporation's debt to the Central Bank amounted to more than CR$10,000 million (Vargas 1987, p. 16). This sad story is not surprising. Since CODESA is a state enterprise, its losses, rather than hurting its shareholders, have been socialized. This hybrid (a state agency constituted as a private corporation and engaging in activities previously in private hands) seems to have created the worst of both worlds. CODESA was not restricted by the traditional political controls on government agencies, and it lacked the profit discipline that constrains private firms. Projects were evaluated on the basis of the size of the initial disbursement-the larger and more visible the initial invest- ment, the happier the politician who announced it. In private business the initial investment is frequently the most painful moment in the evolution of the enterprise, and concern for profitability leads the owners to minimize the investment required to obtain a given flow of future net returns. This was not the case for CODESA. Its worst feature seems to have been its almost unrestricted access to financing; the Central Bank directly provided the funds required for any given investment. As a result, there was no limit on the size of the enterprises financed (Vargas 1987, p. 20). Productive activities in direct competition with the private sector created tension in the cordial and symbiotic relations that had developed between the state and the industrial groups. CODESA'S privileged access to loans and the resulting crowding out of the private sector in credit portfolios were also a reason for concern. The confrontation between the state and the industrial community reflected the increasing power within the Partido Liberaci6n Nacional (PLN) of politician-entrepre- 120 Costa Rica and Uruguay neurs. The origin of this group may be linked to the centralization of political power and the changes in economic policies that took place during the 1970s. Whereas in the 1950s the autonomous institutions had provided a means for new groups of professionals and technocrats closely linked to the PLN to gain access to the direct exercise of power, after 1969 party leaders promoted the centralization of power in the executive. The politician-entrepreneurs associated with the PLN derived their power from their control of the state. From their high positions as heads of the most important autonomous institutions and government enter- prises and in the executive, they accumulated an immense influence over economic policies. The increasing complexity of the state and of the tasks to be performed translated into high salaries and social status, which these technocrats and politicians used to venture into private business. They developed their skills in the political arena and then became entrepreneurs mostly through their privileged access to credit and other implicit subsidies. When not in power, they ran highly protected enter- prises. The direct control of the state has been essential for their accumu- lation of economic and political power (Sojo 1985). CODESA represented the confluence between the interests of the politician-entrepreneurs and of those who promoted greater state inter- ventionism. The corporation was created with the support of the Cham- ber of Industry, which perceived the new activities as complementary to the private sector. The traditional industrialists, however, could not prevent the development of activities in direct competition with the private sector and could not attract CODESA's funds toward private firms (Achio and Escalante 1985). Toward the end of 1978 some members of CODESA's board of directors studied the possibility of selling some of the subsidiaries. The Legislative Assembly enacted the Ley de Regulaci6n de la Venta de Acciones de Empresas de Propiedad Publica (law for the regulation of the sales of stock of public enterprises). This law prohibited the sale of stock to foreigners and limited to 2.5 percent the maximum share that one individual could acquire. It was later modified to allow the sale of up to 40 percent of a given enterprise to foreigners. In March 1984 the Ley de Equilibrio Financiero del Sector PuIblico (law of financial equilibrium for the public sector) authorized the sale of CODESA's subsidiaries at the price set by the Contralorfa General de la Republica. In March 1985 the U.S. Agency for International Development gave Costa Rica Us$140 nillion to pay the corporation's debt and so facilitate the sale of the subsidiaries. The Crisis and the Financial System During the 1960s and most of the 1970s Costa Rica experienced a signif- icant process of financial deepening, the result of vigorous economic growth and relative price stability. The ratios of the monetary aggregates External Shocks and Fiscal Crisis: 1973-85 121 to GDP, the proportion of private savings channeled through the banking system, and the number of bank branches increased rapidly. Costa Rica's financial system suffered significantly in the crisis, how- ever-probably more than any other sector. There was a clear fiscal reason for this. The deterioration of the country's international terms of trade, other external shocks, and inappropriate policy responses to those shocks caused real incomes to decline after 1977. The recession sharply reduced the rate of growth of government revenues, but public sector expenditures continued to grow rapidly. It was difficult, moreover, to increase taxes in the face of the economic recession, pessimistic expecta- tions, and strong motives for capital flight. The authorities attempted to cushion the effects on aggregate spend- ing of the decine in income by increasing public sector deficits and, in the beginning, financing them by borrowing abroad. The stock of accu- mulated public sector deficits financed abroad eventually reached the limit that foreign lenders were willing to accept. Since programmed expenditures were not reduced, the continuing deficits had to be fi- nanced with domestic credit. The expansion of domestic credit at a rate too high to maintain domestic price stability made it impossible to sustain the fixed exchange rate regime. The crowding out of the private sector in bank loan portfo- lios contributed to the stagnation of output and to the crisis. Inflationary pressures led rapidly to the loss of the country's large stock of international monetary reserves (accumulated when the price of coffee was high), to additional borrowing abroad in order to replenish those reserves, and to accelerating domestic inflation, once reserves were exhausted and access to foreign borrowing ceased. The wholesale price index increased 65 percent in 1981 and 108 percent in 1982; the consumer price index increased 65 percent in 1981 and 90 percent in 1982. Ex- change controls, multiple rates, devaluation, and floating exchange rates followed. The financial repression that accompanied this attempt to postpone the adjustment to the fall in real income led to a dramatic contraction of the domestic financial system in real terms. The money supply (M2) dropped from 12,105 million constant colones (excluding dollar denom- inated deposits) in 1978 to 8,322 million colones (excluding dollar de- nominated deposits) in 1982, only 69 percent of its 1978 real value (figure 7-2). Ml fell from 5,438 million colones in 1978 to 3,032 million in 1982, which was only 56 percent of the 1978 real value and was comparable to the 1970 level. Between 1970 and 1975 real domestic credit increased at an average annual rate of 7.1 percent. This rate of increase more than doubled between 1975 and 1978. Although mobilization of domestic resources declined from 1978 on, domestic credit, aided by the inflow of foreign funds, increased through 1980, when it reached 14,097 million constant 1978 colones. During 1981 and 1982, however, domestic credit dropped 122 Costa Rica and Uruguay dramatically. By 1982 it had declined to 5,875 million constant 1978 colones-only 41.7 percent of the 1980 level. Even after some recupera- tion in 1983, real domestic credit was still at its pre-1975 level. The contraction was particularly acute in the case of domestic credit for the private sector, which declined in real terms from 8,544 million colones in 1978 to 3,060 million in 1982, only 35.8 percent of the former value. In a few years the banking system's supply of real loanable funds to the private sector had been reduced to one-third of its original (1978) value. Costa Rican firms experienced a painful loss of access to bank credit for investment and working capital, in part because inflation eroded the purchasing power of the loan portfolios, in part because of the crowding out of the private sector in those portfolios. To make matters worse, inflation and devaluation had reduced the real value of Figure 7-2. Costa Rica: Total Domestic and Private Sector Credit and Total Liquidity, 1950-86 (outstanding balances at end of year) Billions of 1978 colones 16 14 - 12 - 1 10 I. 8 6- 4 2 O I II I I I 0 1950 1955 1960 1965 1970 1975 1980 1985 - Total credit - - - Private credit -- --M2 Source: Banco Central de Costa Rica, Cr6dito y Cuentas Monetarias. External Shocks and Fiscal Crisis: 1973-85 123 the firms' own funds, and the firms, for all practical purposes, had lost their access to foreign borrowing because of the moratorium on the public external debt and the generalized turrmoil in Central America. Domestic credit for the public sector continued to increase through 1980, when it reached 6,247 million constant 1978 colones. In the follow- ing two years, however, it too declined dramatically. By 1982 it amounted to only 2,852 million, or 45.6 percent of the 1980 level. In the race between the expansion of credit for the public sector and inflation, inflation was the easy winner. The strategy was self-defeating. Once the country's international monetary reserves were exhausted, the acceler- ated expansion of credit contributed to the decline of its real value. The crowding out of the private sector in loan portfolios was pro- nounced. Whereas between 1961 and 1975 the share of the private sector in domestic credit declined only from 87.1 to 79.5 percent, by 1981 its share had dropped to 55.7 percent. Moreover, before 1974 the private sector received at least three-quarters of the annual net increment in domestic credit, but by 1980 this share had declined to one-third. The Determinants of Economic Stagnation and the Crisis A slow but steady loss of dynamism of production was among the long-term trends of the Costa Rican economy that explained the crisis of the early 1980s. The causes of this gradual stagnation included changes in the relative availability of resources and their productivity. Distor- tionary economic policies and the accumulation of directly unproduc- tive activities also contributed. Rapid population growth and the exhaustion of the agricultural fron- tier reduced the amount of available land per person. Agricultural output could no longer grow simply by expanding the cultivated area, and distorted relative prices that penalized investment in many agricul- tural activities hindered increases in yields. Factor price policies did not promote labor-intensive activities, and the modern private sector failed to generate enough jobs to absorb the growing labor force. Public sector jobs grew less rapidly after the crisis. In the early 1980s the ratio of gross domestic investment to GDP was below its historical levels. This reflected macroeconomic instability and the higher risks of economic activity. Inflation rates were higher and less predictable than in the past, and, in combination with price controls, they sharply increased uncertainty about relative profitability. Perceptions of political risks also increased because of the circumstances in Central America. Low investment levels were accompanied by a massive crowd- ing out of the private sector as a result of the continued overexpansion of the public sector. Public investment increased from one-fourth of the total in the early 1970s to two-fifths in the 1980s. The ratio of public expenditure to GDP increased from less than 10 percent in the early 1950s to almost 70 percent toward the end of the 124 Costa Rica and Uruguay 1970s. The number of government agencies grew from 65 in the early 1950s to 185 in 1980, and public employment increased from 6 to 20 percent of the labor force. The growth of the public sector was particu- larly excessive in the 1970s, when the coffee boom made possible its expansion beyond sustainable levels. To finance this expansion, the tax burden increased from 18 percent of GDP in the early 1970s to 24 percent a decade later. The public sector received 60 percent of the increments in domestic credit in the late 1970s, as against 20 percent early in the decade. The loss of dynamism of the economy also reflected the decreasing opportunities for import substitution within the CACm, the distortions introduced by protectionism in both agriculture and manufacturing, and the spread of rent-seeking behavior. In summary, the Costa Rican econ- omy accumulated many features that worked to reduce growth. These induded changes in relative factor endowments, the increasing distor- tions in relative prices, protectionism, and an excessively large public sector. When the country had to face the adjustments imposed by the unusual external shocks, these long-term trends contributed signifi- cantly to the crisis. From Coffee Exports to State Enterprises Costa Rica has differed from other developing countries that are similar to it in size, resource endowment, and geopolitical circumstances. The country's unusual combination of growth and equity outcomes has been explained here as the product of long historical processes of interaction between political and economic factors. The evolution of the country's socioeconomic and political system has been complex. The outcomes have been the result of a combination of several fortunate, mutually dependent circumstances that have usually complemented one another. They have reflected, moreover, a sustained social effort over time, with improvements in one dimension reinforcing progress in others, frequently after long gestation periods and experi- mental preparatory efforts. In this sense, Costa Rica's "technology" for socioeconomic and political progress has shown important economies of scope. The following sections summarize the main conclusions of this part of the book and present plausible hypotheses about the political-economy story behind the outcomes in growth, distribution, and the alleviation of poverty. The main thesis-that the same circumstances explain both the successful outcomes and the recent crisis-is further discussed. The Growth-with-Equity Outcomes During 1950-85 Costa Rica enjoyed rapid economic growth. It was, however, vulnerable to external events, as indicated by the wide fluctu- ations in the annual rate of growth of real income, particularly after adjustment for changes in the country's international terms of trade. Although growth and instability were compatible in the long run, ad- justment to external shocks presented a major challenge for macroeco- nomic management in the short run. The growth-stability tradeoff was at the root of crucial policy decisions in this open economy. The main social indicators reflected a better quality of life in Costa Rica than would be predicted for countries with the same per capita 125 126 Costa Rica and Uruguay output That many of these indicators were already exceptional by 1950 suggests that it is necessary to take a very long perspective in explaining the outcomes. These outcomes were the result not of specific interven- lions but of policy clusters and cumulative processes. Most indicators continued to improve after 1950 as the infrastructure was expanded and institutions were strengthened. The consequences of the conflicts aris- ing in a more complex society, of the weaknesses introduced by the protectionist strategy of development, and of the limits to the sus- tainability of welfare and other entitlements once access to foreign savings declined were felt only with a long lag. This made it difficult for voters (and researchers) to assess the performance of different adminis- trations. Income inequality has been moderate, and a substantial reduction in poverty was observed during most of the 1950-85 period. Alleviation of poverty was complemented by effective assistance programs for the indigent and other critical groups. Thus, Costa Rica has been an example of growth-with-equity. In effect, there has been a strong positive corre- lation between rapid economic growth, increasing equality, and the alleviation of poverty, not only as a long-term trend but also for specific periods. The slower growth of the late 1950s coincided with a less egalitarian distribution of income; the very rapid growth of the 1960s was associated with a substantial decline in the concentration of the distribution of income and with major reductions in poverty; the mixed growth record of the 1970s was accompanied by minor changes in income distribution; and the negative growth of the early 1980s coin- cided with a deterioration of the distribution of income and with in- creased poverty. In Costa Rica's institutional and political framework, when growth led, equity followed. Determinants of Growth-with-Equity Economic growth was the result of both increased factor supplies and higher factor productivities. Changes in factor supplies included a com- paratively high rate of physical investment, made possible by substantial inflows of foreign savings; a significant investment in human capital through emphasis on nutrition, health, and education; and an expanding agricultural frontier, as the rapid development of the country's infra- structure made available for cultivation previously inaccessible land. Factor productivity increased in response to technological innovations, particularly in agriculture. There was more integration of factor and product markets, and labor was particularly mobile. The country's pro- ductive structure became more diversified. The modern sectors ex- panded, as did the domestic market, the population, and output. Although the protectionist strategy of development introduced dis- tortions and induced unproductive behavior, which reduced factor pro- ductivity, the economy maintained a substantial openness toward From Coffee Exports to State Enterprises 127 international markets, which alowed exploitation of pronounced com- parative advantages given buoyant world demand. On balance, there- fore, despite less than optimal policies, the positive influences on growth predominated for most of the period. The negative impact of protection- ism, however, steadily undermined efficiency and eventually weakened growth. Political stability promoted economic growth because it favored in- vestment and the strengthening of institutions. The absence of political unrest attracted substantial flows of foreign savings, and the stable legal framework permitted a reliable definition of property rights and efficient enforcement of contracts. A peaceful environment of law and order reduced risks and lowered transaction costs. Political stability thus served as an effective counterbalance to economic instability in promot- ing investment and growth. Political stability also contributed, however, to the consolidation of interest groups, to an increasingly rigid deadlock of power shares, to complacency and overconsumption, and to the accumulation of growth- reducing fiscal entitlements. Over time, the demands on available re- sources and the waste associated with directly unproductive activities had an increasingly negative effect on growth.' Because there was no army, defense expenditures were very low, freeing resources for health, education, and the building of infrastruc- ture. The emphasis on equity reinforced the formation of human capital and, after a long period of gestation, further contributed to long-term growth. Education and social mobility, however, fueled rising expecta- tions and growing demands for public sector services. This, combined with a strong concern for equity, led to the institutionalization of numer- ous entitlements and transfer payments, to the overexpansion of the public sector, and, eventuaUy, to a major fiscal crisis. High rates of economic growth, in turn, made the pursuit of equity objectives feasible. Income growth, supplemented by a substantial use of foreign savings, financed progress in education, health, communica- tions, and transport and the provision of electricity, water, and other basic services. The growth of household income fueled demand for these services and made it possible to cover the opportunity costs (time) and the complementary expenses (for example, transport and food) associ- ated with the demand. Economic growth and improvements in the standard of living for wide segments of the population went hand in hand. Whereas earlier the main beneficiaries of public sector services had been the swelling middle-income groups, now the poor increasingly shared in the fruits of growth. The equity-oriented system was expen- sive, however, and a large bureaucracy evolved to administer it. The growing financial burden contributed to the fiscal crisis, and an increas- ing proportion of the shrinking available resources went to pay employ- ees, at the expense of the target populations. 128 Costa Rica and Uruguay Given Costa Rica's unusual initial conditions, for most of the period economic growth and improvements in the labor market were them- selves responsible for increased equality in income distribution and for alleviation of poverty. Only after the mid-1970s were explicit redistribu- tive policies important to equity outcomes. The effect of these policies was mixed, however, because of the constraints imposed by the fiscal crisis of the early 1980s. In general, improvements in distributional equality, growth, and po- litical stability reinforced each other. In the short run growth was deter- mined by external trade conditions, and equity followed. As long as the actual rates of growth coincided with the expected rates of growth, conflicts were kept to a minimum and equity was promoted. But when external events reduced the country's purchasing power, excessive en- titlements and less than optimal policies tended to retard growth, and the dynamic interactions were not always positive. The Formation and Role of Deeply Rooted Initial Conditions The country's initial conditions in 1950 are important for understanding the 1950-85 outcomes. These conditions induded several deep-seated sociopolitical features that distinguished Costa Rica from its neighbors: political stability, democratic institutions, mechanisms for reducing the concentration of power, an efficient legal system, and a generalized concern with equity. The low transaction costs and reduced risks offered by a well-functioning political and legal system promoted growth, while the widespread distribution of the fruits of growth helped to prevent political unrest. Costa Rica's exceptional circumstances in 1950 were the result of long historical processes. The small population, limited trade, and crushing poverty of colonial Costa Rica fostered minimal social divisions, self- sufficient and independent farm-household homesteads, and rural de- mocracy. There was no market for land, which was viewed as essentially in limitless supply. Taxation discouraged large landholdings, and pos- session was denied to none. The introduction of coffee accelerated the privatization of land, prompted an early definition of individual property rights as distin- guished from communal rights, and encouraged the consolidation of small landholdings. The timing was critical. In 1821 Costa Rica became independent, escaping colonial taxation and mercantilist regulations. It could therefore devote all the coffee profits to building the infrastructure needed to export the new crop. Ecological conditions were favorable for coffee cultivation, and coffee became the economy's engine of growth. It was the key factor in the development of Costa Rica's infrastructure, institutional organization, and productive structure, and it lifted the country out of the backwardness of colonial poverty. Coffee's technolog- ical features facilitated the preservation of Costa Rica's unique social From Coffee Exports to State Enterprises 129 structure of equality and its land tenure pattern of small farms. The interest in coffee shared by most Costa Ricans also contributed to the formation of a common ideology. The introduction of coffee into a system of small property holdings created a delicate equilibrium that imposed mutual interdependencies and norms of reciprocity among social groups and facilitated the consol- idation of an implicit contract. The actors in this balancing act were the complex farming-processing-exporting enterprises (the beneficios), the small and medium producers who used family labor, and the landless workers. The implicit pact was a social mechanism for dealing with the risks of the new long-term investment and overcoming the shortcomings of small size. It made possible the exploitation of economies of scale and scope in production and marketing, more efficient use of information, easier access to credit, and the reduction of transaction costs. Land was relatively abundant, reservation wages were high, and mechanizing coffee production was impossible. All this created critical demands for labor inputs, so that even landless workers participated in the implicit contract. The interlinked market organization not only reflected a dom- inant optimizing economic arrangement; it also guaranteed a politically stable distribution of the new rents. The politically dominant coffee exporters became increasingly vul- nerable to the demands of the other partners in the coffee pact and were forced to open the political arena to widespread participation. These relationships gradually led to the emergence of a national ideology of equality and participation and to the local version of the liberal state. Government was transferred to an enlightened elite that specialized in educational and political affairs and exercised power with a large degree of class neutrality and formal rationality. The resulting legal framework promoted the growth of both economic activity and a democratic society. By the turn of the century most of the process of infrastructural adaptation and institutional organization for the exploitation of compar- ative advantages was well advanced. The Costa Rican state had man- aged to guarantee a high degree of domestic security. It had created a legal system to protect property rights and market freedoms and to manage the basic social relationships implicit in the coffee pact. The interlinked credit, output, and labor markets made possible efficient production and marketing transactions and a widespread distribution of the rents from the vent-for-surplus activities. Thus, the success of coffee reflected an organization capable of realizing the potential of the country's resource endowment while at the same time creating an ad- vantageous political system. This was facilitated by the country's small size and the concentration of a homogeneous population in the Central Valley. Banana exports also succeeded in exploiting the country's compara- tive advantages, although through an entirely different arrangement that adapted organizational forms prevailing in other countries. 130 Costa Rica and Uruguay Whereas coffee was fully integrated into the domestic economy, banana cultivation developed as an isolated endave. Coffee was owned com- pletely by Costa Ricans; the banana enterprise was owned by a foreign corporation. Coffee was produced on small family-owned plots; ba- nanas were cultivated on large plantations with hired (and frequently foreign) labor. Rather than a social compact, the banana plantations spawned the most serious labor conflicts in the country's history. Be- cause the plantations were isolated from the rest of the country, how- ever, this conflict did not have spillover effects. Capital intensity, sophisticated technology, and critical marketing links for exports of the perishable bananas created explicit or implicit barriers to entry, but the fruit companies undertook the development of the required infrastruc- ture, organization, and technology. Foreign ownership prevented these factor intensities and the large scale of operations from influencing the domestic distribution of income and also facilitated the eventual taxation of the fruit companies. The timing of the introduction of bananas was critical; the powerful banana companies entered the stage only at the end of the nineteenth century, when the Costa Rican state, legal institutions, and democratic traditions were already consolidated. Costa Rica was thus in a good position to exercise control over the banana sector. Institutional innovation and policymaking in Costa Rica have been characterized by pragmatism, experimentation, and consensus build- ing. The country's revealed preference for stability and attachment to legal ways have led to the increasing institutionalization of compromise and the resolution of economic conflicts in the political arena. Thus, during the Great Depression the relationships among the participants in the coffee economy began to be formally regulated by the state. This model of institutionalization of the political solution of economic con- flicts, with the state as arbiter, was frequently replicated. Political solu- tions, however, have been less responsive than the market to changes in resource scarcities and comparative advantages and have shown a ten- dency to break down during periods of rapid structural transformation. Institutionalization of the solutions has led to rigidity and to reduced efficiency. The preference for stability was a response to the risks and vulnera- bility of a small, open economy. Risk management required the devel- opment of mechanisms of voluntary solidarism and the recognition of interdependencies, as reflected in the coffee pact. Feelings of solidarism were intensified by the ethnic, economic, and social homogeneity of Costa Rican society and by the country's small size. The ideology of solidarism and equality provided a springboard for launching the social security system in the 1940s, and successive administrations of different persuasions have preserved and intensified this strong concern with equity. Growth and structural transformation during 1950-85 led to a more complex society, to less personal contact, and to a less commonly held From Coffee Exports to State Enterprises 131 ideology. Costa Ricans found it difficult to reproduce the voluntary social contract of the coffee sector in other sectors, and legislated replicas have been less efficient. Solidarism was replaced by an increasingly unsustainable system of legislated entitlements and forced transfers. The Legacy of the 1940s and the Change in Ideology For more than three decades Costa Rica experienced major transforma- tions that slowly modified the exceptional conditions of 1950. During this time the country's political and economic institutions evolved from the liberalism, softened by a strong voluntary solidarism, that had characterized the earlier development toward an interventionist, protec- tionist welfare state. The main turning point was in 1948, when the proponents of a new social-democratic view gained power and began to replace the local version of a liberal ideology. The events of the 1940s, including the 1948 civil war, greatly influenced the situation in 1950. The political arena has since been dominated by the actors of the 1940s. The Calder6n Guardia administration (1940-44) recorded significant achievements (the founding of the University of Costa Rica, the social security system, the Labor Code, and the New Industries law) but also made political mistakes that led to the 1948 civil war. Young profession- als, intellectuals, and small entrepreneurs, grouped in the Centro para el Estudio de los Problemas Nacionales, opposed the administration and began to develop a new, "scientific and pragmatic" social-democratic ideology that gradually replaced the liberal legacy of the previous cen- tury. This group was particularly worried about monoculture and for- eign investment and strongly promoted industrialization. When the Picado administration did not recognize the results of the 1948 presidential election, the young social democrats had an opportu- nity to seize power. Ruling by decree, the junta, led by Figueres, intro- duced major economic and political reforms. The army was abolished, the banking system was nationalized, the United Fruit Company was required to pay a 15 percent income tax, and several autonomous agen- cies were created, while the social reforms of the 1940s were retained. A new constitution, representing a compromise between the two strug- gling ideologies, was enacted in 1949. During the 1950-85 period new groups of small rural and urban entrepreneurs, professionals, and public sector employees used the power of the state to reduce the economic and political supremacy of the old coffee exporters and to try to capture the rents derived from a protectionist strategy of industrialization and the transfers available from the expanded social security system. Before the 1950s income and wealth were associated with Ricardian land rents and exports of a vent-for-surplus. The successful exploitation of the comparative advantage in coffee increased the earnings of small- scale units of production, of landless workers, and of small noncoffee sectors that were allowed to share in the coffee pact as a preventive 132 Costa Rica and Uruguay measure. The successful exploitation of the comparative advantage in bananas meant increased earnings by a foreign investor and increased tax revenues that were used to provide public goods such as infrastruc- ture and education. Rents, therefore, were widely distributed among the population, for the most part through market forces, in response to technological considerations and factor scarcities. During 1950-85 the old coffee alliance was gradually replaced by a new coalition of state-dependent groups located in public agencies, state-owned enterprises, and highly protected private sector enclaves whose income and wealth derived from their rent-seeking and revenue- seeking activities, through the manipulation of protectionist and inter- ventionist policies. The distribution of the newly created quasi-rents increasingly took place in the political arena, through the legislation of explicit and implicit taxes and subsidies, instead of through the market, and reflected relative political power rather than economic competitive- ness. The resulting entitlements exceeded available resources, eventu- ally leading to a fiscal crisis. Costa Rica in the 1950s: A Larger Government The rural character of Costa Rican society in 1950 reflected a compara- tively low productivity of labor in agriculture. Although 55 percent of the labor force was employed in agriculture, the sector contributed only 41 percent of GDP. Coffee and bananas accounted for 97 percent of total exports, for about 66 percent of value added in agriculture, and for 25 percent of GDP. Subsistence production was already diminishing in importance. Manufacturing was small and primitive. Despite increasing demands for services by a rapidly growing population, the government was small; only 6 percent of employed persons worked in the public sector. Comparatively favorable social indicators reflected the availabil- ity of a skilled, literate labor force and a substantial investment in human capital. The structure of society corresponded to the simple organization of the economy and the dominance of coffee. It included the participants in the coffee pact-the prominent exporters as well as the small produc- ers and landless laborers-and the associated bankers and importing merchants. It also included the isolated banana plantation workers, small groups of artisans, and a relatively influential rural middle class. The labor unions in the banana plantations had been banned because of their affiliation with the Communist party, and those in urban areas were inactive. The Chambers of Commerce, of Agriculture, and of Industry were not active, either. An urban middle class of small merchants and entrepreneurs, professionals, graduates from the recently created Uni- versity of Costa Rica, teachers, technicians, managers, and white-collar employees had been actively participating in the political arena, but, because of the small domestic market, they lacked economic opportuni- From Coffee Exports to State Enterprises 133 ties outside the traditional exporting activities. It was these groups that fortuitously gained access to power with the 1948 civil war and ex- pressed their aspirations through the Partido Liberaci6n Nacional (PIN). The ostensible justification for the civil war was to protect the electoral process, but the war also gave the new social democrats an opportunity to gain power and to govern under exceptional circumstances. They dramatically reoriented the country's economic and social policies. Costa Rica's simple, narrow economy offered few opportunities for new entrepreneurial ventures. The groups were eager to use the power of the state to diversify the country's productive structure and to generate opportunities for entrepreneurship and rent seeking. Nationalization of the banks was the most important step. Although the political agenda of the new social democrats was to take power from the traditional exporters, importers, and bankers, they wanted not to destroy the economy but to create new economic oppor- tunities for themselves. Most members of the emerging groups lacked financial resources and resented their limited access to bank credit (a consequence of World War II and of fiscal mismanagement during the 1940s). The nationalization of the banks provided an opportunity to create a new set of entrepreneurs. For similar reasons they urged the diversification of productive structures to allow greater participation by new social forces, encouraged cooperatives as instruments for the sur- vival of small property, and supported the idea of the state as a scientific promoter and organizer of economic activity. They used government to develop infrastructure (roads, electricity, and the like) and to create numerous autonomous institutions intended to promote economic de- velopment while avoiding the concentration of power. Although they preserved the social security reforms of the 1940s, they did not expand them. Structural transformation, growth, and the modernization of the state, rather than equity, were their main concerns in the 1950s. They redistributed wealth, but in the form of new opportunities for the mid- dle classes. The dramatic reforms of the junta were followed by the conservative Ulate administration (1949-53). Economic growth, fueled by the rapidly expanding international economy and high coffee prices, was brisk, despite occasional setbacks caused by floods and drought. Rovira Mas (1987, p. 23) called this period "a brief oligarchic restoration." For Ulate, coming to power after a decade of fiscal mismanagement, the main objectives were to sustain budgetary and balance of payments surpluses and to maintain the external value of the col6n-easy goals, in view of the buoyant world market conditions. In addition, the public debt was substantially reduced, and price stability was restored. No new reforms were introduced, except for the creation of the Central Bank, but neither were any of the earlier institutional innovations revised. In the move- ment toward a new version of the state, there was already no turning back. 134 Costa Rica and Uruguay The election of Figueres (1953-58) accelerated these institutional changes, as numerous new autonomous agencies were created. Despite their desire to take power away from the coffee exporters, the social democrats nevertheless understood the key role that coffee played in the economy, and coffee exports were promoted in innovative ways. Addi- tional considerations were the opportunities presented by the extraordi- narily high price of coffee on world markets-the price increased from us$0.67 a pound in 1949 to us$1.49 a pound in 1954-and the desire to strengthen the country's importing capacity, domestic demand, and tax base to facilitate the introduction of new activities. At the intemational level the Figueres administration actively cam- paigned for the cartelization of the coffee-producing countries. Domes- tically, it promoted the use of fertilizers, new varieties, and modern technologies to increase yields. Most of the rapidly expanding agricul- tural credit from the nationalized banking system was targeted toward investment in coffee. Yields increased sharply to become the highest in the world. At the same time, the Figueres administration increased the income tax on the banana companies from 15 to 30 percent and negoti- ated higher wages for plantation workers. The ultimate objective of the social-democratic economic policies of the 1950s was the diversification of the country's economic output and the creation of new entrepreneurial groups. Among the new crops and activities promoted were basic grains for domestic consumption, beef and dairy cattle, sugarcane, cotton, and fishing. Construction of infrastructure-highways and feeder roads, bridges, ports, airstrips, electricity-generating plants, and industrial water supplies-and tech- nological improvement through research and extension were empha- sized. Redistributive initiatives sought to serve both equity objectives and the enlargement of the domestic market. The expansion of employ- ment in the public sector was also expected to increase domestic de- mand. But nationalistic fears about foreign investment, and the absence of industrialists among the main PLN leaders, prevented the group from openly supporting the industrialization bills debated during those ear- lier years. The debate about incentives for industrialization went on for more than six years and led to the Industrial Promotion Law of 1959. The Chamber of Industry, already influential and 100 members strong, launched a massive campaign on behalf of manufacturing interests to promote passage of this bill. Opposition came from the Chamber of Commerce, the oldest private sector association in the country. The conservative Echandi administration (1958-62), fearful that the PLN would claim another victory in Congress, sponsored the bill. The opposing forces were the emerging class of small manufacturers, on the one hand, and the established coffee growers and importers of consumer goods, on the other. Given the strength of the latter, it is From Coffee Exports to State Enterprises 135 doubtful that the Chamber of Industry could have won, had it not been for two external factors: the drastic decline in coffee prices and the growing momentum of the Central American integration movement, sponsored by the UN Economic Commission for Latin America (ECLA). (This followed the clear historical pattern of important policy shifts always being triggered by major external shocks.) The industrialization bill, which was mainly a response to those immediate pressures, was soon superseded by the protectionism of the Central American Common Market (CAcM). The conflict between the new industrialists and the old exporters deepened, however, when the Echandi administration showed reluctance to sign the 1960 integration treaties. The rapid growth of the early 1950s, fueled by the postwar expansion of traditional exports, was interrupted toward the end of the decade, when coffee prices declined. During 1950-63 growth was accompanied by substantial structural transformation. While the share of agriculture in GDP fell from 41 to 26 percent and the share of manufacturing hardly increased, the share of general government and other public sector- related activities, such as banking, transport, and public utilities, rose from 21 to 30 percent. The proportion of the labor force employed in agriculture declined from 55 to 50 percent, and the share of manufactur- ing did not change at all, but the share of the personal services sector increased from 18 to 24 percent. Public sector employment grew at 8.8 percent a year, as against 1.9 percent in the private sector. The decline in the relative importance of agriculture thus reflected the expansion not of manufacturing but of government and related services. Growth resulted essentially from the exploitation of pronounced comparative advantages in and expanding world demand for coffee and bananas and from major productivity gains in the cultivation of several crops. Because of the wide ownership of factors of production in coffee, large segments of the population benefited. The new crops and products that were promoted-sugar, dairy products, beef, and cotton-were more capital-intensive than coffee and were usually cultivated by larger landowners. Sharply increased taxation of the banana companies, in addition to high coffee and import taxes, financed heavy investments in infrastructure and the expansion of public sector employment. The great net winners of the fruits of economic growth in the 1950s, therefore, were the public sector and the growing bureaucracy. In 1953, for example, on the basis of the fiscal surplus accumulated by the Ulate administration, the PLN legislated an additional thirteenth month of salary (aguinaldo) for all public employees, which they still receive. Specific groups within the private sector were especially advantaged, such as new firms en- gaged in constructing infrastructure and government-sponsored hous- ing. It appears that the distribution of household income deteriorated during the 1950s, as most gains accrued to an expanding, but still small, middle class. 136 Costa Rica and Uruguay Costa Rica in the 1960s: Protectionism In the mid-1960s Costa Rica was a small, rural, open economy with an unexploited agricultural frontier still available. Between 1950 and 1963 policies to promote diversification had reduced the share of coffee and bananas from 97 to 72 percent of total exports. Beef and sugar grew to account for 11 percent, reflecting in part the reallocation of the U.S. sugar quota after the Cuban revolution. The public sector had grown signifi- cantly: central government expenditures had increased 5.2 times since 1950; numerous autonomous institutions with separate budgets had been created; and public sector employment had doubled. Life expec- tancy had climbed to 63 years of age, and illiteracy had declined to 14 percent of the population. The structure of society had not changed much, however, except for the steady expansion of the middle classes. Increasingly, industrialization and participation in the CACM had be- come key components of the PLN agenda to diversify the economy. The Echandi administration, in contrast, heavily emphasized agriculture, which had been badly hurt by the drop in world coffee prices and the decline in banana export revenues. Exporters, represented by Jorge Borb6n, the chairman of the Coffee Office and minister of agriculture and industry, lobbied for and obtained subsidized targeted credit and other advantages for agriculture. For the first time, funds borrowed abroad were used for production credit rather than for infrastructure. The Chamber of Industry was unsuccessful in lobbying for a realloca- tion of a portion of those funds to manufacturing. Borb6n, with the support of his brother-in-law Manuel Jimenez, chairman of the Chamber of Sugar Producers, also opposed participation in the CACM. They claimed that Costa Rica was essentially a country of farmers, that the industrial incentives were nothing more than tax evasion schemes, and that little was to be gained, since the Central American economies were competitive rather than complementary. They were able to block the signing of the treaties-probably the last time that the agricultural interests, as a whole, defeated the industrial interests. After the victory of the PLN and the advent of the Orlich administration (1962-66), Costa Rica formally joined the customs union, in 1963. By joining the CACM, Costa Rica consolidated its choice of a protection- ist strategy of import-substituting industrialization. This step, which followed an interlude during which an attempt was made to promote manufacturing on the basis of the minuscule domestic market, repre- sented the adoption of an intermediate trade policy. Costa Rica chose to look outward with respect to the rest of Central America and inward with respect to the rest of the world. Fields (1988) called this "export-led growth within a regionally protected framework." It may just as well be termed "import substitution at the regional level," since the overall pattern was one of extremely high protection, with many triple-digit effective tariff rates. The Central American market was never suffi- From Coffee Exports to State Enterprises 137 ciently large to avoid high costs and substantial monopoly rents. The dispersion of the rates of effective protection was very high. There was a permissive attitude toward granting protection and ample opportuni- ties for rent seeking. Politically influential sectors managed to obtain especially favorable incentives, while other sectors lagged substantially behind. Given the strength of pressure groups in Costa Rica, it is not surprising that "when all the determinants of effective protection were taken into account, Costa Rica was the most highly protective country in the region" (Rapoport 1978). The implicit subsidies increased the economic and political power of the industrialists, leading to further privileges. "Economic planning" was introduced in Costa Rica in 1963 as a precondition for the disbursement of funds from the Alliance for Prog- ress. It was clearly a task for which the Costa Rican govermnent lacked organizational talent; the required information, human resources, and administrative channels were not in place. As one of the pioneers re- called, when the government was faced with the insistence that a plan be completed before funds could be used, numbers were invented. The neoliberal Trejos administration (1966-70) abandoned the idea of draft- ing a national plan but moved successfully to a more formal analysis of the operation of the economy. In addition, during both administra- tions specific projects to promote particular crops were a by-product of planning. The Orlich administration encouraged the further improvement of coffee yields and Costa Rica's participation in the International Coffee Agreement. To compensate for the resulting strengthening of the coffee classes, the administration also promoted the formation of cooperatives of smaRl coffee producers. The establishment of the highly successful Federation of Coffee Cooperatives was a serious challenge to the old exporting beneficios. Until 1956 the United Fruit Company (United Brands) had exercised absolute control over Costa Rica's banana production. In that year it was joined by the Standard Fruit Company (Castle and Cook) and in 1965 by the Banana Development Corporation (Del Monte) and COBAL. Substan- tial increases in production were made by domestic entrepreneurs, who signed long-term contracts with the multinationals for sales at a fixed price. By 1975 these independent producers were growing 41 percent of the bananas exported, on plantations that were large by Costa Rican standards but small when compared with those run by the fruit compa- nies. Among these new producers were numerous professionals and politicians, many without any previous experience in the banana trade, who received abundant subsidized credit from the nationalized banks for up to 90 percent of their total investment. The banana program was financed by the Costa Rican government against the opposition of the World Bank, which refused to fund it. Organized in the powerful ASBANA (Association of Banana Producers), the new entrepreneurs represented 138 Costa Rica and Uruguay an emerging dass of politicians turned businessmen, with massive support from the state. The foreign companies began to replace bananas with African oil palm and other crops and eventually abandoned the production of bananas to avoid increasingly costly labor strikes. Other sectors similarly promoted by the PLN were sugar, beef, and cotton. Conflicts between the sugarcane growers and the sugar refineries were solved by the creation of LAICA, a tripartite institutional arrangement similar to that for coffee, and a conflict between beef producers and exporters was settled through the creation of a state-owned meat- processing firm, which later became a cooperative (Montecillos). The highest rates of sustained economic growth in recent times were experienced in the late 1960s. Between 1963 and 1973 GDP grew at 7.2 percent a year. Before Costa Rica joined the CACM, the rates of growth of agriculture and of manufacturing were similar, but thereafter industry grew twice as rapidly (10.8 percent a year, compared with 5.5 percent), particularly in the early years of expansion of trade within the customs union. The share of manufacturingin GDPincreased from 14 to2O percent in real terms, while the share of agriculture declined in nominal terms but remained fairly constant in real terms. This reflected a significant deterioration of the domestic terms of trade of agriculture. The propor- tion of the labor force employed in agriculture declined to 38 percent, whereas a decade after Costa Rica had joined the CACM the share of manufacturing in employment had not changed much. Employment increased more rapidly in the public than in the private sector. Exports continued to be Costa Rica's engine of growth. The volume of exports increased 17.4 percent a year during 1965-69. The high rates of GDP growth reflected the dramatic increase of exports to Central Amer- ica. The share of manufactures in total exports climbed from 4 percent in 1963 to 29 percent in 1979. The same period saw a substantial expan- sion of traditional agricultural exports. For 1965-69 export volumes increased 9.4 percent a year for coffee, 22.2 percent for bananas, 12.0 percent for beef, 13.4 percent for sugar, and 25.2 percent for all other exports (Cespedes, Di Mare, and Jimenez 1986, p. 175). Given the high import intensity of manufacturing, import substitu- tion was successful as long as exports of primary commodities were growing rapidly. Under the protectionist policies, however, the rents extracted from natural resources on the basis of comparative advantages began to be used to support the more capital-intensive manufacturing sector. The consequences of this reallocation of resources did not become evident until a decade later. Growth in the 1960s reflected, in addition to expanding exports, significant increases in agricultural productivity (the consequence of augmented land yields, greater skills, and a better utili- zation of labor in the economy). A substantial improvement in the distribution of income and a major alleviation of poverty also took place during the 1960s. High rates of output growth, combined with great occupational mobility, led to From Coffee Exports to State Enterprises 139 higher incomes for large segments of the population and a more egali- tarian distribution. The shares of households with intermediate incomes increased, mostly at the expense of those with the highest incomes. Furthermore, the proportion of the poor declined from about 50 percent of the total population in the early 1960s to about 20 percent in the mid-1970s. Among Latin American countries, Costa Rica had the highest rate of growth of employment in modem nonagricultural activities and the quickest reduction of underemployment and of subutilization of the labor force. It was also the country with the highest rate of absorption of the labor force. All this reflected considerable enlargement of the modem sectors. Dualism was rapidly eliminated. At least 75 percent of the labor force became salaried. Differences in the distribution of skills within the labor force were the main determinants of inequality. The share of labor in total factor payments increased from 57 to 63 percent during 1960-71. These improvements were not the result of government policies or redistributive measures; rather, they reflected the high rate of growth, the modernization of the economy, the process of structural transforma- tion, the integration of the labor market, and the high level of education and skill acquisition of the labor force. Improvements in distribution and poverty alleviation were the fruits of growth acting on favorable initial conditions. Until the mid-1970s average wages actually increased faster than the legal minimum wage, reflecting a growing demand for labor in the modem sectors of the economy. These wage increases could not be attributed to unionization. Factor-price policies (high payroll taxes and subsidies for capital utilization) actually favored capital over labor. Moreover, major administrative and organizational constraints slowed the universalization of social security. The system had been set up on the basis of contributions by the workers, the employers, and the state, and eligibility required a permanent salaried job. This exduded the self- employed, who were mostly in agriculture, and the unemployed. Be- cause of the weak organizational framework, health services were offered first in the large urban centers, and the ceiling on the contribution implied that the poorest paid the highest proportion of their wage to the system. Costa Rica in the 1970s: Redistribution By the early 1970s, as a result of substantial economic growth and significant modernization, Costa Rica had a considerably more diversi- fied and complex economy than in 1950. The population had doubled, and so had income per capita. Agriculture was no longer the most important sector, and new, more skilled occupations attracted the labor force. Rapid urbanization had significantly reduced the rural character of society. As the labor force grew, the favorable land-to-labor ratio 140 Costa Rica and Uruguay shrank, modifying comparative advantages and generating strong pres- sures for job creation. Employment in the public sector had reached 15 percent of the total. Despite protectionism, the economy was even more open than before as a result of increased trade with Central America, a growing demand for imported inputs and capital goods, and the contin- ued strong performance of traditional exports. Coffee and bananas represented just over one-half of total exports. Total imports amounted to 35 percent of GDP, and the country had begun to use substantial amounts of foreign savings for domestic investment. Life expectancy had increased to 68 years of age, and illiteracy had dropped to less than 10 percent of the population. The state-promoted accumulation of human capital, through educa- tion, training, and health care, even for the children of the poor, and the natural rise in wages through the working of the labor market were the most effective mechanisms for improving the distribution of income and for alleviating poverty. Rapid economic growth had made possible the steady incorporation of new groups into a modern, more affluent soci- ety. Participation by new groups in the process of development was limited, however, by serious organizational problems. Reaching the scattered population beyond the Central Valley, particularly on the Atlantic coast, was a great challenge because of the high per capita cost of the infrastructure required. This process was begun by the Trejos admninistration, which built the first road from the Central Valley to Port Lim6n. Additional problems were presented by marginal sectors, which did not participate in the labor market, the main mechanism for income improvement. The Figueres (1970-74) and Oduber (1974-78) administrations, going beyond the traditional emphasis on growth, highlighted equity issues and adopted the first major redistributive policies. The ceiling on social security contributions was eliminated in 1971, and the movement to- ward universal coverage was accelerated. Social security services were offered to the self-employed and to the indigent. Health clinics reached into the countryside. The Instituto Mixto de Ayuda Social was created to provide assistance to the poorest. After a lively debate, the family allowances program (asignaciones familiares) was adopted in 1974, to be financed with additional payroll taxes. Among its goals was the redis- tribution of 2 percent of national income to the poorest 20 percent by 1978. It included components for health, food, nutrition, housing, land, training, and pensions. The program suffered from organizational defi- ciencies that limited its success. A large portion of the funds was spent on logistics and staffing and did not reach the targeted beneficiaries, while less-poor nontargeted beneficiaries also shared in the distribution of food and other services. Specific distributive goals were also incorporated in wage policies after the first oil crisis, in 1974. Adjustments to the legal minimum wage included a wide range of increases that were inversely related to existing From Coffee Exports to State Enterprises 141 wage levels. Whereas in 1974 the lowest wages increased 41 percent, the highest rose only 10 percent. This policy may have had a limited distrib- utive impact, since most low-income households were in rural areas, where minimum wages were less effectively enforced, or were not wage earners. Growth itself had earlier promoted equity; the explicit shift of emphasis toward equity, at a time when growth was beginning to decline, turned out to be less successful. The expanded welfare system created an excess demand for the available resources, which made macroeconomic management more difficult, particularly in view of the acute external shocks of the late 1970s. The 1976 coffee boom had provided an opportunity to expand the welfare system beyond sustain- able levels, and the attempt to incorporate everybody into a system of forced transfers and other entitlements led to a major fiscal crisis when additional foreign savings were not available to continue financing the outlays. The promotion of manufacturing, in the context of the CACM, initially accelerated growth, as a result of increased trade. These high rates of growth were not entirely sustained in the 1970s; the early, easy stages of import substitution were exhausted, the inefficiencies brought about by protectionism limited competitiveness in markets outside the CACM, and exports were discouraged. The artificial incentives became less and less powerful, and the constraints imposed by the size of the regional market became binding. Productivity growth slowed. Increasingly pow- erful groups devoted more and more resources to directly unproductive activities, and their success added new distortions to the system. The high degree of political participation typical of Costa Rica led to the proliferation of pressure groups that pursued their own interests. As additional groups were formally incorporated into the distribution of entitlements, privileges had to be granted to almost every sector. The public sector became larger and larger, introducing additional bureau- cratic controls and regulations. Autonomous institutions and state- owned firms became important pressure groups in their own right. The nationalized banks, which had behaved as a private banking system at first, became increasingly politicized. Financial repression and national- ization constrained institutional growth and left Costa Rica with an obsolete financial system. The net result was an unsystematic pattern of protection. Within the byzantine mosaic of implicit taxes and subsidies, it became difficult to identify the net winners and the net losers. Protectionism was not an orderly strategy but the haphazard result of historical events and relative political strengths. The multiplicity of entitlements reflected participation in policymak- ing by wide segments of the population. In the end, Costa Rica was undecided between promoting manufacturing and promoting agricul- ture. Whereas the production of most final consumer goods was heavily protected, the production of raw materials and intermediate goods was 142 Costa Rica and Uruguay discouraged. High levels of effective protection also developed within agriculture. Some specific activities-such as rice production, which was pursued capital-intensively on large landholdings-received excessive incentives, while other activities were penalized. All this brought about a slow deceleration of growth (interrupted only by the coffee boom) and the end of the continued improvement in income distribution that had characterized the previous decade. In addition, the voluntary reciprocity that had prevailed earlier was steadily replaced by compulsory transfers that were made to prevent political disaffection. These problems were accentuated by the major external shocks of the 1970s. Nationalistic feelings were not important in policy decisions until 1970, when the Costa Rican student movement prevented an agreement with ALCOA for aluminum exploitation. Increasingly, however, key PLN leaders adopted ECLA's ideas about protectionism, nationalism, and planning. These ideas provided the ideological background for the creation of the Costa Rican Development Corporation (CODESA), the instrument for the state's direct intervention in production activities, and represented the new approach of PLN leaders dose to Oduber. CODESA's purposes went beyond the modernization of the public sector and the promotion of new private entrepreneurs espoused by the young social democrats of the 1940s. The role of the state was now extended into productive activities that competed directly with the private sector. These activities never became profitable, but CODESA's unrestricted ac- cess to Central Bank credit contributed significantly to the deterioration of public finances and the crowding out of the private sector from credit portfolios. Its enterprises used 18 percent of all domestic credit but contributed only 1.8 percent of GDP and 0.3 percent of total employment. CODESA, unrestricted by the political controls typical of government agencies or by the market discipline of private firms, became a major factory of new quasi-rents. The larger the project, irrespective of profit- ability, the larger the rents created. Productive activities that competed directly with the private sector created tensions in the symbiotic relation- ship that had developed between the state, in the hands of the PLN, and the industrialists. The confrontation reflected the increasing power within the PLN of the politician-entrepreneurs, whose strength derived from their control of the state. From their prominent positions as heads of the autonomous institutions and state-owned enterprises, as well as in the executive branch, they accumulated immense influence over economic policies. In view of the complexity of the state and of the tasks performed, these technocrats earned high salaries and enjoyed a prominent social status. These advantages allowed them to venture into private business, where they made use of their privileged access to credit and to other implicit subsidies. During PLN administrations they were close to the highest levels of government; when not in power, they ran their highly protected enterprises. CODESA represented the confluence of the interests of this group and of those who favored greater state intervention. From Coffee Exports to State Enterprises 143 The extension of state economic activity coincided with the strength- ening of the middle classes and the proliferation of organizations created by and for them. The expansion of the middle dasses was closely associated with the growth of the public sector and, in particular, of the autonomous institutions. The largest number of lobbying associations represented two groups: professionals and government employees, and (mostly) large agricultural, manufacturing, and commercial entrepre- neurs. Small and medium-size producers had fewer organizations of their own, except for the coffee cooperatives. Lizano Fait (1975) noted that whereas the productive middle classes (those involved in directly productive activities) were interested in profitability and innovation and were subject to risk, the bureaucratic middle classes were more inter- ested in the stability of their jobs than in entrepreneurship and more interested in the level of their wages than in profits. The productive middle classes had a high propensity to save, but the bureaucratic middle classes attempted to copy the consumption patterns of the upper classes. Their main demands were redistributive and attempted to pre- vent the operation of market forces. Protectionism and the too rapid expansion of the public sector led to the rapid growth and strengthening of the bureaucratic middle classes and the relative stagnation of the productive middle classes. Because they were in charge of important public services, the bureaucrats managed to extract important privileges by threatening strikes. The PLN cultivated these middle classes through wage increases and income transfers and promoted a certain mobility of the lower classes into the bureaucracy to reduce popular pressures and allow the middle classes to absorb the most talented members of the lower classes. Increasing government intervention was the mechanism used to favor the upper classes and the bureaucracy simultaneously. The former were granted opportunities for rent seeking, and the latter were allowed artificially high levels of consumption. As long as there was rapid economic growth and an ample supply of foreign savings, the system was stable. Costa Rica in the 1980s: Crisis The extraordinary expansion of export earnings during the coffee boom and increased foreign borrowing provided new opportunities for creat- ing rents and rapidly expanding aggregate spending. When the boom was over, it was difficult to adjust to the decline in real income. The influential manufacturing sector was dependent on imported inputs (because of the high import-intensity of protected activities), and the powerful public sector unions prevented any reductions in government expenditures. The authorities chose to postpone adjustment by increas- ingly borrowing abroad until foreign funds were no longer available. Then domestic credit expanded, the private sector was crowded out of credit portfolios, and inflation and devaluation ensued. Inflation and devaluation reflected income entitlements that added up to a total well 144 Costa Rica and Uruguay above the available income from productive activities and the country's importing capacity. As a result, the exchange rate and the financial system collapsed. The crisis exhibited a clear ratchet effect. During each boom, entitle- ments expanded. Powerful groups took advantage of the new income levels to incorporate the claims of new groups and so expand their political base. When the economy contracted, it was politically impossi- ble to eliminate already established entitlements outright, and exclu- sions became implicit, through inflation and crowding out. For decades, abundant foreign savings helped to carry this cyde to ever higher levels. When almost every segment of society had been incorporated into the entitlements and foreign savings stopped flowing in, a severe crisis was unavoidable. By the late 1970s, even before the crisis exploded, there were signs that inequality in income distribution was no longer declining. When the crisis struck, income distribution became more unequal. During the worst three years output per capita declined 17 percent, unemployment rates doubled, and inflation reached three digits. Between 1980 and 1982 real wages declined 40 percent and consumption per capita dropped 27 percent. Poverty increased, to encompass 30 percent of the population. Between 1971 and 1983 real income in rural areas declined only for the poorest 10 percent of the households, but in urban areas it declined for all but the 10 percent richest households. The crisis produced a general- ized impoverishment of the urban population and a significant concen- tration of income. The growth-reducing accumulation of redistributive entitlements eventually hampered equity. Note 1. Directly unproductive activities are described in Bhagwati 1982. Statistical Appendix A Costa Rica A-1. Costa Rica: Land Use, 1963, 1973, and 1976 A-2. Costa Rica: Population Growth, 1950-85 A-3. Costa Rica: Birth, Death, and Population Growth Rates, Selected Years, 1910-82 A-4. Costa Rica: Population, by Age and Sex, Selected Years, 1950-85 A-5. Costa Rica: Economically Active Population, by Age and Sex, Selected Years, 1950-85 A-6. Costa Rica: Employed Labor Force, by Age and Sex, Selected Years, 1950-85 A-7. Costa Rica: Unemployed Labor Force, by Age and Sex, Selected Years, 1950-85 A-8. Costa Rica: Labor Force Participation Rates, by Age and Sex, Selected Years, 1950-85 A-9. Costa Rica: Open Unemployment Rates, by Age and Sex, Selected Years, 1950-85 A-10. Costa Rica: Open Unemployment and Visible and Invisible Underemployment Rates, 1976-83 A-11. Costa Rica: GDP, in Current and Constant 1966 Prices, 1950-85 A-12. Costa Rica: GDP per Capita, in Current and Constant 1966 Prices, 1950-85 A-13. Costa Rica: GNP and Gross National Income (GNI), GNP per Capita, and GNI per Capita, in Constant 1966 Prices, 1966-84 A-14. Costa Rica: GDP, by Sector, in Constant 1966 Prices, 1957-85 A-15. Costa Rica: Structure of GDP, in Current Prices, 1950-80 A-16. Costa Rica: Structure of GDP, in Constant 1966 Prices, 1957-85 A-17. Costa Rica: Domestic Terms of Trade Index, by Sector, 1957-85 A-18. Costa Rica: Components of Aggregate Supply and Demand, in Constant 1966 Prices, 1966-85 A-19. Costa Rica: Export Prices, Import Prices, and Intemational Terms of Trade, 1950-85 A-20. Costa Rica: Value of Exports and Imports and Trade Balance, 1950-85 145 146 Costa Rica and Uruguay A-21. Costa Rica: Exports and Imports as a Share of GDP, in Current and Constant Prices, 1950-85 A-22. Costa Rica: Value of Selected Exports as a Share of Total Exports, 1957-80 A-23. Costa Rica: Consumer Price Index, 1950-85 A-24. Costa Rica: Wholesale Price Index, 1950-85 A-25. Costa Rica: GDP Deflator, 1950-85 A-26. Costa Rica: Official and Free-Market Exchange Rates, Annual Averages, 1950-79 A-27. Costa Rica: Monthly Exchange Rate, 1980-85 A-28. Costa Rica: Average Monthly Wage, in Constant 1975 Colones, by Sector, 1972-85 A-29. Costa Rica: Average Monthly Wage, in Constant 1975 Colones, by Institutional Sector, 1972-85 A-30. Costa Rica: Annual Growth Rates of Average Monthly Wage, in Constant 1975 Prices, by Sector, 1972-85 A-31. Costa Rica: Annual Growth Rates of Average Monthly Wage, in Constant 1975 Prices, by Institutional Sector, 1972-85 Statistical Appendix A 147 Table A-1. Costa Rica: Land Use, 1963,1973, and 1976 (thousands of hectares) Use 1963 1973 1976 Cropland 610.0 490.6 527.2 Annual crops 143.1 141.0 187.6 Commercial horticulture 1.4 3.3 4.0 Fallow 180.0 124.8 124.8 Other cropland 85.0 14.3 14.3 Subtotal 409.5 283.4 330.7 Tree crops 200.5 207.2 196.5 Livestock 935.7 1,558.1 1,738.0 Natural pasture 535.7 825.6 921.1 Improved pasture 400.0 732.5 816.9 Forest 1,097.1 1,000.1 1,000.0 Woodland 819.3 716.5 716.5 Shrubland 227.8 283.6 283.5 Cities and roads 25.3 73.9 101.9 Not identified 2,468.8 2,013.2 1,768.8 Total 5,135.9 5,135.9 5,135.9 Source: Costa Rica, Direcci6n General de Estadistica y Censos, 1963,1973; Costa Rica, Ministerio de Agricultura, Oficina de Planificaci6n Sectorial Agropecuaria, 1979. 148 Costa Rica and Uruguay Table A-2. Costa Rica: Population Growth, 1950-85 Population Growth rate Year (thousands) (annual percentage change) 1950 858 n.a. 1951 887 3.4 1952 918 3.5 1953 951 3.6 1954 986 3.7 1955 1,024 3.8 1956 1,067 4.2 1957 1,109 3.9 1958 1,150 3.7 1959 1,192 3.7 1960 1,235 3.7 1961 1,286 4.0 1962 1,330 3.4 1963 1,380 3.7 1964 1,431 3.7 1965 1,482 3.6 1966 1,534 3.5 1967 1,585 3.3 1968 1,635 3.2 1969 1,684 3.0 1970 1,735 3.0 1971 1,779 2.5 1972 1,826 2.6 1973 1,872 2.5 1974 1,919 2.5 1975 1,968 2.5 1976 2,018 2.5 1977 2,070 2.6 1978 2,126 2.7 1979 2,184 2.7 1980 2,245 2.8 1981 2,306 2.8 1982 2,370 2.7 1983 2,433 2.7 1984 2,497 2.6 1985 2,562 2.6 n.a. Not applicable. Source. Costa Rica, Direcci6n General de Estadistica y Censos, and Centro Latinoamericano de Demografia, 1976,1983. Statistical Appendix A 149 Table A-3. Costa Rica: Birth, Death, and Population Growth Rates, Selected Years, 1910-82 Per thousand population Growth rate Year Birthrate Death rate (percent) Period averages' 1910-20 46.3 29.8 1.7 1920-30 45.7 27.1 1.9 1930-40 45.3 23.2 2.2 1940-50 44.5 18.2 2.6 1950-55 47.6 12.4 3.5 1955-60 48.3 10.8 3.8 1960-65 45.3 9.1 3.6 1965-70 38.3 7.9 3.0 1970 33.3 7.3 2.6 1971 31.7 6.5 2.5 1972 31.5 6.5 2.5 1973 29.9 5.6 2.4 1974 29.6 5A 2.4 1975 29.6 5.2 2.4 1976 29.8 5.0 2.5 1977 31.1 4.6 2.7 1978 32.1 4.3 2.8 1979 32.0 4.0 2.8 1980 31.0 4.0 2.7 1981 30.0 4.0 2.6 1982 30.0 4.0 2.6 Note Figures differ from those in table A-2 because different methodologies were used to estimate population figures for noncensus years. a. Average annual rates for the corresponding period. Source: Academia de Centroamerica 1981; Rosero Bixby 1980. 150 Costa Rica and Uruguay Table A-4. Costa Rica: Population, by Age and Sex, Selected Years, 1950-85 (thousands) Category 1950 1960 1970 1980 1985 Total population 858.2 1,236.1 1,735.1 2,245.4 2,562.0 0-14 years old 373.2 586.5 799.8 863.9 937.5 15-64 years old 455.8 612.2 879.8 1,301.6 1,526.6 65 years and older 29.3 37.3 55.5 79.9 97.8 Men 431.3 622.7 875.0 1,134.5 1,293.5 0-14 years old 189.3 298.0 406.5 440.9 478.5 15-64 years old 228.0 307.0 442.3 656.5 770.2 65 years and older 13.9 17.7 26.2 37.0 44.8 Women 426.9 613.4 860.1 1,111.0 1,268.5 0-14 years old 183.9 288.5 393.3 423.0 459.0 15-64 years old 227.7 305.2 437.5 645.0 756.4 65 years and older 15.3 19.7 29.3 42.9 53.1 Source- See table A-2. Table A-5. Costa Rica: Economically Active Population, by Age and Sex, Selected Years, 1950-85 (thousands) Category 1950 1960 1970 1980 1985 Total labor force 286.5 364.5 519.2 768.1 899.7 12-14 years old 16.1 14.5 18.5 23.4 16.9 15-64 years old 259.3 339.1 484.7 726.4 863.2 65 years and older 11.1 11.0 16.0 18.3 19.6 Men 245.0 308.0 422.5 588.5 677.1 12-14 years old 14.6 12.7 15.4 19.0 14.1 15-64 years old 220.1 285.1 392.3 552.9 645.4 65 years and older 10.3 10.2 14.8 16.6 17.6 Women 41.5 56.6 96.5 179.5 222.7 12-14 years old 1.5 1.8 3.0 4.3 2.9 15-64 years old 39.2 54.0 92.4 173.5 217.8 65 years and older 0.8 0.8 1.1 1.7 2.0 Source: Computed from tables A-4 and A-8. Statistical Appendix A 151 Table A-6. Costa Rica: Employed Labor Force, by Age and Sex, Selected Years, 1950-85 (thousands) Category 1950 1960 1970 1980 1985 Total employed labor force 274.8 339.1 481.9 722.7 838.1 12-14 years old 13.4 10.1 11.4 18.8 14.4 15-64 years old 250.9 318.8 456.1 686.0 804.5 65 years and older 10.5 11.0 14.4 17.9 19.2 Men 233.4 283.6 389.4 557.3 633.1 12-14 years old 11.9 8.5 9.3 15.4 12.0 15-64 years old 211.8 265.6 366.8 525.8 603.9 65 years and older 9.7 10.2 13.4 16.1 17.2 Women 41.4 55.4 92.4 165.5 205.1 12-14 years old 1.5 1.5 2.1 3.3 2.5 15-64 years old 39.1 53.1 89.4 160.5 200.6 65 years and older 0.8 0.8 1.0 1.7 2.0 Source: Computed from tables A-5 and A-9. Table A-7. Costa Rica: Unemployed Labor Force, by Age and Sex, Selected Years, 1950-85 (thousands) Category 1950 1960 1970 1980 1985 Total unemployed labor force 11.7 25.4 37.3 45.4 61.6 12-14 years old 2.7 4.4 7.1 4.6 2.5 15-64 years old 8.4 20.3 28.6 40.4 58.7 65 years and older 0.6 0.0 1.6 0.4 0.4 Men 11.6 24.4 33.1 31.2 44.0 12-14 years old 2.7 4.2 6.1 3.6 2.1 15-64 years old 8.3 19.5 25.5 27.1 41.5 65 years and older 0.6 0.0 1A 0.5 0.4 Women 0.1 1.2 4.1 14.0 17.6 12-14 years old 0.0 0.3 0.9 1.0 0.4 15-64 years old 0.1 0.9 3.0 13.0 17.2 65 years and older 0.0 0.0 0.1 0.0 0.0 Source: Computed from tables A-5 and A-9. 152 Costa Rica and Uruguay Table A-8. Costa Rica: Labor Force Participation Rates, by Age and Sex, Selected Years, 1950-85 (percent) Category 1950 1963 1973 g98oa 1985a Total population 52.8 49.7 48.4 49.5 50.5 12-14 years old 27.8 17.2 13.4 13.8 10.6 15-64 years old 56.8 55.4 55.1 55.8 56.5 65 years and older 37.8 29.5 28.8 22.9 20.2 Men 12-14 years old 50.0 29.7 22.0 21.9 17.5 15-64 years old 96.5 92.9 88.7 84.2 83.8 65 years and older 74.1 57.6 59.5 44.9 39.5 Women 12-14 years old 5.2 4.4 4.4 5.2 3.8 15-64 years old 17.3 17.7 21.1 26.7 28.8 65 years and older 5.6 4.1 3.9 4.0 3.8 a. As of July. Source- Costa Rica, Direcci6n General de Estadistica y Censos, 1950,1963,1973; Costa Rica, Direcci6n General de Estadistica y Censos, and Ministerio de Trabajo y Seguridad Social, various years. Statistical Appendix A 153 Table A-9. Costa Rica: Open Unemployment Rates, by Age and Sex, Selected Years, 1950-85 (percent) Category 1950 1963 1973 1980a 1985a Total labor force 4.1 6.9 7.3 5.9 6.8 12-14 years old 16.5 30.5 37.5 19.8 16.0 15-64 years old 3.2 6.0 5.9 5.6 6.8 65 years and older 5.3 0.0 9.2 2.4 2.7 Men 4.8 7.9 8.1 5.3 6.5 12-14 years old 18.2 32.9 39.3 19.0 15A 15-64 years old 3.7 6.8 6.5 4.9 6.5 65 years and older 3.7 0.0 9.3 2.7 2.3 Women 0.2 2.1 4.3 7.8 7.9 12-14 years old 0.6 14.4 28.6 22.6 18.5 15-64 years old 0.2 1.7 3.3 7.5 7.9 65 years and older 0.0 .. 8.4 0.0 0.0 .. Negligible. a. As of July 1. Source. Costa Rica, Direcci6n General de Estadistica y Censos, 1950,1963,1973; Costa Rica, Direcci6n General de Estadfstica y Censos, and Ministerio de Trabajo y Seguridad Social, various years. Table A-10. Costa Rica: Open Unemployment and Visible and Invisible Underemployment Rates, 1976-83 (percent) Area and unemployment category 1976 1977 1978 1979 1980 1981 1982 1983 National Openunemploymenta 6.2 4.6 4.5 4.9 5.9 8.7 9.4 9.0 Visible underemployment1 2.8 2.9 3.1 4.7 4.6 5.8 7.0 6.2 Open unemployment + visible underemployment 9.0 7.5 7.6 9.6 10.5 14.6 16.4 15.2 InvisibleunderemploymentC 4.1 3.7 3.2 2.9 3.0 2.9 7.4 4.7 Total 13.1 11.2 10.8 12.5 13.5 17.4 23.8 19.9 Rural Open unemployment 5.8 4.1 3.6 4.2 5.9 8.4 8.3 8.7 Visible underemployment 3.3 3.2 3.2 5.2 4.8 7.2 7.8 7.2 Open unemployment + visible underemployment 9.1 7.3 6.8 9.4 10.7 15.6 16.1 15.9 Invisible underemployment - 4.3 3.9 3.5 3.6 3.6 9.0 5.3 Total - 11.6 10.7 12.9 14.3 19.2 25.1 21.2 Urban Open unemployment 6.8 5.2 5.6 5.7 5.9 9.1 10.5 9.3 Visible underemployment 2.2 2.5 3.1 4.1 4.3 4.3 6.1 5.1 Open unemployment + visible underemployment 9.0 7.7 8.7 9.8 10.2 13.4 16.6 14.4 Invisible underemployment - 2.9 2.6 2.2 2.4 2.1 5.6 4.0 Total - 10.6 11.3 12.0 12.6 15.5 22.2 18.4 San Jos Metropolitan Area Open unemployment 6.1 5.5 5.4 5.2 5.0 8.3 11.3 8.5 Visible underemployment 1.4 2.4 2.6 3.7 3.6 3.2 5.3 4.3 Open unemployment + visible underemployment 7.5 7.9 8.0 8.9 8.6 11.5 16.6 13.2 Invisibleunderemployment - 2.9 2.4 2.1 2.1 2.0 5.6 3.6 Total - 10.8 10.4 11.0 10.7 13.5 22.2 16.8 - Not available. a. People actively looking for a job who could not find one, as of July 1. b. People who could find only part-time jobs despite their wish to work more, as of July 1. The rate is the unemployment equivalent of the difference between 47 hours a week and the number of hours actually worked. c. People who could only find work for less than the legal minimum wage, as of July 1. Source: Cespedes and others 1983a; Costa Rica, Direcci6n General de Estadistica y Censos, and Ministerio de Trabajo y Seguridad Social, various years. 156 Costa Rica and Uruguay Table A-1l. Costa Rica: GDP, in Current and Constant 1966 Prices, 1950-85 GDP, current prices GDP, 1966 prices Millions Growth rate Millions Growth rate Year of colones (percent) of colones (percent) 1950 1,446.3 n.a. 1,772.9 n.a. 1951 1,563.5 8.1 1,863.3 5.1 1952 1,708.9 9.3 2,131.8 14.4 1953 1,886.6 10.4 2,190.0 2.7 1954 2,039.4 8.1 2,490.0 13.7 1955 2,225.0 9.1 2,405.1 -3.4 1956 2,291.7 3.0 2,403.1 -0.1 1957 2,500.4 9.1 2,674.6 11.3 1958 2,609.0 4.3 2,798.7 4.7 1959 2,678.5 2.7 2,919.8 4.3 1960 2,860.5 6.8 3,096.5 6.1 1961 2,929.3 2.4 3,066.9 -1.0 1962 3,186.6 8.8 3,316.8 8.1 1963 3,404.2 6.8 3,475.5 4.8 1964 3,608.2 6.0 3,619.7 4.1 1965 3,928.5 8.9 3,975.5 9.8 1966 3,186.6 9.2 4,288.4 7.9 1967 3,404.2 8.1 4,530.7 5.7 1968 3,608.2 10.6 4,914.6 8.5 1969 3,928.5 10.3 5,184.5 5.5 1970 6,524.5 15.4 5,573.5 7.5 1971 7,137.0 9.4 5,951.3 6.8 1972 8,215.8 15.1 6,438.0 8.2 1973 10,162.4 23.7 6,934.3 7.7 1974 13,215.7 30.0 7,318.8 5.5 1975 16,804.6 27.2 7,472.5 2.1 1976 20,675.6 23.0 7,884.8 5.5 1977 26,330.7 27.4 8,586.9 8.9 1978 30,193.9 14.7 9,125.1 6.3 1979 34,484.4 14.2 9,575.8 4.9 1980 41,405.5 20.0 9,647.8 0.8 1981 57,102.7 37.9 9,429.6 -2.3 1982 97,505.1 70.8 8,742.6 -7.3 1983 129,314.0 32.6 8,992.9 2.9 1984 163,010.9 26.1 9,714.5 8.0 1985 197,919.8 21.4 9,784.6 0.7 n.a. Not applicable. Source. Banco Central de Costa Rica, Cuentas Nacionales de Costa Rica, various issues. Statistical Appendix A 157 Table A-12. Costa Rica: GDP per Capita, in Current and Constant 1966 Prices, 1950-85 GDP per capita, current prices GDP per capita, 1966 prices Millions Growth rate Millions Growth rate Year of colones (percent) of colones (percent) 1950 1,685 n.a. 2,066 n.a. 1951 1,762 4.6 2,100 1.6 1952 1,861 5.6 2,321 10.5 1953 1,983 6.6 2,302 -0.8 1954 2,068 4.3 2,525 9.7 1955 2,173 5.1 2,349 -7.0 1956 2,148 -1.2 2,252 -4.1 1957 2,255 5.0 2,413 7.1 1958 2,269 0.6 2,434 0.9 1959 2,247 -1.0 2,449 4.5 1960 2,314 3.0 2,505 2.3 1961 2,278 -1.6 2,385 -4.8 1962 2,396 5.2 2,494 4.6 1963 2,467 3.0 2,519 1.0 1964 2,522 2.2 2,530 0.4 1965 2,650 5.1 2,682 6.0 1966 2,796 5.5 2,796 4.3 1967 2,924 4.6 2,868 2.2 1968 3,135 7.2 3,006 5.2 1969 3,358 7.1 3,078 2.4 1970 3,760 12.0 3,212 4.4 1971 4,012 6.7 3,345 4.1 1972 4,500 12.2 3,527 5.4 1973 5,429 20.6 3,705 5.0 1974 6,886 26.8 3,813 2.9 1975 8,539 24.0 3,797 -0.4 1976 10,246 20.0 3,907 2.9 1977 12,716 24.1 4,147 6.1 1978 14,205 11.7 4,293 3.5 1979 15,792 11.2 4,385 2.1 1980 18,440 16.8 4,297 -2.0 1981 24,759 34.3 4,089 -4.8 1982 41,148 66.2 3,689 -9.8 1983 53,152 29.2 3,696 0.2 1984 65,280 22.8 3,890 5.2 1985 77,252 18.3 3,820 -1.8 n.a. Not applicable. Source Banco Central de Costa Rica, Cuentas Nacionales de Costa Rica, various issues. Table A-13. Costa Rica: GNP and Gross National Income (GNI), GNP per Capita, and GNI per Capita, in Constant 1966 Prices, 1966-84 GNP GNI GNP per capita GNI per capita Millions Growth rate Millions Growth rate Millions Growth rate Millions Growth rate Year of colones (percent) of colones (percent) of colones (percent) of colones (percent) 1966 4,195.1 n.a. 4,195.1 n.a. 2,735 n.a. 2,735 n.a. 1967 4,425.6 5.5 4,399.8 4.9 2,792 2.1 2,738 0.1 1968 4,797.2 8.4 4,666.4 6.1 2,934 5.1 2,854 4.2 1969 5,080.8 5.9 4,935.9 5.8 3,017 2.8 2,931 2.7 1970 5,485.4 8.0 5,433.7 10.1 3,161 4.8 3,132 6.9 1971 5,873.4 7.1 5,620.4 3.4 3,301 4.4 3,159 0.9 1972 6,247.7 6.4 5,911.9 5.2 3,422 3.7 3,238 2.5 1973 6,728.8 7.7 6,409.4 8.4 3,595 5.1 3,424 5.7 1974 7,172.3 6.6 6,525.6 1.8 3,737 3.9 3,400 -0.7 1975 7,251.6 1.1 6,700.0 2.7 3,685 -1.4 3,405 0.1 1976 7,618.3 5.1 7,464.4 11.4 3,775 2.4 3,699 8.6 1977 8,322.3 9.2 8,762.4 17.4 4,019 6.5 4,232 14.4 1978 8,774.2 5.4 8,811.7 0.6 4,128 2.7 4,146 -2.0 1979 9,131.3 4.1 8,862.8 0.6 4,182 1.3 4,059 -2.1 1980 9,082.5 -0.5 8,805.3 -0.6 4,045 -3.3 3,921 -3.4 1981 8,682.3 -4.4 7,903.3 -10.2 3,765 -6.9 3,427 -12.6 1982 7,723.4 -11.0 6,988.8 -11.6 3,259 -13.4 2,949 -13.9 1983 8,125.4 5.2 7,458.1 6.7 3,340 2.5 3,066 4.0 1984 8,794.3 8.2 8,234.5 10.4 3,522 5.4 3,298 7.6 n.a. Not applicable. Source: Banco Central de Costa Rica, Cuentas Nacionales de Costa Rica, various issues. Statistical Appendix A 159 Table A-14. Costa Rica: GDP, by Sector, in Constant 1966 Prices, 1957-85 Agriculture Manufacturing Construction Growth Growth Growth Millions rate Millions rate Millions rate Year of colones (percent) of colones (percent) of colones (percent) 1957 652.0 n.a. 377.0 n.a. 122.3 n.a. 1958 687.0 5.4 397.9 5.5 149.7 22.4 1959 696.1 1.3 410.1 3.1 160.1 6.9 1960 780.6 12.1 428.3 4.4 140.3 -12.4 1961 809.3 3.7 406.0 -5.2 156.7 11.7 1962 858.9 6.1 437.2 7.7 176.4 12.6 1963 856.4 -0.3 495.7 13.4 176.9 0.3 1964 893.8 4A 552.1 11.4 159.1 -10.1 1965 912.1 2.0 664.0 20.3 185.7 16.7 1966 994.1 9.0 730.9 10.1 184.9 -0.4 1967 1,072.3 7.9 778.9 6.6 199.3 7.8 1968 1,169.1 9.0 888.4 14.1 217.7 9.2 1969 1,290.6 1OA 947.0 6.6 219.5 0.8 1970 1,343.6 4.1 1,036.3 9.4 229.1 4.4 1971 1,405.6 4.6 1,120.3 8.1 268.6 17.2 1972 1,481.8 5.4 1,238.3 10.5 327.6 22.0 1973 1,565.5 5.6 1,364.8 10.2 337.7 3.1 1974 1,539.0 -1.7 1,538.4 12.7 364.0 7.8 1975 1,585.7 3.0 1,587.1 3.2 384.7 5.7 1976 1,593.6 0.5 1,679.2 5.8 464.7 20.8 1977 1,628.7 2.2 1,893.0 12.7 482.8 3.9 1978 1,736.2 6.6 2,048.2 8.2 510.8 5.8 1979 1,744.8 0.5 2,102.8 2.7 609.4 19.3 1980 1,736.1 -0.5 2,119.6 0.8 602.7 -1.1 1981 1,824.6 5.1 2,109.0 -0.5 471.9 -21.7 1982 1,738.8 -4.7 1,868.6 -11.4 321A -31.9 1983 1,808.3 4.0 1,902.2 1.8 336.5 4.7 1984 1,990.3 10.1 2,100.0 10.4 415.9 23.6 1985 1,880.4 -5.5 2,142.2 2.0 439.2 5.6 Commerce General government Electricity and water Growth Growth Growth Millions rate Millions rate Millions rate Year of colones (percent) of colones (percent) of colones (percent) 1957 552.8 n.a. 323.4 n.a. 29.2 n.a. 1958 560.6 1.4 328.4 1.5 28.6 -2.1 1959 592.3 5.7 337.6 2.8 35.4 23.8 1960 629.8 6.3 348.2 3.1 39.3 11.0 1961 585.4 -7.0 340.0 -2.4 38.8 -1.3 1962 664.0 13.4 356.7 4.9 38.7 -0.3 1963 694.0 4.5 379.6 6.4 42.5 9.8 1964 713.2 2.8 395.7 4.2 48.4 13.9 1965 802.3 12.5 430.3 8.7 58.7 21.3 (Table continues on thefollowing page.) 160 Costa Rica and Uruguay Table A-14 (continued) Commerce General government Electricity and water Growth Growth Growth Millions rate Millions rate Millions rate Year of colones (percent) of colones (percent) of colones (percent) 1966 879.4 9.6 454.8 5.7 64A 9.7 1967 896.9 2.0 459.4 1.0 71.1 10.4 1968 964.9 7.6 466.0 1.4 84.2 18.4 1969 977.7 1.3 503.6 8.1 93.2 10.7 1970 1,109.5 13.5 549.2 9.1 106.4 14.2 1971 1,159.3 4.6 594.4 8.2 120.3 13.1 1972 1,248.0 7.7 642.6 8.1 131.6 9.4 1973 1,354.8 8.6 678.5 5.6 139.6 6.1 1974 1,345.0 -0.7 746.1 10.0 152.6 9.3 1975 1,288.0 -4.2 769.8 3.2 156.1 2.3 1976 1,402.0 8.9 799.1 3.8 169.8 8.8 1977 1,653.2 17.9 839.1 5.0 181.6 6.9 1978 1,722.6 4.2 881.1 5.0 191.4 5.4 1979 1,794.0 4.1 932.7 5.9 201.2 5.1 1980 1,740.8 -3.0 966.7 3.6 224.9 11.8 1981 1,556.3 -10.6 984.3 1.8 242.4 7.8 1982 1,374.2 -11.7 955.8 -2.9 252.6 4.2 1983 1,418.2 3.2 940.5 -1.6 303.6 20.2 1984 1,579.9 11.4 954.6 1.5 313.3 3.2 1985 1,652.6 4.6 959.4 0.5 290.1 -7.4 Transport Finance Real estate Other services Growth Growth Growth Growth Millions rate Millions rate Millions rate Millions rate Year of colones (percent) of colones (percent) of colones (percent) of colones (percent) 1957 115.5 n.a. 85.5 n.a. 282.3 n.a. 134.6 n.a. 1958 121.6 5.3 91.5 7.0 290.3 2.8 143.1 6.6 1959 135.4 11.3 98.2 7.3 302.5 4.2 152.1 6.3 1960 143.0 5.6 105.7 7.6 316.1 4.5 165.2 8.6 1961 138.9 -2.9 107.8 2.0 320.6 1A 163.4 -1.1 1962 144.0 3.7 118.0 9.5 339.5 5.9 183.4 12.2 1963 147.4 2.4 127.5 8.1 360.6 6.2 194.9 6.3 1964 155.1 5.2 135.5 6.3 361.6 0.3 205.2 5.3 1965 167.7 8.1 154.7 14.2 373.6 3.3 226.4 10.3 1966 179.7 7.2 165.9 7.2 391.7 4.8 242.6 7.2 1967 198.9 10.7 178.8 7.8 424.1 8.3 251.0 3.5 1968 221.3 11.3 194.3 8.7 445.4 5.0 263.3 4.9 1969 239.8 8.4 196.3 1.0 441.6 -0.9 275.2 4.5 1970 247.7 3.3 216.1 10.1 447.7 1.4 287.9 4.6 1971 275.6 11.3 235.7 9.1 470.1 5.0 301.4 4.7 1972 307.5 11.6 257.1 9.1 485.0 3.2 318.5 5.7 1973 356.7 16.0 203.3 10.2 519.9 7.2 333.5 4.7 1974 407.0 14.1 329.2 16.2 546.4 5.1 351.1 5.3 1975 432.2 6.2 359.5 9.2 564.8 3.4 344.6 1.9 Statistical Appendix A 161 Transport Finance Real estate Other services Growth Growth Growth Growth Millions rate Millions rate Millions rate Millions rate Year of colones (percent) of colones (percent) of colones (percent) of colones (percent) 1976 457.3 5.8 380.4 5.8 582.7 3.2 356.0 3.3 1977 512.2 12.0 410.1 7.8 603.1 3.5 383.1 7.6 1978 572.1 11.7 444.1 8.3 623.6 3.4 395.0 3.1 1979 643.0 12.4 486.3 9.5 649.2 4.1 412.4 4.4 1980 676.4 5.2 500.4 2.9 664.7 2.4 415.5 0.8 1981 671.7 -0.7 490.4 -2.0 676.0 1.7 403.0 -3.0 1982 666.3 -0.8 494.3 0.8 682.1 0.9 388.5 -3.6 1983 673.6 1.1 522.0 5.6 689.0 1.0 396.3 2.0 1984 700.6 4.0 551.7 5.7 700.0 1.6 408.2 3.0 1985 716.7 2.3 573.2 3.9 711.2 1.6 419.6 2.8 n.a. Not applicable. Source Banco Central de Costa Rica, Cuentas Nacionales de Costa Rica, various issues. 162 Costa Rica and Uruguay Table A-15. Costa Rica: Structure of GDP, in Current Prices, 1950-80 (percent) Agri- Manufac- Construc- General Year culture turing tion Commerce government Other 1950 40.9 13.4 - 19.1 5.4 21.2 1951 40.9 13A - 19.0 5.8 21.2 1952 41.0 13.1 - 18.3 6.3 21.3 1953 40.3 13.3 - 19.0 6.7 20.7 1954 38.8 13.4 - 19.7 7.4 20.7 1955 38.3 13.3 - 19.5 7.7 21.2 1956 33.5 13.9 - 20.2 8.7 23.7 1957 30.2 12.9 4.9 21.1 7.5 23.4 1958 28.3 13.5 5.7 20.7 8.1 23.7 1959 25.7 13.6 6.1 21.2 8.9 24.5 1960 26.0 14.2 4.9 21.0 9.0 24.9 1961 25.7 14.0 5.5 20.1 9.5 25.2 1962 25.8 14.0 5.8 20.5 9.3 24.6 1963 24.5 15.0 5.6 20.4 9.5 25.0 1964 24.6 16.0 4.8 20.4 9.5 24.7 1965 23.5 16.8 5.2 20.2 9.7 24.6 1966 23.2 17.0 4.8 20.5 10.6 23.9 1967 23.0 16.9 4.9 19.8 10.7 24.7 1968 23.0 17.5 4.9 19.7 10.6 24.3 1969 23.0 17.8 4.8 19.7 10.9 23.8 1970 22.5 18.3 4.7 21.0 10.6 22.9 1971 20.2 18.6 4.8 21.0 11.4 24.0 1972 19.5 18A 5.2 20.1 12.1 24.7 1973 19.3 18.7 5.0 20.2 11.8 25.0 1974 19.4 20.8 5.2 21.1 11.9 21.6 1975 20.3 20.4 5.2 19.1 12.4 22.6 1976 20.4 19.7 5.8 18.5 13.0 22.6 1977 21.9 19.0 5.2 19.5 12.9 21.5 1978 20.4 18.7 5.5 19.7 14.0 21.7 1979 18.5 18.3 6.4 20.4 15.0 21.4 1980 17.8 18.6 6.2 20.1 15.2 22.1 - Included under Other. Source: Banco Central de Costa Rica, Cuentas Nacionales de Costa Rica, various issues. Statistical Appendix A 163 Table A-16. Costa Rica: Structure of GDP, in Constant 1966 Prices, 1957-85 (percent) Manufac- Construc- General Year Agniculture turing tion Comnmerce government Other 1957 24.4 14.1 4.6 20.7 12.1 24.1 1958 24.6 14.2 5.4 20.0 11.7 24.1 1959 23.8 14.0 5.5 20.3 11.6 24.8 1960 25.2 13.8 4.5 20.4 11.3 24.8 1961 26.4 13.2 5.1 19.1 11.1 25.1 1962 25.9 13.2 5.3 20.0 10.8 24.8 1963 24.6 14.3 5.1 20.0 10.9 25.1 1964 24.7 15.3 4.4 19.7 10.9 25.0 1965 22.9 16.7 4.7 20.2 10.8 24.7 1966 23.2 17.0 4.3 20.5 10.6 24.4 1967 23.7 17.2 4.4 19.8 10.1 24.8 1968 23.8 18.1 4.4 19.6 9.5 24.6 1969 24.9 18.3 4.2 18.9 9.7 24.0 1970 24.1 18.6 4.1 19.9 9.9 23.4 1971 23.6 18.8 4.5 19.5 10.0 23.6 1972 23.0 19.2 5.1 19.4 10.0 23.3 1973 22.6 19.7 4.9 19.5 9.8 23.5 1974 21.0 21.0 5.0 18.4 10.2 24.4 1975 21.2 21.2 5.2 17.2 10.3 24.9 1976 20.2 21.3 5.9 17.8 10.1 24.7 1977 19.0 22.0 5.6 19.2 9.8 24.4 1978 19.0 22.4 5.6 18.9 9.7 24.4 1979 18.2 22.0 6.4 18.7 9.7 25.0 1980 18.0 22.0 6.2 18.0 10.0 25.8 1981 19.4 22.4 5.0 16.5 10.4 26.3 1982 19.9 21.4 3.7 15.7 10.9 28.4 1983 20.1 21.2 3.7 15.9 10.5 28.6 1984 20.5 21.6 4.3 16.3 9.8 27.5 1985 19.2 21.9 4.5 16.4 9.8 28.2 Source. Banco Central de Costa Rica, Cuentas Nacionales de Costa Rica, various issues. 164 Costa Rica and Uruguay Table A-17. Costa Rica: Domestic Terms of Trade Index, by Sector, 1957-85 (1966= 100) Agriculturel Manufac- General govern- Agriculturel Year GDP turing/GDP mentIGDP manufacturing 1957 123.7 91.9 62.0 134.7 1958 115.1 95.0 69.2 121.1 1959 108.0 96.8 77.0 111.6 1960 103.3 102.3 79.8 100.9 1961 97.6 105.8 85.4 92.3 1962 99.7 106.1 86.2 94.0 1963 99.3 105.5 86.7 99.3 1964 99.5 105.1 87.1 94.7 1965 102.5 100.5 90.0 102.0 1966 100.0 100.0 100.0 100.0 1967 97.2 98.1 106.0 99.1 1968 96.8 96.8 111.5 99.8 1969 92.5 97.2 111.9 95.2 1970 93.4 98.3 107.8 95.1 1971 85.6 98.6 114.1 86.8 1972 84.7 95.4 121.7 88.8 1973 85.6 95.2 120.3 89.9 1974 90.8 96.4 117.0 94.2 1975 95.8 96.0 120.4 99.8 1976 100.8 92.5 128.0 109.0 1977 115.4 86.2 132.2 134.0 1978 107.3 83.5 144.8 128.5 1979 101.5 83.4 154.4 121.8 1980 98.9 84.6 151.6 116.9 1981 119.0 84.7 127.9 140.5 1982 140.7 95.1 106.2 129.5 1983 115.0 108.6 122.8 105.9 1984 118.8 119.4 147.1 99.5 1985 n.a. n.a. n.a. 97.3 n.a. Not available. Note: The first three indexes were computed by dividing the index of the implicit de- flator in the particular sector by the implicit GDP deflator. The last index was obtained by dividing the implicit deflator for the agricultural sector by the index of the implicit deflator for the manufacuring sector. Source Banco Central de Costa Rica, Cuentas Nacionales de Costa Rica, various issues. Table A-18. Costa Rica: Components of Aggregate Supply and Demand, in Constant 1966 Prices, 1966-85 Private Government GDP Imports Aggregate supply consumption consumption Investment Exports Growth Growth Growth Growth Growth Growth Growth Millions rate Millions rate Millions rate Millions rate Millions rate Millions rate Millions rate Year of colones (percent) of colones (percent) of colones (percent) of colones (percent) of colones (percent) of colones (percent) of colones (percent) 1966 4,288.4 7.9 1,319.7 n.a. 5,608.1 n.a. 3,191.2 n.a. 536.5 n.a. 817.3 n.a. 1,062.7 n.a. 1967 4,530.7 5.7 1,401.8 6.2 5,932.5 5.8 3,369.7 5.6 547.3 1.9 872.8 6.8 1,142.7 7.5 1968 4,914.6 8.5 1,595.3 13.8 6,509.9 9.7 3,596.7 6.7 557.3 1.8 812.2 -1.2 1,493.7 30.7 1969 5,184.5 5.5 1,828.9 14.6 7,013.4 7.7 3,792.5 5.4 590.2 5.9 990.5 14.9 1,640.2 9.8 1970 5,573.5 7.5 2,269.7 24.1 7,843.2 11.8 4,176.9 10.1 659.6 11.8 1,128.6 13.9 1,878.1 14.5 1971 5,951.3 6.8 2,452.0 8.0 8,403.3 7.1 4,241.0 1.5 738.8 12.0 1,399.9 24.0 2,023.6 7.7 1972 6,438.0 8.2 2,471.2 0.8 8,909.2 6.0 4,444.6 4.8 790.8 7.0 1,297.4 -7.3 2,376.0 17.4 1973 6,934.3 7.7 2,676.6 8.3 9,619.9 7.9 4,676.8 5.2 838.7 6.1 1,539.5 18.7 2,555.1 7.5 1974 7,318.8 5.5 2,771.1 3.5 10,089.9 5.0 4,734.6 1.2 909.5 8.4 1,671.6 8.6 2,774.2 8.6 1975 7,472.5 2.1 2,568.1 -7.3 10,040.6 -0.5 4,837.4 2.2 961.0 5.7 1,522.7 -8.9 2,719.5 -2.0 1976 7,884.8 5.5 2,983.6 16.2 10,868.4 8.2 5,039.0 4.2 1,036.0 7.8 1,926.5 26.5 2,866.9 5.4 1977 8,586.9 8.9 3,731.7 25.1 12,318.6 13.3 5,726.2 13.6 1,126.7 8.8 2,365.0 22.8 3,100.7 8.2 1978 9,125.1 6.3 4,011.7 7.5 13,136.8 6.6 6,204.7 8.4 1,168.0 3.7 2,355.2 -0.4 3,408.9 9.9 1979 9,575.8 4.9 4,128.7 2.9 13,704.5 4.3 6,353.3 2.4 1,258.1 7.7 2,573.1 9.3 3,520.0 3.3 1980 9,647.8 0.8 3,987.0 -3.4 13,634.8 -0.5 6,238.0 -1.8 1,276.4 1.4 2,753.3 7.0 3,367.1 -4.3 1981 9,429.6 -2.3 2,936.9 -26.3 12,366.5 -9.3 5,705.7 -8.5 1,204.8 -5.6 1,714.5 -37.7 3,741.5 11.1 1982 8,742.6 -7.3 2,404.9 -18.1 11,147.5 -9.9 5,158.0 -9.6 1,174.1 -2.5 1,278.1 -25.4 3,537.3 -5.5 1983 8,992.9 2.9 2,785.1 15.8 11,778.0 5.7 5,446.8 5.6 1,139.6 -2.9 1,700.7 33.1 3,490.9 -1.3 1984 9,714.5 8.0 3,082.3 10.7 12,796.8 8.7 5,841.6 7.2 1,183.9 3.9 1,886.8 10.9 3,884.5 11.3 1985 9,784.6 0.7 3,266.9 6.0 13,051.5 2.0 6,092.6 4.3 1,196.4 1.1 2,032.8 7.7 3,729.4 -4.0 n.a. Not applicable. Source: Banco Central de Costa Rica, Cuentas Nacionales de Costa Rica, various issues. 166 Costa Rica and Uruguay Table A-19. Costa Rica: Export Prices, Import Prices, and International Terms of Trade, 1950-85 Export prices Import prices Terms of trade Index Growth Index Growth Index Growth (1966 = rate (1966 = rate (1966 = rate Year 100) (percent) 100) (percent) 100) (percent) 1950 98A n.a. 78.8 n.a. 124.9 n.a. 1951 117.5 19.4 82.5 4.7 142.4 14.0 1952 111.0 -5.5 83.0 0.6 133.7 -6.1 1953 120.5 8.6 92.4 11.3 130.4 -2.5 1954 135.6 12.5 91.4 -1.1 148.4 13.8 1955 124.2 -8.4 104.1 13.9 119.3 -19.6 1956 136.0 9.5 100.0 -3.9 136.0 14.0 1957 128.7 -5.4 101.0 1.1 127.3 -6.4 1958 112.8 -12.4 96.9 -4.2 116.4 -8.6 1959 102.8 -8.9 93.9 -3.1 109.4 -6.0 1960 96.2 -6.4 95.1 1.3 101.1 -7.6 1961 98.3 2.2 95.2 0.1 103.3 2.2 1962 97.0 -1.3 94.6 -0.6 102.5 -0.8 1963 98.2 1.2 95.0 0.4 103.4 0.9 1964 102.8 4.7 96.9 2.0 106.1 3.5 1965 100.5 -2.2 99.3 2.5 101.3 -4.5 1966 100.0 -0.5 100.0 0.7 100.0 -0.3 1967 98.3 -1.7 100.5 0.5 97.9 -2.1 1968 89.8 -8.6 98.3 -2.2 91.4 -6.6 1969 90.0 0.2 97.0 -1.3 92.7 1.4 1970 96.7 7.4 99.4 2.5 97.3 4.9 1971 90.6 -6.3 103.6 4.2 87.4 -10.2 1972 94.5 4.3 110.1 6.3 85.8 -1.8 1973 106.5 12.7 121.9 10.7 87.4 1.9 1974 127.7 19.9 167.1 37.1 76.5 -12.5 1975 145.2 13.7 182.9 9.3 79.5 3.9 1976 164.2 13.1 173.7 -4.9 94.5 18.9 1977 209.8 27.8 182.9 5.3 114.7 21.4 1978 195.8 -6.7 193.6 5.9 101.1 -11.9 1979 205.2 4.7 222.1 14.7 92.4 -8.6 1980 231.6 12.9 252.1 13.5 91.9 -0.5 1981 211.9 -8.5 269.2 6.8 78.7 -14.4 1982 207.8 -1.7 261.7 -2.8 79.2 0.6 1983 205.1 -1.0 251.2 -4.0 81.6 3.0 1984 208.8 1.8 247.5 -1.5 84A 3.4 1985 208.2 -0.3 238.5 -3.6 87.3 3.4 n.a. Not applicable. Source: Banco Central de Costa Rica 1986. Statistical Appendix A 167 Table A-20. Costa Rica: Value of Exports and Imports and Trade Balance, 1950-85 Exports Imports Trade balance Millions of Growth rate Millions of Growth rate (millions of Year U.S. dollars (percent) U.S. dollars (percent) U.S. dollars) 1950 54.1 n.a. 45.7 n.a. 8.4 1951 62.2 14.8 55.3 21.0 6.9 1952 72.7 17.1 67.2 21.5 5.6 1953 79.9 9.9 72.8 8.3 7.1 1954 84.4 5.6 80.1 10.0 4.3 1955 81.0 -4.0 87.0 8.6 -6.0 1956 68.4 -15.6 91.1 4.7 -22.8 1957 84.7 23.8 102.3 12.3 -17.6 1958 92.7 9.4 99.0 -3.2 -6.2 1959 77.3 -16.6 102.3 3.3 -24.9 1960 84.3 9.1 110.4 7.9 -26.1 1961 84.2 -0.1 107.2 -2.9 -23.0 1962 93.0 10.5 113.3 5.7 -20.4 1963 95.0 2.2 123.8 9.3 -28.8 1964 113.9 19.9 138.6 12.0 -24.7 1965 111.8 -1.8 178.2 28.6 -66.4 1966 135.5 21.2 178.5 0.2 -42.9 1967 143.8 6.1 190.7 6.8 -46.9 1968 170.8 18.8 213.9 12.2 -43.1 1969 189.7 11.1 245.1 14.6 -55.4 1970 231.2 21.9 316.7 29.2 -85.5 1971 225.4 -2.5 349.7 10.4 -124.4 1972 280.9 24.6 372.8 6.6 -91.9 1973 344.5 22.6 455.3 22.1 -110.9 1974 440.3 27.8 719.7 58.1 -279.3 1975 493.3 12.0 694.0 -3.6 -200.7 1976 592.9 20.0 770A 11.0 -177.5 1977 828.2 39.7 1,021.4 32.6 -193.3 1978 864.9 4.4 1,165.7 14.1 -300.8 1979 934.4 8.0 1,396.8 19.8 -462.4 1980 1,001.7 7.2 1,523.8 9.1 -522.1 1981 1,008.1 0.6 1,208.5 -20.7 -200.4 1982 870.4 -13.7 893.2 -26.1 -22.8 1983 872.6 0.3 987.8 10.6 -115.3 1984 975.6 11.8 1,094.1 10.8 -118.5 1985 933.2 -4.3 1,109.0 1.4 -175.8 n.a. Not appicable. Source- Banco Central de Costa Rica 1986. 168 Costa Rica and Uruguay Table A-21. Costa Rica: Exports and Imports as a Share of GDP, in Current and Constant Prices, 1950-85 (percent) Exports/GDP Imports/GDP Year Current prices 1966 prices Current prices 1966 prices 1950 27.6 - 23.4 - 1951 26.9 - 24.4 - 1952 28.2 - 26.5 - 1953 28.3 - 26.2 - 1954 28.1 - 26.1 - 1955 25.0 - 26.0 - 1956 21.7 - 26.7 - 1957 23.8 - 27.5 - 1958 24.8 - 25.8 - 1959 20.7 - 25.9 - 1960 21.4 - 26.2 - 1961 21.1 - 25.1 - 1962 22.9 - 26.1 - 1963 22.2 - 27.2 - 1964 24.6 - 28.6 - 1965 22.8 - 33.3 - 1966 25.0 25.0 30.9 30.0 1967 25.2 25.5 31.5 31.0 1968 28.2 30.8 32.8 32.2 1969 26.9 32.0 32.2 34.2 1970 28.2 34.2 35.0 39.6 1971 27.3 34.6 37.6 39.9 1972 30.2 37.4 36.6 37.0 1973 30.8 37.3 36.9 36.5 1974 33.1 37.9 48.0 37.9 1975 30.1 36.4 38.5 34A 1976 28.9 36A 34.9 37.8 1977 30.9 36.1 36.3 43.5 1978 28.2 37.4 36.0 44.0 1979 26.9 36.8 37.2 43.1 1980 26.5 34.9 36.8 41.3 1981 43.3 39.7 48.2 31.1 1982 45.1 40.5 42.2 27.5 1983 36.0 38.8 36.8 31.0 1984 34A 40.0 34.0 31.7 1985 30.7 38.1 32.5 33.4 - Not available. Source Banco Central de Costa Rica, Cuentas Nacionales de Costa Rica, various issues. Statistical Appendix A 169 Table A-22. Costa Rica: Value of Selected Exports as a Share of Total Exports, 1957-80 (percent) Other primary Manufac- Year Coffee Bananas Beef Sugar commodities tures 1957 48.7 38.6 2.6 0.1 - 10.0 1963 47.6 27.1 6.0 5.4 - 13.9 1964 42.0 24.8 7.0 4.5 - 21.7 1965 41.6 25.3 4.6 4.2 - 26.7 1966 38.8 21.5 5.2 6.4 - 28.1 1967 38.4 21.7 6.7 5.9 - 28.0 1968 32.3 25.0 7.3 5.1 - 30.3 1969 29.4 27.1 7.0 4.8 - 30.7 1970 31.6 28.9 7.8 4.4 - 27.7 1971 26.3 28.4 9.2 5.7 - 30.0 1972 27.8 30.0 10.9 4.3 - 27.4 1973 27.2 26.3 9.6 6.2 - 30.6 1974 28.3 22.3 7.8 5.5 - 36.0 1975 19.6 29.2 7.7 9.8 6.0 27.7 1976 26.0 25.1 7.7 4.2 6.1 31.1 1977 38.5 18.2 6.2 1.9 7.5 27.8 1978 36.3 19.6 7.1 1.8 9.2 25.9 1979 33.8 20.4 8.8 1.9 7.1 28.0 1980 24.2 19.8 7.0 4.0 8.2 36.8 - Not available. Source Banco Central de Costa Rica, Principales Estadisticas sobre las Transacciones de Costa Rica en el Extranjero, various issues. 170 Costa Rica and Uruguay Table A-23. Costa Rica: Consumer Pice Index,1950-85 (1975 =100) December CPI Annual average CPI Rate of change Rate of change Year Index (percent) Index (percent) 1950 33.81 n.a. 32.61 n.a. 1951 34.50 2.0 34.83 6.8 1952 34.15 -1.0 33.86 -2.8 1953 33.90 -0.8 34.10 0.7 1954 36.66 8.1 35.14 3.0 1955 37.33 1.8 36.60 4.2 1956 37.05 -0.8 36.98 1.0 1957 38.32 3A 37.72 2.0 1958 39.05 1.9 38.72 2.7 1959 38.92 -0.3 38.83 0.3 1960 40.15 3.2 39.14 0.8 1961 40.21 0.1 40.08 2.4 1962 42.28 5.1 43.16 2.7 1963 43.03 1.8 42.40 3.0 1964 43.26 0.5 43.44 2.5 1965 42.89 -0.9 43.16 -0.6 1966 43.71 1.9 43.23 0.2 1967 44.86 2.6 43.76 1.2 1968 46A2 3.5 45.51 4.0 1969 48.01 3.4 46.74 2.7 1970 50.07 4.3 48.92 4.7 1971 51.05 2.0 50.43 3.1 1972 54.56 6.9 52.75 4.6 1973 63.23 15.9 58.93 11.7 1974 82.55 30.6 74.43 26.3 1975 99.44 20.5 92.78 24.7 1976 104.36 4.9 103.49 11.5 1977 109.84 5.3 107.81 4.2 1978 118.75 8.1 114.29 6.0 1979 134.37 13.2 124.79 9.2 1980 158.27 17.8 147.43 18.1 1981 261.29 65.1 202.03 37.0 1982 474.90 81.8 384.10 90.1 1983 525.72 10.7 509.41 32.6 1984 616.93 17.3 570.28 11.9 1985 684.33 10.9 656.11 15.1 n.a. Not applicable. Source. Banco Central de Costa Rica 1986. Statistical Appendix A 171 Table A-24. Costa Rica: Wholesale Price Index, 1950-85 (1966 =100) December WPI Annual average WPI Rate of change Rate of change Year Index (percent) Index (percent) 1950 109.9 n.a. 99.5 n.a. 1951 95.8 -6.9 102.5 3.2 1952 89.6 -6.5 92.2 -10.2 1953 87.4 -1.9 87.9 -4.7 1954 94.6 8.2 91.9 4.6 1955 95.9 1.4 93.7 2.0 1956 94.6 -1.3 94.7 1.1 1957 93.1 -1.7 94.2 -0.5 1958 94.6 1.7 94.9 0.7 1959 92.2 -2.5 94.0 -0.9 1960 97.6 5.8 93.7 -0.3 1961 96.6 -1.0 96.2 2.7 1962 98.3 1.8 95.8 -0.4 1963 99.0 0.7 98.3 2.6 1964 100.9 1.9 99.9 1.6 1965 99.2 -1.7 99.1 -0.8 1966 100.8 1.6 100.0 0.9 1967 106.2 5.3 103.3 3.3 1968 109.8 3.5 108.4 4.9 1969 115.9 5.5 113.0 4.2 1970 125.3 8.2 120.3 6.5 1971 130.3 4.0 128.0 6.4 1972 140.4 7.8 135.0 5.5 1973 177.6 26.4 157.0 16.3 1974 245.3 38.2 219.5 39.8 1975 279.7 14.0 266.9 21.6 1976 299.9 7.2 291.6 9.3 1977 322.1 7.4 313.6 7.5 1978 352.3 9.4 337.9 7.8 1979 437.1 24.1 392.4 16.1 1980 521.5 19.3 485.3 23.7 1981 1,132.6 117.2 802.3 65.3 1982 2,028.5 79.1 1,670.3 108.2 1983 2,148.2 5.9 2,108.0 26.2 1984 2,410.3 12.2 2,270.3 7.7 1985 2,594.5 7.6 2,506.3 10.4 n.a. Not applicable. Source: Banco Central de Costa Rica 1986. 172 Costa Rica and Uruguay Table A-25. Costa Rica: GDP Deflator, 1950-85 Year Index (1966 = 100) Rate of change (percent) 1950 81.6 n.a. 1951 83.9 2.8 1952 80.2 -4.4 1953 86.1 7.4 1954 81.9 -4.9 1955 92.5 12.9 1956 95.4 3.1 1957 93.5 -2.0 1958 93.2 -0.3 1959 91.7 -1.6 1960 92.4 0.8 1961 95.5 3.4 1962 96.1 0.6 1963 97.9 2.5 1964 99.7 1.8 1965 98.8 -0.9 1966 100.0 1.2 1967 102.3 2.3 1968 104.3 2.0 1969 109.1 4.6 1970 117.1 7.3 1971 119.9 2.4 1972 127.6 6.4 1973 146.5 14.8 1974 180.6 23.3 1975 224.9 24.5 1976 262.2 16.6 1977 306.6 16.9 1978 327.8 6.9 1979 361.2 10.2 1980 429.2 18.8 1981 605.6 41.1 1982 1,115.3 84.2 1983 1,438.0 28.9 1984 1,641.8 14.2 1985 1,884.8 14.8 n.a. Not applicable. Source: Banco Centml de Costa Rica 1986. Statistical Appendix A 173 Table A-26. Costa Rica: Official and Free-Market Exchange Rates, Annual Averages, 1950-79 (colones/US. dollar) Year Official rate Free-market rate 1950 n.a. 8.50 1951 n.a. 7.65 1952 n.a. 6.75 1953 5.60 6.63 1954 5.60 6.63 1955 5.60 6.63 1956 5.60 6.63 1957 5.60 6.63 1958 5.60 6.63 1959 5.60 6.63 1960 5.60 6.63 1961 5.60 6.62 1962 6.62 n.a. 1963 6.62 n.a. 1964 6.62 n.a. 1965 6.62 n.a. 1966 6.62 n.a. 1967 6.62 7.77 1968 6.62 7.32 1969 6.62 n.a. 1970 6.62 n.a. 1971 6.62 8.57 1972 6.62 8.57 1973 6.62 8.57 1974 6.62/8.57 n.a. 1975 8.57 n.a. 1976 8.57 n.a. 1977 8.57 n.a. 1978 8.57 n.a. 1979 8.57 n.a. n.a. Not applicable. Source: Banco Central de Costa Rica 1986. 174 Costa Rica and Uruguay Table A-27. Costa Rica: Monthly Exchange Rate, 1980-85 (colones/U.S. dollar) Offlcial Bank Free-market Central Bank Year and month rate rate rate free rate 1980 April 8.60 8.54 8.74 n.a. May 8.60 8.54 8.71 n.a. June 8.60 8.54 8.76 n.a. July 8.60 8.54 9.01 n.a. August 8.60 8.54 9.71 n.a. September 8.60 8.54 9.80 n.a. October 8.60 11.30 11.46 n.a. November 8.60 11.86 12.09 n.a. December 8.60 14.25 14.36 n.a. 1981 January 8.60 13.17 13.28 n.a. February 8.60 14.17 14.04 n.a. March 8.60 15.51 17.29 n.a. April 8.60 16.56 18.83 n.a. May 8.60 17.00 18.92 n.a. June 8.60 18.40 19.30 n.a. July 8.60 18.86 20.84 n.a. August 8.60 18.84 22.99 n.a. September 8.60 18.84 26.33 n.a. October 8.60 30.39 36.66 n.a. November 8.60 36.74 37.40 n.a. December 8.60 35.80 38.00 n.a. 1982 January 20.00 36.05 39.75 n.a. February 20.00 37.05 42.12 n.a. March 20.00 37.49 44.15 n.a. April 20.00 38.00 48.39 n.a. May 20.00 38.00 48.50 n.a. June 20.00 38.00 53.66 52.37 July 20.00 38.00 62.40 55.00 August 20.00 38.19 59.60 57.16 September 20.00 40.00 n.a. 53.58 October 20.00 40.00 n.a. 51.28 November 20.00 40.00 n.a. 47.00 December 20.00 40.00 n.a. 45.17 1983 January 20.00 40.00 n.a. 44.86 February 20.00 40.00 n.a. 44.66 March 20.00 40.00 n.a. 44.43 April 20.00 40.00 n.a. 44.17 May 20.00 40.00 n.a. 44.10 June 20.00 40.14 n.a. 43.96 July 20.00 41.00 n.a. 43.10 Statistical Appendix A 175 Table A-21 (continued) Official Bank Free-market Central Bank Year and month rate rate rate free rate August 20.00 41.00 n.a. 42.81 September 20.00 41.07 n.a. 42.10 October 20.00 41.25 n.a. 42.77 November 20.00 42.46 n.a. n.a. December 20.00 43.15 n.a. n.a. 1984 January 20.00 43.15 n.a. n.a. February 20.00 43.15 n.a. n.a. March 20.00 43.15 n.a. n.a. April 20.00 43.15 n.a. n.a. May 20.00 43.16 n.a. n.a. June 20.00 43.50 n.a. n.a. July 20.00 43.75 n.a. n.a. August 20.00 43.75 n.a. n.a. September 20.00 44.50 n.a. n.a. October 20.00 44.90 n.a. n.a. November 20.00 47.50 n.a. n.a. December 20.00 47.50 n.a. n.a. 1985 January 20.00 47.52 n.a. n.a. February 20.00 48.09 n.a. n.a. March 20.00 48.53 n.a. n.a. April 20.00 48.84 n.a. n.a. May 20.00 49.08 n.a. n.a. June 20.00 49.84 n.a. n.a. July 20.00 50A6 n.a. n.a. August 20.00 51.10 n.a. n.a. September 20.00 51.62 n.a. n.a. October 20.00 52.12 n.a. n.a. November 20.00 52.64 n.a. n.a. December 20.00 53.12 n.a. n.a. n.a. Not applicable. Source. Banco Central de Costa Rica 1986. 176 Costa Rica and Uruguay Table A-28. Costa Rica: Average Monthly Wage, in Constant 1975 Colones, by Sector, 1972-85 Period All workers Agriculture Manufacturing Services 1972 July 1,490 727 1,371 - 1973 March 1,532 777 1,406 2,103 July 1,443 731 1,332 1,944 November 1,420 736 1,310 1,853 1974 March 1,314 674 1,219 1,727 July 1,379 713 1,306 1,817 November 1,371 709 1,241 1,818 1975 March 1,300 709 1,202 1,705 July 1,344 718 1,243 1,816 November 1,306 698 1,191 1,723 1976 March 1,330 725 1,235 1,744 July 1,418 727 1,235 1,970 Novemnber 1,461 754 1,276 2,014 1977 March 1,458 860 1,358 1,915 July 1,590 879 1,321 2,060 November 1,555 916 1,394 2,059 1978 March 1,635 991 1,446 2,168 July 1,618 951 1,394 2,223 November 1,715 1,012 1,513 2,320 1979 March 1,724 1,061 1,502 2,314 July 1,714 1,030 1,482 2,331 November 1,700 1,083 1,532 2,155 1980 March 1,656 1,030 1,477 2,220 July 1,847 1,019 1,550 2,723 November 1,731 1,075 1,507 2,332 1981 March 1,632 1,002 1,463 2,136 July 1,562 940 1,469 1,982 November 1,381 901 1,224 1,770 1982 March 1,286 875 1,253 1,612 July 1,099 736 1,057 1,352 November 1,182 846 1,151 1,399 Statistical Appendix A 177 Table A-28 (continued) Period All workers Agriculture Manufacturing Services 1983 March 1,263 858 1,290 1,448 July 1,330 926 1,220 1,644 November 1,571 1,018 1,642 1,857 1984 March 1,499 1,019 1,202 1,785 July 1,414 1,018 1,208 1,627 November 1,483 1,005 1,236 1,648 1985 March 1,534 1,009 1,362 1,853 July 1,599 1,045 1,381 1,883 November 1,647 1,120 1,415 1,935 - Not available. Note. Wage figures have been deflated by the consumer price index for low- and middle-income groups in the San Jose Metropolitan Area. Source. Unpublished data from the Caja Costarricense de Seguro Sodal. 178 Costa Rica and Uruguay Table A-29. Costa Rica: Average Monthly Wage, in Constant 1975 Colones, by Institutional Sector, 1972-85 Private Public Central Autonomous perioda sector sector government institutions 1972 July 1,178 2,198 2,106 2,284 1973 March 1,177 2,323 2,222 2,416 July 1,096 2,203 2,162 2,239 November 1,096 2,153 2,116 2,189 1974 March 1,020 2,003 1,983 1,992 July 1,062 2,106 2,046 2,155 November 1,048 2,107 2,100 2,114 1975 March 1,022 1,934 1,937 1,932 July 1,006 2,082 2,030 2,122 November 987 1,979 1,956 1,996 1976 March 1,022 1,993 1,975 2,005 July 1,027 2,236 2,452 2,068 Novemnber 1,115 2,273 2,211 2,321 1977 March 1,132 2,158 2,237 2,101 July 1,120 2,316 2,407 2,252 November 1,290 2,325 2,418 2,253 1978 March 1,261 2,463 2,466 2,460 July 1,210 2,491 2,636 2,385 November 1,290 2,325 2,765 2,446 1979 March 1,316 2,587 2,678 2,524 July 1,276 2,589 2,522 2,638 November 1,307 2,427 2,265 2,556 1980 March 1,267 2,454 2,453 2,455 July 1,285 2,945 3,647 2,455 November 1,280 2,603 2,676 2,555 1981 March 1,250 2,372 2,365 2,376 July 1,177 2,295 2,195 2,363 November 1,079 1,999 1,953 2,031 Statistical Appendix A 179 Table A-29 (continued) Private Public Central Autonomous Period a sector sector government institutions 1982 March 1,007 1,854 1,812 1,881 July 884 1,535 1,492 1,563 November 992 1,558 1,485 1,608 1983 March 1,044 1,711 1,457 1,888 July 1,075 1,854 1,718 1,946 November 1,229 2,245 1,955 2,462 1984 March 1,187 2,145 1,877 2,326 July 1,197 1,804 1,841 1,783 November 1,226 1,947 1,796 2,032 1985 March 1,258 2,097 1,821 2,279 July 1,288 2,247 1,907 2,487 November 1,356 2,241 1,955 2,440 Note: Wage figures have been deflated by the consumer price index for low- and middle-income groups in the San Jose Metropolitan Area. Source Unpublished data from the Caja Costarricense de Seguro Social. 180 Costa Rica and Uruguay Table A-30. Costa Rica: Annual Growth Rates of Average Monthly Wage, in Constant 1975 Prices, by Sector, 1972-85 (percent) Perioda All workers Agriculture Manufacturing Services 1972-73 July -3.2 0.6 -2.8 - 1973-74 March -14.2 -13.3 -13.4 -7.5 July -4.4 -2.5 -2.0 -6.5 November -3.5 -3.7 -5.3 -1.9 1974-75 March -1.1 5.2 -1.4 -1.3 July -2.5 0.7 -4.8 -0.1 November -4.7 -1.6 -4.0 -5.2 1975-76 March 2.3 2.3 2.7 2.3 July 5.5 1.3 -0.6 8.5 November 11.9 8.0 7.1 16.9 1976-77 March 9.6 18.6 10.0 9.8 July 6.4 20.9 7.0 4.6 November 6.4 21.5 9.2 2.2 1977-78 March 12.1 15.2 6.5 13.2 July 7.2 8.2 5.5 7.9 November 10.3 10.5 9.9 12.7 1978-79 March 12.1 7.1 3.9 6.7 July 7.2 8.3 6.5 4.9 November 10.3 7.0 1.3 -7.1 1979-80 March -3.9 -2.9 -1.7 -4.1 July 7.8 -1.1 4.4 22.5 November 1.8 -0.7 -1.6 8.2 1980-81 March -1.4 -2.7 -0.9 -3.8 July -15.4 -7.8 -5.2 -27.2 November -20.2 -16.2 -18.8 -24.1 1981-82 March -21.2 -12.6 -14.4 -24.5 July -24.9 -33.1 -32.0 -33.9 November -8.1 -22.1 -24.0 -20.8 Statistical Appendix A 181 Table A-30 (continued) Period a All workers Agriculture Manufacturing Services 1982-83 March -1.8 -1.9 3.0 -10.2 July 21.0 25.8 15.4 21.6 November 32.9 20.3 42.7 32.7 1983-84 March 18.7 18.8 -6.8 23.3 July 6.3 9.9 -1.0 1.0 November -5.6 -1.3 -24.8 -11.3 1984-85 March 2.3 -1.0 13.3 3.9 July 13.1 2.7 14.3 15.7 November 11.1 11.4 14.5 17.4 - Not available. a. Annual rates of growth are computed from March to March, July to July, and No- vember to November. Source. Unpublished data from the Caja Costarricense de Seguro Social. 182 Costa Rica and Uruguay Table A-31. Costa Rica: Annual Growth Rates of Average Monthly Wage, in Constant 1975 Prices, by Institutional Sector, 1972-85 (percent) Private Public Central Autonomous Perioda sector sector government institutions 1972-73 July -7.0 -0.2 2.7 -2.0 1973-74 March -13.3 -13.8 -10.8 -17.5 July -3.1 -4.4 -5.4 -3.8 November -4.4 -2.1 -0.8 -3.4 1974-75 March 0.2 -3.4 -2.3 -3.0 July -5.3 -1.1 -0.8 -1.5 November -5.8 -6.1 -6.9 -5.6 1975-76 March 0.0 8.1 2.0 3.8 July 2.1 7.4 10.8 -2.5 November 13.0 14.9 13.0 16.3 1976-77 March 10.8 8.3 13.3 4.8 July 9.1 3.6 -1.8 8.9 November 15.7 2.3 9.4 -2.9 1977-78 March 11.4 14.1 10.2 17.1 July 13.8 7.6 9.5 23.0 November 0.0 11.0 14.4 8.6 1978-79 March 4.4 5.0 8.6 2.6 July 5.4 3.9 6.7 10.6 November 1.3 -5.9 -18.1 4.5 1979-80 March -3.7 -5.1 -8.4 -2.7 July 0.8 13.8 44.6 -6.9 November -2.1 7.3 18.1 -0.1 1980-81 March -1.3 -3.3 -3.6 -3.2 July -8.4 -22.1 -39.8 -3.7 November -15.7 -23.2 -27.0 -20.5 1981-82 March -19.4 -21.8 -23.4 -20.8 July -24.9 -33.1 -32.0 -33.9 November -8.1 -22.1 -24.0 -20.8 Statistical Appendix A 183 Table A-31 (continued) Private Public Central Autonomous Period a sector sector government institutions 1982-83 March 3.7 -7.7 -19.6 0.4 July 21.6 20.8 15.1 24.5 November 23.9 44.1 31.6 53.1 1983-84 March 13.7 25.4 28.8 23.2 July 11.3 -2.7 7.2 -8A November -0.2 -13.3 -8.1 -17.5 1984-85 March 6.0 -2.2 -3.0 -2.0 July 7.6 24.6 3.6 39.5 November 10.6 15.1 8.9 20.1 a. Annual rates of growth are computed from March to March, July to July, and No- vember to November. Source: Unpublished data from the Caja Costarricense de Seguro Social. I | | I I | | | l | | I I I | | I I | ! | i . | | I l i Edgardo Favaro 4 i i . I | I Aloerto Benslo'n | | l I | g I | | | I | i I N ! I | S | | l I | ! | | . l | I | . I | | | . l | I i | | l | | I i | I I I | | | I l | ! l | . I I | 11 , I I fl | | . I ! | | | I I . g | | I s . S I g l g | | . X 7 T l W X g v g uruuau l | | S S O J Introduction Uruguay is a small country of about 3 million people nestled between Argentina and Brazil at the mouth of the Rio de la Plata. This river, one of the most important navigable streams in South America, provides a deep-water port with a large capacity for transoceanic shipping traffic. The country was part of the Spanish viceroyship of the Rio de la Plata. In the wave of independence movements that swept over Latin America in the early nineteenth century, Uruguay became a separate nation on the diplomatic initiative of Great Britain, which wanted to create a buffer between Argentina and Brazil to reduce the potential for territorial conflict. The land that became Uruguay was first settled by Europeans in the sixteenth century. The early immigrants came from Spain, but in the nineteenth century and early twentieth century a large number of im- migrants arrived from other European countries, especially Italy. Today, Uruguay's population has approximately equal proportions of descen- dants of Spaniards and Italians and important smaller segments of descendants of immigrants from other countries of Europe and South America. Uruguay's territory-177,000 square kilometers, flat and level, with temperate climate and abundant rain-is especially suitable for raising livestock. For many generations, grazing cattle and sheep on natural pasture has been the country's most important economic activity. The cattle were raised first for their hides and later for meat and meat products, and the sheep for their wool. The livestock economy is char- acterized by relatively large ranches that employ land-intensive meth- ods of production. Until the early 1970s Europe was the main export market for Uruguay's livestock products. The industry then began to feel the ad- verse effects of measures taken by the consumer countries to protect their domestic producers of livestock and livestock products from the competition of more efficient producers-including Uruguay. 187 188 Costa Rica and Uruguay Uruguay is heavily urbanized; about one-half of the population lives in the Montevideo metropolitan region. This urban concentration is consistent with the light labor intensity of ranching, which accounts for most of the country's agricultural land. For much of the nineteenth century after independence, Uruguay experienced violent struggles for power that sometimes reached the proportions of civil war. For many years, however, Uruguay has been regarded as a model country that has followed democratic traditions. With minor lapses, there have been regular and periodic elections, competing political parties, and free and open debate in political cam- paigns. The electorate is literate and informed and participates heavily in the electoral process. The counting of ballots is honest, and the winners take office. For many decades, except during the late 1960s, social relations within the community have been calm and nonviolent. The population is rela- tively homogeneous. On average, the material condition of life in Uru- guay is high in comparison with that of most other developing countries. Policies adopted years ago have brought about a more equal distribution of income than would be produced by market forces. Economic growth has been meager during the past five decades. Except for a short period of import-substitution-led growth in the im- mediate postwar period and during 1979-81 and a period of export- oriented expansion between 1974 and 1978, growth performance since the Great Depression contrasts dramatically with the dynamic behavior of the economy in the first century after independence. Both the stubborn stagnation that lasted from 1957 to 1973 and the significant expansion achieved between 1974 and 1981 are remarkable episodes in the context of the contrasting behavior of the world econ- omy. Uruguay's economy stagnated when the world economy was ex- panding enormously, and it performed well while the rest of the world was reeling from the 1973 oil crisis. These contrasts suggest that domestic variables, rather than external circumstances, may be the most plausible candidates for explaining patterns of GDP growth and income distribu- tion in Uruguay. This study gives particular attention to how external events and economic policies combined after World War II to encourage the adoption of new technologies and the expansion of the country's endowment of human and physical resources and to how they affected income distribution. It examines and interprets the factors behind the adoption and maintenance of different economic policies during the period. Chapter 9 surveys economic growth and income distribution between 1955 and 1985. Chapter 10 discusses the reasons for the dynamic behav- ior of the economy and the high standard of living prevailing in 1930 and the transition to economic stagnation and price instability during 1930- 55. The degree of openness of the economy, monetary instability, and the role of the state are identified as the main explanations for economic Introduction 189 performance. Chapter 11 analyzes growth and income distribution be- tween 1955 and 1973 and discusses the rationale for the maintenance of economic policies that have had a high cost in that they slowed the rate of growth of the economy. Chapter 12 looks at the role of external factors and domestic policies in modifying the patterns of growth and income distribution during the past decade. Chapter 13 summarizes the main conclusions of the study. Economic Growth and Income Distribution FOR A BRIEF PERIOD after World War U, Uruguay enjoyed sustained economic growth led by the manufacturing industry and, in particular, by the production of substitutes for imports. But in the mid-1950s the economy entered a period of stagnation. Between 1955 and 1973 GDP grew less than 1 percent a year, and in 1975 real income per capita was barely above its 1956 level. The immediate reason for this poor eco- nomic performance was the low level of investment during the period. Between 1955 and 1973 investment was less than depredation allow- ances; thus, capital stock grew until the late 1950s and contracted there- after (table 9-1). The population grew at a very low 0.6 percent a year between 1963 and 1975 (table 9-2); 170,000 out of a population of 2.8 million emigrated.' The outward population movement dosely paral- leled the destruction or stagnation of the capital stock. Table 9-1. Uruguay: Economic Indicators, Selected Periods Period g I/GDP P E 0 1956-59 -0.9 12.2 19.6 1,806a 22.6 1960-61 3.2 15.5 30.4 - 22.3 1962-68 0.3 12.0 55.7 3,550b 19.6 1969-70 5.4 11.1 18.6 12,600 18.4 1971-73 -0.6 10.0 62.6 19,700 19.0 1974-78 4.1 13.6c 40.8 - 36.4c 1979-81 4.7 17.7 46.2 - 41.4 1982-85 -4.3 11.2 46.8 - 40.3 -Not available. Note: g = average annual rate of growth of GDP; I/GDP = average investment/GDP ratio; P = average rate of inflation; E = average number of emigrants; 0 = degree of open- ness of the economy (exports plus imports divided by GDP). a. 1955-59. b. 1963-68. c 1975-78. Source- Banco Central del Uruguay; Banco de la Repiublica Oriental del Uruguay (BROU); Uruguay, Direcci6n General de Estadistica y Censos. 190 Economic Growth and Income Distribution 191 Table 9-2. Uruguay: Population, Selected Years Item 1963 1975 1985 Age group 0-14 years 725,209 752,588 - 15-64 years 1,673,972 1,763,025 - 64 years and over 196,329 272,816 - Urban or rural Urban (Montevideo)a 1,202,757 1,237,227 1,303,942 Rural 1,392,753 1,551,202 1,626,622 Total 2,595,510 2,788,429 2,930,564 - Not available. a. Montevideo is the only large city in Uruguay. Source. Uruguay, Direcci6n General de Estadistica y Censos, Censo Nacional de Poblacion y Vivienda, various years. High emigration suggests low job opportunities2 and low real wages, particularly for skilled workers. Real wages fell behind those in Argen- tina and Brazil. Low investment suggests either a low expected return on investment or a resource constraint. Estimates of the average return of the capital stock during the period point to low productivity of capital (Harberger and Wisecarver 1978). The absolute level of investment was also constrained by the size of the budget deficit and by the low level of domestic savings (table 9-3), but although savings were low, interna- tional capital inflows should have provided resources for investment. Another possibility is that growth was hampered by the scarcity of foreign exchange, which is a significant element in gross capital forma- tion. The experience of the Uruguayan economy after 1974 suggests that Table 9-3. Uruguay: Net Savings, Net External Resources, and Net Investment, Selected Periods (percentage of GDP) Net receipt of Period Net savings a external resourcesb Net investment 1956-59 -2.1 6.7 4.6 1960-61 1.6 4.2 5.8 1962-68 1.5 -0.9 0.6 1969-70 1.1 2.1 3.2 1971-73 3.0 0.5 3.5 1974-79 3.4 4.2 7.6 a. Net investment minus net external resources. b. Imports minus exports. Source- Diaz 1984. The depreciation charges used to calculate net investment are from Harberger and Wisecarver 1978. 192 Costa Rica and Uruguay this constraint was built into the policy regime rather than imposed by structural constraints on exports or imports. There are three economic explanations for the low expected return on capital, low investment, and, ultimately, poor economic performance during this period. * Since its early stages, import substitution in Uruguay has in- volved direct and indirect taxation of agricultural exports. The result has been a structure of relative prices that discouraged domestic production of exportable goods and investment in agriculture. In addition, external shocks posed new obstacles to the traditional export sector. The fall in the price of wool after the end of the Korean war induced domestic producers to reduce output, and the protectionist agricultural policies adopted by the European Communities (EC) in the late 1960s narrowed the external market for agricultural exports. * In the mid-1950s the expansion of import-substituting industry began to be restricted by the size of the domestic market. The estab- lishment of the Latin American Free Trade Agreement in the 1960s was an unsuccessful attempt to overcome this constraint. * Uruguay faced increasing price instability during the period. In the late 1940s and early 1950s the relaxation of credit limits and the expansion of the Central Bank's discounting of private short-term bills sparked monetary instability. Double-digit inflation, coupled with interest rate ceilings and a fixed exchange rate, led to the distor- tion of relative prices and the misallocation of resources. In the 1960s a new source of credit expansion emerged as the public sector began to run significant deficits. Monetary expansion under a fixed ex- change rate regime led to frequent balance of payment crises, step devaluations, and increasing instability that fostered capital flight and discouraged investment. Although the closure of the economy, the consequent discouragement of investment in the agricultural sector, and price instability were recog- nized as having high social costs, protectionism and monetary misman- agement prevailed, except for two short episodes during the 1960s. There were political reasons for the persistence of these damaging policies during those years. A reduction in tariffs and export taxes would mean increased land prices, lower wages, and higher prices for beef (which accounts for a significant share of consumer expenditure, partic- ularly for low-income people). Although the higher beef prices would encourage producers to raise more cattle, the increased supply of beef would not come on the market for three or four years. Thus, a change in agricultural price policy might well generate consumer discontent and the consequent short-run political costs without offering significant immediate political benefits-a combination presumably not very at- tractive for a government with a short and finite horizon (Sapelli 1985). Economic Growth and Incomne Distribution 193 Political Developments and Economic Outcomes All the monetary and fiscal variables associated with inflation follow a regular cycle in Uruguay. Inflation almost always peaks in the year following an election, whereas government expenditure, the rediscount- ing of commercial bills, and the fiscal deficit peak in election years (Diaz 1984). The implication is that in election years the party in office resorts to expansionary policies to obtain voter support. Because the adminis- tration is reluctant to devalue, it restricts foreign exchange transactions and represses inflation until after the election. This electoral cycle pro- duced significant departures of the real exchange rate from its equilib- rium level during 1955-73. The most interesting attempts to reverse both stagnation and inflation followed a pattern consistent with the election cycle hypothesis. There are two main political parties in Uruguay, the Colorados and the Blancos. In 1959 the Blanco party took office after almost a century of Colorado party rule. During its first year in office the Blanco admin- istration introduced significant reforms in commercial and exchange rate policies. It eliminated import quotas and multiple exchange rates and implemented a floating exchange rate regime. The public sector, however, ran significant deficits, and exchange rate pressures developed in late 1961 and continued into 1962, an election year. The authorities' reluctance to devalue induced a significant loss of foreign reserves and an upsurge of inflation in 1963. The second stabilization attempt came in 1968, one year after a Colo- rado party administration took office. The authorities sought to reduce the inflation rate of 180 percent a year by means of a shock strategy, including a wage and price freeze. After some encouraging results during 1969 and 1970, when the inflation rate fell to 20 percent, fiscal discipline was relaxed in 1971-an election year-and unremitting ex- change rate pressures developed. Once again, the authorities' reluctance to devalue the peso in an election year led them to impose severe restrictions on foreign currency transactions and to repress inflation until the next administration. Crises and Reforms Economic stagnation and high inflation rates gradually engendered social and political instability in the 1960s and led to a systematic erosion of democratic institutions. There were major strikes in such key sectors as the slaughter industry and banking and continuous clashes between the government and labor unions. The appearance of an urban guerrilla movement in the late 1960s was followed by an increasing involvement of the military in political affairs and finally by a coup in 1973. Between 1971 and 1973 the rate of economic growth was negative. Although the 194 Costa Rica and Uruguay fiscal deficit declined from 5.9 to 1.5 percent of GDP, the inflation rate accelerated, and the country experienced a significant outflow of capital. The energy crisis of 1973 had a dramatic impact on the Uruguayan economy. A threefold increase in the price of oil, coupled with EC restrictions on beef imports, led to a terms of trade loss equivalent to 2.1 percent of GDP and to a severe external crisis in 1974. The balance of payments went from a current account surplus of us$37.1 million and a net reserve gain of us$6.4 million in 1973 to a current account deficit of us$118.0 million and a net reserve loss of us$79.8 million in 1974. A fiscal deficit equivalent to 30 percent of government expenditure and 4.4 percent of GDP developed as the government increased subsidies in an attempt to sustain real income levels for the working classes while real national income was declining. Wage and price policies and an accom- modating monetary policy contributed to an inflation rate that exceeded 100 percent. There were no significant changes in economic policy during the first year of the military government that took over inJune 1973. The oil shock and the inability of existing policies to cope with the altered international circumstances, however, led the authorities to appoint a new economic team in July 1974. This team introduced a significant twist in economic policy: a program of price stabilization and economic reforms that gradually freed domestic prices from administrative controls and liber- alized the tight restrictions that had been imposed on foreign trade and payments. The basic objectives of the program were to improve eco- nomic efficiency and to promote and diversify nontraditional exports- those other than animal products and their derivatives. Between 1974 and 1977 the authorities abolished import licensing and quotas, reduced the average level and dispersion of nominal tariffs, introduced subsidies for exports of nontraditional products, and low- ered taxes on exports of agricultural goods. They deregulated the foreign exchange and capital markets, eliminated interest rate ceilings, and allowed unrestricted inflows and outflows of capital. They tightened controls on public sector expenditure, improved the economic perfor- mance of public utilities, eliminated the personal income tax and wid- ened the application of the value added tax, decontrolled many consumer prices, reduced social security taxes on labor, and kept the exchange rate in line with domestic and foreign prices. A second wave of reforms, including important changes in agricul- tural policies, began in 1978. Price controls and export restrictions had significantly hampered the growth of the agricultural sector. In 1978 controls on domestic prices for agricultural goods were abolished, beef and wool exports were liberalized, export taxes were eliminated (as were import taxes for some agricultural inputs and capital goods), and im- ports of agricultural goods were authorized subject to a 35 percent tariff on the FOB price. In addition, tax exemptions that had benefited export- Economnic Growth and Income Distribution 195 oriented activities were eliminated, social security taxes were reduced, and the application of the value added tax was extended. A stabilization program was adopted; the exchange rates were set in advance, to be valid for specified periods. Other measures were a gradual, predeter- mined tariff reduction program, a further reduction in social security taxes, a reduction in subsidies for nontraditional exports, the elimination of subsidized credit for exporters, and a program of deregulation in the agricultural sector. Following these reforms, growth and investment improved remark- ably, but there was no significant progress regarding price stabiliza- tion. GDP growth, investment, and emigration exhibited differences from the patterns of the previous decade. Emigration peaked during 1974 and fell steadily thereafter, suggesting that job opportunities had improved. (Even with the downward trend, the number of emigrants remained high until 1978.) The increase in gross capital formation, which became significant after 1976, reflected a higher expected return on capital. The reallocation of resources within the economy, the elimination of high-cost regulations such as import licenses and quotas, the manage- ment of the exchange rate in relation to domestic prices, and the decline in social confrontation appear to be the key explanatory factors behind economic growth before 1977. Since Uruguay experienced adverse terms of trade during the period, it cannot be argued that economic recovery originated in external circumstances. Rather, the change in major economic variables seems to be associated with the opening of the economy to trade and capital flows and with the elimination of the significant distortions caused by the import license and price control regimes that were in force before 1975. The pattern of growth between 1974 and 1978 was led by export- oriented industrial activities-dothing, leather, shoes, and fishing. The increased significance of these activities was associated with the trajec- tory of the real effective exchange rate faced by each economic sector. Thus, nontraditional exports, which accounted for less than 50 percent of total exports in 1976, rose to more than twice the level of traditional exports in the late 1970s. In contrast, during 1978-81, the sectors that had led recovery in the previous period contracted as the real exchange rate appreciated, and growth was led mainly by domestically oriented activ- ities (Favaro and Spiller 1990). Depression and Debt Problems Several economic variables explain the changes in GDP during 1979-81 and the contraction of the economy at the end of the period. The invest- ment of Argentine capital in land and real estate assets led to a rise in prices and a boom in the construction sector during 1979-80. The an- 196 Costa Rica and Uruguay nounced devaluation of the peso was low in the context of domestic and foreign interest rates, and this induced a significant inflow of capital. The inflow of capital caused a real appreciation of the peso and a contraction of export-oriented and import-competing activities. It is difficult to isolate this economic situation from political condi- tions. Since 1977 the military government had made clear its intention to move the country back to a democratic regime, but in 1980 the govern- ment failed to gain an electoral majority for a constitutional reform that was supposed to accelerate the transition. In 1982 the government moved toward an agreement with the political parties for a rapid tran- sition to civilian government. The political uncertainty during the period seems to have intensified the deep economic depression that began in the second half of 1981 and continued for the next three years. GDP decreased by 15 percent between 1981 and 1984. Several external factors contributed to the acute economic contraction. * The appreciation of the U.S. dollar against European currencies and the yen after 1981 aggravated the overvaluation of the Uruguayan peso, which was pegged to the dollar. * A series of devaluations by Argentina in 1981-the result of increasing exchange rate pressures-fostered capital flight, spread uncertainty in the region, and displaced Uruguayan exports from the Argentine market. * A significant increase in interest rates during 1981 led the world into economic recession. Already in early 1981 Uruguay's exchange rate policy and the induced capital inflows had led to an overvalued exchange rate. As the U.S. dollar appreciated and the Argentine and Brazilian currencies depreciated abruptly, the Uruguayan peso moved increasingly out of equilibrium. Between February and No- vember 1982 the authorities tried to restore equilibrium between domestic prices and wages by accelerating the rate of devaluation and freezing wages. But, faced with rising unemployment, they also main- tained an expansionary fiscal policy, particularly with respect to state-financed housing construction programs and social security expenditures. Increasing government expenditure and falling fiscal revenues led to an enormous fiscal deficit (more than 18 percent of GDP in 1982), an increasing external debt, and the exhaustion of international reserves. In November 1982 the authorities abandoned the announced exchange rate regime and allowed the peso to float. During the next three months the peso fell in value by more than 150 percent, and the banking sector suffered a severe run. In 1982 and 1983 the authorities absorbed bad loans from financial institutions and stimulated mergers and acquisi- tions to prevent bankruptcies. Simultaneously, they were trying to re- duce the fiscal deficit and were facing difficulties associated with higher external debt service. Economic Growth and Income Distribution 197 Household Income Distribution Before 1982 the quality of statistics on personal income was poor, and estimates of the degree of income concentration depended on surveys that used different methodologies. Thus, care has to be exercised when comparing results based on different sources. A rough comparison of the indicators of household income concentra- tion reveals a trend toward a greater inequality that developed in the 1960s and accelerated in the 1970s. Beginning in the 1980s the distribu- tion of income moved toward greater equality. Data on personal income (restricted to labor earnings) also show a tendency toward higher con- centration in the 1970s. Urban figures for total household income show an increase in inequal- ity between 1980 and 1984, whereas rural income figures exhibit the opposite tendency (tables 9-4 and 9-5). The poorest 40 percent of house- holds received about 16 percent of total income in 1984. Unequal distri- bution of income is moderate in Uruguay by international standards. A steady decrease in the share of wages in total income started in 1972 and became acute in the late 1970s (figure 9-1). The increase in employ- ment in the 1970s apparently did not compensate for the drop in nomi- nal wages in relation to the GDP deflator. These observations suggest that the prohibition of labor union activities after 1974 had a significant effect on the level of real wages. But even during the period when unions were active, the share of labor in total income and the average level of real wages were very low in comparison with other countries. The increased demand for labor during 1974-81 differed among cate- gories of workers. Educational level seems to have significant power in explaining wage differentials during the period, which suggests that highly educated workers were scarce in the short run (table 9-6). Low- skill labor-the type used predominantly in export-oriented activities- increased as a share of total employment, but because of high elasticity, wages for these workers did not rise significantly until the late 1970s. The authorities' determination to maintain a high real exchange rate during the 1974-78 period, together with the introduction of export subsidies and the reduction of taxes on agricultural exports, brought about an increase in the relative prices of several food items and, ini- tially, a decline in the purchasing power of nominal wages. The net effect on real wages is, however, not dear because this policy also increased the demand for labor. The deregulation of price controls, the increase in the price of public services, the indexation of controlled housing rents, and the liberalization of international capital flows may also have had an initial depressive effect on real wages. During 1979-81 exchange rate policy induced a significant inflow of capital and an economic boom in the nontradable goods sector. There was an unambiguous increase in real wages and employment and hence in the share of wages in GDP. Since 1982 the decrease in GDP and the OQ Table 9-4. Uruguay: Household Income Distribution, Urban (Montevideo), Selected Years, 1961-84 (cumulative percentage of income) Percent- 1961-62 1963 1967 1976 1980 1982 1984 age of Percent- Percent- Percent- Percent- Percent- Percent- Percent- house- age of Cumula- age of Cumula- age of Cumula- age of Cumula- age of Cumula- age of Cumula- age of Cumula- holds income tive income tive income tive income tive income tive income tive income tive 10 2.5 2.5 2.4 2.4 1.3 1.3 1.3 1.3 2.0 2.0 2.1 2.1 2.2 2.2 20 4.0 4.5 3.9 6.3 3.0 4.3 3.0 4.3 3.6 5.6 3.6 5.6 3.5 5.7 30 5.0 11.4 5.0 11.3 4.4 8.7 4.2 8.1 4.4 9.0 4.4 10.0 4.4 10.1 40 5.9 17.1 6.0 17.6 5.6 14.3 5.3 13.7 5.2 15.2 5.4 15.4 5.5 15.6 50 7.0 24.1 7.2 26.6 6.8 21.1 6.5 21.8 6.6 21.8 6.6 22.0 6.7 22.3 60 8.2 32.4 8.6 33.2 8.0 29.1 7.9 26.2 7.9 29.7 8.0 29.9 8.3 30.6 70 9.7 42.3 10.3 43.5 10.2 29.6 9.7 37.7 9.7 39.4 9.5 39.5 10.1 40.7 80 11.8 54.1 12.0 56.2 13.0 52.6 12.1 49.0 12.1 51.5 12.6 52.1 12.9 53.6 90 15.2 89.3 16.0 72.5 16.9 69.5 16.2 66.0 16.0 67.5 16.6 68.7 17.3 70.9 95 10.0 79.3 10.0 23.2 11.0 77.0 10.9 78.4 11.3 80.0 11.7 83.6 100 10.7 100.0 16.6 100.0 30.5 100.0 23.0 100.0 21.7 100.0 20.0 100.0 17.4 100.0 Gini index 0.3661 0.3706 0.4181 0.4500 0.4237 0.4152 0.4837 Source: For 1961-62,1963,1967, and 1976, Melgar 1982; for 1980 and 1982, Rossi 1982; for 1984, authors' calculations. All results were obtained using methodology described in Kakwani 1980. Economic Growth and Income Distribution 199 Table 9-5. Uruguay: Household Income Distribution, Rural, 1963,1982, and 1984 1963 1982 1984 Percentage Percentage Percentage Percentage of households of income Cumulative of income Cumulative of income Cumulative 10 1.20 1.20 2.05 2.05 2.40 2.40 20 2.85 4.05 3.63 6.68 3.60 6.00 30 3.98 8.03 4.72 11.40 4.60 10.60 40 5.13 13.16 5.79 17.19 5.60 16.20 50 6.41 19.57 6.96 24.15 6.70 22.90 60 7.95 27.52 8.37 32.52 8.10 31.00 70 9.94 37.44 10.16 42.68 9.80 40.80 80 12.71 50.71 14.56 57.24 12.20 53.00 90 17.27 67.46 16.44 73.68 16.30 69.30 95 11.90 79.34 10.88 84.56 11.00 80.30 100 20.66 100.00 18.44 100.00 19.70 100.00 Gini index 0.4236 0.3978 0.4055 Source For 1963, Melgar 1982; for 1982, Rossi 1982; for 1984, authors' calculations. transfers associated with increased external debt service have worked to reduce earnings from both labor and capitaL Capital earnings appear to have fallen more abruptly than real wages-a result that explains the leveling of income distribution during the period. Figure 9-1. Uruguay: Wages as a Share of GDP, 1954-82 Percent 47 - 42- 37 32 27 1954 1958 1962 1966 1970 1974 1978 1982 Source- Based on Banco Central del Uruguay, Cuentas Nacionales, and Uruguay, Direcci6n General de Estadisticas y Censos. Anuario Estadistico, various years. 200 Costa Rica and Uruguay Table 9-6. Uruguay: Educational Levet and Workers' Income, Montevideo, 1972 and 1979 (income of workers who did not complete primary school = 100) Educational level 1972 1979 Did not complete primary school 100.0 100.0 Completed primary school 108.9 115.5 Completed primary school but did not complete secondary school, first level 108.7 118.0 Completed secondary school, first level 132.7 170.5 Completed secondary school, first level, but did not complete secondary school, second level 117.3 144.2 Completed secondary school, second level 137.4 198.0 Completed secondary school, second level, but did not complete university 148.5 229.7 Completed university 211.3 563.0 Note: Primary education is six years. Secondary education includes a first stage (four years) and a second stage (two years of pre-university training). Source: Indart 1981. Poverty The sustained process of economic growth experienced up to 1930 and again in the immediate postwar period combined with extremely favor- able terms of trade to give Uruguay a high standard of living in the early 1950s, compared with other Latin American countries. There is only ambiguous evidence about the effect that the period of stagnation be- tween 1955 and 1972 had on poverty. The proportion of poor households-those with incomes less than one-half the national average-has been stable. It was 30 percent in 1967, 35 percent in 1976, and 30 percent in 1982 and again in 1984 (Instituto de Economia 1971; Uruguay, Direcci6n General de Estadistica y Censos, Encuesta de Hogares 1976, 1982, 1984). Social Indicators Table 9-7 shows public expenditures on health, education, and social security. The trend for the first two indicators has been ambiguous since the 1960s. The share in GDP of public expenditure on education and health decreased steadily, but since public expenditure basically consists of labor earnings and real wages declined during the period, the level of services may not have declined. The share in GDP of social security expenditures remained constant throughout the period. Although the share of education in the overall government budget declined during the period, evidence from census figures points toward an improvement in quality. The number of primary school pupils per Economic Growth and Income Distribution 201 Table 9-7. Public Expenditure in the Social Sectors, Selected Years, 1961-83 (percentage of GDP) Year Education Health Social security 1961 4.3 1.3 9.4 1972 2.3 0.4 12.8 1980 1.9 1.1 10.6 1983 1.6 0.8 12.9 Source: For 1961, authors' estimates; for 1972,1980, and 1983, International Monetary Fund 1985, table 5.7. teacher and the number of secondary school students per building decreased. Pupils per teacher 1959 1972 1981 National 32 25 21 Montevideo 35 27 25 Rural 31 24 19 Students per building 1970 1981 National 966 642 Montevideo 1,641 1,310 Rural 684 433 The educational level of the urban labor force has improved (table 9-8), and the already high literacy rate has increased. (In the table below, the 1963 figures are for the population eight years of age and older; the 1975 figures are for ten years and older.) Literacy rate 1963 1975 Montevideo 94.6 96.9 Uruguay 91.0 94.3 The number of hospital beds in public health facilities (a proxy for the quality of public health services) fell, according to figures from the Ministerio de Salud Pdiblica. Number of hospital beds 1962 1970 1975 1980 1984 Montevideo 6,380 5,551 4,402 4,094 5,068 Rural 7,609 7,042 6,810 6,446 3,779 Total 13,989 12,593 11,212 10,540 8,847 This trend, however, is explained by the lower incidence of tubercu- losis and by changes in the treatment of psychiatric cases that reduced hospitalization. More direct measures of the health of the population 202 Costa Rica and Uruguay Table 9-8. Uruguay: Educational Level of the Labor Force, Montevideo, 1972 and 1979 (percent) Educational level 1972 1979 Did not complete primary school 25.8 15.6 Completed primary school 39.6 38.1 Completed primary school but did not complete secondary school, first level 10.3 11.2 Completed secondary school, first level 11.1 14.7 Completed secondary school, first level, but did not complete secondary school, second level 2.3 3.3 Completed secondary school, second level 4.0 6.8 Completed secondary school, second level, but did not complete university 4.3 6.6 Completed university 2.5 3.7 Total 100.0 100.0 Source: Indart 1981. indicate a general improvement. Life expectancy at birth has increased, as shown by census data. Life expectancy Total Male Female 1963-64 68.46 65.51 71.56 1974-76 68.89 65.66 72.41 1980-85 70.34 67.11 73.74 Figures from the Ministerio de Salud Piblica indicate a considerable decline in the infant mortality rate over the study period. Year Deaths per 1,000 live births 1950 64.0 1955 53.2 1960 54.3 1965 55.2 1970 50.2 1975 48.6 1985 29.3 Available housing has increased, according to census figures. Number of houses 1963 1975 1985 Montevideo 348,997 374,541 419,579 Rural 416,328 505,124 565,315 Total 765,325 879,665 984,894 Public expenditure has played a significant part in this expansion of housing. During the second half of the 1970s the Banco Hipotecario (the Economnic Growth and Incotne Distribution 203 Table 9-9. Uruguay: Number of Houses Constructed, 1977-84 Year Total Financed by BHU Other 1977 13,196 2,447 10,749 1978 16,450 3,605 12,845 1979 20,413 7,121 13,292 1980 26,418 15,006 11,412 1981 26,956 12,632 14,324 1982 19,394 8,730 10,664 1983 17,390 7,473 9,917 1984 13,852 3,405 10,447 Note: BHU, Banco Hipotecario del Uruguay. Source Based on unpublished data from Camara de la Construcci6n and Banco Hipotecario del Uruguay. public mortgage bank) developed an ambitious plan for subsidiz- ing construction of new houses for low-income families. This program financed 80 percent of housing constructed between 1975 and 1985 (table 9-9). To summarize, although the public expenditure indicators are contra- dictory, the available evidence indicates that the standard of living in Uruguay has risen during the past three decades. Notes 1. Emigrants were concentrated in the 15-34 age group and were mainly males with a higher level of education than the average for Montevideo (Aguiar 1982). 2. The annual rate of growth of employment between 1963 and 1975 was 1.4 percent, whereas the econornically active population grew at a rate of 0.7 per- cent. Of 160,000 new jobs created between 1963 and 1975 at least 45,300-28.3 percent-were in the public sector. 3. Official wage indexes have serious shortcomings and must be treated with caution. The use of 1968 as a base period for comparisons is questionable because the general freeze in wages and prices imposed by the government during that year caused serious distortions in relative prices. In addition, the official index does not incorporate true wage increments during part of the 1970s. There is evidence for a steady decline in real wages since the early 1960s; this trend is consistent with an observed contraction in the stock of capital and growing inefficiency in the economy. Historical Background to 1955 During Spain's colonial rule, what is now Uruguay was part of the viceroyship of the Rio de la Plata. Although these lands were discovered in 1516, they did not attract Spanish attention because they lacked mineral resources, human resources-the indigenous inhabitants were too fierce to be used as laborers on plantations-and agricultural land useful for marketable crops such as sugar or cotton. In 1611 Hernandarias, a Spanish colonial officeholder, introduced cattle, which grazed on the Uruguayan prairies and reproduced rapidly in the following decades. This was the start of an industry that is still the main source of the country's wealth. Until the late 1700s cattle were raised for their hides. Bandits from Brazil, profiting from the low level of control in the country, preyed on the cattle industry. Large parcels of land were given to the first settlers and, later on, to recipients of favors from the authorities. At the begin- ning of the nineteenth century, however, a significant share of land remained in public hands. Much of Uruguay was virtually a commons. Landed property rights, let alone the real capacity to exploit them, were little developed during this period. Montevideo, founded in 1724, had the best natural harbor in the area. In the late 1700s it began its development as the main port in the region, attracting most of the trade destined for the present territory of Argen- tina. This led to an early conflict of interest with Buenos Aires. Independence and Early Political Development In the 1810s the inhabitants of the right bank of the Uruguay River joined a movement against the restrictive Spanish commercial regime that had been imposed in neighboring Buenos Aires. Although the initial goal was a change in colonial commercial practices, the movement eventually culminated in independence. The first constitution was adopted in 1830, but for several decades thereafter the new presidential regime was unable to control the country. Only three of the twenty-five 204 Historical Background to 1955 205 governments in office between 1830 and 1903 finished their terms with- out facing serious revolutions. Continuous civil war between the consti- tutional government and local rural leaders, or caudillos, diminished the government's authority. The 1830 Constitution called for a Parliament composed of a House of Representatives and a Senate. Representatives were elected by direct vote; senators were elected indirectly through departmental electoral colleges. (The country was initially divided into nine departments, or political districts, and later into nineteen departments.) Since majority rule prevailed in both cases, the minority was not represented at the department level. Uruguayan democracy was hardly more than a formal label during the nineteenth century. Fraud was rampant, and the num- ber of voters in the overall population was negligible. In 1905 the voting population amounted to less than 5 percent of the total population. The Blanco and Colorado parties, founded in 1836, were primarily military bands rather than groups distinguished by ideological differ- ences. Between 1838 and 1851 theee was continuous war between the Blancos, who controlled the rural areas, and the Colorados, whose stronghold was Montevideo. Argentina, Brazil, and several European countries intervened in the struggle. By the end of the "Guerra Grande," in 1851, the country was a shambles. The cost of the unrest was enor- mous. Both sides frequently expropriated ranchers' horses without proper compensation. Ranchers of British or French origin were privi- leged in that they could call on the power of their embassies to secure adequate compensation for damages. In 1853 a national army was created. It was not a professional army with a stable officer corps, and it was no match for the forces that could be assembled against it by the caudillos (Moore 1978). The foundation for a genuine professional army was laid in 1865, when Uruguay (under Venancio Flores), Argentina, and Brazil dedared war on Paraguay. Uruguay suffered heavy casualties in this war of the Triple Alliance; of 2,000 troops who went to war, only 250 survived. In 1868 Flores was assassinated, and Lorenzo Batlle, his former war minister and a general in the army, took office. Thus began a period of almost two decades when all presidents were either former war minis- ters or were eventually ousted by the military, which dominated politics through its powerful Montevideo garrison. Batlle modernized the army, which was unabashedly Colorado, and used its power to keep his enemies in check. In the era of military ascendancy the army evolved from guaranteeing the political survival of civil administrations (1868-75) to implementing military control over the political system for "the good of the nation" (under Lorenzo Latorre, a former army colonel who dismissed Parlia- ment) and finally to exercising military domination for the advantage of military elites (under Maximo Santos). After 1886 its role shifted from 206 Costa Rica and Uruguay permanent intervention in political affairs to compliant rectitude. Presi- dent Maximo Tajes, the last of the active military rulers, reduced the size of the Montevideo garrison by sending units out into the countryside and developed a national police force that could serve as a countervail- ing force against the army. His successor, Julio Herrera y Obes, who had been Tajes's minister of the interior, expanded the police force, created a complex, bureaucratized chain of command, and appointed loyal officers to key positions. The process of subordination was completed during the first Jose Baflle administration (1903-07). In 1872 a peace agreement between the warring parties gave the Blancos control over four of the existing twelve departments of Uru- guay. Thus began the practice of rule by "coparticipation." In 1897 war broke out between the national government and a large rebel army assembled by the Blanco party. After six months of fighting, peace was made under an agreement that increased from four to six the number of departments controlled by the Blancos while leaving their military ca- pacity intact. In 1903 Jos6 Baflle, the son of Lorenzo Batlle, was elected president, although he was the Colorado party candidate least acceptable to the Blancos. His nomination created unrest among the Blancos, who were suspected of commanding an army larger than that of the national government. To counter the Blancos, Batlle, who openly disavowed the 1897 coparticipation agreement, increased the size of the national army by nine or ten times. In 1904 he went to war with the Blancos and defeated them, thus closing a period of war and unrest, opening a road for peaceful political competition, and consolidating the authority of the state. After the war Batlle took steps to limit the military's ability to inter- vene in political affairs. He reduced the army from roughly 35,000 to 10,000 men, increased the number of military units, divided the territory among three military commands, and integrated Blanco officers into the regular army. Most important, he introduced measures that increased the prestige of the political system and eliminated the battlefield as a legitimate arena for achieving political goals. Demographic Changes The Uruguayanpopulation remained stable forsometime afterindepen- dence. Between 1852 and 1872, however, it grew at an annual rate of 6.0 percent with the arrival of large numbers of European immigrants, predominantly from Italy and Spain. Immigration brought about a rapid growth of the country's popula- tion in the last three decades of the nineteenth century. In 1889, 46.8 percent of Montevideo's population was foreign born. Whereas two- thirds of the foreigners were economically active, the proportion was Historical Background to 1955 207 barely one-fourth among native Uruguayans. The differing ratios are explained by differences in the age composition of the two groups. In 1908 the country's population was a little more than 1 million, of which 17.4 percent were foreigners and 29.7 percent lived in Montevi- deo. (Already at the time of independence approximately one-fourth of the population lived in Montevideo.) Between 1908 and 1929, while the country's population and labor force grew at 2.3 and 2.5 percent a year, respectively, Montevideo's population and labor force expanded at 3.5 and 4 percent a year. Immigration was interrupted by World War I but proceeded rapidly in its aftermath. Between 1919 and 1930 almost 200,000 people im- migrated to Uruguay. After 1932 a number of policy measures were introduced to curb immigration. These culminated in a restrictive im- migration law, passed in 1936. Economic Developments to 1890 In the late 1700s a hung beef industry developed, and by 1860 half a million animals were being slaughtered each year. This industry in- creased the market value of cattle, which untifl then had been valued only for their hides. Two plants that produced concentrated beef and corned beef were founded in the 1860s. Sheep breeding, introduced in the 1860s (see table 10-1), was more labor-intensive than cattle raising, since sheep require continuous super- vision, and it attracted skilled European labor. The new industry also required the endosure of fields. The development of sheep raising and the rise in the market value of cattle increased the value of land (table 10-2) and gave further impetus to the demand for an adequate definition of property rights. Table 10-1. Uruguay: Livestock, Selected Years, 1852-1908 (thousands) Year Cattle Sheep 1852 1,888 796 1860 5,218 2,594 1874 4,745 9,753 1886 6,254 17,246 1890 5,282 13,757 1894 5,205 12,821 1898 4,827 15,537 1902 7,029 17,927 1908 8,193 26,287 Source Finch 1980; Favaro 1990. 208 Costa Rica and Uruguay Table 10-2. Uruguay: Land Prices, 1852-1939 (pesos per hectare) Period Current price a 1852-56 0.60 1857-61 2.09 1862-66 3.47 1867-71 4.81 1872-76 6.17 1877-81 6.38 1882-85 8.94 1886-90 16.06 1891-95 14.93 1896-1900 15.74 1901-05 21.94 1906-10 39.45 1911-13 67.01 1918-22 66.49 1923-27 65.90 1928-32 62.23 1933-39 50.53 a. Average price per hectare. Source. For 1852-1913, Barran and Nahum 1967-78; for 1918-39, Finch 1980. In the late 1860s the absence of well-defined property rights impeded the introduction of wire fencing. This, in turn, discouraged attempts to improve the quality of the herd and fostered a floating population of wanderers who provided the manpower used by the caudillos in their periodic uprisings. During this period a group of cattle producers estab- lished the Asociaci6n Rural del Uruguay (ARU), a ranchers' organization that advocated the modernization of the country and articulated the interests of the leading rural entrepreneurs. The founders of the ARU were aware of the possibilities for improving technology in the livestock sector and of the opportunities offered by the enlarged world market. They lobbied strongly for the establishment of the institutional basis necessary for modernizing the country. For example, they were in favor of measures that would define property rights, improve rural commu- nications and security, and upgrade the educational level of the popula- tion. The ARU emphasized the virtues of thrift and effort, the leading role of agriculture in the country, and the need to reduce discretionary state power. It was highly critical of the political elite of the time and provided expert advice and ideological support to the military governments that ruled the country beginning in 1874. Latorre's administration laid the groundwork for Uruguay's eco- nomic growth in the twentieth century. Mandatory field endosure, the buildup of an operational police force, and the definition of rights to use Historical Background to 1955 209 public lands under precarious tenancy created an institutional environ- ment appropriate for the introduction of new technology. Latorre also established a national public school system that helped to adapt the skills of a rapidly growing population to the demands of a period transitional to modernization. This period was also the starting point for protection- ism in Uruguay. The political instability of the 1830-90 period may not have provided the most appropriate environment for economic growth, but the econ- omy nevertheless seems to have grown rapidly. By 1890 Uruguay had achieved a privileged position in comparison with other countries in the region and with Europe. An estimate of the country's 1866 GDP put output at 48 million pesos-approximately us$350 million at 1978 prices. This puts income per capita at us$875 (at 1978 prices). Although high, the estimate is consistent with the observed flow of immigration to Uruguay during those years. It has been estimated that GDP grew at 5.3 percent a year during 1830-80. This appears reasonable when compared with the rates of growth of tariff revenue (5.3 percent for 1828-88) and of exports and imports (4.3 percent for 1830-90), as shown in tables 10-3 and 10-4. Economnic growth during the period is explained by more efficient land use and by significantflows of immigration and foreign investment. Three characteristics of land use are noteworthy: new production tech- niques were introduced and altered, over time, when appropriate; land Table 10-3. Uruguay: Fiscal Revenue, Selected Years, 1829-1924 (for ranges, period averages) Customs Customs Total revenue/total Year (U.S. dollars) (U.S. dollars) revenue (percent) 1829 582,234 751,040 77.6 1839 1,728,621 2,619,762 66.0 1854 1,380,000 3,715,586 37.2 1862 1,489,300 2,863,324 52.1 1872 7,207,907 8,099,554 89.0 1880 4,409,946 7,015,558 62.9 1888 9,000,000 13,793,796 65.3 1898 9,872,977 15,101,948 65.4 1904 9,162,211 18,018,791 50.9 1907-08 13,194,681 26,517,723 49.8 1911-12 16,904,546 37,556,760 45.1 1915-16 11,811,075 35,173,942 33.6 1919-20 16,593,560 44,936,537 37.0 1923-24 17,788,027 50,692,744 35.1 Source Acevedo 1933. 210 Costa Rica and Uruguay Table 10-4. Uruguay: Growth Rates of Exports and Imports, 1830-1930 (average annual percentage change) Period Exports Imports 1830-60 2.8 3.9 1860-80 6.6 4.4 1880-90 4.0 5.2 1890-1900 0.1 -3.0 1900-10 3.4 5.5 1910-14 9.2 -2.3 1915-25 2.4 8.9 1830-90 4.3 4.3 1890-1914 2.9 0.6 1915-30 1.7 5.7 Source: Uruguay, Direcci6n General de Estadistica y Censos, Anuario Estad(stico, vari- ous years. use followed the signals provided by world market prices and benefited from increased international trade; and, even though the introduction of sheep raising increased the use of labor, land exploitation was low in labor intensity. Even at this early stage, the country was already highly urbanized. One reason for early urbanization was the role played by Montevideo as the main port of the region. There was no domestic currency before the 1850s. In 1857 two com- mercial banks were founded and were allowed to print bank notes convertible to gold or silver. In 1862 a gold-peso parity was established that remained unchanged until 1935. Thus, the government did not resort to inflation to finance fiscal deficits, and the country benefited from remarkable price stability. The absence of unified state power during these decades considerably limited the influence that the govern- ment and its policies had on the allocation of resources and the distribu- tion of income. Economic Developments to 1930 Between 1890 and 1930 Uruguay experienced a moderate rate of eco- noninc growth, consolidated a modern polity, and shaped the basis for a welfare state. GDP grew at an annual rate of 2.8 percentbetween 1880 and 1930 (Diaz 1979). Exports grew at 2.9 percent a year between 1890 and 1914 and 1.7 percent a year between 1915 and 1930; imports grew at 0.6 and 5.7 percent a year during those periods. Other indicators suggest that the growth rate slowed during these years. For example, according to Acevedo (1933), the amount of freight that passed through the port of Montevideo increased from about 960 tons in 1880 to almost 1,700 tons in 1910 but was only about 1,625 tons in 1920. (By 1930 the figure had risen to about 2,300 tons.) Population growth also slowed during the Historical Background to 1955 211 period (table 10-5) as a result of both a lower birthrate and reduced immigration. The Livestock Sector Land prices, which had increased at 8.5 percent a year between 1858 and 1888, rose only 3.3 percent a year between 1888 and 1930. From 1912 on, the price of land diminished. The evolution of the price of land was the mirror image of the changes in the value of the output of the rural sector that had been made possible by technological improvements and by the definition of property rights. Technological innovations introduced during the last quarter of the nineteenth century permitted the shipment overseas of frozen beef and paved the way for the development of the slaughter industry during 1900-20. The first slaughterhouse was established in 1902. Originally a Uruguayan capital venture, it was later bought by Argentine investors. Two U.S. firms, Swift (in 1912) and Armour (in 1917), began exporting Uruguayan beef to the United Kingdom; they came to handle 8 percent of total slaughtered cattle. The availability of refrigeration overcame the constraint of low international demand for hung beef and meat concen- trates and expanded the demand for cattle. The consequent increase in prices provided further incentives for introducing technical innovations to improve the quality of the herd. The drop in international meat prices after the end of World War I caused the domestic price of cattle to decline. After reaching a peak price of us$68.40 in 1920, the average price of steers fell to us$45.70 and US$31.80 in the next two years. Domestic producers viewed this down- ward trend as a consequence of collusion among slaughterhouses. Table 10-5. Uruguay: Population Growth, 1895-1934 Natural rate Total rate Period of increase Migration rate of increase 1895-99 28.6 0.1 28.7 1900-04 25.2 0.9 26.1 1905-09 23.6 2.2 25.8 1910-14 23.0 1.3 24.3 1915-19 17.8 0.2 18.0 1920-24 17.5 2.6 20.1 1925-29 16.7 3.9 20.6 1930-34 14.3 1.2 15.5 Note. The natural rate of increase is the average annual birthrate per thousand mninus the average annual death rate per thousand. The migration rate is the average annual number of mnigrants per thousand base population. Source Finch 1980. 212 Costa Rica and Uruguay In 1928 the authorities established the Frigorifico Nacional, a public slaughterhouse. The logic behind this move was that the new slaughter- house would reduce the meat-packing companies' market power and set a floor for the domestic price of cattle. This argument reflected enormous confusion regarding the determinants of the domestic price of beef and the origins of the slaughter companies' supposed market power. Any such power (if it existed) was located in the international market. Unless Uruguay was able to affect world market prices, the government's strategy was bound to be unsuccessful-as turned out to be the case. The founding of the Frigorifico Nacional was a landmark in a series of misguided political decisions that severely distorted the domestic beef market, created disincentives to invest in the sector, and finally caused foreign investment to abandon the activity in the late 1950s. Tariffs Before 1874 Uruguay had a uniform 20 percent tariff on imports. Taxa- tion on imports was not protectionist in intent; rather, it was the country's main source of fiscal revenue. The first protectionist law, enacted in 1875 during the Latorre administration, implied a general increase in tariffs as well as a differentiated treatment of inputs and final goods. The rise in protectionism was interrupted in 1879 by a general reduction of tariff levels-by as much as 50 percent for certain items- but in 1881, 1886, and 1888 further steps were taken toward the dosure of the economy. Table 10-6 shows the change in imports of consumer goods during this period. The introduction of higher tariffs appears to have been an attempt to redistribute part of the earnings of the rural sector among other social groups, particularly the urban population. Interestingly enough, the first protectionist law was passed by a government strongly influenced by the rural entrepreneurs who had led the process of modernization of the country. Table 10-6. Uruguay: Imports of Consumer Goods, Selected Periods, 1872-1900 (thousands of U.S. dollars) Imports 1872-74 1888-90 1890-1900 Beverages 8,897 13,408 7,379 Food 455 333 99 Clothing 5,038 2,091 1,396 Other 2,606 2,002 685 Total 16,996 17,834 9,559 Source. Anichini, Caumont, and Sjaastad 1978. Historical Background to 1955 213 Public Enterprises Another significant development of the period was the replacement of private investment, usually of foreign origin, with public firms. In most cases these firms were granted legal monopolies. In 1911 the Banco de la Republica Oriental del Uruguay (BRou), originally a commercial mixed-capital bank, was nationalized. In addi- tion, a public insurance company was funded and was given a legal monopoly in most insurance lines. In 1912 the government nationalized the mortgage bank and established another monopoly, a national power- generating firm. In 1916 the national port services administration was founded; in 1928 a mixed-capital company was allowed to construct and operate, under a legal monopoly, a new telephone system that displaced two private suppliers; and in 1931 a public oil-refining and alcohol- producing monopoly (ANCAP) was established. Although explanations of the expansion of the public sector during the first decades of the century have emphasized the role of ideas, it is difficult to account for the course of events in terms of ideology. In general, the original investment in areas such as railroads, water supply, and power generation was made on the initiative of the private sector. An agreement with the state laid down the basis for public regulation, usually through a rate-of-return control. During this period the political system appears to have been extremely vulnerable to pressures from the private sector to intervene in economic affairs. Once intervention had taken place, there was a tendency to create rents by establishing a legal monopoly. In the 1910s public sector activities were expanded mainly to prevent bankruptcies. (The exceptions were in port services and insurance.) Thus, the nationalization of the BROU in 1911 was the last step in a series of events that began with the collapse in 1893 of the National Bank, a predecessor of the BROU. The failure of the National Bank, which owned the company that supplied electricity to Montevideo, also led to the development of a public power company. The new company, operating with municipal support, was granted a monopoly right to supply elec- tricity to Montevideo in 1905 and a national monopoly in 1912. Similarly, the nationalization of the mortgage bank had its origin in a state initiative in 1912 to prevent the bankruptcy of a private mortgage bank. Public sector involvement in railroads can be traced back to 1915, when action was taken to prevent the failure of a private railroad company. This process of public sector expansion reduced competition because in most cases the public companies were given legal monopoly rights. Legal monopolies were not always put into force immediately, but they eventuallybecame binding. The second wave of public sector expansion, in the late 1920s and 1930s, also involved grants of monopolies. (The mixed-capital slaughterhouse established in 1928 benefited from a mo- nopoly right to supply beef to Montevideo.) 214 Costa Rica and Uruguay Electoral Politics and Social Policies In the 1890s the Blanco and Colorado parties began a gradual process of transformation into political organizations able to spread ideas and attract votes and adherents. A new breed of professional politicians who came mainly from the middle classes and were able to run a complex organization displaced the traditional elites in the parties' leadership. Jose Batlle was one of the architects of this transformation from elite to mass politics. He was a member of a generation that expressed dissent with the military governments of the previous decade and had confi- dence in the modernization of the country and the consolidation of democracy. Although Batlle's policies were based on deeply rooted beliefs, they also suited the objectives of the Colorado party under his rule. Batlle pursued the unification of the country under a single author- ity and the consolidation of a modem democracy. This implied, in 1903, the disavowal of the Pact of 1897 and the elimination of war and revolt as legitimate means of achieving political goals. Changes in the political system were required, including a higher degree of mass participation and honest electoral practices that encouraged the opposition to compete under democratic rules. To counter the Blanco party, Batlle had to enlist the support of urban groups. One means for doing this was through income redistribution policies that favored the urban population. Baflle's protectionist policies redistributed part of the value of agricultural output to urban groups, in addition to increasing the government's revenues to meet the financial needs implied by the enlargement of the national army. During 1900-20 Uruguay developed, under Jos6 Batlle's leadership, a vast program of social reforms that transformed the country into one of the world's first welfare states. Working conditions were improved, and in 1904 a social security system was established that provided cover- age to public employees who were more than 60 years of age and had worked for thirty years. In 1919 coverage was extended to the private sector and in the 1920s to women with children who had been employed at least ten years. Batlle's reforms have often been explained as the triumph of his socialist ideas. Although the influence of ideology cannot be denied, the social reforms enacted by the Colorado governments seem to have been more intended to obtain the support of the growing and politically active urban population. It is likely that Batlle's policies toward the British-owned public utili- ties and the Catholic Church during this period were strongly influ- enced by his desire to develop a unified authority and a modem state. Thus, a divorce law was enacted, religious education in primary schools was eliminated, and the state and the Church were definitely separated. In this context, Batlle's stand against British firms appears to be moti- vated less by a deep ideological opposition to foreign investment than Historical Background to 1955 215 by fear of the companies' power, compared with the weakness of the Uruguayan state, or by the desire to put pressure on the companies to keep prices in check. During this period both parties pursued similar social policies. The 1921 Colorado party program favored old age pensions, social security benefits, minimum wages, free medical assistance, and protectionism. It opposed an income tax, which it considered a tax on labor. The Blanco party in 1906 advocated social security benefits, the mandatory eight- hour day, and state mediation in conflicts between unions and firms. The similarities in the social policies pursued by the parties reflected their competition for the support of the growing urban population. Although the Blanco party was still considered the party that repre- sented the interests of agriculture and the Colorado party was seen as the political representative of urban groups, their ideological differences were minor and were associated with their particular current interests. The Blanco party's concern about the enlargement of the state appeared to stem more from its inability to share part of the power to appoint public employees than from deeply rooted ideas. Thus, this issue was given low priority in the party agenda once the political system managed to co-opt the minority party. The political reforms enacted during the first two decades of the twentieth century established basic rights and procedures that created incentives for the parties to compete according to democratic rules. And, as the menace of civil war and revolt receded, so did the prospects of military interference in political affairs. The 1919 Constitution introduced proportional representation, the direct vote for all candidates, and the secret ballot, and it significantly reduced the grounds for suspending the right to vote. A public bureau was given the responsibility for registering all citizens able to vote and for creating a directory that allowed electoral control and severely lim- ited fraud. The 1910 electoral law established the simultaneous vote for party and candidate. Under this system votes for different candidates on a particular party list were added up. The party with the largest number of votes won the elections, and the group with the largest number of votes within the party captured executive power. The law established proportional representation for the election of senators and representa- tives (although each department had a minimum number of representa- tives), a unique political district for the election of senators, and a unique list for candidates for the executive, the Senate, and the House of Repre- sentatives. This peculiar electoral regime enabled the political parties to face internal disputes and factions without experiencing formal divi- sions, but it often fostered a low degree of agreement and a level of ideological heterogeneity that posed difficulties for the party in office. Voters had little control over their representatives because of the rigid- ity imposed by lists that tied together the elections for Parliament and the executive. 216 Costa Rica and Uruguay To sum up, the development of the modem Uruguayan state was accompanied by increased public sector intervention in the economy through a general trend toward protectionism, the establishment of public enterprises (most of them endowed with legal monopolies), and the development of a welfare state. These changes in the pattern of regulation signaled a trend in public policy toward income distribution objectives that favored urban areas. This tendency was a response to the growth in the numbers and proportion of the urban population and to changes in the political system that consolidated democratic processes and initiated an era of mass politics. Heavy taxation of agriculture allowed the state to capture and redistribute a significant share of the enormous rents created by the definition of property rights and the introduction of modern technology during the last decades of the nine- teenth century. Although initially this did not have a significant detri- mental effect on technological innovation, after the 1910s the burden of taxation led to a decrease in the price of land and, ultimately, to the stagnation of the livestock sector, which had no incentive to introduce technological improvements at the prevailing relative prices. Initial Conditions, 1930-55 The political system developed in the 1920s and 1930s implied a higher degree of professionalism in the political parties and an increasing demand for funds to support party politics. The expansion of the public sector was an invaluable source of employment for party adherents and militants. Uruguayan democracy included features that favored collu- sion and power sharing between the Blancos and Colorados. Two exam- ples were the constitutional reform of 1919 and the Pacto del Chinchulin. The 1919 Constitution was the result of a pact between the batllista government of Feliciano Viera, which supported a collegiate executive, and the majority of the Constitutional Assembly elected in 1916, which opposed such a collegium. The pact established an executive consisting of a president, elected for a four-year period by direct popular vote, and a National Administration Council of nine members representing both the majority and the minority parties. Its members served for six years, and one-third of the membership was elected every two years. Within the new organization some ministries reported directly to the president and others reported to the National Administration Council. The reform institutionalized power sharing and fragmented decisionmaking at the executive level. The Pacto del Chinchulin-literally, pork barrel-was an agreement between groups within the Blanco and Colorado parties. It provided that the participation of representatives of the majority and the minority parties in the direction of public enterprises would be determined by the proportions each had in the National Administration Council. The pact led to the establishment of ANCAP, the national oil-refining and alcohol- producing monopoly. Historical Background to 1955 217 This organization of the political system, coupled with fragmentation within the political parties, gave rise to multiple centers of decisionmak- ing that were largely unchecked and that disregarded the consequences of their decisions for society as a whole. Thus, the political system combined collusion with an incapacity to recognize the costs of various public services for society as a whole. These properties of the Uruguayan political regime were to impose a very large cost when the country began experiencing the consequences of the Great Depression. Political Developments In 1930 Gabriel Terra, the leader of a group within the Colorado party that opposed the collegial executive established under the 1919 Consti- tution, was elected president. Terra's administration coincided with the beginning of the Great Depression. The value of the country's ex- ports contracted, its real income declined, and unemployment increased (table 10-7). From the beginning of his term, in 1930, Terra campaigned against the executive organization established by the constitutional reform of 1919. He argued that the structure of state power defined by that reform was not appropriate to the demands imposed on the government by the crisis. Terra argued forcefully for the elimination of the collegium, but he faced strong opposition both inside the Colorado party, where he was opposed by the batllistas, and from the Blanco party. In 1933 Terra dissolved Parliament. Terra managed to get support for a new constitutional reform that returned the countiy to a presidential regime and established a Senate of thirty members, fifteen of whom belonged to the majority faction of the winning party and fifteen to the majority faction of the minority party. This peculiar structure meant a de facto veto of any law that was not supported by the ruling majorities of both parties. Terra's coup Table 10-7. Uruguay: Effects of the Great Depression on the Uruguayan Economy, 1930-35 Net ranchers' Unemploymenta income (millions GDP Year (thousands) of dollars) (1930 = 100) 1930 30.0 67.4 100.0 1931 - 53.0 79.8 1932 38.8 31.8 53.2 1933 40.8 40.8 39.2 1934 28.0 50.1 45.1 1935 26.6 66.0 38.9 - Not available. a. Number of individuals. Source Mifllot, Silva, and Silva 1972. 218 Costa Rica and Uruguay appears to have been a response to the incapacity of a fragmented and collusive political system to confront a severe external shock. This inter- pretation is consistent with the steps taken by his administration to centralize the different social security regimes under a single authority and with the design of a Senate structure that drastically limited the power of small political factions. Terra imposed severe restrictions on the expansion of government expenditures. In fact, during his period in office, wages and salaries in the public sector were reduced in nominal terms, and social security expenditures were held down. Ironically, the incentives created by the protectionist policies implemented during this period were to contribute to the enlargement of public employment in the next two decades. Alfredo Baldomir, who had been chief of the Montevideo Police Department under Terra, was elected president in 1938. He maintained the same political alliances as his predecessor until 1942, when he dismissed Parliament and called on the batllistas and the minority of the Blanco party to participate in the government. Under the prosperity associated with the war period the country returned to a mixed execu- tive power organization with the constitutional reform of 1942. In 1951 a new constitution was adopted. It provided for a collegiate executive, and it institutionalized power sharing by specifying that the executive boards of public enterprises would contain three members from the majority party and two from the minority party. The return to power sharing and the fragmentation of power were facilitated by the improve- ment in the terms of trade during World War II and the Korean war. Uruguay and the Great Depression The protectionist policies followed in most countries during the Depres- sion, coupled with rising unemployment and falling real income, con- fronted the Uruguayan government with two alternatives for reestablishing external equilibrium: maintaining an open economy and accepting deflation, or introducing policy measures that would isolate the economy from foreign competition. In addition, since goverunent revenue depended heavily on tariff collection, the contraction in inter- national trade flows meant that the government faced an incipient fiscal deficit. Terra's reaction toward both external and domestic disequilibria was a mix of orthodox policy and interventionism. The links between the Uruguayan economy and the rest of the world were severed by restric- tions on trade and immigration, and an inward-looking growth strategy was substituted for the open economy model that had provided favor- able conditions for rapid growth in the hundred years after 1830. The size and scope of public sector activities grew steadily. Interventionism replaced the liberal state of the 1800s. Monetary restraint, a distinctive attribute of the economic policy of the 1800s, was gradually loosened, Historical Background to 1955 219 and the country was lured from the path of price stability. Exchange controls (introduced in 1931), higher tariffs, and quantitative restrictions on imports led to repressed inflation, which distorted relative prices and misdirected investment, imposing an additional toll on economic growth. Protectionist measures created incentives to invest in import- substituting activities. These tendencies had been seen in previous crises, but the 1930s were unique in the degree to which the economy was isolated from the rest of the world. Isolation led to the development of an import-substituting industry and the creation of powerful vested interests in favor of protectionism. Meanwhile, the growth of agriculture slowed, and the beef sector stag- nated. The establishment of multiple exchange rates and quotas in- creased the power of the state to influence the allocation of resources and created rents by restricting access to foreign currency. The closure of the economy concealed the long-run costs of an increase in the govenrnment bureaucracy and thus favored its expansion. Livestock and Agriculture The technical improvements in the livestock herd that had occurred with the development of the beef industry and the export of chilled and frozen beef did not continue past the 1920s. Beef production reached the limits imposed by the carrying capacity of the land and then stagnated; the amount of meat produced per animal remained unchanged. The decline in the profitability of marginal investments in the sector can be attributed to changes in the external market and to the domestic policies followed after the 1930s. The decline in world trade caused by the Great Depression hit Uru- guayan beef exports, which had depended almost excdusively on the British market. In 1932 the Ottawa agreements gave preference to British producers over competitors in the beef market and set quantitative restrictions on Uruguayan exports to Britain. Prices recovered in the late 1930s, but domestic producers were unable to capture this increase in earnings because of domestic policies. These included, in addition to specific and relatively unfavorable exchange rates for beef exports, a complicated system that regulated beef exports and the supply of beef to the Montevideo market. During the late 1930s and 1940s Uruguay signed agreements with the United Kingdom specifying the quantities and prices of meat exports. Because these agreements meant a very low price for cattle in some years, the authorities paid slaughterhouses a subsidy to maintain higher prices. After World War II Uruguay was able to expand its markets and obtain better prices for its exports, but it still had to comply with the agreements. The administration of these subsidies and transfers led to acrid public disputes between the slaughterhouses and the authorities in the 1950s. The slaughterhouses' complaints concerned discriminatory 220 Costa Rica and Uruguay practices that restricted their access to domestic cattle, rising costs, and the increasingly overvalued domestic currency. Finally, at the end of the decade, foreign investors abandoned the sector. Although the livestock sector as a whole stagnated in the 1930s, during the next two decades the composition of its output changed as the share of wool and dairy products in total production rose. The increased significance of wool in total agricultural output was in part the result of the introduction of new breeds of sheep that were specialized to produce wool rather than mutton. The yield of wool per animal rose. The size of the sheep herd increased, and since the carrying capacity of the land remained unchanged, beef production contracted. In general, the variations in the composition of the constant output of the livestock sector were attributable to changes in the relative prices of beef and wool in the world market that induced replacement of cattle by sheep. The increased importance of dairy products in total output was a result of the establishment of milk-processing plants, which provided a stable demand for milk and created incentives for expanding total production. The stagnation of the livestock sector did not attract the attention of the community at large until the 1950s, probably because it was over- shadowed by the dynamic growth of manufacturing and some pro- tected agricultural crops during the 1940s and early 1950s. Only one isolated voice-that of Julio Martfnez Lamas-wamed of the perverse effects on agriculture of the pro-urban income distribution policies and called for a drastic change in economic policy (Martinez Lamas 1930). The number of hectares devoted to crops had been increasing since the beginning of the century, although the amount of land allotted to this purpose was still relatively small. In the 1930s and 1940s the land area planted in such crops as sunflower, wheat, and sugar increased significantly. The development of these crops was encouraged by spe- cific protectionist policies that prevented competition from imports and were designed to make the country self-sufficient in these products. During the 1940s price support policies and subsidized credit led to a significant rise in the number of hectares planted in wheat. Manufacturing and Trade The protectionist policies of the 1930s brought about remarkable changes in the structure of the economy. In 1930 manufacturing ac- counted for 12.5 percent of GDP and the livestock sector for 14.9 percent. In 1955 the livestock sector had shrunk to 10.7 percent of GDP, while the industrial sector had swollen to 22 percent.' Manufacturing replaced livestock as the leading growth activity. Between 1930 and 1955 total GDP grew 2.5 percent a year, but the average growth was 4.9 percent for manufacturing and barely 1.2 percent for the livestock sector (tables 10-8 and 10-9 and figure 10-1). Historical Background to 1955 221 Table 10-8. Uruguay: GDP at Constant Factor Cost, 1930-55 (millions of 1961 pesos) Year Agriculture Manufacturing GDP 1930 1,600 1,010 8,063 1935 1,556 1,133 7,647 1940 1,763 1,563 8,834 1945 1,694 1,823 9,641 1950 2,144 2,505 12,358 1955 2,496 3,303 15,039 Source: Banco Central del Uruguay, Cuentas Nacionales, various years. The share of consumer goods in total imports contracted steadily. This trend, which began in the 1920s, was reinforced in the 1930s and 1940s by protectionist policies that favored the importation of raw materials and capital goods over that of consumer goods (table 10-10). The share of exports in total GDP fell from 12.5 percent in 1930 to 8 percent in 1955. Thus, as the country pursued an inward-looking growth strategy, the domestic market replaced export expansion as the main source of eco- nomic growth. The structure of manufacturing GDP changed significantly between 1936 and 1954. The most dynamic sectors within manufacturing were those oriented toward the domestic market. Thus, the share in GDP of rubber, chemicals, and oil refining-import-substituting activities-in- creased, while that of food, an export-oriented sector, declined (table 10-11). As the price of importable in relation to exportable goods rose sharply, the demand for labor in urban areas increased. This led to higher real wages and higher industrial employment (table 10-12). The rising cost of labor, originally a market phenomenon, was reinforced at the end of Table 10-9. Uruguay: Manufacturing, Selected Years, 1930-55 (millions of 1961 pesos) Average Value number Numberof Number of (millions of 1961 pesos) of employees Year enterprises employees Production Machinery perenterprise 1930 7,116 77,588 - - 10.9 1936 10,286 65,339 2,251 280 6.4 1948 20,523 111,255 3,815 - 5.4 1955 21,102 161,879 7,511 2,415 7.7 -Not available. Source Unpublished data from Uruguay, Ministerio de Industrias y Trabajo, Direcci6n de Industrias; Acevedo 1933. 222 Costa Rica and Uruguay Figure 10-1. Uruguay: The LivestockHerd, 1920-85 Beef cattle (nmllions) 12 11 10 9 8 7 6 1920 1930 1940 1950 1960 1970 1980 Sheep (millions) 25.0 22.5 .l, ,.; " 20.0,'',:,.. i~~~~~~~~~,; 17.5 15.0 12.5 1920 1930 1940 1950 1960 1970 1980 Source: Favaro 1990. Historical Background to 1955 223 Table 10-10. Uruguay: Composition of Imports, Selected Periods, 1908-56 (percent) Period Consumer goods Raw materials Capital goods Total 1908-10 40.7 52.4 6.9 100.0 1924-26 29.5 60.4 10.1 100.0 1939-40 22.6 68.1 9.3 100.0 1948-50 16.6 61.5 21.9 100.0 1954-56 11.1 66.2 22.7 100.0 Source. Finch 1980. the period by increased public sector employment, the practices of wage boards, and higher social security taxes on labor. Public Enterprises Between 1930 and 1955 the number of public firms increased, as did the goods and services they supplied. The firms' monopoly rights, which had been nominally in force since their foundation, were now enforced, as in the cases of the public insurance and power companies. The history of public intervention in alcohol production illustrates the attitude of the authorities toward the creation and appropriation of rents during the period. The first steps toward the establishment of a monop- oly in alcohol production date back to 1912 and to Batlle's desire for public intervention in that supposedly highly profitable industry. Alco- Table 10-11. Uruguay: Structure of Manufacturing GDP, 1936 and 1954 (percent) Sector 1936 1954 Food 29.1 14.5 Beverages 13.2 12.0 Tobacco 3.8 3.0 Textiles 7.9 9.5 Shoes and clothing 10.4 5.7 Paper 1.3 1.8 Printing 4.0 3.5 Rubber 0.8 2.5 Chemicals 4.6 6.7 Oil refining 0.1 10.1 Nonmineral metals 4.9 5.7 Metallic products 4.8 3.9 Electric products 0.9 3.5 Other 14.2 17.6 Total 100.0 100.0 Source: Unpublished data from Banco Central de Uruguay. 774 Costa Rica and Uruguay Table 10-12. Uruguay: Employment in Manufacturing and Real Wages, 1930,1947, and 1955 Wages Employment Year (1930 pesos) (number of workers) 1930 66.3 54,143 1947 107.3 109,918a 1955 163.5 141,106' a. 1948. b. 1952. Source: Sapelli 1985; Instituto de Economia, Universidad de la Republica, Estadfsticas Bdsicas, 1969. hol production, which had developed in previous decades under the umbrella of protectionism, was highly concentrated. This characteristic led Batlle to favor expropriation because, as he argued, the real alterna- tives in that market were either a private or a public monopoly. When the leading firm in the sector opposed expropriation, the government retaliated by lowering tariffs, and the share of domestic production in total consumption fell from about 70 percent of the market to 10 percent. Although it could hardly be said that the market was being monopolized at that time, the authorities gave a legal monopoly in alcohol production and oil refining to ANCAP. The expansion of state activities during the early 1930s was marked by the displacement of private investment-as in the cases of tele- phones, oil refining, alcohol, and the beef industry, where the Frigorifico Nacional was given the monopoly on supplying beef to the capital city-and by the establishment of legal monopolies. Until 1931 two private companies provided telephone service. In 1931 the national power company was given a legal monopoly in the sector, displacing private investment in telecommunications. After World War II a third wave of public sector expansionism reached the railroads, public urban transport, and water supply. The regulation of public utilities, which allowed a "fair" rate of return on capital, biased the optimal capital-labor ratio toward higher capital intensity, as illustrated by the railroad system, with its countrywide network of winding rail lines. The state lacked sufficient information to control effectively the costs reported by the public utilities. Furthermore, the authorities favored investment and price policies that emphasized distributional objectives; they penalized price discrimination and fa- vored cross-subsidization. These sources of conflict led to frequent dis- putes between state agencies and the public utility firms. The unfavorable atmosphere decreased the incentives to invest in expanding and renewing capital equipment Ultimately, British enterprises were nationalized, the investors being compensated by the state. Historical Background to 1955 225 Before the 1930s the administration of public firms was fairly efficient. After the Great Depression, however, the expansion of state activities was accompanied by a steady trend toward political use of the firms. The collusion between the Blanco and Colorado parties under the new type of coparticipation agreed on in the 1930s and the dosure of the economy to foreign competition during the period reduced the political costs of using the existing monopoly rents to finance political clientelism and favored management practices that disregarded efficiency and ex- panded public employment. Money Uruguay maintained an orthodox monetary tradition from indepen- dence to the Great Depression. During most of the period the peso was freely convertible into gold, and the stock of money was demand- determined under the price-specie flow mechanism. Although the mon- etary authorities made the Uruguayan peso inconvertible in 1914, until 1939 money issue remained legally constrained by the size of the gold stock. In 1931 the monetary authorities established exchange controls, and four years later they fixed a new, lower exchange parity. Not until 1939 was the expansion of domestic credit relieved of the legal constraints that tied it to the size of the gold stock, and price stability was maintained until the mid-1940s (table 10-13). In 1939 the monetary authority was permitted to rediscount commer- cial bills without a ceiling, provided that the bills were backed by real transactions. This policy found theoretical support in the "real bills Table 10-13. Uruguay: Rate of Growth of Money, Credit, Income, and Prices, 1930-55 Period M L P m I g 1930-35 1.7 -2.2 -0.7 2.4 -1.5 -1.0 1935-40 7.8 5.1 2.3 5.4 2.7 1.5 1940-45 14.2 7.8 4.9 8.9 2.8 1.6 1945-50 7.8 15.9 5.4 5.1 10.0 5.1 1950-55 7.5 14.8 11.1 -3.2 3.3 4.3 1930-45 7.7 3.4 2.1 5.5 1.3 12a 1945-55 9.2 15.3 8.2 0.9 6.1 4.5 Note M = rate of growth of nominal M2; L = rate of growth of credit to the private sec- tor; P = rate of growth of the Consumer Price Index; m = rate of growth of the stock of real Mz I = rate of growth of real credit to the private sector;g = rate of growth of GDP. a. 1935-45. Source Unpublshed data from Banco Central del Uruguay; Uruguay, Direcci6n Gen- eral de Estadistica y Censos; and Banco de la Repuiblica Oriental del Uruguay. 226 Costa Rica and Uruguay doctrine"; it was argued that since the creation of money was supported by a previous real transaction, expansion of credit was not inflationary. Inflation, which had been nil in the twenty years before this innovation, crept up until by 1950-55 it was running 11.1 percent a year. At least in this initial stage, the inflation originated in subsidized credit expansion that benefited import-substituting manufacturing firms.2 Monetary expansion and price instability distorted the working of the capital market-the banking system and the stock exchange. The higher rate of inflation led the public to reduce its holdings of real money and other financial assets after the early 1950s, and savings were channeled toward assets that provided an adequate hedge against inflation, often bypassing the traditional financial intermediaries. Thus, an imperfect arbitrage between savers and investors fragmented the capital market into segments in which the social rate of return was not equalized. Interest rate ceilings and an exchange rate that failed to keep pace with domestic price changes had significant effects on the distribution of income. Tax revenues provided by inflation were used to subsidize banks and credit recipients, since the government kept a balanced bud- get during the period. The increased number of financial institutions entering the market in the 1940s and early 1950s suggests the existence of high expected profits in this activity during the period. Summary Beginning with the Great Depression, Uruguayan society experienced significant changes that altered the structure of the polity. Urban areas grew rapidly as a result of the incentives created for the development of import-substituting industry, the expansion of public sector employ- ment, and the higher standard of living in urban, in relation to rural, areas. Thus Montevideo grew from 460,000 to 900,000 inhabitants be- tween 1930 and 1943. Secondary school enrollment expanded from 6,000 students in 1930 to 12,000 in 1942 and 65,000 in 1957. The scope of the social security system was considerably enlarged, and retirement benefits were increased; after 1948 the social security system returned to a decentralized administration. The number of public sector employees exploded, from 42,700 in 1929 to 58,000 in 1938 and approximately 168,500 in 1955. The enlargement of the government bureaucracy and the develop- ment of import-substituting industry were financed by heavy implicit taxation of the livestock sector through the prevailing multiple ex- change rate regime, the tariff structure, and the direct taxes levied on exports. The burden of taxation brought about a decline in the price of land and induced migration from rural to urban areas, reinforcing the political rationale for pro-urban income distribution policies. The ad- ministrations that held office following recovery from the consequences of the Great Depression made increasing use of state power to develop Historical Background to 1955 227 a political clientele by restricting trade and expanding public sector employment. Although the policies followed during the period initially encouraged economic growth in manufacturing, this growth did not last because it was constrained by the size of the domestic market. The livestock sector experienced a contraction that was masked by favorable extemal circumstances until the end of the Korean war but became dramatically evident in its aftermath. Notes 1. As a result of significant price incentives in the 1945-55 period, the share of crops in agricultural GDP increased from 25 percent in 1930 to 35.7 percent in 1955. 2. The main source of monetary expansion before the 1960s was credit cre- ation. Before 1967 monetary authority was vested in the Banco de la Repdblica Oriental del Uruguay (BROu), a commercial public bank. After the reforms in banking regulations of 1939 and the 1940s, this institution was allowed to print money to finance its own credit expansion and the discounting of commercial bills from other banks. Since credit was associated with subsidized interest rates, it involved real transfers to debtors. Under conventional accounting rules, how- ever, these transfers are not counted as goverrunent expenditures. Economic Stagnation and Price Instability: 1955-73 Uruguay in the early 1950s could be considered a country in which most of the aspirations of the population had been fulfilled. Following the 1933-42 dictatorship the country enjoyed a democratic system based on two political parties that were supported by an estimated 90 percent of the voters. Income per capita was the highest in Latin America as a result of the general progress experienced up to the turn of the century, the high rate of economic growth recorded during 1945-55, and the rela- tively high prices of the country's export commodities during and fol- lowing World War II. The economic structure had been diversified, but the share in exports of livestock products remained high, and the import- ant livestock sector was stagnant. The high indices in education and health and a progressive expansion of the social security system (which mainly sought to protect retirees) were the most outstanding features of a welfare state that had evolved early, in comparison with other countries of the region and even of the world. Montevideo was the center of an active academic and cultural life with standards comparable in many respects to those of many devel- oped countries. Until the defeat of the Colorado party in 1958, Uruguay continued implementing an essentially batllista-based policy whereby government decisions were designed to favor the urban population. The Political Situation In 1951 a constitutional amendment instituted the colegiado system (a multiperson executive power that had been advocated by Jos6 Batlle) in place of the one-man presidency. The same system was extended to municipalities and public enterprises, with representation for both ma- jority and minority parties. Until 1958 the Blanco party remained internally divided. This division dated back to 1933, when a majority led by Luis Alberto de Herrera voted with the traditional faction of the party while a minority voted indepen- dently, refusing to support Herrera in his party's dispute with the 228 Economic Stagnation and Price Instability: 1955-73 229 Colorados. Under Herrera's leadership the Blanco party developed a basically pragmatic policy, distrustful of ideology and based on liberal ideas and strong individualism. The party showed a preference for agriculture and free trade and some indifference-sometimes even hostility-toward industrialization and the increasing interference of the state in economic affairs. But many of Herrera's ideas had to coexist with the electoral needs of the Blanco party, especially in Montevideo. Hence there were contradictions; some of Herrera's followers and other party sectors advocated a welfare state, industrial development, and state action for redistributional purposes. Despite their differing ideologies, the traditional parties operated under an implicit agreement that allowed the political system to work. Political activity in the twentieth century led to respect for a democratic government and to compromises on the important problems about which the parties traditionally disagreed, such as the size of the state and the form of government. Public sector appointments were distributed proportionately among the voters and partisans of both parties. The progressive increase in the role of the state became a way of offering jobs to voters of both parties, especially in Montevideo, which received many migrants from rural areas. Thus, more electoral "clients" were ensured, and the social unrest that might have arisen from unemployment was curtailed. Political parties became the means for obtaining pensions, free medical assistance, water, and telephones. Even though such services were theoretically available to the whole population, state mismanage- ment or a lack of installed capacity caused shortages that were rationed by the Blanco and Colorado parties for patronage purposes. These characteristics of the political system reinforced the autonomy of politi- cal groups in relation to economic groups-a situation that was already emerging in the early twentieth century. Political work increasingly became a career activity, and political workers were the beneficiaries of a special system that arranged for public financing of electoral campaign expenditures and for special retirement conditions. Population and Social Classes By mid-century Uruguay's population growth rate was very low and was similar to that in richer countries during the same period. In partic- ular, the birthrate was low, in part because of the population's high educational level, concentration in urban areas, and lack of strong reli- gious beliefs. The low birthrate brought about a progressive aging of the population, with a strong predominance of those over 60 years of age. This implied that in years to come the costly social security system developed in previous decades would impose an increasing economic burden on the active population. More than two-thirds of the population lived in urban areas, and about 40 percent of the total population lived in Montevideo. Industrial devel- 230 Costa Rica and Uruguay opment and the growth of the public sector after the 1930s encouraged high migration from rural areas to Montevideo. About 50 percent of the country's economically active population worked in the service sector. Employment was higher in manufactuning than in agriculture. In the 1950s social security beneficiaries numbered almost 30 percent of the active population. Many recipients remained economically active. In addition, many people were employed "under the table," and taxes on their earnings were not remitted to the social security system. European immigration was important to the formation of the Uru- guayan population. In general, the immigrants were craftsmen and workers whose preference for settlement in urban areas, particularly Montevideo, contributed to urbanization and to the growth of the service sector. Unlike other countries in Latin America, Uruguay exhibited a remark- able degree of social integration and had a dominant middle class, which accounted for between 47 and 66 percent of the total population. The upper class consisted principally of landowners who, although consti- tuting a minority, had strong economic power and dynamic organiza- tions that defended their interests. The basis of upper-class economic power was landed property. Many landowners lived in Montevideo and engaged in industry, commerce, and banking. There is no accurate information regarding the importance and struc- ture of the rural middle class. A small proportion of this group worked as technicians, managers of small farms, medium-size rural producers, small leaseholders, and even small landowners who also worked tem- porarily as wage earners. This rural middle class lacked strong organi- zations to express its interests, and in general terms its interests were promoted by the rural upper class. The rural middle class was repre- sented by political groups within both traditional parties, such as those led by Tomas Berreta in the Colorado party during the 1940s and Benito Nardone in the Blanco party in the 1950s. The large number of small enterprises devoted to industry, com- merce, and other services gave rise to the urban middle class, an extraor- dinarily heterogeneous conglomerate that included small property owners and a wide range of public and private employees. Public employees were an important part of this group. Among private sector employees, those in the banking sector had the highest salary levels during the 1950s and early 1960s. The heterogeneity of the middle class prevented it from being effectively organized. Existing organizations represented the interests of certain sectors of the class rather than of the whole class. The only power these groups had was derived from their numbers, which had always attracted the interest of traditional parties and, more recently, of the leftist parties. The urban upper class was made up of a small number of owners in manufacturing, commerce, and banking who represented a large pro- Economic Stagnation and Price Instability: 1955-73 231 portion of production in these sectors. As in the case of agriculture, this class had organizations that worked in defense of its interests. A Marxist-oriented study has underlined the strong links between the urban and rural upper classes, identifying owners and families who simultaneously carried out activities in more than one sector (Trias 1970). The lower class in rural areas had never organized unions, as urban workers had. Legislation, however, ensured rural workers certain bene- fits, such as a minimum wage level and some forms of health protection. Labor was the most important sector of the urban lower class. Workers in the large industrial enterprises in Montevideo established labor unions of increasing size and power, which may have helped them attain a relatively acceptable standard of living, especially in comparison with other countries in Latin America. The coexistence of various polit- ical tendencies, basically anarchistic or communist oriented, within the urban proletariat prevented the formation of a single major organiza- tion, thus limiting the strength of the labor movement and its capacity to influence the country's politics until the 1960s. Ideology and the Economy With the exception of the period between 1933 and 1942, a democratic ideology dominated the country's political life during the first half of the twentieth century. This ideal manifested itself in several important achievements shared by most Uruguayans, including a welfare state, public enterprises, and import-substituting industries. There was, more- over, a feeling of pride when Uruguayan democracy was compared with the authoritarian regimes that characterized most Latin American na- tions at that time. Uruguay's special situation within the continent generated rather conservative attitudes, especially in some sectors of the middle class. Economic and social stability and a wish to maintain their salary levels, employment, educational levels, and health and social security benefits became the most important values in the minds of many Uruguayans. Political nationalism has never been dominant in Uruguay, probably because of the country's weakness in relation to its neighbors, Brazil and Argentina, and because of the absence of important border conflicts. The nationalization of British utilities and the hostility expressed by cattle owners toward foreign-owned slaughterhouses did not represent a deeply rooted attitude. An aversion to change and risk was a common social attitude that easily evolved into an overly critical spirit and a certain tendency to- ward pessimism. As these values spread and government intervention in the economy increased, people lost confidence in entrepreneurial activity and even became hostile toward the idea of profit as an index of economic success. The social standing of entrepreneurs was low in 232 Costa Rica and Uruguay Uruguay during the postwar period once the waves of immigration of previous decades had ended (Graceras 1970). The rise of various state enterprises during the first half of the century and the promotion of industry after the Great Depression were an expression of certain economic ideas that were contrary to the notion of free trade and were common among the nation's politicians and econo- mists. Only the organizations that represented rural producers and commerce opposed the ideas that dominated the period, and these groups were not successful. Even the agricultural sector was divided between producers of meat and wool, who supported free trade, and wheat producers, who benefited from government price support policies. During that time the Universidad de la Repiublica, a free public insti- tution that had a monopoly in the supply of higher education and no enrollment restrictions, exerted a great influence on the country's ideo- logical structure. Student movements promoted active participation by students in the administration of the university, support of labor union daims, and a strong stand against U.S. foreign policy. As a consequence, the university usually clashed with the government, sometimes vio- lently, over funding and over various economic and foreign policy measures. Few Uruguayan intellectuals held conservative ideas; most were left- ist and confrontational in orientation. In the postwar period Uruguayan intellectuals gradually began to break away from the traditional political parties. This situation led to the political radicalization of those intellec- tuals and, in general, to their abstention from participation in political parties. Indeed, intellectuals were progressively secluded within the university and were isolated from the country's political and economic life. Initial Conditions, 1955 By the mid-1950s the performance of the Uruguayan economy was deteriorating, after a decade of sustained economic growth. The average annual growth rate of GDP was 5.4 percent between 1945 and 1950 and 4.2 percent between 1950 and 1955. According to several estimates made at the time, Uruguay's income per capita was the highest in Latin America (Balassa 1986). The performance of the economy between 1945 and 1955 was uneven. Growth occurred in import-substituting industry and, as a result of price support policies, in the dairy sector and agricultural crops. Be- tween 1945 and 1955 crop production increased at more than 9 percent a year, mostly as a result of the dynamic expansion of wheat production. The beef sector stagnated, but wool production increased under favor- able world market conditions. During 1945-55 the industrial sector grew at an annual rate of 7.7 percent as a consequence of the import-substitution strategy in force Economic Stagnation and Price Instability: 1955-73 233 after the Great Depression. The share of manufacturing in GDP increased to surpass that of agriculture. The most significant growth occurred in domestically oriented industries-rubber, metals, electricity, chemicals, and paper. Even though the share of industry in GDP had risen, Uruguay was still an agricultural nation. Agriculture accounted for about 15 percent of overall GDP; of this, livestock accounted for 60 percent and crops for the remainder. Meat and wool made up more than 70 percent of livestock production and dairy production about 20 percent. Meat and wool production supplied the raw materials for a large industrial sector that included slaughterhouses, textiles, and leather manufacturing. Whereas domestic consumption of beef represented a significant part of total beef production, more than 90 percent of wool production was exported. As a whole, livestock production and the meat-, wool-, and leather- processing industries accounted for about 30 percent of GDP. This group of agricultural and industrial activities produced almost 90 percent of the nation's exports. During the 1940s exports increased continuously; in 1940 they amounted to US$71 million and in 1950 to us$270 million. The expansion of the value of exports was mainly the result of an increase in the international prices of beef and wool during this period. The price of Uruguayan exports peaked in 1951 and declined sharply thereafter. Domestic consumption of beef increased, and the volume exported consequently declined. Imports expanded steadily, and the share of raw materials and capital goods in total imports increased. Almost all investment and production decisions in agriculture were subject to government interference. The domestic prices of beef and wool were strongly influenced through an implicit form of taxation built into the prevailing multiple exchange rate regime. The supply of beef to Montevideo was assigned to a state-controlled slaughterhouse, while private slaughterhouses were allowed only to export. The beef retail trade was subject to administrative permits that severely restricted entry. Crop production was encouraged through price support policies and the creation of buffer stocks; highly protective tariffs gave substantial incen- tives for sugar and sunflower production. The supply of milk to Monte- video was assigned to a monopoly, and milk prices were subject to administrative controls. The extent of protection for manufacturing implied isolation from foreign competition. Domestic competition was also severely limited by the barriers to entry implicit in restricted access to foreign exchange. The management of multiple exchange rates and quotas promoted the im- portation of raw materials and capital goods and penalized imports of consumer goods and traditional exports. The financial sector was subject to interest rate ceilings and discriminatory credit subsidies. Expansionary domestic policies led to a significant current account deficit, which induced a decline in international reserves and an in- 234 Costa Rica and Uruguay crease in the external debt during 1951-55. The inflation rate, which averaged 5.5 percent a year between 1946 and 1950, increased to 11.1 percent between 1951 and 1955. In general, the policies followed during the period seem to have contributed to a reduction in the degree of inequality and poverty in Uruguayan society. In 1950 Uruguay's social indices compared favor- ably with those of most developed countries. The Structure of the Economy and of Society Of Uruguay's area of 18.7 million hectares, the 16.5 million hectares suitable for agriculture (livestock raising and crops) are fully in use for production. Ninety percent of the land is given over to livestock, mostly in natural pastures, and the remaining 10 percent to crops. In contrast to other countries in Latin America, livestock production in Uruguay has been independent of dairy production. Usually, sheep and beef cattle have coexisted on the same ranches, while milk production has been carried out on small holdings close to urban centers. In the 1945-55 period livestock was raised on about 50,000 properties totaling about 15 million hectares in area. The dominant productive technique was grazing on natural pasture. The value of land represented more than 60 percent of overall capital in livestock production, and the stock of bovines and sheep accounted for most of the remainder. About two-thirds of the land given over to livestock was exploited by the owners, while the rest was worked by leaseholders. Landed property was highly concentrated; 2 percent of the producers held 30 percent of the land suitable for livestock in holdings larger than 2,500 hectares. Of 50,900 livestock raisers, 43,600 owned 26 percent of the land. The share of investment in machinery and equipment in the total capital of livestock firms decined in direct proportion to the size of the ranch. The use of seeded pastures in livestock raising was not significantly different for different sizes of holding. In the manufacturing sector, about 60 percent of production was generated by traditional activities such as food, beverages, tobacco, textiles, garments, wood, and leather. At the beginning of the period the only significant exporting industry was meat processing, but over time the textile industrybecame increasingly important. More than 50 percent of industrial production was generated in enterprises of more than 100 workers, which constituted a very small proportion of the total number of firms. Enterprises with fewer than nineteen employees were in the majority but accounted for only 16 percent of total production. The industries with a higher capital-labor ratio were rubber, tobacco, paper, and chemicals; the garment and furniture industries were the most labor-intensive activities. Uruguay's small size and easy communica- tions among regions made for national markets and forestalled price or Economic Stagnation and Price Instability: 1955-73 235 quality differences between goods consumed in Montevideo and in rural areas. Foreign investment in manufacturing came mainly from the United States following the establishment of the slaughterhouses in the early twentieth century. Foreign investment increased from us$6 million to us$28 million in the 1940s, especially in import-substituting activities such as textiles, chemicals, and electrical appliances and in banking. INTEREST RATES. Interest rate regulations were imposed on banking activities but were not binding until the end of the period, when inflation became an intractable problem in Uruguayan economic life. TRADE. The traditional influence of Argentina and Brazil in the border areas brought about an active informal trade in those regions. A decisive factor in determining the intensity of this trade was differences in exchange rate policies, which caused large variations in Uruguay's competitive capacity during some periods. Consumer goods from Brazil and Argentina were smuggled into Uruguay when the latter had an overvalued exchange rate, and Uruguayan cattle, textiles, and even some imported goods were smuggled to neighboring countries when the opposite occurred. FOREIGN OWNERSHIP. In general, there were no limitations on foreign ownership of domestic assets in spite of various parliamentary propos- als, never approved, that would have prohibited the purchase of land by foreigners or restricted their presence in border areas. Generally, foreign investment in agriculture was insignificant except for landownership by Brazilian firms and individuals in border areas. Laws were passed, however, that restricted land leasing to discourage absentee landlordism. LABOR. The labor market remained relatively free during the 1950s-at least when compared with the rigidity introduced a few years later by unions and by the government's anti-inflationary policies. Since 1943 the executive has participated directly in determining wages in the private sector through its compulsory presence in negotiations between enter- prises and unions. It has been pointed out that the government's vote has generally favored workers' aspirations, bringing about a significant increase in wages, especially during 1945-55. In addition, since the public sector accounted for more than 20 percent of the country's eco- nomically active population, wages in the public sector indirectly influ- enced wages in the private sector. (In the early 1960s approximately 21 percent of the country's active population was employed in the public sector-60 percent in the central government, 11 percent in municipali- ties, and 29 percent in public enterprises.) The degree of distortion introduced by the presence of the state in the labor market seems to have 236 Costa Rica and Uruguay been more important for less-skilled than for highly skilled workers, as indicated by the higher salaries for less-skilled workers in the public sector compared with those in the private sector. THE GOVERNMENT BUDGET AND SOCIAL SERVICES. As of 1955, more than 50 percent of public sector GDP was generated by the central government; the remainder came from the state's participation in manufacturing, public utilities, and banking. By the mid-1950s the share of the public sector in GDP was about 16.5 percent. Public sector investment accounted for 24 percent of total investment. About 75 percent of that investment consisted of construction; the residual was machinery and equipment. In the early 1960s government tax revenue (including social security taxes) amounted to 23 percent of GDP. The share of indirect taxation in total revenue was 55 percent, followed by social security taxes (32 percent). Thus, direct taxation was a minor share of revenues. Govern- ment expenditure amounted to 25 percent of GDP. More than 50 percent of that expenditure consisted of social security transfers, approximately 33 percent was for government administrative services, and barely 10 percent was for health and education. By the early 1950s Uruguay had established a highly advanced welfare state, especially where education and retirement benefits under the social security system were concerned. The public education system had expanded considerably since the late nineteenth century. By 1905 public schools accounted for about 75 percent of the total number of students, there were secondary schools in all department capitals, and both enroll- ment at the university and the scope of instruction had expanded re- markably. The public school system continued to improve throughout the century and contributed greatly to the relatively high educational level of the society in the 1950s. Free medical assistance was provided to the poor through public hospitals and through private institutions that provided services on the basis of prepayment and closed physician panels. The public health system was used by more than 10 percent of the population in Montevi- deo and between 15 and 47 percent of the population in other depart- ment capitals. The private health system covered 87 percent of the population in Montevideo and between 50 and 85 percent of the popu- lation in other department capitals. The social security system covered work-related accidents, as well as maternity expenses for women employees and wives of employees enrolled in the system. Retirement benefits accounted for about 90 percent of the total expenses of the social security system. In general, employees reaching a certain age-60 years for men and 55 for women- who had worked a minimum number of years (usually thirty) were entitled to retirement benefits equivalent to a certain percentage of their wages. The same benefits covered individuals with working disabilities and the families of those who had suffered work-related accidents. Economic Stagnation and Price Instability: 1955-73 237 Beginning in 1958 all private employees were protected against unem- ployment under a general system that had previously covered only workers in the slaughter and wool storage sectors. The social security system was financed through wage taxes paid by the worker and by the firm. The system encountered increasing financial difficulties during the 1960s. Although social security tax rates were increased, tax evasion, coupled with economic stagnation, limited the resources available for financing the explosive increase in the system's expenditures. Social security expenditures expanded for several reasons. (a) The ratio of the economically active population to retirees declined continuously after 1964, when it was estimated at 1.96. (b) In past decades retirement benefits were granted with excessive generosity to retirees who had not completed thirty years of work. (c) Most of the financial reserves of the system generated in previous periods were used to purchase public debt instruments that were issued to finance fiscal imbalances. As inflation soared, the social security system suffered a capital loss on these investments at the same time that its financial needs became increasingly acute. During the 1960s the central government began making continuous transfers to the system. PUBLIC ENTERPRISES. In the 1950s public enterprises, as legal monopolies, refined oil; supplied alcohol, electric power, telephone communications, water, insurance, port services, and rail and air transport; granted mort- gage loans for house construction; managed the state casinos; and fished for certain marine species. Other public firms competed with the private sector in urban transport, banking services, cement production, and hotel services. Public enterprises were increasingly a source of patron- age. Their management was left to politicians appointed by the majority and minority parties, which were entitled to share appointments of new employees. The existence of legal monopolies in most services exduded competition and led to a gradual deterioration in the quality of the services. Monopoly rents were gradually dissipated by expanded em- ployment and growing inefficiency, and investment was postponed because of lack of concern about the future. Political Events, 1955-73 The postwar period saw a gradual movement of foreign investment from the export sector and the public utilities toward import-substitut- ing manufacturing. This trend reflected a change in the expected rate of return for different economic activities that had its origin in the protec- tionist policies developed after the Great Depression. The decision of foreign meat processors to abandon their investments in Uruguay came at a time when Uruguay was encountering difficulties in the European beef market. These difficulties mounted in 1969, when the British government imposed restrictions on Uruguayan beef imports 238 Costa Rica and Uruguay on sanitary grounds, and became more acute after the entrance of the United Kingdom into the European Community. In 1961 most South American countries signed the Latin American Free Trade Association (LAFrA) agreement. Tariff concessions by the signatory countries led to an increase in Uruguayan imports from Brazil and Argentina and a decline in imports from the rest of the world, while Uruguayan exports remained largely unaffected by the treaty. The LAFrA agreement was a further step in the long-term process of import substi- tution rather than a move toward the creation of a common market. Its most significant consequence was trade diversion rather than trade expansion.1 The Colorado party won the 1954 elections, and within the party, the batllista sector, under the leadership of Luis Batlle Berres, obtained a large majority. In the years that followed, minority groups within the party carried on intense ideological and personal disputes with the winning faction. The Blanco party, in turn, was divided between Herrera's followers, who stil represented the majority within the party, and groups opposed to Herrera that had electoral support in Montevideo. Colorados and Blancos in Power The 1954 Colorado government followed the main guidelines of postwar batllismo: it promoted import-substituting industries and refused to ac- cede to the agricultural sector's demands. The decline in the terms of trade following the Korean war did not modify the government's attitudes regarding strong state intervention. In 1955 and 1956, for instance, exchange and foreign trade controls were tightened to restrict imports and make possible new bilateral trade agreements with other countries. In 1957 the exchange market was dosed, and imports were prohibited. The agricultural sector resisted these policies and often succeeded in bypassing them by smuggling cattle across the border and by building up inventories of wool while pressing for a more favorable exchange rate. In the 1958 elections the Colorado party faced the alliance of the Blanco party with the Liga Federal de Acci6n Ruralista (LFAR), an orga- nization led by a journalist whose campaign against the Colorado party's pro-urban economic policies had strong support in rural areas. The stagnation of the economy, coupled with renewed inflation and short- ages, added to the discontent even in urban areas, a traditional strong- hold of the Colorado party. The Blanco party won the elections for the first time in ninety-three years, and by a wide margin. In 1962 the Blanco party won again, but by a narrower margin than in 1958. The ideological background of the Blanco party and the increasing disillusionment with the economic policy in force during the 1955-58 period ensured that the new administration would favor agriculture and less government intervention in the economy. Its first steps were dearly Economic Stagnation and Price Instability: 1955-73 239 based on those principles. Over time, however, it abandoned the defense of free-market policies. In 1962 it maintained an overvalued exchange rate, and it incurred an enormous fiscal deficit during 1963-66. The Blanco administration initially attempted to bring the relative domestic prices of agricultural and manufactured goods close to those prevailing in the world market. These efforts, however, faded as a consequence of the strong opposition of urban sectors and the influence of the Cuban revolution of 1959, the Alliance for Progress, and the Economnic Commission for Latin America (ECLA). With the deaths of the two most outstanding leaders of the traditional parties-Herrera in 1959 and Luis Batlle in 1964-factional disputes flared up, and new leaders arose. A similar evolution took place within the centrist Christian Democrats and the left; groups formed around electoral alliances led by the Socialist and the Communist parties, respec- tively. The dynamics of the political process and the formation of new groups and electoral alliances reflected a search for adequate responses to the deepening economic and social difficulties of Uruguayan society. Labor and Politics The labor movement was becoming increasingly significant in political life. Until the mid-I 960s, however, it was divided between an organiza- tion led by the Communist party and a coalition of leftist noncommunist unions. The economic stagnation and the inflation that set in after 1955 paved the way for increasing labor unrest, initially among industrial workers but later among employees of banks and public utilities. The 1960s saw many strikes, in both the public and the private sectors, and the armed forces were often brought in to help the police maintain order. In 1964 the labor movement finally achieved unification under the Convenci6n Nacional de Trabajadores (cNT). According to its statutes the CNT's main objective was to obtain a "society without exploitation." Between the mid-1960s and 1973 union activity (which, like manufactur- ing, is essentially an urban phenomenon) grew far beyond the search for better working conditions and higher salaries and pursued social and economic changes such as agrarian reform and monopolistic public control of banking and external trade. Most union leaders of the period belonged to left-wing political parties. The influence of the Blanco and Colorado parties in the labor unions was almost insignificant. Between 1956 and 1968 price instability gave rise to labor-manage- ment disputes in certain strategic sectors and to the adoption of medidas prontas de seguridad (MPS)-measures that were at first transitory but later were adopted permanently. (The MmS procedure, which is similar to a state of siege, permits the confinement of citizens when there is internal turmoil.) During 1968-73 open confrontation between the government and the unions occurred. Ten general strikes took place in 1968. The government 240 Costa Rica and Uruguay decreed a price and salary freeze in June, imposed the Mps, and subjected public employees in such strategic services as natural gas, water, elec- tricity, oil, and communications to certain military regulations. In 1969 a bank strike led to violence, induding terrorist attacks in support of unions, and the executive imposed military regulations on striking employees. In 1970-71 labor-management disputes were increasingly associated with violence. In 1972, with a new administration in office, the unions dedared open war on the executive. A survey of 300 industrial entrepreneurs found that a majority of those interviewed believed that the nation was close to collapse, essentially because of lack of discipline in labor. A third of the people interviewed considered the guerrilla movement and unions to be part of a leftist conspiracy. A significant number considered the cNT, not the guerrilla movement, to be the principal subversive threat in the late 1960s and early 1970s (Rial 1984). Union and enterprise pressure groups were in constant conflict dur- ing this period. Although mutual interest in the maintenance of a status quo should have limited confrontation, common interests failed to act as a restraint, possibly because union leaders believed that the government was implicitly committed to bailing out finns that faced troubles, what- ever the source of their problems. The Gestido Administration The 1966 elections took place in a dynamic and unstable political cli- mate, and the Colorado party won. The winning faction within the party was led by Oscar Gestido, a retired army general of much personal prestige, somewhat conservative and with relatively successful govern- mental experience in the management of the public railway. Gestido won by a very narrow margin over a party faction led by Jorge Batlle, the son of Luis Batlle. In his campaign Batlle had proposed a constitutional amendment that would solve certain important institutional problems faced by the coun- try. This amendment was approved in 1966 with the support of the majority sectors in both traditional parties and was a dear expression by politicians of the time regarding institutional inefficiencies that were hampering governmental functions. The most important change brought about by the amendment was the replacement of the collegium by a presidential regime. The amendment also introduced changes designed to achieve tighter control of public enterprises. To limit parlia- mentary authority, initiatives in legislation dealing with retirement, tax forgiveness, and price and salary fixing were reserved to the executive. For bills deemed to warrant "urgent consideration," special procedures were set up under which Parliament had to reach a decision within a specific time period. The government's term in office was increased from four to five years to permit longer-term policies. Economic Stagnation and Price Instability: 1955-73 241 The new administration adopted a policy of strong state intervention- ism and attempted to conciliate the demands of opposing interest groups. The result was an upsurge of inflation and, in December 1967, a 100 percent devaluation of the currency. The Pacheco Administration and the 1971 Election Jorge Pacheco took office in December 1967, on the death of Gestido, and served until 1971. The Pacheco administration inherited an economic situation that was highly unstable, mainly because of monetary misman- agement. In June 1968 the government implemented a price stabilization program based on a temporary price and wage freeze. The unions opposed the plan, and the ensuing labor-management disputes forced the authorities to impose the MPS to restore internal order. Beginning in 1968, intense disputes between the government, opposing political par- ties, and unions created a crisis in Uruguayan politics, which had tradi- tionally been favorable to compromise and opposed to confrontation. Constant conflicts between the executive and Parliament occurred. The executive limited union activity, banned radical leftist political parties, and closed daily and weekly newspapers, temporarily or permanently. The university authorities openly confronted the executive. After 1967 an urban guerrilla movement inspired by the ideas spread by the Cuban revolution appeared on the Uruguayan political scene. This was the Movimiento de Liberaci6n Nacional (MLN), better known as Tupamaro. Its founders were mostly former members of leftist par- ties who distrusted democratic methods and openly advocated the use of violence as a legitimate means of taking over the government. Up to 1970, however, the Tupamaro guerrillas avoided terrorist actions and direct confrontation with the police. Despite open disputes between the executive and legislative powers, widespread violence, and continuous labor-management confronta- tions, the 1971 elections were held according to democratic procedures. Both traditional parties participated, taking ideological stands some- what contradictory to those historically assigned to them. The Colorado party seemed to abandon its conventional economic and social batllista paradigm for more conservative attitudes. The Blanco party, in turn, seemed to have set aside its conservative rural orientation to seek struc- tural changes, induding an agrarian reform. Another distinctive feature of the 1971 election was the appearance for the first time in the country's political history of a third major political party. Several leftist parties that had rarely obtained more than 5 percent of the vote joined forces with a few dissidents from traditional parties to form a coalition called the Frente Amplio (FA). This new party, with General Liber Seregni as its presidential candidate, obtained about one- fifth of the total vote and became established as the second most power- ful force in Montevideo. 242 Costa Rica and Uruguay The Colorado party won narrowly. Within the Colorado party the winner, by a relatively large margin, was Juan Maria Bordaberry, the candidate of the party faction led by the outgoing president, Pacheco. Bordaberry's political program followed the main ideas of the Pacheco administration and included a strong stand against the unions and the guerrilla movement. The Bordaberry Administration and the Resurgence of Military Influence The new government inherited many problems. The large fiscal and external deficits made a new stabilization plan necessary; the unions were very active; and the administration faced a strong opposition in Parliament, a growing military presence in national affairs, and open warfare with the guerrillas.2 In April 1972 the level of violence in the antiguerrilla confrontation led Parliament to declare a state of siege in which personal rights and guarantees were suspended. The armed forces and the police used force to suppress the guerrillas. Between April and June 1972 accusations in Parliament concerning violations of human rights abounded, as did confrontations between the executive and legislative powers (and even within the executive itself) regarding this issue. During this period the military and its organizations participated openly in political life. Civilian control of the armed forces deteriorated. Confrontations between the armed forces and the legislative and execu- tive powers revealed a weakening of the military hierarchy; that is, power in the armed forces lay in the hands of officers directly command- ing the troops and not with the higher levels of the hierarchy. During the second half of 1972 the intrusion of the military into politics was evident. The military was participating in the repression of illicit dealings, accusing members of Parliament of being linked to the guerrilla movement, and insisting on having an active role in decisions affecting national development. This intrusion took place during a time of extreme weakness in government caused by lack of parliamentary support, which in turn led to further debilitation. In February 1973 the military leaders rejected the president's appoint- ment of a retired general as minister of defense and forced his with- drawal. Neither Parliament nor the unions forcefully challenged this rebellious act, which in fact met with apathy and even with the sympathy of the left wing and the unions. These groups saw populist expressions in communiques written by the military command, and they viewed the ascent of the military as a way of institutionalizing structural economnic reforms that they considered desirable.3 The isolation of President Bordaberry at that time probably greatly conditioned the subsequent political solution, which provided for the participation of military leaders in the government.4 The personal ambi- Economic Stagnation and Price Instability: 1955-73 243 tion of some of the most important military chiefs and the deeply rooted belief that political parties were not able to solve the country's serious problems helped to shape the alliance between the president and the armed forces. The failure of the political system to solve the problems affecting Uruguayan society during the foregoing decades and lack of confidence in the democratic system appear to have been the dominant factors behind the June 1973 military coup. An Analysis of thte Period The period 1955-73 was one of stagnation in production. After a decade of rapid growth following World War II, deceleration became evident between 1954 and 1957. From the mid-1950s to 1973 the country's GDP did not grow except for a short period in the late 1960s; thus, in 1970 GDP per capita was at the same level as in 1957. Between 1955 and 1960 the primary sector experienced a downward trend. In the 1960s agricultural output fluctuated greatly, mainly because of the performance of crops (since livestock production remained constant). Manufacturing grew continuously until 1957, declined from 1957 to 1963, and recovered slightly in the remainder of the period. After 1955 the ratio of investment to GDP declined sharply. Accurate information on unemployment during 1955-73 is not avail- able, but stagnation in production must have led to increased unemploy- ment levels, compared with previous years. The number of public employees expanded significantly as clientelism spread. The period was characterized by a rapid increase in the inflation rate. The rate of increase of domestic prices followed a steady upward trend, from less than 10 percent a year in the mid-1950s to a peak of 168 percent in the first half of 1968. Price and salary freezes in 1968 reduced the inflation rate to less than 20 percent during 1969-70, but the fiscal deficit created in 1971 led to an inflation rate of 95 percent in 1972. External Influences Between 1955 and 1973 three external factors brought about important changes in the Uruguayan economy: the decline in terms of trade after the Korean war, the decision of foreign slaughterhouses to abandon their investments in the country, and the founding in 1961 of LAFrA. After 1940 the volume of Uruguay's exports hardly grew. Export values, however, increased at an average annual rate of 8 percent be- tween 1943-45 and 1953-55 because of the rise in international prices, especially of wool. Once prosperity came to an end following the Korean war, export earnings decined more than 40 percent. The fall in terms of trade, coupled with expansionary domestic poli- cies, brought about a serious balance of payments disequilibrium during the second half of the 1950s. The persistent external deficit caused a loss 244 Costa Rica and Uruguay of reserves and an increase in the external debt. Instead of adjusting the economy to the new external circumstances by devaluing the currency and drastically reducing expenditures, the authorities severely restricted imports and limited subsidies, particularly during 1957, thus preventing further expansion of manufacturing. Fiscal and Exchange Rate Policy The stagnation of production in the late 1950s did not bring about inmmediate changes in economic policy. Foreign trade policies gave priority to industrial growth based on import substitution. A differential exchange rate policy favored the importation of raw materials and machinery for industry, financed through a lower exchange rate for beef and wool exports. The contraction in export earnings that followed the Korean war reinforced the overvaluation of the exchange rate, as is shown by differ- ences between the official exchange rate, fixed by the Banco de la Repiublica and applied to all imports and exports, and the financial exchange rate, which was determined in a free foreign exchange market and which applied to all other transactions. In 1957 the financial ex- change rate was 37 percent higher than the official exchange rate for commercial transactions, and in 1958 it was 144 percent higher. In 1957 the exchange markets were dosed and imports were totally prohibited. This adversely affected domestic activity by reducing the supply of imported inputs. Although public sector financial deficits occurred during the period, they were not the principal causes of monetary expansion during those years. The increase in the money supply was mainly a result of banking credit policy for both the public and the private sectors, which was based on the rediscounting of commercial papers at subsidized rates by the Banco de la Republica. The inflation rate, which averaged 8 percent a year between 1949 and 1954, jumped to an annual average of 23 percent between 1955 and 1960. At the same time, the interest rate was adminis- tratively fixed below the inflation rate, which motivated capital out- flows, especially in 1957 and 1958. In 1959 the Blanco party administration introduced important changes in economic policy. Under the terms of a standby credit from the Inter- national Monetary Fund (IMF), the government drew up an economic plan based on widespread reform of the foreign exchange and foreign trade systems, with a large foreign exchange devaluation designed to change domestic price relationships in favor of agricultural production and so foster recovery in that sector. In December 1959 the government submitted a law that eliminated all provisions that fixed (or authorized the executive to fix) exchange rates and promoted free imports of all goods. In addition, there was a significant exchange devaluation, ex- Economic Stagnation and Price Instability: 1955-73 245 change markets were unified, and all controls on capital movements were revoked. Thus, a complex system of multiple exchange rates and quotas was dismantled. The law, however, empowered the executive to set tariffs of 300 percent over the c.i.f. value on luxury goods, dispensable goods, and goods that competed with domestic industry; to prohibit for up to six months imports of such goods; to introduce advance deposits on imports; and temporarily to exempt some imports from taxes. Certain exports, such as greasy wool, were taxed between 25 and 50 percent, and other traditional exports were taxed between 5 and 50 percent. This law was implemented by several executive decrees, starting in 1960. After a transition period, in September 1960 an import system was introduced that set three tariff rates-10 percent for inputs, 40 percent for noncompetitive goods, and 150 percent for luxury goods. The latter two categories were subject to an advance deposit of 100 percent over their c.i.f. import values. All import prohibitions were lifted. The export tax on greasy wool was set at about 35 percent over the fo.b. price and the export tax on beef at 5 percent over the f.o.b. price. A new personal income tax was also approved, replacing a tax that had been imposed only on the net income of enterprises. This law provided for several tax exemptions that favored new industries and exports, thus giving incentives for reinvesting profits and bringing in capital. Enforcement of this change in the tax system was delayed, and the new tax did not change the structure of revenues significantly, since the income tax was less than 5 percent of the total. Between 1959 and 1961 the decline in the fiscal deficit contributed to better control of the sources of money creation (table 11-1). The country, however, experienced continuous imbalances in the external sector, and increasing inflation reinforced economic stagnation during the 1960s. In 1962 fiscal and exchange policies brought about a massive capital flight from the private sector, giving rise to a loss in intemational reserves and an increase in the external debt. In 1963 a dual exchange market was reestablished. Use of the official exchange rate, fixed by the Banco de la Republica, was compulsory for exports, imports, and public debt service. All other transactions were carried out under free fluctuating rates, without govermment interven- tion. Tariffs and advance deposits on imports were increased. The man- agement of public finances was less strict than in previous years. This was especially the case in 1965, when a deficit of 5 percent of GDP was recorded. In 1964 and 1965 the external deficit led to exchange market pressures. Instead of devaluing the peso, the authorities further restricted imports at a time when the ratio of exchange rates in the two markets was 3 to 1. At the end of 1965, as part of an agreement with the iM, a new devalu- ation took place (from 24 pesos/dollar to 65 pesos/dollar), both markets 246 Costa Rica and Uruguay Table 11-1. Uruguay: Macroeconomic Indicators, 1955-72 Indicator 1955-59 1960-62 1963-67 1968-72 1. Real exchange rate (1961 = 100) 61.2 104.4 102.6 94.9 2. Public expenditure/GDP (percent) 12.0 16.4 15.6 15.4 3. Public income/GDP (percent) 10.8 14.6 12.5 13.3 4. Fiscal balance/GDP (percent) -1.2 -1.8 -3.1 -2.1 5. Real wages (1961 = 100) Manufacturing 91.7 96.8 97.7 92.4 Public sector 91.7 87.1 102.2 91.1 6. Ml (growth; percent) 17.0 17.0 60.0 47.0 7. Real interest rate on deposits -10.0 -15.0 -32.0 -20.0 8. GDP (variation; percent) Total -0.9 1.4 -0.2 2.2 Agriculture -3.9 -0.2 0.3 OA Manufacturing 0.2 -1.2 -0.1 3A 9. Unemployment rate - - 8A 8.0 10. Change in consumer prices (percent) 17.0 24.0 55.0 47.0 11. Investment/GDP (percent) Total 12.9 15.3 11.5 10.8 Public investment 2.6 2.8 2.5 2.6 Private investment 10.3 12.5 9.0 8.2 12. Exports (millions of U.S. dollars) 160 153 176 206 13. Imports (millions of U.S. dollars) 204 220 172 206 14. Public sector external debt (millions of U.S. dollars) 156 253 297 400 - Not available. Source Banco Central del Uruguay, Boletin Estadistico, various issues; Instituto de Economia, Universidad de la Republica, 1969. were unified, and certain imports were prohibited. In 1967 import quotas were introduced, tariffs on imports were increased to a maximum of 300 percent, and several advance deposit systems were set up. Export taxes were eliminated in 1969. CIDE and the Ten-Year Plan In 1960 the Blanco government created the Comisi6n de Inversiones y Desarrollo Econ6mico (CIDE) to coordinate public sector investment, Economic Stagnation and Price Instability: 1955-73 247 analyze Uruguay's economic situation, and prepare an economic devel- opment plan. In 1963 the commission published an analysis of the economy and in 1965 it issued a ten-year plan. CIDE's activities were part of a regional trend toward preparing national development plans in order to secure external aid from the Alliance for Progress, which relied on ideas developed by ECLA during the previous decade. CIDE attributed economic stagnation to the exhaustion of the import- substitution model for industry and the structural incapacity of agricul- ture to apply the technology needed to increase production. The commission regarded inflation as a consequence of economic stagnation and of subsequent social conflicts. The ten-year plan sought to increase and rationalize public sector investments and selectively promoted certain investment projects in the private sector. It advocated major economic reforms: an agrarian reform designed to overcome the limits imposed by the structure of landed property and land tenancy; the modernization of the state through administrative and institutional reforms and changes in the fiscal sys- tem; the implementation of a short-term program combining an ade- quate exchange rate policy with both monetary and fiscal mechanisms; and an agreement between the govermnent, the private sector, and the unions with respect to price and wage policies. With the exception of the change proposed in agricultural tenancy, all the changes suggested by CIDE were implemented in the following years. Thus, after 1966 a Central Bank, an Office of Planning and Budget, a Public Sector Labor Bureau (Oficina de Servicio Civil), and a Foreign Trade Bureau (Direcci6n General de Comercio Exterior) were created. Some new import-substitution sectors were promoted in agriculture (sugar beet and sugarcane) and industry (car assembly), and changes were made in taxation and in the adjustment for inflation in the tax scheme. The Left considered the proposed structural changes insufficient and believed they would not lead to significant changes in production and income distribution. Furthermore, the rejection of changes in the struc- ture of property in the agricultural sector was considered a clear expres- sion of the opposition of members of the dominant class to any changes, even changes that would affect their personal interests only slightly. At the other ideological extreme, the plan was criticized for not giving prime importance to inflation and to the role of fiscal and monetary disequilibria as causes of inflation. The plan's structuralist interpreta- tions concerning agricultural stagnation were much criticized because of the low importance given to the distortion of relative prices and to the adverse effects of distortion on agricultural earnings. In addition to the plan's own failings, the political situation worked against initiatives designed to overcome economic difficulties. The un- precedented fiscal deficit of 1965 came in the same year that CIDE de- manded relatively cautious management of public finances in order to solve the problem of inflation. Similarly, a social agreement between 248 Costa Rica and Uruguay government, entrepreneurs, and employees was readily spoiled by con- tinuous conflicts between the government and the unions. The Colorado government elected in 1966 started its term by oscillat- ing between two opposing economic views. A group inside the party adhered to ECLA ideas and to dDIEs proposals for structural changes and for a social agreement between the groups that best represented entre- preneurs and workers. Another group advocated drawing up a stabili- zation program that would give priority to the struggle against inflation within the framework of fiscal and balance of payments adjustments. The Stabilization Plan During his first year in office Gestido favored an ECLA (desarrollista) approach, especially in late 1967, when outstanding leaders of the Colo- rado party's left wing were appointed to ministerial posts. A large fiscal imbalance-the result of measures adopted by the Blanco government in 1966-and weather conditions that adversely affected the food supply led to the abandonment of the desarrollista orientation and the im- plementation of a stabilization plan in December 1967. The plan started with a devaluation (from 100 pesos/dollar to 200 pesos/dollar) and an agreement with the IMF. The MPS was invoked to counter union reaction. In April 1968 a new devaluation occurred. At the same time, monetary mismanagement led to a 14 percent increase in domestic prices during June 1968. Starting in July, this increase was to be incorporated into wage and salary increases under the terms of previous agreements between most enterprises and unions. Under these circumstances the government inposed a price and wage freeze and took a strong stand against the unions that opposed the price stabiliza- tion plan and against entrepreneurs who attempted to avoid price con- trols. The shock imposed by the stabilization plan had an unambiguous effect on expectations of inflation and explains in part the initial success of the plan. The maintenance of a fixed exchange rate at 250 pesos a dollar also contributed to a rapid decline in the rate of price increase, since the domestic prices of all tradable goods were kept unchanged. In addition, because the interest rate was not modified, the sharp decline in the inflation rate gave rise to high real interest rates, which contributed to a decline in expenditure and to lower pressures on do- mestic prices. Tax measures adopted in late 1967 and early 1968 to deal with a public finance deficit were complemented by the effects of the price and wage freeze in June 1968. This freeze restricted wages and other expenditures while increasing the real value of the government's tax revenues. The results of the freeze were favorable. The fiscal deficit decreased from 3.2 percent of GDP in 1967 to 0.2 percent in 1968, and inflation during the second half of 1968 was 2 percent, in contrast to 64 percent in the first half of the year. Economic Stagnation and Price Instability: 1955-73 249 Prices rose 14.5 percent in 1969 and 20.9 in 1970, and GDP grew 6.1 and 4.7 percent in those years. During 1968 and 1969 the monetary authority's international reserves increased substantially. The average wage index, for both public and private employees, increased 10 percent in real terms between 1968 and 1970. Economic Policy under Bordaberry By mid-1970 the maintenance of a fixed exchange rate had led to an overvalued currency, an external deficit, and a loss in international reserves. The authorities were divided regarding the strategy required to adjust the external deficit. A proposal for a devaluation was disre- garded by the president, who did not want to lose popularity in the year before the national elections. The exchange overvaluation was accompa- nied by a progressive abandonment of fiscal discipline; in 1971 the central government deficit reached 5.8 percent of GDP. In October 1971 the authorities ordered a salary increase but post- poned price adjustments. Thus, the government's decisions brought about a transitory rise in real wages and significantly repressed inflation. In addition, the overvalued currency caused a wide gap between the official and black-market exchange rates and a loss of international reserves. The economic policies of the Bordaberry government elected in 1971 were similar to those of the Pacheco administration. The new govern- ment secretly sold some of the gold that formed part of the international assets of the Central Bank in order to obtain the liquidity necessary for maintaining a normal supply of imports. At the same time, an exchange devaluation (from 250 pesos a dollar to 500 pesos a dollar) was decreed, and a crawling peg system was put in place. This essential change from the previous system was made to avoid the sharp fluctuations in the real exchange rate that had occurred in the past. A more conservative wage policy and a significant increase in the prices of public firms' services made possible a drastic reduction in the fiscal deficit, from 5.8 percent of GDP in 1971 to 2.6 percent of GDP in 1972. The Bordaberry government considered the possibility of implement- ing major changes in economic policy-a step devaluation followed by the unification of the exchange market, liberalization of imports, and decontrol of prices and salaries. Although some of these policy changes were included in the 1972-77 economic development plan, the political situation forced the postponement of their implementation. Most of these policy changes were implemented by the military after the June 1973 coup. The contractionary policies followed during 1972 led to a 3.4 percent decline in GDP, while the rate of inflation increased from 36 percent in 1971 to 95 percent in 1972 and the real wage rate fell 19 percent 250 Costa Rica and Uruguay The Political Economy of the Period The political economy of the period was affected by inflation, stagnation, and the distribution of government expenditure and income. Stagnation Stagnation in the livestock sector, which began in the 1930s and was reinforced in the 1950s, was one of the most important problems for the Uruguayan economy. Two basic reasons were given during the 1960s for the lack of investment in land-saving techniques (which were con- sidered the only way to overcome the constraint on growth imposed by a fixed supply of land). THE STRUCrURAL EXPLANATION. The most widely held explanation stressed the structure of lot size, the pattern of land tenancy, and the alleged absence of a strong capitalist motive among ranchers. With some differences, this basic interpretation was shared by the CIDE develop- ment plan. According to this interpretation, the distribution of rural holdings resulted in inefficient exploitation of the country's main natu- ral resource, since both large and small rural holdings were subject to diseconomies of scale. The fixing of a limit below which a holding is considered minifundio (too small) and above which it is considered latifundio (too large) de- pends on such things as soil characteristics, proximity to markets, and the degree of technological development. It has been said that 60 percent of rural enterprises, occupying less than 12 percent of the total land area, might be defined as minifundio. Less than 3 percent of rural enterprises had areas considered too large for their adequate use, but they occupied 44 percent of the total area of the country. Thus, more than one-half of the total rural area of the country was in rural enterprises of inappropri- ate size. Forms of land tenancy ranged from ownership or self-management to leasing or share tenancy. Since existing legislation did not provide a proper definition of the rights of the landowners and tenants with respect to investments and technological improvements, the structure of land tenancy was seen as a significant deterrent to the introduction of modern capital-intensive technology in agriculture. The combination of size and tenancy problems was thought to affect about 84 percent of rural holdings, or 82 percent of the total land area. The behavior of the agricultural sector during the last decades of the nineteenth century, however, dramatically refutes the idea that entrepre- neurial capacity within the sector was lacking and that ranchers were not responsive to profitable opportunities. Investments in wire fencing and improved breeding, which made it possible for the cattle industry to cater to the tastes of the international market, were a direct and rapid Economic Stagnation and Price Instability: 1955-73 251 response to the increased profitability of investment in the sector. Fur- thermore, available estimates of the supply elasticity of agriculture and of the changes in land use as a response to relative price changes consistently suggest a strong response of the sector to price incentives (Cobas and others 1985). The effect on economic growth of institutional conditions such as the structure of lot size and the pattern of land tenancy has not been subjected to rigorous empirical analysis. Favaro and Spiller (1990), using the "survivor's technique," found evidence consistent with an absence of economies of scale in a wide range of lot sizes-500 to 2,500 hectares. There are, however, no studies of differences in the pattern of adoption of new technologies according to land tenancy or lot size. THE POLICY EXPLANATION. The second interpretation of stagnation in the beef sector, advanced during the 1960s, emphasized the adverse role of discriminatory policies on relative prices and investment incentives (tables 11-2 and 11-3). The main technological characteristic of beef production in Uruguay is its great reliance on the use of land; thus, availability of land is the most important constraint on the expansion of production in the sector. The high taxes traditionally levied on beef and wool production discouraged the implementation of techniques for making more intensive use of land, such as improving pastures to increase their carrying capacity. Taxes that affect prices in the sector reduce land prices in relation to other inputs, since land is the most Table 11-2. Relative Prices of Beef and of Selected Agricultural Inputs, Uruguay and Other Beef-Producing Countries (relative pnce, in tons of beef on the hoof) United Price and year Uruguay Argentina Brazil States France Per tractor horsepower (35-40 HP tractors) 1963-66 0.70 0.41 0.63 0.20 0.15 1973-76 1.09 0.47 0.34 0.21 0.10 Per ton phosphoric anhydride 1961 0.68 1.80 0.87 0.40 0.44 Per 1,000 liters gas and oil 1961-64 0.20 0.30 0.33 0.10 0.08 1969-72 0.19 0.18 0.31 0.07 0.07 1975-76 0.85 0.31 0.43 0.10 0.10 Source Reca and Regunaga 1978. 252 Costa Rica and Uruguay Table 11-3. Relative Prices of Wool and of Selected Agricultural Inputs, Uruguay and Other Wool-Producing Countries, Various Years, 1961-75 Tons of greasy wool needed to purchase: One HP of 35-50 HP tractors 1961-64 1967-70 1973-75 Uruguay 0.14 0.38 0.31 Argentina 0.15 0.17 0.13 New Zealand 0.06 0.10 0.13 United States 0.09 0.12 0.12 One ton of phosphoric anhydride 1965 1971 1975 Uruguay 0.20 0.53 0.89 Argentina 0.46 0.46 0.90 New Zealand 0.29 0.55 0.42 United States 0.20 0.58 0.53 Source: Reca and Regunaga 1978. inelastic factor of production. Most of Uruguay's land is not suitable for alternative uses such as crop production. The low price of land intensifies the use of land, diminishes invest- ment in livestock production, and reduces the technical efficiency of the industry. Livestock are fed on natural pasture and lose weight in the winter. Because of nutritional deficiencies, cattle take longer to reach slaughter weight, and cows are less fertile. In comparison with other countries, Uruguay produces a small quantity of meat per animal and per unit of land (Sapelli 1985). Several taxes were levied on the agricultural sector, either explicitly or implicitly through taxes on land and other transactions. The most rele- vant were export taxes and exchange rate policies; during certain periods overvaluation of the currency affected exports in general and the agri- cultural sector in particular. Industrial protection constituted another form of tax, as it increased the domestic prices of manufactured goods in relation to export prices and created a less favorable relationship between export prices and prices of inputs. The percentage of the price received by producers was fixed by the government through exchange rates and export taxes; the highest export tax rates occurred when there was a devaluation. (Before the late 1950s the producer price was completely divorced from the international price, but later the prices were more closely related.) These taxes brought about income transfers among producers of exports, producers of imn- port substitutes, and consumers. The measurement of these transfers depends on different parameters. Even though it is clear that the export Economic Stagnation and Price Instability: 1955-73 253 sector loses income and the import sector benefits, consumers may either gain or lose income, since they benefit from a lower relative price of export goods but have to pay higher prices for imports and nontradable goods. The available data show that in Uruguay the industrial protection policy produces a large benefit for consumers. (The amount of the consumer's benefit depends heavily on the share of agricultural and livestock products in the consumption basket.) Sapelli (1985) analyzed the overall effect of export taxes, exchange rate policy, and import tariffs on cattle production. His study concluded that to generate a transfer in favor of the state and of beef consumers that in the long run amounted to 7 percent of GDP, cattle production was maintained at one-third of its potential level, imposing a loss in overall GDP of 12 percent. It is dear that the benefit to the state and to consumers has been one of the most powerful motives for the design of Uruguay's agricultural policy in spite of its damaging effects on production. PROTECrIoNISM. Although protectionism in the Uruguayan economy dates back to 1875, it was not until the two decades following the Depression that protectionist policies brought about significant transfor- mations in the economic structure. The principal changes were the development of import-substituting manufacturing and the loss of dy- namism in the agricultural sector. The thrust in protectionist measures, in both 1875 and 1930, coincided with world crises, trade disruption, and deflationary pressures in the world economy, which may have concealed the potential cost of high tariffs. The introduction of tariffs within a framework of deflationary pressures and fixed exchange rates was presumably an attractive strat- egy for government officials, since it permitted achievement of a new equilibrium at a lower world price level and reduced the adjustment cost associated with the domestic recession. Even though ECLA strongly supported Uruguay's growth strategy in the 1950s on ideological grounds, ideas seem to have lagged behind the facts, and ECLA can be held responsible only for defending the status quo in the 1960s rather than for shaping protectionism during previous decades. Ignorance with respect to the general equilibrium effects of tariffs may have delayed the reaction to the ideas that manufacturing was a prime factor in determining growth and that the transfer of resources from agriculture would cause no decline in output in the rural sector. RURAL-TO-URBAN TRANSFERS. The new policies led to the rise of private interest groups whose survival depended entirely on high tariffs and whose power was associated with the duration of the policy. Although Latorre's government was able to lower tariffs by 50 percent in 1879 despite opposition from industry, confirming the short-run perspective 254 Costa Rica and Uruguay of the macroeconomic policy behind the original increase in tariffs, the rapid growth in manufacturing during the 1940s brought about the development of vested interests that resisted any attempt to liberalize the economy in the 1950s and 1960s. Commercial policy was originally adopted to deal with the critical international situation, but its latent distributive purpose is evident if it is examined within the context of the parallel expansion in the size and scope of the public sector, the increase in the size of bureaucracy, and the creation of new public enterprises. Govermment administrations following the Depression used state power to gain the support of voters by creating trade restrictions and hence rents, by increasing govermnent bureaucracy and hence public employ- ment, and by extending subsidized credit. Agriculture provided an ideal source of resources to finance import- competing activities and the growing government bureaucracy, since in the short run it could withstand heavy taxation. The tax burden was felt by landowners, who faced a one-time capital loss as the price of land decreased, making the rate of return sufficiently attractive for people to hold and exploit land. The dynamics of the new policy produced migra- tion from rural to urban areas, which reinforced the structure of taxation by making it less costly in terms of votes. In the short run, the redistributive aspect of taxing agriculture sur- passed in importance the welfare loss that accompanied changes in output. In the long run, the new policy proved extremely costly. Rural entrepreneurs reacted against the expropriatory policy, delaying the adoption of land-saving techniques not only because of the risk of income exaction under the prevailing policies but also because of the low rate of return determined by the new relative prices. There is no reason to assume that the new policies created dramatic shifts in the personal distribution of income or significant changes in landowners' personal wealth. In fact, the landowners may well have succeeded in capturing the rents created in the urban sector. This plau- sible result illustrates the paradox that although no significant and sustainable change in the distribution of income occurred, the structure of taxation and of the vested interests associated with it prevented growth along the lines of the country's comparative advantage. Policies that were damaging to the economy as a whole persisted because they served the personal interests of bureaucrats and politi- cians. Electoral support was achieved through food subsidies and the support of inefficient industries. A reversal in policy would have im- posed costs on urban workers, industrial entrepreneurs, and govern- ment employees. Landowners would have benefited, but because of the length of the cattle cycle, supply would have declined in the short run. Furthermore, the benefits attributable to a change in policy would not have been felt until the following administration took office-making the strategy unacceptable to a government that had a high discount rate because of its interest in being reelected. Economic Stagnation and Price Instability: 1955-73 255 THE 1959 REFORMS. The only attempt to alter the structure of protection- ism came in 1959 when the Blanco party sponsored an exchange and trade act that called for moving from quantity restrictions to ad valorem tariffs and eliminating multiple exchange rates. The elimination of im- port quotas may have affected vested interests, but it is unlikely that the effect was significant, for two reasons. First, whereas under previous regulations the scarcity of foreign currency had led to sharp cuts in import quotas on consumer goods, under the new act high tariffs on imports made the import of finished goods impossible, and there was little difference in the outcome. Second, importers of raw materials and intermediate goods benefited from the lower tariffs under the new policy. In the short run agriculture benefited from a more realistic exchange rate, but new regulations introduced direct taxes on exports to moderate the rise in domestic prices. Although this was theoretically conceived as a move toward free trade, in practice it was restricted in scope and short-lived. High tariffs virtually prohibited the importation of finished goods and had no significant effects on the allocation of resources. Tariffs on imports raised the prices of importable goods in relation to those of exportables and nontradable goods, shifting demand toward the latter group. Resources were bid toward the import-competing sector and away from production of exportables and domestic goods. THE EFFECT OF TARIFFS. Since demand for home goods rose while supply declined, tariffs worked to increase the price of these goods. Although tariffs were paid by importers, the consequent changes in relative prices implied that the burden of the tax fell mainly on exporters. It is only in such extreme cases that the effect of tariffs falls wholly on exports. For example, when there is a high degree of substitutability between home goods and importables, both in demand and supply, the relative prices of importables and home goods do not change. Clements and Sjaastad (1984) suggest measuring the net effect of protection on one sector by using the percentage change in wages as a proxy for the price of home goods; when wages rise by more than the output price, the sector is adversely affected. Between 1940 and 1975 real wages in manufactur- ing industry increased 69 percent, whereas the price of meat increased only 30 percent.5 Since the price of land is determined by demand, a tax on agricultural exports reduces the market value of land and imposes a one-time capital loss on landowners. An indication of the damage that commercial policy inflicts on agriculture is that in 1976 one hectare of average grassland was worth us$175 in Uruguay, us$213 in Argentina, and us$250 in Brazil (Anichini, Caumont, and Sjaastad 1978). Although the implicit tax produced by a tariff brings about a transfer from exporters to the import-competing sector, a complete analysis of the effects of tariffs on income distribution also requires that the effects 256 Costa Rica and Uruguay of tariffs on consumers be examined. As the relative price of exportables falls, those who consume exportables benefit (other things being equal), whereas those who consume mainly importables suffer losses. Since in Uruguay two-thirds of meat production is consumed domestically, con- sumers may actually benefit from protection. The size of the gain is larger for the lowest 10 percent of the income distribution because in that bracket 14 percent of total expenditure goes for meat, whereas for the highest 10 percent the figure is only 3 percent. Three parameters determine who gains and who loses from protec- tionism: the fraction of protection that is transformed into an implicit tax on exports; the percentage of exportable goods consumed at home; and the percentage of consumption of importables produced at home. Given the implicit tax on exports, the higher the level of domestic consumption of exportables and the lower the fraction of importables produced do- mestically, the more consumers will benefit. Sciandra (1979) estimated the transfer from the agricultural sector to the rest of the economy as a result of 1979 commercial policy to be 8..7 percent of GDP under free trade. Sapelli (1985), using a higher estimate of nominal protection, obtained a figure of 9 percent of GDP for 1930 and 19 percent for 1961. According to his methodology 97 percent of the transfer resulted in a consumer subsidy in 1930; in 1961 the figure was 63 percent. Our estimates indicated that in 1930 the transfer from agriculture was 2.4 percent of GDP, which translated into a gain to import-competing industries of 0.1 percent of GDP and a benefit to consumers of 2.3 percent. In 1961 the transfer was 6.1 percent of GDP, or a benefit to import- competing activities of 2.3 percent and a subsidy to consumers equiva- lent to 3.8 percent.6 Although consumers clearly gained immediately from a protection policy that implied a tax on beef exports because it reduced the domestic price of beef, import-competing firms shared the spoils in the dynamics of the process. Sapelli (1985) estimated the effect of the structure of protection on factor prices. He found that in equilibrium, the tariff in force during the period caused a decline in land rents of 8.2 percent and an increase in wages of 7 percent. Using a 1961 input-output matrix and estimated tariff level, he found that manufacturing wages increased 143 percent as a result of commercial policy and that rents declined 43.7 percent Inflation Between 1830 and the Great Depression prices remained virtually un- changed. But during the 1930s the stage was set for monetary misman- agement and price instability. In 1929 the Banco de la Republica Oriental del Uruguay (BROU) aban- doned intervention in the foreign exchange market, and the gap between the market exchange rate and the 1862 parity became wider. In 1935 the peso was devalued. The gold content established for the peso in 1862 Economic Stagnation and Price Instability: 1955-73 257 was reduced, and the authorities, regarding the accounting adjustment of the value of the stock of gold reserves as new resources, proceeded to spend this windfall. Until 1939 monetary expansion by the BROU re- mained constrained by the gold stock and by a ceiling on the fiduciary issue, but the constraint was later relaxed, and the BROU was allowed to rediscount commercial bills maturing in no more than six months, provided that they were related to the sale of goods without a ceiling. The 1935 devaluation paved the way for a loosening of monetary discipline. It was, however, the authorization to rediscount commercial bills without limit that was the source of future monetary mismanage- ment. It has been argued that fiscal deficits were not a significant source of monetary expansion before the 1960s. This is true in form rather than in content; rediscounts were in fact a kind of expenditure that did not need parliamentary approval. The share of rediscounts in total credit swelled in the 1950s and 1960s. One of the uses of rediscounts within the public sector was to finance subsidies for the public railway, real estate construction, employment in slaughterhouses, and urban passenger transport and to extend credits to farmers who exploited state-owned land. In 1963 rediscounting was used to subsidize bank debtors who faced bankruptcy. In 1965 another rediscount line was used to reimburse depositors in banks that had gone bankrupt. The use of rediscounts was progressively related to private sector activities, especially for industrial organizations that processed agricul- tural raw materials. During the late 1960s rediscount lines were available for buying wool, cattle, cotton, oleaginous seeds, and raw materials in general, as well as for payment by enterprises of additional wages at the end of the year. In the following years other purposes were added, such as the purchase by nontraditional export industries of raw materials, hides, and sackdoth. Firms that received these funds dearly benefited; during most of the 1960s, when the average annual inflation rate was 44 percent, the interest rate on these credits was between 10 and 12 percent a year. In 1965 the increasing importance of the deficit in the finances of the central government became a new factor in the inflationary process. The inflation rate increased from an average 30 percent a year between 1960 and 1965 to 81 percent a year in the two-year period 1966-67. The erratic development of the real exchange rate and the continuously negative level of real interest, in the context of increasing inflation, were two important new factors that contributed to stagnation in production during the period. Instability in the real exchange rate reduced the possibilities of export expansion and economic growth. During those years exports were almost exdusively beef and wool. There is strong evidence showing that inflation had a negative influ- ence on investment in the Uruguayan economy (Favaro 1987). More- over, two other factors usually associated with inflation-the gap 258 Costa Rica and Uruguay between the financial and commercial exchange rates and the capital account of the net balance of payments-are also significant in explain- ing the level of investment. Other evidence pointing in the same direction lies in the history of the capital market. Although Uruguay had a growing and fluid capital market in the period 1935-50, the market started to decline abruptly during the 1950s, while the share of public debt in total traded securities increased as a result of discriminatory tax treatment. The total volume traded in the stock market in 1970 was 9 percent of the volume traded in 1946. During the same period financial assets in the economy decreased significantly; bank deposits and securities were 23.6 percent of GDP in 1945 but only 5.95 percent in 1970. The absence of a well-developed capital market reduced the possibility for private investors to finance capital accumulation through long-term instruments and caused saving to be channeled into investment in real estate and the holding of inven- tories or of foreign currency. Inflationary taxation created rents that were received mainly by the government. Until the 1950s the government benefited from inflation because of the decrease in the value of public debt issued in local currency and not indexed. Nevertheless, inflation during those years progressively limited public demand for public debt instruments and eventually led to the closure of those sources of finance. The inflation tax collected by expanding base money gained in importance. Inflationary taxation was also a source of direct transfers between private net debtors and creditors. Since real interest rates on loans were negative during most of the period under study, credit was rationed and loan recipients received a net benefit, if only because they had access to the credit market. Although import-substituting industry was again the main beneficiary of the transfers induced by negative real interest rates and access to the credit market, the transfers did not increase the net wealth of these firms. In fact, a rather perverse mechanism developed because firms were taxed on their inflationary gains and were thus subject to a dramatic wealth depletion during the period. Another undoubtedly important factor that affected inflation in Uru- guay was the strength of the labor movement and its constant opposition to changes in relative prices that could lower real wages. Continuous strikes by public and private workers during the 1960s were significant limitations on economic policy. For example, important devaluations in exchange rates were generally neutralized in later months by a rise in wages for the purpose of maintaining purchasing power. In the same way, governmental financial deficits were in many cases the result of increases in public employees' salaries, granted to satisfy the unions' demands. INFLATION AND ELECrORAL POLITICS. The inflation rate tended to change cyclically in tandem with elections; the average duration of the inflation Economic Stagnation and Price Instability: 1955-73 259 cycle was almost exactly that of the political cycle (Diaz 1984). Five of the six inflationary peaks between 1950 and 1972 correspond to years im- mediately following election years. All of the monetary and fiscal vari- ables that economic theory generally associates with inflation closely follow the same pattern. During the year before an election year, the governing party used its control over the nation's monetary and fiscal systems to improve its chances of victory by increasing expenditures and transferring wealth. This behavior can be attributed to the lack of well-defined limits to discretion in a political administration and to a high discount rate associated with reelection interests. Administrations endowed with the power to promote distributive policies and use inflationary finance did not resist temptation, even though such actions had a high social cost. To take, during an election year, conservative measures that reduced the scope of the government's redistributive initiatives would be to risk the support of powerful interest groups and reduce the chances of reelec- tion. As the probability of reelection diminished, price stability in the next period had a very low discount value for the incumbent adminis- tration; administrations not yet in power had no means of paying the government in power for its generosity. The result was a type of political equilibrium that was not Pareto optimal. THE EFFEC OF NFLATiON. In the short run, inflation does not seem to affect real wages significantly, since workers rapidly incorporate infla- tion into their bargaining for wage increases. In the long run, inflation reduces investment and the capital stock, and it lowers both the level and the rate of growth of real wages. When inflation is associated with financial restrictions such as interest rate controls and credit rationing, the allocation of resources in the economy is distorted, and inefficiency becomes widespread. As the economy withdraws inside its frontier, the burden of waste falls mainly on the factors with the lowest supply elasticity-land and labor. Inflation is also a tax on a particular form of wealth: net nominal assets. The incidence of price instability on personal income thus de- pends on the distribution of nominal assets, the return to nominal assets, and the capacity of different individuals to acquire through indebted- ness a hedge against this form of taxation. Although there seem to be no economies of scale in holding money, it is likely that the range of assets that provide an adequate hedge against inflation increases with income, particularly when financial repression exists, whereas access to credit lines and the cost of credit are both unequally distributed. Interest rates that were negative in real terms during the 1960s became a source of additional income for enterprises indebted to the banks. At the same time, interest rates brought about capital depletion of local currency savers. This was, in turn, the main reason for an increasing capital outflow, especially from wealthy savers. An inflation tax also 260 Costa Rica and Uruguay falls heavily on those earning rents from real assets that are fixed in nominal terms. This was the case for landlords in Uruguay, who suffered continuous adverse effects from rent freezes imposed during the 1960s. Government Expenditures and Income Distribution The increase in the size and scope of public sector activities became apparent at the beginning of the century and was more pronounced following the Depression. Expansion was part of an ideological scheme thatbegan to be expressed at the beginning of the century through public enterprises and social services. Voters had little control over the actions of government officials, and it was almost impossible for officials to be penalized for promoting political initiatives that involved high costs for society as a whole. Collusion, rather than competition, characterized the political process. The traditional parties reached agreements to increase the number of employees and to bring new activities into the state domain. High political payoffs were associated with increased public expenditures. In the 1930s the limits on the expansion of government expenditure were loosened as the authorities allowed unlimited monetary expansion through the rediscounting of short-term commercial paper. As a conse- quence, the increase in the level of government expenditure was uncon- strained. INCOME DISTRUTON. In the short run, increased government expendi- tures have favored a diminution of inequality in Uruguayan society. Since most government expenditure is used for wages, salaries, and social security transfers, expansion appears to redistribute income to- ward the middle class. Wages and salaries forless skilled labor are higher in the public sector than in the private sector, and government expendi- ture tends to bid up the price of less skilled labor in the market. The government influences the real wage rate of less skilled labor in the private sector by detaching resources from the rest of the economy and by expanding public employment (mainly by political means). In the long run, the effect of government intervention on income distribution is far more complicated. The larger the relative size of government expenditure, the more probable it is that a marginal expan- sion of governmental activity will introduce a distortion rather than a positive externality. Thus, in time an increase in the size of government reduces both the levels of real income and wages and their rate of growth (Favaro, Graziani, and Sapelli 1987). Furthermore, the government cre- ates rents and so gives incentives for rent-seeking activities. When the rate of return on lobbying for privilege is higher than the profitability of introducing new technologies, better quality control systems, or im- provements in marketing procedures, firms will invest in lobbying Economic Stagnation and Price Instability: 1955-73 261 rather than in other activities. In summary, distributionally oriented policies have distorted incentives, inducing investment of both human and physical capital in activities that are highly profitable for agents in the private sector but have a low return for society as a whole. There is no accurate information on what happened to poverty during the period, but available statistics do reveal progress in such social indicators as the literacy rate, the ratio of teachers to primary school pupils, life expectancy, infant mortality, and housing SOCIAL SECURITY. Perhaps one of the most outstanding events during the period was the appearance of certain signs of disequilibrium in the finances of the social security system. The political climate of the time was not favorable for attempts to curb easy access to retirement benefits by, for example, raising the minimum retirement age and abolishing certain grounds for retirement. The increasing difficulties in central government finances restricted the possibilities for substantial addi- tional transfers from the general revenues to the social security system. Under these circumstances administrative mechanisms were used to defend the finances of the social security system. One was a delay in granting retirement benefits to applicants. Although this was also the consequence of an imperfect system of information on workers' employ- ment backgrounds, it was widely believed that final approval of appli- cations for pensions was subject to the financial possibilities of the system; it was common for a year or more to pass before benefits were granted. No statistics are available to quantify the importance of these delays, although it seems to have been very large. The second mechanism for defending the finances of the system was the lagged adjustment of pensions in relation to wages. Between 1964 and 1968 pensions grew by 490 percent while salaries increased by 920 percent. It was only in 1969, when this adjustment mechanism was eliminated, that a doser correspondence between wage and pension changes was achieved. This adjustment procedure produced a large deterioration in retirees' incomes. In 1970, for instance, the average pension was only 90 percent of the national minimum wage. Notes 1. For evidence concerning the effects of trade agreements on trade creation and trade diversion, see Favaro and Sapelli 1989. 2. The armed forces took charge of antiguerrilla warfare in September 1971. The decision implied the creation of a united command of the armed forces and the police to coordinate the fighting. Until then the military had been forbidden to participate in politics, although some military facilities served as detention centers for people arrested under MPS rules between 1968 and 1971. 3. The military command's communiqu6s 4 and 7, dated February 9 and 10, 1973, were of a nationalist and populist nature. 262 Costa Rica and Uruguay 4. The participation of the armed forces in the administration was institution- alized through the creation of the COSENA, a presidential advisory council con- sulted in all decisions that affected security and development. 5. The averages for the periods 1936-45 and 1971-78 are used in calculating the increase in the price of meat. 6. The estimates are based on a simplification of Clements's and Sjaastad's (1984) methodology under the extreme assumption that the full burden of the tax falls on exporters. We used as a base for our estimates the share in total value added for 1961 of the beef sector's value added. The Oil Shock and the Resumption of Economic Growth, 1973-84 In June 1973 the executive branch dissolved the parliament that had been elected in November 1971, and a stage of civilian-military government began that would last until February 1985. The intrusion of the military into the political scene, and the coup itself, represented a breach in the political history of the country, which during the twentieth century had enjoyed a high degree of democratic stability. But the democratic system had been deteriorating, as shown by growing social confrontation and by the incapacity of the political system to implement efficient reforms for promoting economic growth. Since the mid-1960s there had been frequent and violent confrontations with the unions, followed by the use-isolated at first and ubiquitous later-of constitutionally excep- tional repressive mechanisms (medidas prontas de seguridad, or MPs). Some studies argue that this period saw the loss of one of the attributes usually associated with the batllista state-its conciliatory role in the struggle between social groups. It is also true, however, that during those years the government faced direct challenges-long strikes in areas such as public services and banking, and an armed urban guerrilla movement. A more adequate explanation of those years might be that the state was seeking to reestablish authority that had not been exercised in the previous two decades. A distinctive characteristic of the period was the executive's difficulty in obtaining a stable majority in parlia- ment. This promoted the permanent use of the MPS. The Military in Power The military intervention in political affairs that began in February 1973 was an unusual phenomenon and a departure from the traditions main- tained by the armed forces for almost a century. Over generations the military had been gradually displaced from an active political role through a series of measures adopted by the Tajes and Herrera govern- 263 264 Costa Rica and Uruguay ments in the 1890s and later consolidated during Batlle's first adminis- tration in the early twentieth century. After the first decade of the twentieth century the national army had developed on a basis of voluntary recruitment and increasingly special- ized training. The military education system was organized during Batlle's second administration (1911-15) along lines similar to those of France. This early influence was reinforced by continuous French tech- nical assistance up to World War II; after that, the influence of the U.S. army in military technical assistance was dominant. Although appoint- ments to key commands were influenced by political preferences, mili- tary organic laws forbade the use of the armed forces for patronage appointments. Thus the armed forces developed an officer corps of skilled specialists who were almost completely isolated from the country's political life. Most officers came from middle- and low-income families and from rural areas. Family military tradition was a character- istic phenomenon. Although the military remained neutral in political events up to 1972, they were often used to help the police maintain internal order during periods of labor-management unrest. From the late 1950s to the early 1970s the armed forces were called on with increasing frequency to intervene in labor-management disputes as social unrest spread through the country. Military participation in administration, particu- larly in the public utilities, gave officers experience and confidence in their capacity to operate public enterprises and consolidated a deep anticommunist perspective among them. During the 1960s economic stagnation, increasing price instability, social unrest, and political bickering eroded the confidence of the mili- tary in the capacity of the political system to solve the country's prob- lems. Political violence was the catalyst for an increasing involvement of the military in civil affairs and for the enlargement of the size of the armed forces shown in the table below. (The data are from Moore 1978.) Year Number of military personnel 1945 11,000 1955 6,450 1965 15,400 1970 16,000 1972 21,000 1973 22,000 1977 23,000 The executive's decisions to put the armed forces in charge of the antiguerrilla fight and to unify the security forces under a single com- mand,' and the temporary suspension by Parliament of several civil rights to facilitate repressive operations, provided opportunities for sanctioned intervention and gradually lowered the restraints on unsanc- The Oil Shock and the Resumption of Economic Growth, 1973-84 265 tioned intervention in civil affairs. In the process, the ambitions of several army leaders, regional circumstances that placed domestic events in a context of international conspiracy, the public image of the rectitude of the military, and the lack of prestige of the political system helped to move the military elite into position as the central policymak- ers of the nation. After June 1973 the armed forces established an authoritarian govern- ment. Most political and labor union activity was prohibited, rigorous censorship was established, and the opposition was severely repressed. The armed forces' participation in government was institutionalized through the creation of a National Security Council. In addition, the military actively participated in the direction of several public utilities and in the administration of municipal governments. Demographic Change In the 1970s some characteristics of the Uruguayan population that had alreadybeen observed two orthree decades beforebecamemore acute- a low birthrate, an aging and increasingly urban population, and an expansion of the number of public employees and of beneficiaries of the social security system. Since the beginning of the 1960s increased emi- gration had contributed to the low population growth rate. Emigration tended to rise throughout the decade, reaching its peak in 1975. The emigrants were predominantly young males with a higher level of educational achievement than the population as a whole (Aguiar 1982). Net emigration was associated with economic phenomena such as low expectations for future income, compared with expected earnings in the country of destination; with sociological factors such as the existence of an information network that reduced the emigrants' cost of moving and settling; and with political issues-for example, the greater intolerance, the increase in violence, and the rupture of the institutional order in June 1973. Sapelli and Labadie (1987) have studied net emigration from Uruguay to Argentina, the country of destination of more than half the emigrants. Whereas during 1966-72 between 83 and 95 percent of the variance of net emigration could be ascribed to economic variables, between 1973 and 1975 political issues were as significant as economic phenomena in explaining the variance. Emigration appears to have been produced by the lower expected earnings that a stagnant economy offered a worker with higher-than-average education.2 Ideology and the Intellectuals In the 1970s the breach between the intellectuals and the political sys- tem that began in the 1950s widened. The intellectuals were much more critical of the political system than of their own stands. The teachings of the university, cultural associations, and intellectual groups were col- 266 Costa Rica and Uruguay ored by radicalism and seldom extended beyond general propositions that lacked a rigorous evidential and logical grounding (Graceras 1970). The intellectuals' consensus that the political system was incapable of answering society's problems led to the development of a messianic attitude among them rather than to a precise analysis of social problems. In fact, studies in the social sciences did not advance beyond the level of rigor of the essay. The university's organization, based on a rigid struc- ture of faculties and curricula, was oriented toward professional studies rather than scholarly activity, and the social sciences, particularly eco- nomics, were not recognized fields of study until the mid-1960s. In the 1960s the Comisi6n Interministerial de Desarrollo Econ6mico (Interministerial Commission for Economic Development, or CDE) was founded. CIDE was strongly influenced by the Economic Commission for Latin America (ECLA) through technical assistance. After 1966 most of the social scientists originally associated with CIDE joined the staff of the recently founded Oficina de Planeamiento y Presupuesto (Office of Planning and Budget, or oPP), became professors at the university's Economic Institute, or served as both researchers and economic advisers. The university had only just created a separate economics curriculum. Until 1968 no significant ideological differences were noticeable be- tween the economists associated with the OPP and those in the Economic Institute. Both groups had absorbed ECLA'S ideas and were influenced by a Marxist interpretation of Uruguayan society. After 1968 the group at the Economic Institute adopted a Marxist view, whereas the OPP economists gradually moved doser to free-market policies. The creation of the oPP as a bureau directly dependent on the president brought the economic advisers associated with it into closer contact with the real world. For example, although many people had predicted that the price and wage freeze of June 1968 would be a certain failure, the economy performed very well during the second half of 1968, and this enhanced the prestige of the defenders of the freeze and their ideas. Also during 1968, economists trained under the neodassical paradigm by conserva- tive intellectuals, whose teaching would grow in importance in the following years, were appointed to office.3 The evolution of Cuba after 1959 and Brazil after 1964 coincided to shape a new view of Uruguayan society. The dominant ideas in the political community at the time were marked by distrust of markets, by the notion that income distribution and growth were competing goals in society, and by the conviction that the state could lead economic development through the design of poli- cies that influenced the decisions of private entrepreneurs.4 An Economic Analysis of the Period 1974-82 The energy crisis that began in 1973 had a dramatic impact on the Uruguayan economy. The fourfold increase in the price of oil raised the The Oil Shock and the Resumption of Economic Growth, 1973-84 267 share of oil in overall imports from 20 to 33 percent, and the world crisis led to an increase in protectionism in the European Communities (EC) that severely disadvantaged Uruguayan beef exports. Both shocks im- plied a terms of trade loss equivalent to 5 percent of GDP. The military government faced the dilemma of whether to manage the exchange rate in spite of the external circumstances-maintaining do- mestic relative prices unchanged and introducing further quantitative restrictions on imports-or to devalue the currency sharply and create incentives for the development of export-oriented activities. Initially, the military administration reacted in much the same way as had the Colo- rado party after the end of the Korean war. It incurred an enormous fiscal deficit and tightened the already severe restrictions on imports. But in the early 1950s a high level of foreign reserves was on hand to cushion for a while the effects of a drop in the terms of trade, and restrictions on imports were introduced at a time when the level of imports was high. In contrast, the military administration was faced with a shortage of foreign reserves and had already limited total imports to raw materials and intermediate goods, which were needed to maintain economic activity. These circumstances led the military to recognize the dangers associated with the initial strategy and to appoint new economic author- ities who introduced sweeping reforms. The change in policy was led by Alejandro Vegh Villegas, an engineer and economist who had been associated in the previous decade with the implementation of stabilization plans in Argentina and Brazil. Between 1974 and 1977 the government abolished import licenses and quotas, implemented an export promotion program, fully deregulated the for- eign exchange market and freed international capital movements, liber- alized the domestic capital market, tightened controls on public sector expenditure, improved public utilities' economic performance, re- formed the tax system, decontrolled many consumer prices, and reduced social security taxes on labor. The goals of the strategy implemented by the new economic team were the achievement of fiscal equilibrium and price stability, the financ- ing of the current account deficit, and the resumption of economic growth. The resumption of growth depended on a drastic change in relative prices, which was implemented by sharply devaluing the cur- rency in relation to nominal wages and by introducing export subsidies. Although both transfers to export activities and public investment were increasing, the fiscal deficit was nevertheless reduced by decreasing the level of real wages in the public sector. The current account deficit was financed by liberalizing foreign exchange transactions and international capital flows. To provide an adequate treatnent of the new economic policies, it is convenient to separate macroeconomic developments and short-run policies from long-run targeted economic reforms. 268 Costa Rica and Uruguay Stabilization In 1974 Uruguay faced severe domestic and external disequilibrium. Faced with the policy alternatives of a shock treatment or a gradual adjustment, the authorities chose the latter, with respect to both stabili- zation and the reduction of the external deficit. The rationale for gradu- alism in domestic stabilization was that a shock treatment for inflation had a low probability of success, given the existence of a fiscal deficit equal to 4.4 percent of GDP. A drastic reduction of the external deficit would have required a dramatic increase in the gap between private savings and investment in order to finance the fiscal deficit, and that would have entailed a further reduction in private consumption (Vegh Villegas 1977). The aims of the domestic stabilization program were to reduce the size of government expenditure in relation to GDP and to decrease monetary disequilibrium. Both were to be achieved through tighter management of domestic credit and through increasing the incentives to hold money by raising the interest rates paid by banks. The government relied on external savings to finance both the fiscal and external deficits. Begin- ning in the last quarter of 1974, it enforced a gradual reduction in the level of the fiscal deficit, dismantled subsidies on consumption, ex- panded credit, and increased the share of public investment in govern- ment expenditure. The main instruments for attracting external savings in the aftermath of the oil crisis were the liberalizations of foreign exchange transactions and of international capital flows that went into effect after September 1974. From 1974 until 1978 the Central Bank maintained a dual exchange rate: a commercial rate that was determined using a crawling peg regime designed to keep a high and stable real parity and a financial exchange rate that was permitted to float in response to market forces.5 Between 1974 and 1976 the monetary authorities managed to tighten credit. They eliminated sources of expansion, such as the discounting of commercial banks' credit instruments, and introduced sweeping insti- tutional reforms in the capital market. The Central Bank removed restric- tions on commercial banks with respect to their foreign assets positions, authorized all types of currency-denominated contracts, allowed the interest rate on deposits denominated in foreign currency to rise, and eventually eliminated interest rate ceilings. Between 1974 and 1978 the authorities relied on control of monetary aggregates for price stabilization. The principal monetary policy instru- ment used during the period was the management of reserve require- ments, although open market operations were performed as well. Inflation declined sharply after 1974 but remained high; in 1977 it was 57 percent even though the fiscal deficit had been reduced from 4.4 to 1.2 percent of GDP. The expansion of monetary aggregates seems to have been the result of a persistent inflow of capital. The unrestricted intemational capital The Oil Shock and the Resumption of Economic Growth, 1973-84 269 movements allowed after September 1974 swelled the domestic banking system. Toward the end of the period the monetary authorities were convinced that the openness of the economy left no room for controlling inflation through monetary policy and that monetary aggregates were demand determined. Wage increases lagged behind inflation during the period and could hardly be held responsible for the behavior of domestic prices. Thus, the key to reducing the inflation rate seemed to be to eliminate inflation inertia by changing the public's inflationary expecta- tions and to reduce the rate of devaluation. (This condusion strongly affected the design of a new exchange rate policy in 1978.) The high level and instability of the inflation rate was probably the result of the real exchange rate rule followed during the period whereby the nominal exchange rate and the money supply were indexed to the price level. (This type of exchange rule ties the actual rate of inflation to whatever it was in the past plus a current-period component that depends on external shocks.) The Current and Capital Accounts The current account of the balance of payments deteriorated during 1974 and 1975 as national income and the fiscal deficit fell. The capital account balance, which had traditionally been negative, changed sign in 1975-76 and rose again in 1977-78. During 1975-76 the capital account surplus was a function of the current account imbalance; the inflow of capital financed the excess of expenditure over income. It is not certain whether the surplus in the capital account after 1976 can be interpreted as an accommodation to the existence of a current account imbalance. It has been argued that opening the capital account in the presence of high protective barriers prejudices the success of a subsequent trade liberalization. According to this view, opening the capital account first generates an inflow of capital that leads, in turn, to a real appreciation of the domestic currency. The Uruguayan experience does not support this hypothesis. Following the opening of the capital account, domestic currency experienced a real depreciation that lasted until 1978. The large inflows of foreign capital did not start until 1977-three years after the capital account was liberalized. Moreover, large capital inflows appear to have been associated with a spread between the domestic interest rate and the yield (measured in domestic currency) of financial investments made in foreign currency. The inflow of capital, in the context of high expected inflation, brought about a high rate of credit expansion, which, in turn, induced higher expenditures and a deteriorating current account balance. In the absence of a liberalization of international capital flows, the current account deficit would not have been maintained. Hence, to establish external equilibrium, the economy should have experienced a higher real depre- ciation of the currency and a rise in the real interest rate, which would have had a larger depressive effect on the economy. During 1974 and 270 Costa Rica and Uruguay 1975 the increment in the Central Bank's domestic credit reached 6.8 and 7.0 percent of GDP as a result of the public sector's financial needs. The fiscal deficit remained constant at 4.4 percent of GDP during the period. The increase in domestic credit led to an increase in base money equiv- alent to 2.9 percent of GDP in 1974 and 3.3 percent in 1975 and a loss in reserves equivalent to 3.9 and 3.7 percent of GDP. Between 1976 and 1978 Central Bank credit to the public sector contracted sharply, paralleling the reduction in the fiscal deficit. Short-Run Effects Within the first year of application of the new policy, all monetary aggregates and credit to the public sector contracted in real terms, while the banking system's credit to the private sector increased. Thus, the authorities managed to induce a reduction in the rate of increase of prices and to finance a high public sector financial deficit without de- taching resources from the private sector, which could have discouraged private sector activity and delayed recovery. Within the next three years-September 1975 to September 1978-the rate of growth of money aggregates accelerated. This was particularly true of base money (because of the decrease in reserve requirements) and of M3 (because of the growth in foreign currency-denominated depos- its). The rate of growth of credit to the private sector, and of foreign currency-denominated credit in particular, exploded. In short, the period 1974-78 was characterized by far-reaching changes in the institutional aspects of the financial sector. The authorities liber- alized foreign exchange transactions, allowed unrestricted capital in- flows, and maintained a high and stable real parity. The exchange rate depreciated sharply with respect to nominal wages, thus encouraging exports. At the same time, the government reduced the fiscal deficit and increased the share of investment in government expenditure. Thus, the structure of total demand changed; exports and investment grew in relation to consumption, and resources were diverted toward these activities. Long-Run Reforms The economic authorities appointed in July 1974 tried to strengthen both the role of market forces in the allocation of resources and the links between the Uruguayan economy and the rest of the world. In particular, they were convinced that the economy had to move from an inward- oriented to an outward-oriented, export-led growth strategy. Among the economic reforms implemented between 1974 and 1978, the following deserve dose consideration: commercial policy, the export promotion program, tax reform, reduction in the size of the government, and decontrol of most consumer prices. The Oil Shock and the Resumption of Economic Growth, 1973-84 271 Between 1974 and 1978 the main commercial policy changes were the elimination of quotas, a reduction in the maximum level of recargos (the most important component of import duties), and the simplification of the tariff regime. During the last quarter of 1974 the administration of licenses was relaxed. Among other steps, the cumbersome bureaucratic procedure whereby those interested in importing capital goods had to apply for a permit to a regulatory commission was liberalized. In April 1975 the license regime was discontinued. In addition, a decline in the level of recargos brought the maximum rate from 300 percent in 1976 to 90 percent in 1979; all fees charged by the border authorities were consolidated under a single heading, and consular taxes were simplified. As a result of these tariff changes, both the average level and the dispersion of nominal tariffs contracted significantly, and the implicit tariff index (defined as the ratio between the domestic price of im- portables and exportables divided by the ratio between the foreign price of importables and exportables) declined. Export promotion was a major area of government concern during 1974-78. It included subsidies for exports, subsidized credit lines for export activities, and fiscal exemptions, as well as administrative devices that simplified the importation of raw materials and intermediate prod- ucts for the manufacture of export goods. The main export incentive was a subsidy (reintegro) that was estimated as a percentage of the f.o.b. price of exports, although it was related in principle to value added. The use of reintegros to provide incentives for industrial exports (there were no reintegros on traditional exports) began in 1964 but was not significant until a new law authorizing higher subsidy rates and extending the scope of application of this instrument was passed in June 1974. The level of subsidies peaked in 1974 and was then gradually reduced, as shown in the figures below (from Favaro and Spiller 1990, part II). Year Percent 1971 13.0 1974 21.5 1977 18.6 1980 12.7 1982 13.2 From 1976 to 1979 industrial exports benefited from subsidized credit lines. According to the terms of the loan, the exporter received in ad- vance a portion of the export revenue, and the exchange rate for repay- ment was frozen at its level at the time of the operation. Although the loan was formally designated in foreign currency and paid a nominal interest rate in U.S. dollars, in practice the borrower benefited from the exchange rate depreciation during the period before repayment was due. The regime implied, during most of the period of its application, that export activities faced a negative nominal interest rate. 272 Costa Rica and Uruguay A third export promotion instrument was discriminatory tax treat- ment for export-oriented activities. Until 1979 firms' net revenue from activities that directly or indirectly involved the manufacture of export goods was tax exempt. Under the 1974 industrial promotion law, invest- ment projects considered to be of high national priority were eligible for fiscal exemptions as well as preferential tax treatment; the main benefit was exemption from all tariffs and port service charges due on imports of capital goods. The tax structure, which relied on a value added tax, allowed taxes paid at different stages of production to be deducted when the final good was exported, thus helping to avoid discrimination against export activities. Finally, the administration simplified the procedure for the duty-free importation of intermediate goods and raw materials used in the man- ufacture of export goods. The new regime provided exporters with ready access to intermediate goods at prices comparable to those of their international competitors. In general, the incentive scheme focused on the nontraditional export sector. The real exchange rate faced by these activities depreciated after 1973 and up to 1978; traditional export goods, although discriminated against, also benefited from the maintenance of a stable parity. Between 1974 and 1980 the tax regime was completely revised. The main trend was toward simplifying the tax structure, eliminating taxes and exemptions, and trying to cure discrimination against labor use and export activities. The 1974 tax reform reduced taxes on wages, elimi- nated taxes on the export of Uruguay's two main traditional products, reduced tariffs on imports, and widened the application of the value added tax. Personal income and inheritance taxes were eliminated, and taxes on firms' net earnings were consolidated into one tax (corporations still paid a higher tax rate). Social security wage taxes were reduced, and a tax on estimated agricultural income (IMPROME) was levied. Although the tax reform was significant, both in its scope and in its effect on government revenue, it did not imply a major change with respect to tax pressure, mainly because one source of tax revenue was substituted for another. The share of taxes on foreign trade transactions increased during the period, but its composition changed dramatically; export tax collection diminished while the share of import duties increased. The share of taxes on wages in overall government revenue diminished. The tax reform was related to the export promotion policy through its attempt to reduce the cost of labor, which is used intensively in most nontraditional export activities. Although the size of the government did not change significantly between 1974 and 1978, the scope of government intervention in eco- nomic activity was reduced, and the trend toward expansion of the share of the government sector in GDP was halted. A significant change in the composition of government expenditure was the increase in the share of gross capital formation in overall expenses. In 1978 public sector invest- The Oil Shock and the Resumption of Economic Growth, 1973-84 273 ment was 4.4 times its 1974 level and represented in absolute terms about 50 percent of total investment (table 12_1).6 As of 1974 private firms had to obtain permission from a regulatory agency to increase prices. Similarly, the government determined wage increases for both the private and public sectors. In the second half of 1974 the government established a rigid wage increase regime that implied the prohibition of wage increases that exceeded official guide- lines. Later this regime was liberalized, and the government began determining only the minimum rate of wage increase, allowing private firms to negotiate with their workers and employees beyond this floor. A gradual price liberalization began in 1974, and controls were lifted on most consumer products. In March 1978, however, 46 percent of all items included in the consumer price index basket were still controlled. Economic Performance, 1974-78 The performance of the economy between 1974 and 1978 shows remark- able differences from that of the previous two decades. The average rate of economic growth for 1974-78 was 4.1 percent, the share of investment in GDP rose from 11.6 to 16.0 percent (table 12-2), nontraditional exports grew at an average annual rate of 32.0 percent, and the share of exports in GDP went from 14.1 to 17.9 percent. Whereas before the reforms traditional exports accounted for more than 75 percent of total exports, by 1978 their share was 36.2 percent. Similarly, the share of final goods in total imports increased from 22.4 to 29.2 percent. Both indicators point to a significant opening of the economy during the period. Employment in manufacturing grew rapidly, and emigration, which had been signif- icant at the beginning of the period, decreased sharply. The pattern of growth of the economy in the period immediately after the 1974 reforms cannot be reconciled with the behavior in those years of investment, particularly private investment, and of the labor force. Emigration peaked in 1974 and decreased afterward but remained a significant explanatory variable of the demographic behavior of the Table 12-1. Uruguay: Gross Capital Formation, 1974-78 (millions of new pesos at 1978 prices) Year Public sector Private sector Total 1974 561 1,677 2,238 1975 1,104 2,037 3,141 1976 1,700 2,331 4,031 1977 1,998 2,323 4,321 1978 2,463 2,480 4,943 Source: Banco Central del Uruguay, Indicadores de la Actividad Econdmica Financiera, Pro- ducto e Ingreso Nacionales, 1985, p. 97. 274 Costa Rica and Uruguay Table 12-2. Uruguay: Economic Indicators, 1974-78 Indicator 1974 1975 1976 1977 1978 Rate of growth of GDP (percent) 1.6 5.9 4.0 1.2 5.3 Gross capital formation as a share of GDP (percent) 11.6 13.5 14.8 15.2 16.0 Traditional exports (millions of U.S. dollars) 238.0 187.1 252.7 261.2 248.6 Nontraditional exports (millions of U.S. dollars) 144.2 174.9 293.8 346.3 437.5 Exports as a share of GDP (percent) 14.1 16.1 18.6 14.0 17.9 Employment in manufacturing (1975 = 100) - 100.0 104.4 110.9 117.0 -Not available. Source Banco Central del Uruguay, Indicadores de la Actividad Econ6mica Financiera, Pro- ducto e Inigreso Nacionales, various issues; Banco Central del Uruguay, Formaci6n Bruta de Capital, various issues. labor force up to the end of the period. Although investment in the export-oriented sector surged after 1974, overall private investment reacted slowly to the new economic policies. During the early years of the reform economic growth seems to have been the outcome of the reallocation of resources inside the economy, the elimination of numer- ous distortions implicit in the import license regime in force up to 1975 and in the regime of capital goods imports and price controls, the prohibition of labor union activity, which dampened social conflict, and the reduction in the size of the government.7 Economic growth was export-led in the 1974-78 period. Export growth was, in turn, the consequence of the export promotion policy and the relative price changes associated with it. The economy experi- enced an across-the-board increase in output, employment, exports, and average labor productivity. The largest increase in the average produc- tivity of labor was in export-oriented activities. The real exchange rate increased substantially. The average increase in the real exchange rate for export-oriented activities was 42.2 percent, but it was 57.1 percent for the import-competing sectors and 72.0 per- cent for nontradable goods activities. The activities that received the highest percentage subsidies were in the import-competing and non- tradable sectors rather than the export-oriented sector. Time-series and cross-sectional evidence supports the view that the allocation of export subsidies to the import-competing and nontradable goods sectors probably had a negligible effect on economic growth. Sapelli (1985), using time-series data, compared the effects of expanding exports to the region (which depends, in general, on preferential trade agreements or specific subsidies) with those of expanding exports to the rest of the world. He was not able to reject the hypothesis that they differ significantly.8 Favaro and Spiller (1990), using cross-sectional data on The Oil Shock and the Resumption of Economic Growth, 1973-84 275 manufacturing, analyzed the determinants of employment-real ex- change rate elasticity and found that industries that made intensive use of capital and of highly skilled workers have a much lower supply elasticity than others. Since export-oriented activities are predominantly labor-intensive and use less-skilled labor (see Bensi6n and Caumont 1983; Favaro 1987), this finding explains the greater responsiveness of those sectors to changes in relative prices. Export expansion had a positive effect on economic growth-directly because exports are a component of GDP and indirectly through the positive externality im- posed by exports on the nonexport sector. In other words, the beneficial effect of export growth spread to the rest of the economy (Favaro and Sapelli 1989b). In general, although the export promotion program had a remarkable effect on growth, it did not succeed in maximizing exports or value added at international prices per unit of subsidy. There are two reasons for this: the highest percentage subsidies were received by the import- competing and nontradable sectors rather than by export-oriented activ- ities, and Uruguay's export-oriented activities have a higher supply elasticity to relative price changes than do other sectors of the economy. Income Distribution Inequality in the distribution of income increased during the 1970s, according to family income surveys, and the real wage rate, as reported in official indexes, fell. The degree of inequality, as measured by the Gini index, went from 0.42 in 1968 to 0.45 in 1976, while the level of average family income increased by 9.2 percent in real terms between 1968 and 1976 and by 6.9 percent between 1976 and 1979. The real wage indexes calculated by the Direcci6n General de Estadistica y Censos (DGEC) and the Banco Central del Uruguay (Bcu) show a significant decline in the real wage rate during the 1970s (table 12-3). For 1974-78 the indexes differ in their estimates of the magnitude of the decrease in the real wage rate (Sapelli 1987).9 Although the minimum wage remained closer to its level in the base period than did the average real wage rate, it dropped more sharply than the average real wage rate between 1974 and 1978. The fall in the minimum wage rate probably had a significant effect on employment and unemployment during the period. Functional income data showed a drop in the share of wages and salaries in national income in 1974-78. According to the DGEC, wages and salaries accounted for 40.4 percent of national income in 1974 but for only 31.7 percent in 1978.10 The magnitude of the recorded fall in real wages contrasts with the evolution of several traditional social welfare indica- tors, which improved during the period (table 12-4). The decline in real wages, as measured by official records, also con- trasts with the path of consumption of goods that usually have a high 276 Costa Rica and Uruguay Table 12-3. Uruguay: Real Wage and Minimum Wage Index, 1970-78 (1968 = 100) Real wage Year DGEC data BCU data Minimum wage 1970 107.1 107.1 108.2 1972 91.8 91.8 123.6 1974 88A 88.4 129.7 1976 75.8 78.4 114.3 1978 63.2 70.6 98.7 Source. Uruguay, Direcci6n General de Estadistica y Censos; Banco Central del uru- guay, Bolet{n Estadistico, various issues. income elasticity of demand, such as beverages and tobacco. These goods are mostly nontradables in Uruguay, and their consumption equals domestic production (table 12-5; Sapelli 1987). Domestic production and imports of electric goods such as refrigera- tors and radios cannot be reconciled with the dramatic decrease in the real wage rate and in the share of labor in national income shown in the official records. The policies pursued during 1974-78 led to an increase in inequality. The main reasons were the increase in the openness of the economy, the reduction in the relative size of the government, and the prohibition of labor union activity. These policies pushed ambiguously toward a redis- tribution of income from unionized to nonunionized workers and, prob- ably, from public workers and employees to nonunionized workers and employees. Although the available indexes suggest immiserization of Table 12-4. Uruguay: Social Welfare Indicators, 1970-80 Indicator 1970-75 1975-80 Life expectancy at birth (years) 68.8 69.6 Infant mortality (deaths per 1,000 live births) 46.3 41.6 Urban population with access to water supply (percent) 85.9a 99.4b Rural population with access to water supply (percent) 13.3a 13Y Population with access to sewerage (percent) 51.2a 57.9 a. 1973. b. 1977. Source. Uruguay, Direcci6n General de Estadistica y Censos, Anuario Estadfstico, vari- ous issues. The Oil Shock and the Resumption of Economic Growth, 1973-84 277 Table 12-5. Uruguay: Production and Imports of Consumer Goods, 1974-78 Production Imports (1974 = 100) (thousands of U.S. dollars) Lottery Electrical Year Beverages Tobacco expenditure appliances Radios Refrigerators 1974 100.0 100.0 100.0 100.0 - - 1975 99.0 106.7 109.5 105.9 137.0 - 1976 86.5 112.2 115.5 125.0 200.0 37.0 1977 96.9 110.0 117.9 150.0 904.0 47.0 1978 104.2 111.1 123.8 147.1 514.0 109.0 - Not available. Source. Uruguay, Direcci6n General de Estadfstica y Censos, Anuario Estad&stico, vari- ous issues; Banco de la Republica Oriental del Uruguay, unpublished data. the labor force during the period, other indicators hint at an improve- ment in workers' situation after 1976. External Influences In 1976 Alejandro Vegh Villegas, the main author of the economic reforms introduced in 1974, resigned as minister of economy. Vegh remained dose to the government, but with his resignation the govern- ment lost a strong personality who was both brilliant and independent in judgment. As of 1978 the economy had experienced four consecutive years of economic growth, for the first time in more than two decades. Employ- ment in manufacturing had increased more than 5 percent a year be- tween 1975 and 1978, and nontraditional exports accounted for more than 60 percent of total exports. The only activity largely unaffected by the new policies was agnculture, which remained stagnant. Although after 1975 the fiscal deficit had contracted sharply, the average rate of inflation remained high, and monetary policy instruments appeared unable to stabilize the economy. In 1979 the price of oil more than doubled. The second oil shock was accompanied by an expansion of world financial liquidity, an increase in commodity prices, and a depreciation of the U.S. dollar in terms of European currencies and the yen. The appreciation of Argentine cur- rency after 1978 increased the demand for Uruguayan nontradable goods and pushed their price upward, thus inducing an appreciation of the Uruguayan peso. The origin of this influence lay in the dose links between the Uruguayan, Argentine, and Brazilian economies through the labor and goods markets that allowed regional trade in a subset of nontradable goods (Favaro and Sapelli 1989a).'l In 1979, at a time when the country was beginning its stabilization program, these external events brought about a higher imported inflation than had been expected. 278 Costa Rica and Uruguay In 1980 and 1981 two important external episodes affected Uruguay's economic performance. The appreciation of the U.S. dollar after the last quarter of 1980 implied the automatic revaluation of the peso and a loss of competitive capacity to Uruguayan exports. (Uruguay's exports to the EC had previously benefited from the depreciation of the dollar with respect to EC currencies after 1973.) And the series of devaluations followed by the Argentine currency after February 1981 induced a real depreciation of the Argentine peso. Both circumstances combined to lead to an overvaluation of Uruguayan currency during the period. Although the economic authorities remained committed to improving the efficiency of the economy by promoting long-run policies such as the trade liberalization program and the liberalization of agricultural prices and price policies, the dominant concern shifted from export expansion toward price stabilization. The behavior of the economy between 1978 and 1982 was strongly affected by the stabilization policies applied in that period and by external events in the region and in the rest of the world. In October 1978 the Central Bank abandoned active monetary policy, unified the financial and commercial exchange rates, and began to rely excdusively on exchange rate management for stabilization purposes. At the same time the authorities started announcing the future spot ex- change rate up to a certain time horizon (which from October 1978 to November 1982 varied from three to nine months) and reduced the pace of depreciation. The logic underlying the new exchange rate regime was that in a small open economy with a fixed exchange rate, the authorities do not have control of monetary aggregates that are demand deter- mined. The difference between the domestic and the international rate of inflation was interpreted as the consequence of the inertia introduced by exchange rate rules and by expectations of inflation. Moreover, in the absence of expansionary forces of net domestic credit such as a fiscal deficit, a passive crawling peg regime tended to perpetuate inflation. Thus, management of the exchange rate within a stabilization plan became crucial not only because the exchange rate directly affected the domestic price of tradable goods but also because the announcement of a lower pace of depreciation would affect the public's expectations of inflation. The authorities believed that in the absence of restrictions on international capital flows, the domestic interest rate would be equal to the international interest rate plus the expected rate of devaluation. Because the new exchange rate regime implied a higher degree of certainty about the path of the rate of devaluation, the difference be- tween domestic and international interest rates was not expected to diverge from the actual rate of devaluation. The predictions of the authorities regarding the behavior of the price level and the nominal interest rate after the implementation of the stabilization plan differed widely from the actual path of these variables. The stabilization program did not bring about a sharp fall in the rate of The Oil Shockand the Resumption of Economic Growth, 1973-84 279 inflation until the second half of 1980, even though the public sector ran a surplus and domestic credit to the government fell sharply in real terms. Moreover, the rate of price increase rose during the first year of application of the new exchange rate rule, and the domestic interest rate remained above the sum of the London interbank offered rate (LIBOR) and the rate of devaluation during the period.'2 The acceleration of the inflation rate was the result of the external factors described above and the expansion of domestic aggregate demand induced by the inflow of capital observed during the period. During the first three years after the implementation of the new exchange rate regime, the real exchange rate appreciated drastically; the exchange rate deflated by the CTI fell at a cumulative annual rate of 21.8 percent during the period. Between 1978 and 1982 the average real exchange rate was lower and the variance of the real exchange rate higher than in 1974-78. Because the appreciation of the currency was led by policies that expanded aggregate demand, it ran parallel with an increase in the level of domestic real activity during 1979 and 1980. This helped to conceal the real effects associated with an overvaluation of the currency. The fall in the rate of devaluation after September 1978 implied an automatic increase in the yield, measured in foreign currency, of a deposit denominated in domestic currency. Differences between the domestic interest rate and the sum of the international interest rate plus the actual rate of devaluation persisted during the whole period. Although the acceleration of the rate of inflation during the first year of application of the stabilization plan implied a decrease in the real interest rate-which initially became negative-by the end of 1979 the latter rate was positive, and it remained high to the end of the period. The real interest rate on loans both in domestic and in foreign currency increased steadily during 1980 and remained above 20 percent up to the abandonment of the fixed exchange rate regime in November 1982. Public concern about the overvaluation of the domestic currency developed during 1981, but the authorities remained committed to the stabilization plan. Uruguay attempted to maintain actual real parity with respect both to the region and to the rest of the world despite adverse circumstances-a severe world recession, accompanied by an increase in the nomninal interest rate and a drastic fall in the terms of trade, and a dramatic increase in the real exchange rate in Argentina, which induced deflationary pressure and a recession in the domestic import-competing and nontradable goods sectors. The economy headed into a depression in the second half of 1981. As of 1981 the authorities were convinced that the exchange rate was sustainable, given the level of the Central Bank reserves, if fiscal equilib- rium were maintained. In 1961, however, fiscal discipline was relaxed, and a fiscal deficit appeared for the first time since 1978. The deficit, the equivalent of 2.3 percent of GDP, was the result of two concurring forces: 280 Costa Rica and Uruguay a significant increase in the govermnent's social security expenditure and, as the economy entered a recession, a sharp decline in real fiscal revenue. In early 1982 the authorities, faced with an overvalued currency, had a choice between two adjustment strategies. * They could reestablish equilibrium through a step adjustment in the price of tradable goods-by devaluing the currency, abandoning fixed exchange rules, and floating the domestic currency, or by reduc- ing the level of domestic nomninal wages. * They could achieve equilibrium by gradually increasing the pace of devaluation. The authorities decided on the latter strategy and initiated contacts with the IMF to discuss a two-year stabilization plan. As the rate of devaluation was increased, the nominal interest rate rose as well, and the real interest rate achieved record highs, inducing a further recession. The authorities pursued two antagonistic policies: they administered a deflationary adjustment strategy, and they tried to com- pensate for the fall in real activity associated with the recession by launching an expansionary program of housing construction. The finan- cial needs of the public sector within the context of a fiscal deficit were met through a loss in international reserves and an increase in the level of the external deficit. In February 1982 the Mexican debt crisis initiated a general debt crisis in the developing countries, and in April 1982 war between the United Kingdom and Argentina led to a drastic reduction in the availability of external finandng. The widespread uncertainty regarding the mainte- nance of the exchange regime led to an increasing move away from domestic money and toward deposits denominated in foreign currency and stimulated an oufflow of private capital. The estimated capital outflow during 1982 was us$2 billion. At the end of 1980 Uruguay's external debt was us$2.1 billion, equiv- alent to the value of exports for two years. In the following years the debt grew about us$1 billion a year until it reached us$4.2 billion at the end of 1982, equivalent to 4.3 years of export value. A small part of this increment was used to finance public sector investments. One of these investments, the Palmar hydroelectric project, required an incremental debt of more than us$150 million between 1980 and 1982. The Banco Hipotecario incurred additional foreign debt of us$300 million to fi- nance an ambitious plan of housing construction. Lesser amounts of additional foreign indebtedness were incurred to finance investments by the public enterprises in such fields as electric power, telephones, and petroleum. The largest part of the additional foreign debt was incurred, however, by the Banco Central, the Banco de la Republica, and the central government to cover the loss of reserves induced, especially in 1982, by exchange rate policy. The Oil Shock and the Resumption of Economic Growth, 1973-84 281 The private sector also contributed to the enlargement of the foreign debt, but much less than did the public sector. Importers incurred an additional foreign debt of us$100 million to their suppliers, and the private banks' foreign debt increased by us$200 million to permit them to meet the demand for additional credit generated by the increase in domestic economic activity. Deposits by nonresidents in the Uruguayan banking system also increased in the 1980-82 period. In November 1982 the authorities, faced with the scarcity of international reserves and the absence of external sources of credit, abandoned the fixed exchange rule and let the Uruguayan peso float. The overall management of the 1982 crisis was very poor: the fiscal deficit reached 18 percent of GDP, and the public sector's external debt rose from us$1,464 million to us$2,705 million. The deficit was the result of the combined effect of an expansion in government expenditure, at a time when real income was declining by more than 8 percent, and a recession-induced decline in fiscal revenue. The persistence of high real interest rates after 1980, the drastic changes in relative prices that oc- curred during the period, and the final devaluation, under circum- stances in which 75 percent of the banking system's credit to the private sector was denominated in foreign currency, generated a financial crisis that was the dominant phenomenon during 1983-84. Trade Policy The reforms in commercial policy that began in 1974 were followed by a trade liberalization program that attempted to simplify the tariff struc- ture and gradually to reduce the level of protection to a target level of 35 percent. The stages of the program were announced so as to provide the private sector with enough information to minimize adjustment costs, and implementation started by the end of 1979. The first three stages were implemented on schedule and reduced the average level of tariffs; the liberalization plan was, however, stopped in the midst of the 1982 depression. In 1979, as inflation soared, the government reduced tariffs ahead of the onginally planned schedule. These cuts were intended to curb infla- tion by increasing competition with foreign products in those sectors in which prices were rising faster than was justified by cost increases. The logic underlying the reductions was that only redundant protection and monopoly practices associated with the dosure of the economy could explain the behavior of domestic prices. Here, the main concern behind tariff reduction was stabilization policy. Although there was a significant decrease in nominal tariffs, the dispersion of effective protection in several sectors of the economy seems to have increased between 1980 and 1982 (Centro de Investigaciones Econ6micas 1982). The authorities tried to use the trade liberalization program begun in 1978 to initiate a change in relative prices that would move resources 282 Costa Rica and Uruguay toward export-oriented activities and away from the import-competing and nontradable sectors. The opposite, however, occurred because the stabilization program was based on an exchange rate rule that implied an appreciation of the real exchange rate, and this appreciation out- weighed the tariff reduction effect. Since GAIT rules did not permit the return of direct taxes paid by an export activity, the new regime provided more favorable treatment for export-oriented activities. The benefits obtained by the export-oriented sector from the new regime were, however, dominated by the decrease in the rate and scope of export subsidies. Agricultural Policy In August 1978 the government introduced economic reforms that brought sweeping changes to agriculture. It eliminated taxes on the export of beef and wool, which had amounted to as much as 50 percent of the value of exports. In addition, it removed geographic barriers to the marketing of beef, reduced to 10 percent the maximum level of tariffs on farm machinery, liberalized grain prices, and discontinued administra- tive controls on livestock prices. These changes coincided with an improvement in the international price of beef that sharply increased the price of livestock and the retail price of beef. Faced with a rise in the domestic price of beef, the author- ities reintroduced interventionism by temporarily prohibiting exports, subsidizing the importation of beef, and placing restrictions on live- stock credit lines. Thus, although the authorities were committed to providing incentives for growth in agriculture, distributional consider- ations associated with high food prices frustrated the attempt to change relative prices permanently. Economic Performance, 1979-82 During the first three years of the 1979-82 period the economy boomed; the average rate of growth of GDP was 4.7 percent. After 1981 the economy entered into a deep recession. The policies pursued between 1978 and 1982, together with the exter- nal favorable influence caused by the overvaluation of the Argentine currency, led to an increase in aggregate demand that induced a rise in both employment and real wages. The second half of 1981, however, saw the beginning of a recession that deepened in 1982, when GDP fell at a rate of 9.4 percent a year (table 12-6). The consequent fall in employment and sharp rise in unemployment made the previous increase in the level of well-being unsustainable. The ratio of investment to GDP increased from an average of 15.3 in 1976-78 to 18.0 percent in 1979-81. In contrast to the 1974-78 period, private investment was the most dynamic component of overall capital The Oil Shock and the Resumption of Economic Growth, 1973-84 283 Table 12-6. Uruguay: Economic Indicators, 1979-82 Indicator 1979 1980 1981 1982 Rate of growth of GDP (percent) 6.2 6.0 1.9 -9.4 Gross capital formation as a share of GDP (percent) 18.7 18.6 15.0 10.1 Traditional exports (millions of U.S. dollars) 222.7 415.9 513.0 435.4 Nontraditional exports (millions of U.S. dollars) 565.5 642.7 702.3 587.5 Exports as a share of GDP (percent) 17.9 17.5 18.3 18.1 Employment in manufacturing (1975 = 100) 128.4 127.6 120.0 89.8 Source. Banco Central del Uruguay, Indicadores de la Actividad Econ6mica Financiera, Pro- ducto e Ingreso Nacionales, various issues; Banco Central del Uruguay, Formacion bruta de Capital, various issues. formation; it increased 72 percent between 1978 and 1981, while public investment declined. The share of traditional exports in total exports increased from 36.2 in 1978 to 42.6 percent in 1982. Although the nominal value of nontraditional exports increased 16.9 percent a year between 1978 and 1981, most of the rise was attributable to inflation. Employ- ment in manufacturing increased up to 1979, declined gradually until 1981, and fell abruptly during the 1982 recession. MANUFACTURING. In 1974-78 growth was led by export-oriented activi- ties; between 1978 and 1982 GDP growth was dominated by the expan- sion of the import-competing and nontradable sectors. The analysis of sectoral data on manufacturing shows a steady downward trend in employment and output in most export-oriented activities between 1978 and 1982. Employment in the import-competing and nontradable goods sectors increased significantly up to 1979; output in these sectors in- creased until 1980-81 and contracted thereafter. Whereas the causality between the real exchange rate faced by the export-oriented activities and the output and employment response is straightforward, the relationship between these variables in the import- competing and nontradable goods sectors is more complex. Even though commercial policy after 1974 considerably reduced the level of tariffs, the degree of protection was still high at the end of the decade. The existence of "water in the tariffs" implied that the domestic price of these goods, and hence the real effective exchange rate, was determined jointly with the level of output and employment. The growth of output and employment in these activities may have been the result of demand or supply factors or both; when demand factors dominated, output and prices moved in line, while the opposite occurred when the impetus came from supply shifts. During 1978-82 the domestic price of these activities moved together. When output and employment decined, the 284 Costa Rica and Uruguay real exchange rate depreciated, suggesting that the expansion of GDP was caused by increased expenditure in the economy. The increase in aggregate demand observed in the period was attrib- utable to both external factors-such as the increase in Argentine de- mand for Uruguayan goods, which originated in the overvaluation of the Argentine exchange rate-and domestic sources, such as the inflow of capital induced by the exchange rate regime. In other words, the expansion of aggregate demand and output was caused by temporary circumstances that attracted resources toward the import-competing and nontradable goods sectors. When Argentina devalued its currency, the favorable external shock changed sign, and real activity in the economy declined dramatically. The composition of nontraditional exports changed over the period, with a steady increase of those activities in which the country had less comparative advantage. The increase in the ratio of imported inputs to nontraditional exports, as shown in table 12-7, suggests that the rise in the share of nontraditional exports originated in the import-competing and nontradable sectors during 1979-81, when Argentine demand was at its peak. Although exports did not decline until 1982, the structure of trade varied, and the impact of exports on growth diminished. The tariff reduction program did not have the expected effect of increasing the price of exportable goods in relation to importable goods inside the economy. Most of the decline observed in the real exchange rate faced by import-competing activities appears to have been a consequence of exchange rate policy rather than of tariff cuts. Thus, the period 1978-82 saw not trade liberalization-that is, a policy oriented toward narrowing the difference between international and domestic terms of trade-but the opposite. Moreover, the effects of the attempt, implemented in 1978, to reform agricultural policy and promote growth were neutralized by the real appreciation of the domestic currency and by further govern- ment intervention. The expansion of the import-competing and home goods sectors, as a consequence of an increase in domestic expenditure, Table 12-7. Uruguay: Imports under Temporary Admission (ITA) and Nontraditional Exports (NTx), 1978-81 (millions of U.S. dollars) Year ITA NTX ITA/NTX 1978 75.4 565.5 13.3 1979 109.8 642.7 17.1 1980 113.4 702.5 16.1 1981 98.9 587.5 16.8 Note Nontraditional exports correspond to one-year forward transactions. Source. Centro de Investigaciones Econ6micas 1982. The Oil Shock and the Resumption of Economic Growth, 1973-84 285 specific export promotion subsidies, or transitory macroeconomic devel- opments, did not bring about the development of export-oriented activ- ities, and it only temporarily altered the overall rate of growth of the economy. The trend, begun in 1974, toward reducing the effective cost of labor was continued. Social security taxes on wages were reduced and simpli- fied, and the treatment of wages in different activities was homogenized. The ensuing deficit in the social security system was covered by transfers from the central government. Finally, the fall in public sector revenue as a result of the reduction of taxes on wages was compensated for by increasing the rate and scope of application of the value added tax. A survey of industrial wages conducted in 1979 showed that the average hourly wage rate paid by import-substituting activities was higher than that prevailing in other sectors of the economy. It also showed that multinational corporations paid higher salaries than the average Uruguayan firm and that the wage level was directly related to firm size (table 12-8). Wages in rural areas were higher than those prevailing in the cities. The behavior of the labor market during previous decades had been greatly influenced by the state's participation in wage boards and in the determination of wage levels and its role as the employer of a significant share of the labor force. Labor market behavior was also much influ- enced by union policies. These factors had induced a more uniform wage structure than would have resulted from market forces, and this created disincentives for highly skilled workers and induced emigration by this group. The changes in relative prices observed after 1973 led to an expansion of export-oriented activities, which were relatively more labor-intensive than import-substituting activities and which made more intensive use of unskilled laborers. Export-oriented firms were, on average, newer and smaller than firms oriented toward the domestic market. The power of unions and the role of preexisting wage structures as determinants of absolute and relative wages were therefore less important in these firms. Thus, the rapid expansion of the economy after 1973 produced an uneven increase in wages for different labor categories because of the scarcities of different labor skills and their short-run supply elasticities. Highly educated workers benefited. The behavior of the labor market between 1979 and 1981 appears to have been dominated by increased demand for labor, which originated in an expansion of aggregate demand in the economy. As the economy prospered, employment, the labor force participation rate, and real wages increased, while unemployment and emigration fell sharply (table 12-9). INCOMEDISTRIBUTION. The tendency toward a more even income distri- bution observed at the end of the period seems to be related to the increase in the size of the government sector in relation to private sector 286 Costa Rica and Uruguay Table 12-8. Uruguay: Average Wage per Hour in Manufacturing, 1979 Category Average wage (1979 new pesos) National 13.59 By sector Iniportsubstitution 14.29 Export-oriented 10.87 By type offinn National 12.78 Multinational 17.49 By size of firn More than 200 workers 14.65 50-200 workers 12.46 Fewer than 50 workers 9.50 By location Montevideo 13.20 Rural 14.90 By education Illiterate 6.64 Primary school 9.90 Secondary school 15.20 University 38.33 By age 15-19 years 4.90 20-24 years 6.94 25-34 years 11.83 35-44 years 14.53 45-54 years 17.18 55-64 years 20.18 65 and over 32.21 By sex Females 7.87 Males 15.21 Source: Instituto de Economia, Universidad de la Reptiblica, 1982, pp. 55,65,70, and 74. GDP and to the recovery of the import-substituting activities observed in the period.13 Recovery Efforts, 1983-84 The 1983-84 period was marked by the effort to manage the domestic financial crisis and the fiscal deficit under severely adverse external circumstances at a time when an internal political transition toward democracy was taking place. FiNANCIAL CRISIS. In the second half of the 1970s credit extended by the banking sector to the private sector grew rapidly. The credits were only The Oil Shock and the Resumption of Economic Growth, 1973-84 287 Table 12-9. Uruguay: Employment, Unemployment, and Emigration, 1979-84 Laborforce Employment, Unemployment participation Montevideo Emigration Year (percent) (percent) (thousands) (thousands) 1979 9.3 41.2 492 9.0 1980 7.3 42.1 492 5.0 1981 6.7 43.1 510 -0.3 1982 12.3 - 490 - 1983 15A - 475 - 1984 14.0 - 492 - -Not available. Source. Uruguay, Direcci6n General de Estadistica y Censos, Anuario Estadistico, vari- ous issues. short termrwhen they financed investment in fixed assets, and an increas- ing share of new loans was denominated in foreign currency-matching a trend in banking resources. As the rate of inflation dedined after 1979, the real rate of interest increased, beginning a process of transfers from debtors to creditors that eroded the net wealth of indebted firms. The credit market remained liquid, and the financial difficulties faced by indebted firms were disguised by the continuous expansion of the original debt. As soon as the economy entered a recession, however, the flow of banking credit diminished, and a deep crisis became evident. During 1982 the increasing lack of confidence in the stability of the exchange regime led the public to make deposits in foreign currency rather than in domestic currency. Accordingly, when the banks had to cover their foreign exchange exposure, they accepted only the renewal of credits that were denominated in foreign currencies. In these circum- stances, the abandonment of the fixed exchange rate regime in Novem- ber 1982 and the consequent devaluation of the peso greatly aggravated the domestic debt problem. At the time of the devaluation the banking system had a considerable percentage of bad loans and a remarkable imbalance between its highly volatile resources and its illiquid portfolio. Faced with a banking crisis, the government acted to bail out banks in trouble, case by case. During 1982-83 the Central Bank intervened to prevent the bankruptcy of four out of twenty-two financial institutions and bought part of the portfolio of the commercial banking system in an attempt to relieve some of the pressure on it. A direct consequence of the Central Bank's efforts to avoid a banking crisis was an increase in government debt outstanding and in debt service. Thus, the expansion of government subsidies to the private sector through the banking system increased the overall fiscal deficit to a record level of 18.2 percent of GDP during 1982. The 1982-84 period was one of great uncertainty. The sharp depreci- ation of the peso after the abandonment of the fixed exchange rate was followed by a severe process of adjustment of relative prices. Although 288 Costa Rica and Uruguay the real exchange rate depreciated abruptly after November 1982, export-oriented activities did not respond immediately, and real GDP contracted dramatically, falling 5.9 percent a year between 1981 and 1984. The growing probability that private contracts could not be en- forced drastically increased the risk of commercial transactions and added to the depth and persistence of the recession. POLMTICAL CHANGE. Between 1982 and 1984 the military authorities en- gineered a transition toward a democratic administration. In the national elections of 1982 voters chose the leaders of the political parties, a step that was considered of utmost importance in the transition to a civilian administration. In fact, the elections determined the leverage of the armed forces in bargaining with the politicians over the terms that were to govern the transition and over the role of the military in the new administration. In November 1984 a new government was elected by direct popular vote. The possibility of abrupt changes in economic policy associated with the return to democratic rule added to the uncer- tainty of the transition period and further delayed a recovery. It has been argued that the economic strategy followed by the military government after 1974 was extremely unpopular and could only have been implemented under a dictatorship. The response of the military to the fall in the terms of trade was, however, remarkably similar to that of the Blanco party in 1959; if the magnitude of the external shocks is taken into account, only the emphasis on resuming growth was different. Although the administration of the costs associated with the new policy might have been different in a democratic framework, the design of economic policy was certainly severely restricted once the government accepted the achievement of economic growth as a major policy target. The resumption of growth required the expansion of exports, and that required a permtanent change in the price of exportables in relation to goods for domestic consumption. The burden of this change fell on workers and employees in the protected sectors-the public sector and import-substituting activities. Both groups had lost considerable power after the dissolution of the unions and the temporary suspension of periodic elections, a circumstance that reduced the political costs associ- ated with the decline in their real wages. The financing of economic growth depended on both domestic and external savings. The increase in domestic savings required a rise in interest rates and a reduction in price instability. In addition, since if only domestic savings were available for investment, a further reduction in consumption would have been required, it was necessary to open the capital account to international flows to smooth consumption during a period of rapid capital accumulation. The opening of the capital account made the supply of capital more elastic and further limited the possibil- ity of shifting part of the burden of taxation away from wages and salaries and onto capital. The Oil Shock and the Resumption of Economic Growth, 1973-84 289 Except for a short period and in a very partial way, the military administration did not address the problem of developing agriculture. In fact, it seems to have behaved toward this sector in much the same way as had previous administrations.'4 Commercial policy during the military period was not significantly different from that observed in civilian administrations. The role of ideology in policy seems to have been minor compared with the force of external circumstances. During the first years of the trade liberalization policy the authorities seem to have been willing to incur the costs associated with measures that adversely affected powerful interest groups. A remarkable change in the government's political sensitivity is evi- dent after 1978, however. In fact, the behavior of the military authorities greatly resembles that of previous administrations in that they post- poned the adoption of necessary but unpopular policies, even though the costs of delay were enormous, and permitted the working of external forces that yielded short-run benefits, although the cost proved to be high in the long run. Furthermore, even though the changes in relative prices after 1974 induced the expansion of export-oriented activities, commercial policy reforms did not reach the main export sector- agriculture. After the military takeover in 1973, the share of government expendi- ture in GDP initially declined. During this first stage the decrease was the result of a drastic reduction in public employees' wages and salaries and in social security expenses. After 1975 the share of government expendi- tures in GDP did not vary significantly until the introduction of the stabilization plan of 1978, when it experienced a slight upward trend that coincided with an increase in real wages and social security payments. Govermment expenditure peaked in 1982 as a result of the expansionary policies followed by the authorities in the midst of the worst domestic recession since the Great Depression. Several measures adopted by the authorities, particularly those hav- ing to do with the social security system, suggest that an unambiguous political motive lay behind the expansion of government expenditure in the early 1980s. In particular, thousands of pensions were increased, transforming what had been a negligible expenditure item into a signif- icant item in the social security budget The distribution of the public sector budget during the nilitary ad- ministration had three characteristics. First, the share of the Ministry of Defense in the overaU government budget doubled. The increase in the size of the budgets of the armed forces and of the police was related not to an expansion in the number or strength of combat units or to major investments in sophisticated equipment (except for some increments during 1980-81) but rather to an increase in the quality and quantity of health services, social security, and other benefits for present or former members of the armed forces and their families. 290 Costa Rica and Uruguay The authorities' decisions meant that the share of govermnent invest- ment in overall expenditure increased in relation to the share of con- sumption. For example, two hydroelectric dams, one of them a joint venture with the Argentine government, were constructed during the period. The decision to cornnit resources to the expansion of power- generating capacity was no doubt motivated by the energy crisis that began in 1973. The type of project undertaken reveals an intention to demonstrate the incapacity of previous civilian administrations and the military's commitment to the "highest interests of the nation." Second, the authorities maintained government expenditures for health, education, and social security at dose to 14 percent of GDP during most of the period except for 1982. In that year the share increased to 20 percent of GDP, mainly because of the increase in social security ex- penses. Public expenditure on social programs appears to have contrib- uted to a more equal distribution of income, since the share of the benefits captured by low-income families was, on average, higher than their share in overall income (table 12-10). Third, the military administration drastically reduced several catego- ries of government expenditure that did not appear explicitly in the public sector budget during the first stage of the period. It eliminated subsidies for beef and other food items, and it insisted on maintaining prices for public utility services that covered their costs. These measures particularly affected the well-being of the middle dasses and were consistent with the lack of immediate concern about gaining the support of this group during the first stage of the military administration. The absence of political opposition to the elimination of several cross- subsidies seems to be attributable to a deeply felt desire to improve efficiency and growth performance during a period of severe external Table 12-10. Uruguay: Benefits of Public Sector Expenditure in Social Progrms, by Household Income Bracket, 1982 Water Household supply Total Distribu- income and Social expen- tion of bracket Education Health sewerage Housing security ditures incomne lstquintile 31.4 34.0 18.0 7.0 10.3 15.6 7.2 2nd quintile 21.0 29.7 18.3 23.9 16.1 18.7 11.8 3rd quintile 17.9 16.1 19.5 17.7 18.8 18.3 14.8 4th quintile 16.3 8.4 23.0 18.6 23.7 20.8 19.9 5thquintile 13.4 11.8 21.2 32.8 31.1 26.6 46.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Poorest 50 percent 60.6 73.1 43.9 38.4 34.7 42.8 25.5 Source: Davrieux 1984. The Oil Shock and the Resumption of Economic Growth, 1973-84 291 difficulties. This interpretation is supported by the significant cost that expansionary government expenditure policies imposed on growth. Favaro, Graziani, and Sapelli (1987) found that a 10 percent increase in government expenditure causes, at the margin, a 2.3 percent decrease in the output of the private sector. These econometric estimates indicate that although the provision of basic services has a positive effect on the rest of the economy, further government intervention often introduces distortions and inefficiency that reduce total output This result provides a rationale for the military's concern with reducing the size of the public sector. The military authorities initially appeared to be committed to carrying out deep reforms in the public sector by, among other steps, eliminating legal monopolies and privatizing several services. Early in the period they dismantled a public urban transport firm that accounted for much of the deficit of the Montevideo municipal government and transformed it into a private company. Later attempts in that direction, however, confronted strong opposition within the armed forces. At the beginning of the military period administration of the public utilities was distrib- uted among the army, navy, and air force, presumably in proportion to their military power. Over time each public firm became a stronghold of a branch of the armed forces, and vested interests developed that strongly opposed any attempt to eliminate legal monopolies or to pro- mote the privatization of nonstrategic sectors. Govermment expenditures between 1973 and 1984 exhibited a political cycle similar to that observed during civilian administrations in the postwar period. The initial austerity of the military administrations appears in this context to have been a response to a change in the external circumstances faced by the country in 1974 rather than a consequence of a change in political attitudes. The main differences between the military and the civilian administrations in this respect appear to be a conse- quence of the institutional changes implemented early in the period, such as the liberalization of foreign exchange transactions and interna- tional capital flows, as part of an attempt to promote the country's economic growth. The first attempt to limit seriously the discretion of the political administrations in the use of inflationary finance and to narrow the costs associated with price instability occurred after the liberalization of foreign exchange transactions and capital flows and the deregulation of financial markets in 1974. The liberalization of foreign exchange trans- actions introduced the problem of currency substitution and consider- ably reduced the inflation tax base. The elimination of interest rate ceilings allowed depositors to escape from anticipated inflation, while the disappearance of subsidized credit reduced the role of rationing in the credit market. Under the new circumstances the burden of the inflation tax fell mainly on recipients of credit. The military admin- istration's monetary reforms of 1974 seemed to be intended to attract 292 Costa Rica and Uruguay capital from abroad and so smooth domestic consumption and to create incentives for an increase in the amount of savings channeled toward the domestic capital market. The stabilization program of 1978 was implemented at a time when the military government had achieved success in several economic areas, even if it had not reduced inflation. An initial expansion of aggre- gate demand produced growth and an increase in the real wage rate from 1979 to 1981. A successful stabilization program was an attractive achievement for a military government that was beginning a transition toward democracy. Conversely, the failure of the plan turned out to be a major factor in eroding the legitimacy of the authorities. The attitude of the military government in maintaining the exchange rate policy unchanged, even when it became clear in 1982 that the peso was overvalued, did not differ from that of postwar civilian administra- tions during election years. The change in policy objectives in the man- agement of the exchange rate after 1978 can be understood when it is kept in mind that price stabilization had popular support, particularly if the policies adopted did not result in short-run output losses (as hap- pened to be the case with the adoption of the announced exchange rate rule). Over time the lack of control of the military authorities by the citizenry resulted in a gradual substitution of "society's goals" for those of narrower special interest groups. This pattern of behavior became evident during 1981 once the existence of an overvaluation in the ex- change rate was recognized. Notes 1. In 1971 the armed forces were invested with the operational control of the 21,000-man national police force; in 1973 they were given legal control of this corps. 2. It is likely that collective bargaining during the period created a disincentive for the most efficient workers within an industry by reducing salary differences across firms and occupational categories. 3. Alejandro Vegh Villegas and Ram6n Diaz were the most brilliant personal- ities associated with the development of a view of the Uruguayan economic crisis that provided an alternative to the dominant EcLA-Marxist interpretation and an analysis of the policies necessary for returning the country to a growth path. During the period Diaz founded Busqueda, a journal that would have enormous influence on the development of a new style of journalism and on the spread of conservative ideas in the society. 4. Such views were also dominant among the military that dismissed Congress in June 1973. In fact, these ideas supported the maintenance of the policies followed by previous civil administrations during the first year of military rule and were displaced only by the force of events associated with the oil crisis and the appointment of Alejandro Vegh as minister of economy in 1974. 5. The commercial rate was used to settle import and export transactions and public sector demands that originated in public debt service. The financial exchange rate was used to settle all other transactions. The gap between the two exchange rates narrowed over the period and was negligible after 1976. The Oil Shock and the Resumption of Economic Growth, 1973-84 293 6. The behavior of public sector investment was strongly influenced by the construction of two hydroelectric dams during this period. 7. There is evidence in the Uruguayan case to support the hypothesis that an increase in the size of the government has a negative external effect upon private sector GDP, even without taking into account the possibility of a crowding-out effect on the private sector's endowment of resources. See Favaro, Grazziani, and Sapelli (1987). 8. An increase in exports both to the region and out of the region had a non-export-sector elasticity of 0.64; an increase in exports only to the region had a non-export-sector elasticity of 0.058 (Sapelli 1986). 9. Uruguayan wage indexes exhibit the usual shortcomings associated with Laspeyre-type indexes under circumstances of dramatic changes in relative prices and in the structure of employment. Moreover, the DGEC index for most of the 1970s was constructed by incorporating only the minimum wage increases determined periodicallybythegovernment and not the actual increments inboth the private and public sector. For subsequent years actual increases are com- puted, but on an uncorrected basis. The Bcu index takes account of actual wage increases after 1978 and adjusts, using a geometric interpolation, the difference between the levels observed in 1978 and the 1975-77 period. 10. ECLA estimated that the share of wages and salaries in national income had decreased from 46.6 percent in 1975 to 45.3 percent in 1978 (Economic Comnis- sion for Latin America 1983). 11. This phenomenon implies that the prices of nontradables and of labor in Uruguay are strongly affected by the variables that influence the price of non- tradables and the real exchange rate in neighboring countries (Favaro and Sapelli 1989a). 12. Recent econometric tests suggest that the nominal interest rate may be determined by domestic variables in addition to the effect of the international rate of interest and the rate of devaluation. See the estimates obtained within a vector autoregression econometric framework in Favaro and Sapelli (1989a). 13. Functional income data show an increase in the share of wages and salaries in national income for 1979-81. According to ECLA the share of labor in net national income increased from 41.1 to 44.5 percent between 1979 and 1981. Family income surveys show a decrease in the degree of inequality in the distribution of income in urban areas for 1976-82; the Gini index went from 0.45 in 1976 to 0.42 in 1982. 14. In a recent study Sapelli (1985) analyzed the determinants of the share of the international price of beef received by producers and found no significant differences between the Blanco and the Colorado parties and the military admin- istrations. Differences in taxation of the sector appear to be determnined more by changes in exogenous factors than by government tastes or preferences. Policy, Institutions, and Economic Performance This chapter examines how the characteristics and evolution of the Uruguayan polity have interacted with external influences and events to shape economic policy. The analysis focuses on some attributes of the political system that limit the capacity of Uruguayan society to adapt to exogenous shocks such as drastic changes in terms of trade. The Background of the 1874 Coup Tlhe first stage in Uruguay's political life covers the years from indepen- dence to the military coup of 1874. After 1830 the Uruguayan state evolved along the lines of other modern democracies, but the political system did not always work according to formal constitutional rules. Political struggle took the form of continuous civil wars between armed bands grouped around caudillos, often supported by foreign countries, rather than democratic competition through fair elections. The period was marked by continuous political turmoil, armed confrontation, and the near-disappearance of a unified state with coercive power over the entire national territory. The country was divided between the Blanco and Colorado parties, each of which controlled parts of the territory according to periodic agreements reached, in general, after military confrontations. The Constitution and the legal state were imposed on a young and immature society by a political elite unable to enforce consti- tutional rule; thus the legal state did not correspond to the real state and the politics of the time. After 1865 a new actor, the army, appeared on the political scene. The national army created in the 1850s developed rapidly as a professional institution after the war of the Triple Alliance against Paraguay, and it had a dominant influence in Uruguayan politics from 1868 to 1886. The army's influence was initially exercised through the ministers of war but evolved into direct military rule after the coup of 1874. The intrusion of the military into politics was prompted by several circumstances. First, the world depression of the late 1860s struck 294 Policy, Institutions, and Economic Performance 295 Uruguay's exports severely, reduced national income, and bred political discontent Second, the expansion of the livestock sector, through the introduction of sheep breeding, and improvements in the quality of the herd to meet changes in world markets created a rural pressure group that demanded an adequate definition of property rights and an end to civil war. Third, factionalism within the Blanco and Colorado parties and the incapacity of the political system to meet these demands produced a response from an increasingly powerful outsider: the Montevideo military garrison, which dissolved Parliament in 1874. From Military Rule to Modem Democracy The second stage in Uruguay's economic and political life runs from the beginning of military rule to the second decade of the twentieth century and corresponds to the formation of the modem Uruguayan state. It is convenient to divide this stage into two periods. In the first period, from 1874 to 1886, the military administrations developed key aspects of a modem state, including the provision of public goods basic for promot- ing economic growth. The second period, from 1886 to the late 1910s, saw the formation of a modern democracy. The behavior of the military administrations in the first period came close to the stereotype of a predatory state-that is, a state controlled by a single ruler in which interest groups have almost no influence on government policies (see Lal 1986). Although the army's rule was not contested during Latorre's presidency, military administrations faced strong competition from political parties in the remainder of the period. The military consolidated the state's coercive power, established prop- erty rights, enforced internal order, and developed a national education system. It enlarged the size of the army, levied discriminatory tariffs on imports, and occasionally made the currency inconvertible. Although the consolidation of the state's coercive power increased the rate of economic growth, the measures that permitted the develop- ment of a modern democracy should be credited to the civilian admin- istrations that held office from 1886 to the late 1910s. The effort to consolidate a modern democracy at the end of the nineteenth century faced enormous difficulties, beginning with the challenge of neutralizing the army after almost two decades of pervasive military influence. In addition, the country was divided between the Blanco party, which controlled part of the territory and maintained its own army, and the incumbent Colorado party. The elimination of armed confrontation as an acceptable political instrument and the consolidation of a unified state were beneficial because the expansion of the international market for Uruguayan exports at the end of the century had increased the opportu- nity cost of civil wars. Under these circumstances the Blanco and Colo- rado parties faced the menace of new military intervention if they continued using violence to resolve their disputes. The elinmination of 296 Costa Rica and Uruguay armed conflict and the acceptance of democratic confrontation through periodic elections required the establishment of fair elections that gave legitimacy to elected governments and protected the rights of political minorities. These problems had to be solved in the context of internal party factionalism. The formation of a modem democracy was an outgrowth of the influence of a new breed of politicians who gradually displaced rural caudillos from leading positions within both parties and who were com- mitted to the suppression of armed confrontation as a legitimate political instrument. Jos6 Batlle was the most brilliant exponent of this generation of professional politicians and the main architect of the political reforms that made possible the pacification of the country and the development of a modem democracy. The changes introduced in the political system during the first two decades of the twentieth century included the development of institu- tions that eliminated electoral fraud and guaranteed fair elections, abol- ished voting qualifications that had limited the number of eligible voters, and replaced majority rule in parliamentary elections with propor- tional representation. These changes gave greater legitimacy to the elected authorities and created incentives for using democratic rather than violent procedures to solve political disputes. The introduction of proportional representation and the enlargement of the size of the polity implied an increase in the political power of urban residents at a time when the country was experiencing a significant flow of immigrants, who settled mainly in urban areas. These changes generated demands for pro-urban income redistribution policies, which were met by taxing the rural sector. The characteristics of the rural sector and the expansion of beef exports to the world market combined to provide an ideal source of revenue with which to finance policies designed to obtain the support of urban groups. Although Jose Batlle and his followers argued for active intervention in some economic activities, during his administrations state interven- tionism was not incompatible with foreign investment in new in- frastructural services or strategic economic activities. Thus, although ideology was significant, it is likely that the primary motive for the development of a social security system, the defense of labor movement rights, the expansion of public enterprises, and the increase in protec- tionism was to obtain important urban support for a weak administra- tion. In summary, the importance of Montevideo, the characteristics of the polity consolidated in the period, and the weakness of the political system go far to explain the development of a welfare state during the first two decades of the twentieth century. The development of a modem political system was also strongly influenced by factionalism within the political parties and the limited democratic traditions in the country. The parties were not ideologically defined, and blocs and factions within each party espoused different Policy, Institutions, and Economic Perfornmance 297 visions of appropriate public policies. This tendency was exacerbated by the system of double simultaneous voting and accumulation. Under this system a party could have more than one candidate for the presidency, and the candidate with the largest number of votes on the list of the party that received the largest total number of votes was elected. The arrangement was an ingenious device for maintaining the unity of parties that contained a multiplicity of ideological and personal differ- ences among their members, but it also implied a low degree of control of representatives, both by their constituencies and by the majority faction within the party. These attributes of the political institutions created incentives for electoral coalitions between candidates of approximately equal strength, who joined forces temporarily to win a parliamentary seat. The candidate who received the largest vote within the coalition took office. This practice led over time to a steady reduction in the number of voters who were truly represented in Parliament and thus distorted voters' preferences (Vernazza 1987). A consequence of the institutional situation was that the majority faction within each party lacked control over its own representatives. This led to a sort of tyranny of the parliamentary minorities over the executive, which needed minority support that could be obtained only in return for compensation. The results were a severe limitation on the capacity to enact certain laws that might affect powerful interest groups, even if those laws had the support of the majority of the polity, and a systematic bias on the part of Parliament toward increases in expenditures. Coparticipation, another characteristic of the political institutions that developed in the first decades of the twentieth century, could be inter- preted as a mechanism for collusion between the Blanco and Colorado parties. Both parties agreed to expand public sector employment accord- ing to a rule of proportional representation of members of the parties. But a more important function of coparticipation seems to have been to overcome party factionalism and its consequences. The participation of the majority of the minority party in the executive under the 1918 amendment to the Constitution and in the administration of public enterprises helped to reduce the costs of reaching the agreements neces- sary to govern the country. The political institutions developed during the period penalized vot- ing for parties other than the Blanco and Colorado parties, thus hinder- ing the entry of new competitors. Factionalism continued, however, and hampered the formation of a stable majority in Parliament in support of the executive. It must be kept in mind that to regard the Uruguayan state of the 1900s as a unity confuses rather than simplifies the interpretation of events. Although economic and social policies and tax policy were consistent with an attempt to exact monopoly rents, this interpretation implicitly 298 Costa Rica and Uruguay assumes more myopia on the part of authorities than is characteristic of a predatory state. The political institutions diffused responsibility, thus creating per- verse incentives among members to adopt a very short time horizon in making decisions. The behavior of politicians under circumstances of diffused responsibility is analogous to the behavior of fishers exploiting an exhaustible species in the absence of well-defined property rights. It is possible that this phenomenon is the main explanatory factor for the development of a cycle of public economic policy. The Great Depression and Its Aftermath The growth of government intervention in the economy and the spread of patronage practices in the late 1920s and early 1930s could not be sustained after the decline in terms of trade associated with the Great Depression. The administration had to implement policy changes to adjust the economy to the new external circumstances, but it could not obtain the support of a parliamentary majority for a constitutional amendment and a return to a presidential regime.' These circumstances led President Terra to co-opt the majority of the Blanco party and dissolve Parliament. The army acquiesced in the coup, although it did not participate in it. Terra's coup revealed the weakness inherent in Uruguayan political institutions and their inability to make necessary changes in policy when the country was faced with drastic changes in external circumstances. The new administration succeeded in amending the constitution to establish what was known as the Senate of Fifteen by Fifteen; half of the members were from the majority faction of each party, and there was no representation for the minority factions. Thus, the system discriminated against minorities, which then refrained from voting in some of the elections held during the period. Under the new arrangement, further intervention in key infrastructu- ral areas, protectionism, and restrictive trade practices continued, signal- ing an attempt to create new sources of monopoly revenue. At the same time, the authorities adopted a conservative stand with respect to the public sector budget. Public sector wages and salaries and social security transfers were reduced, even in nominal terms. The number of public sector employees, however, increased, from 52,000 in 1931 to 57,500 in 1938. The development of a vast state machinery that included public enterprises, social security, import quotas and exchange controls, and credit subsidies was a major step in the use of the public sector as a source of monopoly profits. The introduction of quantitative restric- tions, such as import quotas, created artificial scarcities that generated rent-seeking activities and provided resources that were important for politicians competing for public support. Policy, Institutions, and Economic Performance 299 The enlargement of government expenditure and employment did not increase provision of public sector goods. On the contrary, government expansion was often associated with the new regulations and the pro- motion of unproductive activities. Public employment became a locus of disguised unemployment. Hence, public sector wages and salaries rep- resented, at the margin, an income transfer to those who were able to obtain these privileged jobs. The expansion of government expenditure in the 1940s and 1950s was also associated with an increase in subsidies to the import-substituting sector. These transfers generally took the form of subsidized credit lines and privileged availability of foreign exchange at lower than equilib- rium prices. Since the expansion of credit to the private sector was not paralleled by an increase in demand for money, the rate of inflation rose steadily after the late 1940s. The social system created after the Great Depression and consolidated during 1945-55 favored the development of organizations with redistributive purposes. The greater interference of the state in the economy made it more profitable to invest in developing influence networks than in promoting new sales methods, improving quality, or introducing modern technology for production. The proliferation of regulations created the need for managers whose remuneration was based on the complexity of administrative regimes rather than on the value of marginal product for society as a whole. The social system, by encouraging lobbying rather than innovation and efficiency in production, had nontrivial consequences for the forma- tion of values and for the development of certain professional skills. In particular, the social prestige of entrepreneurial activity fell drastically when the public came to see that firms' profits were predominantly the result of their ability to obtain privileges rather than a consequence of innovative effort. Uruguay's experience from the Great Depression to the postwar pe- riod exhibits two well-defined stages. The first stage, associated with the Great Depression and the decine in terms of trade, created political tensions that eventually resulted in Terra's coup in 1933. The second stage started with the improvement of the terms of trade in the late 1930s and coincided with the presidency of Baldomir and a transition toward democracy. The restoration of democracy was gradually accompanied by the enlargement of social security benefits; one of the first steps of the new democratic authorities was to undo Terra's decision to centralize all social security regimes under a single authority. The second stage was also marked by the expansion of public sector employment and the introduction of prohibitive tariffs, import quotas, and exchange controls. These examples of clientelism and rent creation appear to be an out- growth of a political system that rewarded its members for maximizing their current utility without regard for the consequences of their deci- sions. Thus, politicians followed a strategy of maximnization within a 300 Costa Rica and Uruguay short time horizon. The spread of clientelism and rent creation was facilitated when Terra decided (in 1931) to introduce exchange controls that severed the links between the Uruguayan peso and other currencies based on the gold standard and (in 1935) to devalue the peso, interrupt- ing a century-long history of domestic price stability. Uruguayan society changed remarkably between 1930 and 1942, no- tably in its urban-rural distribution. (The population of Montevideo almost doubled during the period.) This shift was influenced by polides that favored the development of import-substituting industry. In the next decade, after the restoration of democracy, the larger urban popu- lation would place new demands on the political system, leading to an explosion of public sector employment and social security benefits and to pro-urban income distribution policies. Such policies were sustain- able while the terms of trade remained favorable and foreign reserves lasted. They collapsed, however, when beef and wool prices dropped at the end of the Korean war and the stock of foreign reserves became exhausted as a result of the continuous current account deficits in the postwar period. The drive to develop import-substituting industry after the Great Depression appears to be the product of both external events and the erosion of confidence in the private sector. The founding of public enterprises and the development of a social security system in previous decades helped shape ideas that were favorable to increased state inter- vention in economic affairs and were crucial for the implementation of new protectionist practices in the 1930s. The decline in the prices of agricultural goods in relation to those of industrial goods reduced the profitability of investment in the livestock sector. This drop in the real rural return was not responsible for the decline in output, which was mainly caused by the technological char- acteristics of the sector, but it did discourage the improvement of pas- tures and promoted stagnation. Moreover, although the policies followed in the decades after 1930 increased the profitability of invest- ment in import-substituting industry, thus fostering capital accumula- tion and growth in these activities, the rate of return on manufacturing investment declined sharply in the mid-1950s (as suggested by changes in investment), and that sector entered a period of stagnation. The policies followed after the Great Depression and particularly in the postwar period led to an increase in the share of wages in total income and a decline in the share of land rents. Both the level of real wages and the share of wages in total income reached at the time were associated with transitory phenomena, such as very favorable terms of trade and domestic expansionary policies, that were not sustainable in the long run. These policies gave rise to systematic current account deficits. The deficits were disguised as long as the price of the country's exports continued high and foreign reserves lasted, but they became dramatically evident after the terms of trade decined sharply at the end of the Korean war. That external shock drastically reduced the country's Policy, Institutions, and Economic Perfonnance 301 national income and the capacity of the rural sector to maintain its level of transfers to the rest of the economy. In addition, it prompted the economy to move toward a new equilibrium through a decline in the rate of capital accumulation, since at the prevailing level of real wages investment became unprofitable. The adjustment to the change in external conditions required signifi- cant changes in domestic policy. These included a contraction in the fiscal deficit and a devaluation of the currency, which in turn implied a drastic fall in real wages and a reduction in the level of implicit taxation on agricultural goods. The reluctance of the authorities to make these policy changes led the country into economic recession and a major external crisis, evoked the opposition of the rural sector, and eventually led to the triumph of the Blanco party in the 1958 elections. Crisis, Stagnation, and Adjustment The years between 1955 and 1973 were characterized by economic stagnation, price instability, and a gathering political storm. The import- substituting strategy developed during the two decades ended in a deadlock. Entrepreneurs who had enjoyed favorable credit lines for their initial investments and who expected to capture monopoly rents did not find it profitable to renew equipment when the real return on capital turned out to be low, both because the size of the market implied highly inefficient utilization of capacity and because union activity and public sector policies combined to produce a large increase in the cost of labor. Given the accommodating monetary policies, the result of the systematic fiscal deficits, resistance by pressure groups to relative price changes, and labor-management disputes was spiraling price instability. The Blanco party administration, which took office in 1959, eliminated multiple exchange rates and import quotas and drasticaly devalued the currency. The change in relative prices was only transitory, however, as expansionary fiscal policies, coupled with a fixed exchange rate, brought about a gradual appreciation of the peso and an external crisis. The years between 1959 and 1974 saw a recurrent cycle: external crisis was fol- lowed by devaluation, a transitory change in relative prices, and a decline in real wages. The process of adjustment met with resistance from unions and pressure groups, which tried to return to the original high real earnings in both the private and public sectors. Accommodat- ing monetary policies fueled the increasing price instability that, under fixed exchange rates, led to frequent external crises. The period 1955-73 was one of stagnation, price instability, and a gradual erosion of democratic institutions. The inability of successive Blanco and Colorado administrations to meet the crises provoked ag- gressive behavior by the unions, urban guerriUlas, and finally the army. The role of the unions was heightened by the dosure of the economy to foreign competition. Faced with the menace of strikes, firms yielded to labor movement demands for wage increases and passed on the 302 Costa Rica and Uruguay higher costs to their customers. Thus, the dynamics of wage and price increments implied either an accommodating monetary policy or- under the prevailing expectations of inflation-recession. The 1968 sta- bilization plan attempted to break a mechanism that was driving the economy into increasing price instability. The plan was aborted, how- ever, as a result of the expansionary policies followed during 1971, an election year. 1955-68 The characteristics of the Uruguayan state during 1955-68 fall close to the stereotype of a factional state (see Lal 1986). In general, successive administrations were incined to yield to demands from pressure groups and often made decisions that conflicted with each other. Economic and social policies became a disorganized mosaic of subsidies and regula- tions that yielded economic inefficiency and social turmoil. In reaction, factions of the Blanco and Colorado parties combined to pass the 1966 constitutional amendment, which attempted to increase the authority of the executive. The collegium was eliminated, and a presidential regime was established. The capacity of Parliament to in- crease government expenditure was restrained by not allowing it to take the initiative in passing laws that would increase the level of expendi- ture. But this did not substantially alter the course of events. 1968-70 From 1968 to 1970 the Pacheco administration introduced dramatic changes in domestic policies in an attempt to reestablish the authority of the state, which was being contested both by the unions and by urban guerrillas. Pacheco's government shared some characteristics with Terra's. Both administrations took office in the midst of a major internal crisis, engineered measures to avoid a parliamentary blockade, and promoted conservative policies. Terra's administration dissolved Parliament with the support of factions of the Blanco and Colorado parties and adopted a constitutional amendment that displaced from power minority factions within both parties. Pacheco retained Parlia- ment but governed through the use of the medidas prontas de seguridad, which allowed the president to bypass parliamentary approval of exec- utive initiatives. Although his policies aroused opposition, Pacheco had at least the acquiescence of the majority of Parliament; the majority of the Colorado party and a conservative faction of the Blanco party sup- ported him. His presidency represented a move toward a predatory state. During the latter part of his term, however, his administration yielded to electoral pressures. Government expenditure rose, and an exchange rate appreciation exactly like those observed in previous ad- ministrations opened the road to an economic and political crisis that ended with the coup of 1973. Policy, Institutions, and Economic Perfonnance 303 Oil Shock and Export Problems The decline in the terms of trade after 1973 forced a significant change in economic policy. The authorities' initial reaction to the rise in the price of oil and the closure of the EC market to Uruguay's beef exports was to restrict imports severely-a strategy similar to that of the Colorado administration after the declne in terms of trade at the end of the Korean war. But the magnitude of the crisis, the low level of foreign reserves, and the pressures to put the economy on a path of sustained growth compelled the government to liberalize exchange transactions and international capital flows and to implement an outward-oriented growth strategy. The economic and social policies followed between 1974 and 1977 were mainly determined by severe external circumstances. Thus, al- though the prohibition of labor union activities and the absence of opposition from Parliament probably accelerated policy changes, the military administration's response to the decline in the terms of trade was very similar to that adopted by the Blanco government, which passed the Exchange and Tariff Act of 1959. The differences between the two administrations seem to be more a matter of their attitude toward increasing government expenditure and public sector wages than evi- dence of a major disagreement in the design of an external adjustment. In fact, although the military reduced public sector employment during the first stage of its period in office, it also redistributed govermnent expenditure, enlarging the size of the armed forces and raising the salaries of military personnel in relation to the salaries prevailing in the rest of the economy. The ability of the military government to reduce the fiscal deficit during those years permitted the maintenance of a high real exchange rate and created incentives for the expansion of export- oriented activities. In general, the policies of the military administration adversely af- fected some vested interests, particularly those of unionized workers and public employees, and protected others. The military was reluctant to modify its policies toward agriculture, and it was moderate in reduc- ing the level of effective protection of import-substituting industry. The distribution of export subsidies mainly benefited import-substituting sectors rather than export-oriented activities; the percentage subsidy received by the former was, on average, larger than that obtained by the latter group of industries. The logic behind the attitude of the administration toward key pres- sure groups-unionized workers and entrepreneurs in the manufactur- ing industry and public employees, in particular-during the first stage of the military government can be understood when it is recognized that the prohibition of labor movement activities reduced the ability of both unions and industrial entrepreneurs to lobby for the continuation of transfers from other sectors of the economy. It did, however, strengthen the firms' side in labor-management disputes and may thus have offset 304 Costa Rica and Uruguay the costs of decreasing the level of effective protection for industrial activities. The military did not have to worry about the support of public sector employees except for those of its own constituency. The second stage of the military government-in particular, the years between 1979 and 1982-was characterized by an increase in the level of effective protection, a real appreciation of the currency, and expansion of govermnent expenditure, especially social security transfers. Thus, the policies followed in this stage differed greatly from those of the 1974-77 period and implied a move away from the export-led growth strategy. Economic events were considerably affected by regional eco- nomic circumstances, which implied a strong demand pressure from Argentina and led to an appreciation of the Uruguayan peso. The military authorities, faced with a large external trade deficit, were reluctant to devalue the peso during an election year until they had exhausted both the stock of foreign reserves and the possibilities of expanding the public sector's external debt.2 Thus, the management of the exchange rate during 1982 closely resembled that of the preceding civilian administrations. Moreover, such variables as the rate of inflation and government expenditure behaved in a way characteristic of election periods. In summary, during the first stage of its administration the military made some deep economic policy changes under the pressure of ex- tremely adverse external circumstances. It enjoyed the advantage of insulation from the pressures of some key interest groups. As soon, however, as the armed forces began a transition toward democracy and developed their own political ambitions, their attitudes regarding im- portant economic issues became very similar to those of the Blanco and Colorado administrations in previous periods. Conclusions Uruguay managed to grow after the oil shock of 1973 while the rest of the world was in crisis. Conversely, it remained stagnant while world output and trade were increasing rapidly in the mid-1950s and 1960s. Both the domestic economy and the polity have exhibited enormous sensitivity to changes in terms of trade. The only sound argument for keeping the economy closed to foreign competition is that it allows the country to isolate itself from foreign disturbances. But closure results in a lower rate of growth, and it mag- nifies the effects of external shocks because it discourages the growth of an export-oriented manufacturing sector and so inhibits the develop- ment of a diversified economic structure. Argentina and Brazil have had a powerful effect on the cyclical behav- ior of output and other real variables in Uruguay. There is, however, no association between the secular trends followed by real variables in Uruguay and those of its neighbors. Uruguay remained largely unaf- Policy, Institutions, and Economic Perfornance 305 fected by the dynamic behavior of the Brazilian economy in the 1950s and 1960s. Its periods of growth paralleled stagnation in Argentina, and its periods of stagnation coincided with periods of Argentine economic expansion. Sustained economic growth in Uruguay has been associated with the expansion of export-oriented activities. The century before the Great Depression and the years between 1974 and 1978 were periods of export- led growth, while the periods 1945-55 and 1979-81 are examples of import substitution-led growth. Although increased investment and employment are necessary con- ditions for growth, a high ratio of investment to GDP is not a sufficient condition for sustained economic expansion. The allocation of invest- ment among economic activities is a primary determinant of the overall effect of capital accumulation on real income. The years 1974-77 provide an interesting example of a period when, although private investment did not increase dramatically, the reallocation of investment toward more productive export-oriented activities brought about a remarkable increase in the rate of growth of GDP. Export-oriented industry is highly sensitive to changes in the real exchange rate. A high and stable real exchange rate, coupled with export subsidies, led to the development of new export activities in the 1970s. Export subsidies compensated in part for the implicit discrimination against export-oriented activities, but these policies had much less effect on economic growth than would have resulted from a uniform tariff reduction. Export subsidies and preferential trade agreements fre- quently worked to encourage the growth of import-substituting activi- ties rather than the expansion of sectors in which the country had a comparative advantage. The increase in government expenditure that began in the late 1930s imposed a negative externality on the rest of the economy. Higher government expenditure and employment was not accompanied by an increase in the output of the public sector; on the contrary, it often denoted only the introduction of new regulations and the promotion of directly unproductive activities. The government imposed costs on the private sector. Domestic price instability affected economic growth. The fixed ex- change rates and interest rate ceilings that were in place until the mid- 1970s meant that a higher rate of inflation was often accompanied by a loss of welfare as well as by incentives to allocate resources to unproduc- tive activities such as rent seeking. Higher rates of inflation also implied a contraction in the domestic capital market, which constrained capital accumulation. Exchange controls, interest rate ceilings, and price instability created incentives for capital outflows and limited the size of the domestic capital market, while public sector deficit financing crowded out private sector possibilities for financing investment in the domestic market. 306 Costa Rica and Uruguay Although the size of domestic saving was a constraint on investment and growth, the limits were endogenously determined by the economic policies followed up to the mid-1970s. The liberalization of foreign exchange transactions and international capital flows eliminated the capital constraint on growth determined by the domestic capital market and considerably enlarged its size. The availability of foreign exchange for financing the importation of capital goods may have hampered economic growth from 1955 to the mid-1970s, but diminished growth was also endogenously determined by economic policies that severely curtailed the expansion of exports and provoked capital oufflows. The level of real wages and the share of wages in national income reached in the mid-1950s were produced by transitory phenomena such as very favorable terms of trade and expansionary government policies that were not sustainable in the long run. The economic reforms of the mid-1970s initially increased the degree of inequality in the distribution of income. There is evidence, however, that growth benefited both less-skilled and highly trained workers. During the second stage of the military period, 1979-82, the degree of equality in the distribution of income increased. Both the extent of openness of the economy and the share of government expenditure in overall GDP had a significant influ- ence on the distribution of income. Although external circumstances have strongly influenced Uruguay's economic performance in the past four decades, the effect of domestic policies on economic growth and income distribution dominated. The closure of the economy after the Great Depression was the principal determinant of the slow rate of economic growth during the past forty years. The increase in protectionism was the result of both external circumstances, such as the disruption of international trade, and domes- tic circumstances, such as the relative growth of the urban population and the characteristics of the political system. Demographic changes implied new demands for pro-urban income distribution policies, and the characteristics of the political institutions promoted an anarchic accumulation of regulations. Once adopted, these policies were fiercely defended by vested interests that resisted any change in the status quo. Furthermore, they helped to disguise the perverse effect on economic growth of further government intervention and hence allowed it to occur. A major finding of this study is the identification of the influence of political institutions on the formation of economic and social policies. The institutions that characterize Uruguayan democracy were devel- oped during a period when party factionalism was common and the menace of military intervention was an important political phenome- non. Although the institutions developed at the beginning of the century were possibly the best conceivable at the time, they proved to be very weak. The executive lacked a stable majority in Parliament. Propor- tional representation and the accumulation of votes promoted factional- Policy, Institutions, and Economic Performance 307 ism within the political parties and diminished party discipline. The institutional characteristics of the system also made it difficult for voters to penalize representatives whose policies produced high social costs, a tendency toward systematic expansion of government expenditure, and an incapacity to adjust to changes in external circumstances. These properties of the political system may be the main underlying factors behind the occasional lapses that have characterized Uruguayan democracy during periods of drastic change in world market conditions in this century. Notes 1. Under the 1918 constitutional amendment the executive had a mnixed structure that combined the attributes of a collegium and a presidential regime. Some ministers reported to the National Administration Council, which had a collegial structure with representation of the majority and minority parties. 2. After the defeat of the constitutional amendment proposed by the military in 1980, a new strategy for the transition was devised. The first step was the election of civilian authorities affiliated with political parties through direct popular vote in November 1982. The campaign for candidacies within the parties ended in the nomination of candidates whose political stands were close to those of the armed forces. 3. The relevant issue is the comparison of the actual institutional and eco- nomic performance with what would have happened under civil war rather than with what would have happened in a "perfect state." Statistical Appendix B Uruguay B-1. Uruguay: Population, 1955-85 B-2. Uruguay: Population, by Sex, Age, and Rural or Urban Residence, 1963 and 1975 B-3. Uruguay: Households, 1963,1975, and 1985 B4. Uruguay: Labor Force and Unemployed Population, 1963 and 1975 B-5. Uruguay: Labor Force, by Sector, 1963 and 1975 B-6. Uruguay: Employment, 1964-83 B-7. Uruguay: Employment and Unemployment, by Sex, 1963 and 1975 B-8. Uruguay: Unemployment Rate, by Activity, 1966, 1971, 1981, and 1984 B-9. Uruguay: Employment in the Public Sector, 1984 B-10. Uruguay: Employment in Public Enterprises, by Activity, 1978 B-Il. Uruguay: Structure of GDP at 1961 Constant Market Prices, 1955-84 B-12. Uruguay: Public and Private Sectors as Shares of GDP, 1955 and 1981 B-13. Uruguay: Value of Agricultural Production, Selected Years, 1955-80 B-14. Uruguay: Industrial GDP, Selected Years, 1955-80 B-15. Uruguay: Effective Protection in the Industrial Sector, 1975 B-16. Uruguay: Effective Protection in the Industrial Sector, 1981 B-17. Uruguay: GDP and GDP per Capita, 1950-84 B-18. Uruguay: GDP and Wages, Selected Years, 1955-80 B-19. Uruguay: Industrial GDP, Montevideo and Rural Areas, 1978 B-20. Uruguay: Labor Productivity, 1963 and 1975 B-21. Uruguay: Exports and Imports, 1950-84 B-22. Uruguay: Prices of Exports and Imports, 1955-84 B-23. Uruguay: Exports and Imports, Selected Items and Years, 1950-80 B-24. Uruguay: Beef Exports, 1961-84 B-25. Uruguay: Wool Exports, 1961-84 B-26. Uruguay: Exports of Frozen Beef, Brazil and Egypt, 1970-84 B-27. Uruguay: Oil Imports, 1961-86 B-28. Uruguay: Balance of Payments, Selected Years, 1950-84 B-29. External Debt: Liabilities with Nonresidents, End of Year, 1955-84 309 310 Costa Rica and Uruguay B-30. Uruguay: Consumer Prices, 1950-84 B-31. Uruguay: GDP Deflator, 1955-84 B-32. Uruguay: Exchange Rate, 1950-84 B-33. Uruguay: Wages, 1957-84 B-34. Uruguay: Relative Prices, 1955-84 B-35. Uruguay: Distribution of Industrial Wages, 1968,1978, and 1981 B-36. Uruguay: Household Income Distribution: Earned Income, Montevideo, 1968, 1976, and 1979 B-37. Uruguay: Age and Income, 1972 and 1979 B-38. Uruguay: Industrial Wages Compared with Minimum Wage B-39. Uruguay: Government Wages Compared with Minimum Wage B-40. Uruguay: Capital Rate of Return, 1967-84 B-41. Uruguay: Size Distribution of Farms, Selected Years, 1951-80 B-42. Uruguay: Land Distribution, by Form of Ownership, Selected Years, 1951-80 B43. Uruguay: Industrial Firms, by Number of Workers, 1960,1968, and 1978 B-44. Uruguay: Number of Students, by Level of Education, 1967,1975, and 1984 B-45. Uruguay: Number of Schools, by Level of Education, 1967,1975, and 1984 B-46. Uruguay: Dwellings in Montevideo, by Type of Occupation and Income Level B47. Uruguay: Labor Force and Social Security Beneficiaries, Selected Years, 1964-83 B-48. Uruguay: Central Government Revenues and Expenditures as a Share of GDP, 1961-84 B-49. Uruguay: Central Government Revenues, by Source, 1955-67 B-50. Uruguay: Revenues of the Central Government and Municipalities, by Source, 1968-84 B-51. Uruguay: Central Government Consumption Expenditure, by Activity, 1955-61 B-52. Uruguay: Central Government Expenditure, by Function, as a Percentage of Totals for 1964, 1966, and 1968 B-53. Uruguay: Sectoral Classification of Budgetary Programs, 1974-82 B-54. Uruguay: Total Public Expenditure, by Function, Selected Years, 1972-83 B-55. Uruguay: Social Security Expenditure, Selected Years, 1964-83 B-56. Uruguay: Social Security Revenues, Selected Years, 1964-83 B-57. Uruguay: Rediscounts, 1955-71 B-58. Uruguay: Special Rediscount Lines (Maximum Authorized at Year's End), 1970-76 B-59. Uruguay: Bank Deposits, Selected Years, 1955-84 B-60. Uruguay: Monetary Liabilities of the Banking System, 1973-84 B-61. Uruguay: Banking Credit to the Private Sector, 1973-84 B-62. Uruguay: Interest Rates, Selected Years, 1955-84 B-63. Uruguay: Structure of Saving, Selected Years, 1955-83 Statistical Appendix B 311 Table B-1. Uruguay: Population, 1955-85 Year Thousands of persons 1955 2,345.6 1956 2,378.4 1957 2,411.7 1958 2,445.5 1959 2,479.7 1960 2,514.4 1961 2,549.6 1962 2,585.3 1963 2,621.5 1964 2,657.6 1965 2,689.3 1966 2,716.2 1967 2,738.4 1968 2,763.3 1969 2,784.9 1970 2,807.6 1971 2,819.5 1972 2,836.6 1973 2,848.6 1974 2,851.1 1975 2,821.8 1976 2,819.1 1977 2,826.9 1978 2,842.1 1979 2,863.3 1980 2,887.7 1981 2,910.0 1982 2,933.7 1983 2,926.6 1984 2,919A 1985 2,930.6 Source: M6ndez 1985. Table B-2. Uruguay: Population, by Sex, Age, and Rural or Urban Residence, 1963 and 1975 (number of persons) Rural Urban Year and age Total Total Male Female Total Male Female 1963 Total 2,595,510 498,381 281,453 216,928 2,097,129 1,008,933 1,088,196 0-14 725,209 153,227 79,930 73,297 571,982 289,918 284,064 15-64 1,651,139 310,863 181,883 128,980 1,340,276 641,413 698,863 65 and over 196,326 29,419 16,795 12,624 166,907 71,819 95,088 Age not given 22,836 4,872 2,845 2,027 17,964 7,783 10,181 1975 Total 2,788,429 474,073 269,778 204,286 2,314,356 1,099,634 1,214,722 0-14 752,588 135,017 70,330 64,678 617,571 311,894 305,677 15-64 1,763,025 303,970 179,254 124,716 1,459,055 688,070 770,985 65 and over 272,816 35,086 20,194 14,892 237,730 99,670 138,060 Source: Uruguay, Direcci6n General de Estadlsticas y Censos, Censo Nacional de Poblacidn y Vivienda, 1963,1975. StatisticalAppendixB 313 Table B-3. Uruguay: Households, 1963,1975, and 1985 Population in private households Private (thousands households Average size Location and year of persons) (thousands) of household Montevideo 1963 1,174.0 328.0 3.58 1975 1,204.0 370.8 3.25 1985 1,235.0 407.4 3.03 Urban areas of provinces 1963 923.7 243.0 3.80 1975 1,116.6 317.6 3.52 1985 1,202.0 373.7 3.22 Rural areas of provinces 1963 447.4 119.0 3.76 1975 386.9 106.1 3.65 1985 376.7 106.1 3.55 Total 1963 2,545.1 690.0 3.69 1975 2,707.5 794.5 3.41 1985 2,813.7 887.2 3.17 Source Banco Hipotecario del Uruguay, unpublished data. 314 Costa Rica and Uruguay Table B-4. Uruguay: Labor Force and Unemployed Population, 1963 and 1975 Laborforce Age and year Male Female Total 1963, population age 10 and over Total 759,887 252,280 1,012,167 0-14 12,480 4,818 17,298 15-64 721,407 240,414 961,821 65 and over 18,699 3,511 22,210 Age not given 7,301 3,537 10,838 1975, population age 12 and over Total 783,584 311,016 1,094,600 0-14 9,889 3,617 13,506 15-64 748,770 301,988 1,050,758 65 and over 24,925 5,411 30,336 Unemployed population Age and year Male Female Total 1963, population age 10 and over Total 275,477 805,375 1,080,852 0-14 100,346 105,074 205,420 15-64 101,889 587,429 689,318 65 and over 69,915 104,201 174,116 Age not given 3,327 8,671 11,998 1975, population age 12 and over Total 269,849 797,154 1,067,003 0-14 65,328 69,596 134,924 15-64 110,425 581,689 692,114 65 and over 94,096 145,869 239,965 Source. See table B-2. Statistical Appendix B 315 Table B-5. Uruguay: Labor Force, by Sector, 1963 and 1975 (thousands) Employed Unemployed No dataa Total Sector 1963 1975 1963 1975 1963 1975 1963 1975 All sectors 859.9 1,020.1 98.3 74.5 54.0 - 1,012.2 1,094.6 Agriculture 168.2 167.0 14.7 7.9 0.8 - 183.7 174.9 Industry 197.1 199.0 21.4 9.1 2.2 - 220.7 208.1 Construction 38.3 53.7 16.2 5.7 0.4 - 55.4 59.4 Electricity, water, etc. 4.7 16.0 0.2 0.2 - - 4.9 16.2 Transport and storage 55.2 52.4 2.8 1.3 0.5 - 58.5 53.7 Commerce 100.9 129.3 8.0 5.2 0.9 - 109.3 134.5 Other services 281.0 368.8 14.6 10.2 2.4 - 298.0 379.0 Seeking work for the first time - - 19.9 17.1 - - 19.9 17.1 No data 14.0 33.9 0.5 17.8 46.8 - 61.3 51.7 -Not available. a. No figures were available for 1975. Source. See table B-2. Table B-6. Uruguay: Employment, 1964-83 (thousands of persons) Public Private Year Montevideo Rural Total sector sector 1964 430 477 907 224 683 1965 434 487 921 - - 1966 436 496 932 - - 1967 434 508 942 - - 1968 433 506 939 - - 1969 431 516 947 231 716 1970 439 530 969 - - 1971 444 537 981 - - 1972 440 543 983 - - 1973 436 542 978 - - 1974 448 552 1,000 - - 1975 473 563 1,036 - - 1976 462 535 997 - - 1977 478 549 1,027 - - 1978 471 567 1,038 233 804 1979 475 585 1,060 - - 1980 494 603 1,097 - - 1981 511 616 1,127 - - 1982 491 591 1,082 - - 1983 475 576 1,051 241 810 -Not available. Source. Vieytes 1984. 316 Costa Rica and Uruguay Table B-7. Uruguay: Employment and Unemployment, by Sex, 1963 and 1975 Item 1963 1975 Laborforce Male 719,778 783,584 Female 238,514 311,015 Total 958,292 1,094,599 Employed population Male 640,152 730,528 Female 218,837 289,560 Total 858,989 1,020,088 Unemployed populationa Male 79,626 53,056 Female 19,677 21,455 Total 99,303 74,511 Unemployment rate (percent) Male 11.06 6.77 Female 8.25 6.90 Total 10.36 6.81 a. Indudes persons seeldng work for the first time. Source- See table B-2. Table B-8. Uruguay: Unemployment Rate, by Activity, 1966,1971,1981, and 1984 1966 1971 1981 2984 Sector First half Second half First half Second half Fist half Second half First haLf Second half Total 7.6 6.9 7.6 7.6 5.8 7.5 14.2 12.6 Manufacturing 6.9 6.2 7.5 8.5 4.7 7.7 12.2 10.7 Construction 16.8 15.8 13.0 9.0 3.9 7.5 18.0 15.4 Commerce 5.6 4.5 4.9 5.3 6.7 5.0 11.0 9.5 Transport and storage 2.1 2.4 3.0 3.4 2.3 4.0 6.5 5.0 Services 3.3 3.5 3.8 3.4 3.2 3.3 8.5 7.2 Source: Uruguay, Direcci6n General de Estadlsticas y Censos, Encuesta de Hogares, Ocupacidn y Desocupaci6n, various years. 318 Costa Rica and Uruguay Table B-9. Uruguay: Employment in the Public Sector, 1984 Activity Number of employed persons Central governnent and sodal security 156,573 Enterprises and banks 56,070 Local government 33,050 Total 245,693 Source. Uruguay, Oficina de Planeamiento y Presupuesto, 1984. Table B-10. Uruguay: Employment in Public Enterprises, by Activity, 1978 Activity Number of persons employed Electric power 10,241 Railroads 9,771 Telephones 8,179 Oil refinery 7,479 Port 5,688 Water 5,139 Commercial bank 3,967 hnsurance 1,986 Housing bank 1,159 Fishing 767 Airline 529 Source. Uruguay, Oficina de Planeaniento y Presupuesto, 1978. Table B- 1. Uruguay: Structure of GDP at 1961 Constant Market Prices, 1955-84 (millions of new pesos) Central Private government Fixed gross Change Year consumption consumption investment in stocks Exports Imports GDP 1955 12,821 1,763 3,135 19 1,914 2,814 16,838 1956 12,596 1,759 2,895 -34 2,470 2,555 17,131 1957 13,698 1,804 2,970 213 1,636 3,017 17,304 1958 12,336 1,794 2,152 44 2,236 1,877 16,685 1959 12,106 1,752 2,261 243 2,028 2,176 16,214 1960 12,933 1,794 2,488 337 2,008 2,758 16,802 1961 12,740 1,828 2,766 126 2,467 2,623 17,304 1962 13,136 1,913 2,828 -88 2,118 2,984 16,923 1963 12,455 1,889 2,324 155 2,212 2,285 16,750 1964 13,559 1,962 2,020 78 2,235 2,498 17,356 1965 12,383 2,113 1,951 41 2,939 1,906 17,521 1966 13,228 2,301 1,919 167 2,606 2,113 18,108 1967 12,747 2,294 2,165 89 2,432 2,362 17,365 1968 12,560 2,485 2,010 -11 2,784 2,186 17,642 1969 13,587 2,488 2,568 -23 2,781 2,688 18,713 1970 14,454 2,783 2,745 -12 2,929 3,304 19,594 1971 14,594 2,595 2,871 176 2,718 3,567 19,387 1972 14,559 2,249 2,341 209 2,526 3,171 18,713 1973 15,084 2,711 1,993 441 2,554 3,448 19,335 1974 14,873 2,892 2,130 206 3,123 3,232 19,992 (Table continues on thefollowing page.) Table B-11 (continued) V Central Private government Fixed gross Change Year consumption consumption investment in stocks Exports Imports GDP 1975 14,848 2,749 2,982 13 3,842 3,492 20,942 1976 14,001 2,932 3,813 -195 4,888 3,616 21,823 1977 14,188 2,855 4,050 -4 5,148 4,016 22,221 1978 14,920 3,172 4,485 13 5,384 4,371 23,603 1979 16,258 3,588 5,398 211 6,478 5,291 26,642 1980 17,077 3,523 5,675 335 5,945 5,722 26,833 1981 17,482 3,787 5,505 -291 6,312 5,779 27,015 1982 15,791 3,696 4,686 -569 5,648 4,994 24,259 1983 14,348 3,409 3,222 -538 6,511 3,829 23,123 1984 14,089 3,453 2,409 -65 6,489 3,543 22,832 Source: Estimates based on data from Banco Central del Uruguay and Instituto de Economia. Statistical Appendix B 321 Table B-12. Uruguay: Public and Private Sectors as Shares of GDP, 1955 and 1981 (percent) 1955 1981 Public Private Public Private Activity sector sector Total sector sector Total Agriculture - 100.0 100 0.3 99.7 100 Fishing 41.6 58.4 100 2.0 98.0 100 Manufacturing 9.6 90.4 100 4.9 95.1 100 Electricity, gas, and water 90.2 9.8 100 98.6 1.4 100 Construction - 100.0 100 - 100.0 100 Trade 0.5 99.5 100 0.3 99.7 100 Transport and storage 27.4 72.6 100 15.3 84.7 100 Communications 3.1 96.9 100 100.0 - 100 Banking and insurance 34.6 65.4 100 41.0 59.0 100 Housing - 100.0 100 - 100.0 100 General govermnent 100.0 - 100 100.0 - 100 Other 2.2 97.8 100 1.6 98.4 100 Total 16.5 83.5 100 21.6 78.4 100 - Not available. Source: Banco Central del Uruguay, Cuentas Nacionales, various issues. Table B-13. Uruguay: Value of Agricultural Production, Selected Years, 1955-80 (percent) Activity 1955 1960 1970 1980 Crops 38 25 36 39 Wheat 15 4 7 15 Other 23 21 29 24 Livestock products 62 75 64 61 Beef 29 36 34 26 Wool 18 25 14 13 Other 15 14 16 22 Total 100 100 100 100 Source See table B-12. 322 Costa Rica and Uruguay Table B-14. Uruguay: Industrial GDP, Selected Years, 1955-80 (percent) Industry 1955 1960 1970 1980 Food 23.3 19.1 22.5 18.9 Beverages 7.7 7.6 11.1 8.3 Tobacco 2.5 3.2 3.6 3.0 Textiles 15.7 12.7 10.3 12.8 Clothing 4.8 5.3 5.0 3.1 Paper 0.9 2.0 2.3 3.3 Rubber 1.0 3.5 1.7 1.9 Chemicals 5.3 6.1 6.6 6.1 Oil 5.1 4.8 4.7 3.4 Capital goods 7.8 7.6 4.2 5.6 Other 25.9 27.1 28.0 33.6 Total 100.0 100.0 100.0 100.0 Source. See table B-12. Table B-15. Uruguay: Effective Protection in the Industrial Sector, 1975 (percent) Rate of effective Product protection Food -8.8 Beverages 36.0 Tobacco 225.7 Textiles 88.9 Shoes and clothing 79.7 Wood _ Furniture Paper products 10.1 Printing Leather products Rubber products 262.0 Chernical products -18.9 Oil derivatives 71.4 Nonmetallic minerals -7.1 Basic metals Metal products 282.7 Machinery Electrical apparatus 608.6 Transport equipment Miscellaneous industries -Not available. Source: Anichini, Caumont, and Sjaastad 1978. Statistical Appendix B 323 Table B-16. Uruguay: Effective Protection in the Industrial Sector, 1981 (percent) Rate of effective Product protection Consumption goods 46.19 Durables 316.93 Automobiles 378.51 Electrical appliances and communications 262.16 Nondurables -33.67 Food, beverages, and tobacco 29.33 Shoes and clothing 45.64 Chemical products 59.60 Producer goods 106.78 Intermediate 100.87 Food -21.30 Textiles 90.69 Tannery 143.21 Paper products 127.03 Chemicals, oil derivatives, and plastics 161.17 Nonmetallic minerals 31.84 Metal products 150.57 Machinery and transport equipment 286.07 Tubes and tires 592.69 Glass 80.68 Industrial machinery 75.37 Automobiles 231.10 Source: Centro de Investigaciones Econ6micas 1982. 324 Costa Rica and Uruguay Table B-17. Uruguay: GDP and GDP per Capita, 1955-84 GDP (millions GDP (millions GDP per capita Year of new pesos) of 1961 dollars) (1961 dollars) 1955 4.6 16,838 7,179 1956 5.2 17,131 7,203 1957 5.1 17,304 7,175 1958 6.6 16,681 6,821 1959 8.9 16,214 6,539 1960 13.6 16,802 6,682 1961 17.3 17,304 6,790 1962 18.8 16,923 6,546 1963 22.4 16,750 6,389 1964 32.6 17,356 6,531 1965 52.5 17,521 6,515 1966 99.6 18,108 6,667 1967 169.8 17,365 6,341 1968 374.5 17,642 6,384 1969 506 18,713 6,720 1970 612 19,595 3,979 1971 722 19,387 6,876 1972 1,242 18,713 6,597 1973 2,561 19,335 6,788 1974 4,546 19,992 7,012 1975 8,166 20,942 7,422 1976 12,638 21,823 7,741 1977 19,915 22,221 7,861 1978 30,930 23,603 8,305 1979 57,625 26,642 9,305 1980 92,204 26,833 9,292 1981 122,453 27,015 9,284 1982 128,696 24,259 8,269 1983 188,437 23,123 7,901 1984 295,546 22,832 7,821 Source. Based on data from Banco Central del Uruguay. Table B-18. Uruguay: GDP and Wages, Selected Years, 1955-80 (millions of new pesos) Wages as Year GDP Wages percentage of GDP 1955 4.6 1.6 34.8 1960 14 4.7 33.6 1970 612 241 39.4 1980 79,539 24,698 31.1 Source: Based on data from Banco Central del Uruguay. Statistical Appendix B 325 Table B-19. Uruguay: Industrial GDP, Montevideo and Rural Areas, 1978 Millions As share of Area of new pesos total (percent) Montevideo 7,804 83.7 Rural 1,521 16.3 Total 9,325 100.0 Source: Uruguay, Direcci6n General de Estadisticas y Censos, 1979. Table B-20. Uruguay: Labor Productivity, 1963 and 1975 Item 1963 1975 Agriculture GDP (thousands of 1961 new pesos) 2,579 2,669 Workers 183,678 174,871 GDP per worker 0.0140 0.0153 Industry GDP (thousands of 1961 new pesos) 3,351 4,426 Workers 195,799 205,943 GDP per worker 0.0171 0.0215 Source. Based on data from Banco Central del Uruguay and Uruguay, Direcci6n Gen- eral de Estadisticas y Censos. 326 Costa Rica and Uruguay Table B-21. Unrguay: Exports and Imports, 1950-84 (millions of U.S. dolars) Current prices Millions of 1961 dollars Year Exports Imports Exports Imports 1950 254.2 211A 204.5 247.8 1951 276.3 316.4 136.4 309.9 1952 208.7 250.9 157.7 238.3 1953 269.5 206.4 207.6 208.7 1954 348.8 273.9 195.0 294.5 1955 183.0 237.6 156.8 234.8 1956 215.7 209.1 196.8 196.5 1957 136.0 252.9 116.8 231.6 1958 155.4 143.1 153.7 132.9 1959 108.3 176.2 110.5 172.1 1960 129.4 217.5 124.4 224.9 1961 174.7 210.9 174.7 210.9 1962 153.7 230.5 153.4 241.9 1963 165.2 176.9 163.1 178.0 1964 178.9 197.9 155.2 200.3 1965 191.2 150.7 173.5 153.5 1966 185.8 164.2 165.4 - 1967 158.7 171.4 151.7 179.1 1968 179.2 159.3 189.6 161.7 1969 200.4 197.3 194.6 200.7 1970 232.7 230.9 218.1 229.8 1971 205.8 228.9 199.3 252.6 1972 214.1 211.6 162.6 238.8 1973 321.5 284.8 173.2 299.8 1974 382.2 486.7 210.6 276.5 1975 383.8 556.5 244.8 294.1 1976 546.5 587.2 327.8 319.0 1977 607.5 729.9 346.2 363.5 1978 686.1 774.3 365.9 377.2 1979 788.1 1,230.8 346.9 489.6 1980 1,058.6 1,602.5 387.9 507.0 1981 1,215.4 1,598.9 446.3 457.0 1982 1,022.9 1,110.0 418A 339.7 1983 1,045.1 787.5 464.2 255.5 1984 924.6 775.7 403.2 248.7 -Not available. Source Banco Central del Uruguay, Boletfn Estadfstico, various issues. Statistical Appendix B 327 Table B-22. Uruguay: Prices of Exports and Imports, 1955-84 (1%1 = 100) Year Export price Import price Terms of trade 1955 116.70000 101.20000 115.31620 1956 109.60000 106.40000 103.00750 1957 116.40000 109.20000 106.59340 1958 101.10000 107.70000 93.87186 1959 98.00000 102.40000 95.70313 1960 104.00000 96.70000 107.54910 1961 100.00000 100.00000 100.00000 1962 100.20000 95.30000 105.14170 1963 101.30000 99.40000 101.91150 1964 115.30000 98.80000 116.70040 1965 110.20000 98.10000 112.33440 1966 112.30000 96.30000 116.61470 1967 105.80000 95.70000 110.55380 1968 94.50000 98.50000 95.93909 1969 103.00000 98.30000 104.78130 1970 106.70000 105.50000 101.13740 1971 103.20000 90.60000 113.90730 1972 134.40000 100.90000 133.20120 1973 189.30000 108.20000 174.95380 1974 185.20000 200.40000 92.41517 1975 160.00000 215.43000 74.27007 1976 170.10000 209.60000 81.15458 1977 179.10000 228.70000 78.31220 1978 191.20000 233.70000 81.81429 1979 231.80000 286.30000 80.96403 1980 278.40000 359.90000 77.35482 1981 277.80000 398.40000 69.72891 1982 249.50000 366.50000 68.07640 1983 229.80000 345.60000 66.49306 1984 230.90000 345.30000 66.86939 Source: Based on data from Banco Central del Uruguay and Banco de la Repdblica Ori- ental del Uruguay. 328 Costa Rica and Uruguay Table B-23. Uruguay: Exports and Imports, Selected Items and Years, 1950-80 (millions of dollars) Item 1950 1960 1970 1980 Exports Wool 152.7 45.1 47.6 125.6 Meat 43.6 30.6 87.8 170.1 Hides 29.4 15.5 24.3 40.2 Agricultural goods 1.7 0.8 1.0 108.0 Other 26.8 37.4 72.0 614.7 Total 254.2 129.4 232.7 1,058.6 Imports Oil 23.8 34.7 33.7 476.5 Machinery 32.4 16.9 26.6 241.4 Vehicles 22.5 21.3 36.1 202.1 Consumption goods 44.8 15.3 14.4 104.7 Other 87.9 129.3 119.9 577.8 Total 211.4 217.5 230.9 1,602.5 Source: Banco Central del Uruguay, BoLetin Estadfstico, various issues. Statistical Appendix B 329 Table B-24. Uruguay: Beef Exports, 1961-84 f.o.b. Thousands Price/ton Year of dollars Tons (dollars) 1961 23,983 51,519 465.5 1962 27,916 - - 1963 28,887 75,980 380.2 1964 63,422 163,577 387.7 1965 44,200 104,697 422.2 1966 33,768 69,182 488.1 1967 33,673 68,965 488.3 1968 51,851 75,693 685.0 1969 53,922 124,208 434.1 1970 74,118 147,658 502.0 1971 58,878 89,347 659.0 1972 97,883 114,999 851.2 1973 119,607 112,019 1,067.7 1974 134,837 114,079 1,182.0 1975 68,148 106,356 640.8 1976 68,814 185,299 371.4 1977 100,442 127,357 788.7 1978 78,227 114,869 681.0 1979 94,872 77,478 1,224.5 1980 155,445 111,049 1,399.8 1981 213,594 167,958 1,271.7 1982 170,341 160,780 1,059.5 1983 222,862 220,493 1,010.7 1984 129,641 135,426 957.3 -Not available. Source. Banco Central del Uruguay and Banco de la Republica Oriental del Uruguay, unpublished data. 330 Costa Rica and Uruguay Table B-25. Uruguay: Wool Exports, 1961-84 f.o.b. Thousands Price/ton Year of dollars Tons (dollars) 1961 109,832 83,881 1,309.4 1962 81,613 56,370 1,447.8 1963 84,991 53,357 1,592.9 1964 67,476 35,490 1,901.3 1965 90,339 66,387 1,360.8 1966 84,372 66,427 1,270.1 1967 98,903 70,061 1,411.7 1968 77,983 80,159 972.9 1969 67,396 63,824 1,056.0 1970 73,211 70,582 1,037.2 1971 64,648 73,965 874.0 1972 54,477 50,384 1,081.2 1973 97,538 43,040 2,266.2 1974 87,194 40,707 2,142.0 1975 86,567 59,813 1,447.3 1976 100,564 53,358 1,884.7 1977 120,716 55,536 2,173.7 1978 132,014 60,096 2,196.7 1979 101,365 40,014 2,533.2 1980 212,752 74,694 2,848.3 1981 236,107 76,182 3,099.2 1982 295,942 78,204 2,621.9 1983 168,565 71,444 2,359.4 1984 164,517 70,042 2,48.8 Source: See table B-24. Statistical Appendix B 331 Table B-26. Uruguay: Exports of Frozen Beef, Brazil and Egypt, 1970-84 Year Brazil Egypt 1970 2,397 3,887 1971 7,850 3,546 1972 1,002 2,986 1973 - 1,000 1974 48,567 - 1975 23,658 5,416 1976 20,438 29,162 1977 26,380 24,507 1978 52,979 11,416 1979 34,470 3,567 1980 57,004 9,143 1981 62,541 32,971 1982 17,045 28,246 1983 19,543 60,393 1984 23,868 12,064 -Not available. Source: Banco Central del Uruguay, unpublished data. 332 Costa Rica and Uruguay Table B-27. Uruguay: Oil Imports, 1961-86 (1961 =100) Year Price Quantity 1961 100.00 100.0 1962 95.92 121.1 1963 90.71 108.1 1964 92.84 112.9 1965 93.38 103.1 1966 87.21 160.8 1967 86.03 132.3 1968 84.63 119.2 1969 85.99 108.3 1970 85.32 150.9 1971 101.30 146.6 1972 111.18 134.0 1973 142.31 149.5 1974 433.66 153.2 1975 479.12 162.4 1976 491.82 154.6 1977 540.37 163.4 1978 521.69 183.1 1979 767.51 142.5 1980 1,204.27 165.6 1981 1,369.23 155.2 1982 1,331.51 148.1 1983 1,147.56 108.0 1984 1,116.63 110.5 1985 1,119.49 94.7 1986 548.50 118A Source:. Cmara Nacional de Comercio, Banco Central del Uruguay, and ANCAP, un- published data. Statistical Appendix B 333 Table B-28. Uruguay: Balance of Payments, Selected Years, 1950-84 (millions of dollars) Private sector capital Public Other itfems, movements sector current Non- capital Monetary Year Trade account Registered registered movements authority 1950 69.7 -23.1 -108.4 19.6 44.1 1.9 1960 -58.5 -15.9 20.6 11.4 14.5 -27.9 1970 21.0 -66.1 32.1 -26.0 12.7 -26.3 1980 -592.3 -99.7 572.9 94.5 178.0 153.4 1984 192.3 -321.5 176.9 -134.2 41.4 -45.1 Source Banco Central del Uruguay, Boletin Estadistico, various issues. 334 Costa Rica and Uruguay Table B-29. Uruguay: External Debt: Liabilities with Nonresidents, End of Year, 1955-84 (millions of dollars) Year Private Public Total 1955 62.1 119.0 181.1 1956 40.9 117.9 158.8 1957 33.6 160.3 193.9 1958 46.8 174.1 220.9 1959 44.2 211.3 255.5 1960 46.5 240.2 286.7 1961 88.7 217.5 306.2 1962 132.0 301.1 433.1 1963 123.6 288.4 412.0 1964 167.9 303.9 471.8 1965 213.5 267.3 480.8 1966 149.8 330A 480.2 1967 158.8 292.1 450.9 1968 167.2 310.3 477.5 1969 205.9 325.9 531.8 1970 191.5 373.0 564.5 1971 221.7 452.5 674.2 1972 231.3 539.9 771.2 1973 180.4 537.5 717.9 1974 217.6 737.5 955.1 1975 170.7 860.5 1,031.2 1976 173.1 961.8 1,134.9 1977 292.1 1,027.9 1,320.0 1978 329.8 909.7 1,239.5 1979 670.5 1,011.9 1,682.4 1980 973;6 1,179.1 2,152.7 1981 1,664.7 1,464.6 3,129.3 1982 1,550.2 2,705.1 4,255.3 1983 1,391.9 3,197.5 4,589.4 1984 1,507.7 3,180.4 4,688.1 Source. See table B-24. Statistical Appendix B 335 Table B-30. Uruguay: Consumer Prices, 1950-84 Index Year (1968 = 100) 1950 0.8 1951 0.9 1952 1.0 1953 1.1 1954 1.2 1955 1.3 1956 1.4 1957 1.6 1958 1.9 1959 2.6 1960 3.7 1961 4.5 1962 5.0 1963 6.1 1964 8.6 1965 13.5 1966 23A 1967 44.4 1968 100.0 1969 120.9 1970 140.7 1971 174.4 1972 307.8 1973 606.3 1974 1,074.2 1975 1,948.6 1976 2,935.1 1977 4,643.1 1978 6,711.5 1979 11,197.0 1980 18,305.5 1981 24,529.2 1982 29,190.0 1983 43,551.4 1984 67,635.3 Source Uruguay, Direcd6n General de Estadisticas y Censos, Indice de los Precios de Consunw, various years. 336 Costa Rica and Uruguay Table B-31. Uruguay: GDP Deflator, 1955-84 Index Year (1968 = 100) 1955 1.3 1956 1.4 1957 1.7 1958 2.0 1959 2.8 1960 4.0 1961 4.7 1962 5.4 1963 6.4 1964 9.1 1965 14.8 1966 25.4 1967 46.5 1968 100.0 1969 127.1 1970 144.1 1971 175.8 1972 285.0 1973 618.5 1974 1,091.7 1975 1,813.3 1976 2,667.4 1977 4,163.8 1978 6,053.3 1979 10,802.0 1980 16,278.7 1981 21,259.9 1982 24,8103 1983 38,158.3 1984 61,053.3 Source Banco Central del Uruguay, Cuentas Nacionales, various issues. Statistical Appendix B 337 Table B-32. Uruguay: Exchange Rate, 1950-84 (new pesos/dollar, annual average) Year Official Free-market 1950 0.00190 1951 0.00190 - 1952 0.00190 - 1953 0.00190 - 1954 0.00190 - 1955 0.00196 0.00343 1956 0.00233 0.00405 1957 0.00303 0.00415 1958 0.00301 0.00735 1959 0.00358 0.01021 1960 0.01130 0.01133 1961 0.01101 0.01104 1962 0.01093 0.01108 1963 0.01430 0.01543 1964 0.01664 0.02135 1965 0.03076 0.05435 1966 0.06449 0.06849 1967 0.10578 0.12837 1968 0.23385 0.23748 1969 0.25000 0.25500 1970 0.25000 - 1971 0.25000 - 1972 0.53600 0.86090 1973 0.86600 0.89600 1974 1.19600 1.62200 1975 2.26000 2.66000 1976 3.34000 3.69000 1977 4.67000 4.73000 1978 6.06000 6.09000 1979 7.86000 7.85000 1980 9.10000 9.09000 1981 10.81000 10.80000 1982 13.93000 13.93000 1983 34.55000 34.55000 1984 56.11000 56.11000 -Not available. Source: Banco Central del Uruguay, Boletin Estadfstico, various issues. 338 Costa Rica and Uruguay Table B-33. Uruguay: Wages, 1957-84 (1968 = 100) Agricultural Industrial Minimum Year sector sector wage Government 1957 - 1.7 - - 1958 - 2.3 - - 1959 - 3.1 - - 1960 - 4.1 - - 1961 - 4.9 - 5.3 1962 - 5.7 - 6.4 1963 - 6.7 - 7.5 1964 - 9.1 - 10.6 1965 11.2 13.6 - 16.7 1966 24.2 26.2 - 24.7 1967 40.9 46.7 - 53A 1968 100.0 100.0 100.0 100.0 1969 129.1 129.1 128.9 134.9 1970 156.2 152.7 152.2 152.7 1971 206.9 182.4 241.6 200.5 1972 296.8 270.8 380.5 284.2 1973 546.4 515.4 775.6 560.4 1974 1,046.3 906.3 1,393.3 967.5 1975 1,860.5 1,492.1 2,417.8 1,601.0 1976 2,578.9 2,030.6 3,354.3 2,322.5 1977 3,630.2 2,758.5 4,567.7 3,265.2 1978 6,305.0 4,579.3 6,625.4 4,585.2 1979 9,666.3 7,166.1 10,203.7 7,083.3 1980 15,094.9 12,789.8 15,920.2 12,370.6 1981 20,076.8 18,787.3 24,056.0 17,655.6 1982 23,351.3 22,131.7 26,564.5 20,942.8 1983 28,652.0 26,559.3 - 24,492A 1984 44,814.8 39,177.5 52,858.3 33,146A -Not available. Source: Based on data from Uruguay, Direcci6n General de Estadisticas y Censos, Banco Central del Uruguay, and Instituto de Economia. Statistical Appendix B 339 Table B-34. Uruguay: Relative Prices, 1955-84 (191 = 100) Real Real wagest GDP deflatorsc exchange Industrial Public Agriculturel Housingl Year ratea sector sector industry total 1955 54.6 - - 105.4 241.0 1956 62.0 - - 100.8 237.0 1957 72.2 98.6 - 113.8 214.6 1958 63.0 109.7 - 92.2 207.5 1959 54.1 108.0 - 109.0 152.0 1960 121.3 99.9 - 147.8 108.6 1961 100.0 100.0 100.0 100.0 100.0 1962 92.0 103.2 109.2 111.7 100.3 1963 99.5 100.3 105.9 91.9 95.1 1964 82.0 96.5 106.0 109.0 75.2 1965 98.9 91.4 105.7 97.8 61.0 1966 122.9 102.0 90.5 99.5 49.4 1967 109.5 95.7 103.0 76.8 55.2 1968 107.1 91.0 89.6 91.1 58.2 1969 104.3 97.1 105.0 90.8 78.5 1970 90.9 98.7 87.2 87.6 89.5 1971 76.5 95.2 98.5 82A 97.1 1972 95.9 80.1 79.1 131.9 77.0 1973 83.7 77.3 79.2 125.7 51.2 1974 72.3 76.8 77.1 98.4 50.7 1975 82.3 69.7 70.4 69.3 82.1 1976 85.4 63.0 67.8 64.7 96.3 1977 80.4 54.1 60.2 77.6 104.6 1978 77.7 59.4 58.5 76.6 134.1 1979 67.2 58.2 54.2 79.6 118.5 1980 54.0 63.6 57.9 81.5 146.1 1981 52.9 69.7 61.6 70.7 195.4 1982 60.6 69.0 61.5 69.7 234.4 1983 104.1 55.5 48.2 82A 186.0 1984 113.6 52.7 41.9 92.4 142.7 - Not available. a. In terms of consumer prices; inflation in the United States was discounted. b. In terms of consumer prices. c. GDP agriculture prices compared with GDP industrial prices and GDP housing prices compared with GDP deflator. 340 Costa Rica and Uruguay Table B-35. Uruguay: Distribution of Industrial Wages, 1968,1978, and 1981 (1961 new pesos) Wages 1968 1978 1981 Blue-collar Wages (per hour) 0.0047 0.0029 0.0036 Coefficient of variation 30.59 15.48 20.60 White-collar Wages (per month) 1.38 0.75 1.44 Coefficient of variation 36.99 35.30 19.10 Source. Instituto de Economia, Universidad de la Repdblica, 1982. Table B-36. Uruguy: Household Income Distribution: Earned Income, Montevideo, 1968,1976, and 1979 Percent 1968 1976 1979 of households Simple Acum. Simple Acum. Simple Acum. 10 2.13 2.13 2.00 2.00 1.61 1.61 20 3.97 6.10 3.52 5.52 2.94 4.55 30 5.10 11.20 4.68 10.20 3.85 8.40 40 6.21 17.41 5.63 15.83 4.75 13.15 50 7.38 24.95 6.83 22.66 5.76 18.91 60 8.74 33.53 8.23 30.89 6.96 25.87 70 10.40 43.93 10.01 40.90 8.49 34.36 80 12.64 56.57 12.48 53.38 10.63 44.99 90 16.08 72.65 16.45 69.83 14.21 59.20 95 10.39 83.04 11.03 80.86 9.74 68.94 100 16.96 100.00 19.24 100.00 31.06 100.00 Gini index 0.3688 0.4054 0.4907 Average income (new pesos of February-June 1973) 115.8 126.5 135.2 Source: Melgar 1982. Statistical Appendix B 341 Table B-37. Uruguay: Age and Income, 1972 and 1979 (14-19 years income = 100) Age group (years) 1972 1979 14-19 100.0 100.0 20-24 158.2 155.2 25-29 195.2 238.2 30-34 208.7 232.5 35-39 249.9 267.0 40-44 251.2 256.8 45-49 224.5 229.4 50-54 218.6 251.0 55-60 253.2 229.9 Source: Indart 1981. Table B-38. Uruguay: Industrial Wages Compared with Minimum Wage, 1979 (percent) Wage earned Pe. centage (minimum wage =1) of workers Less than 1 2.1 1-2 25.4 2-3 27.0 3-4 16.2 4-5 9.4 5-7.5 9.1 7.5-10 3.7 10-15 3.5 15-20 1.4 20-25 0.9 25-50 1.0 More than 50 0.3 Source. Instituto de Economia, unpublished data. Table B-39. Uruguay: Government Wages Compared with Minimum Wage, 1983 (percent) Wage earned Percentage (minimum wage =1) of workers Less than 1 2.8 1-2 44.4 2.5-3 38.1 3-4 7.0 4-5 3.0 5-7.2 2.9 7.2-10.8 0.1 Source: Contaduria General de la Naci6n, unpublished data. 342 Costa Rica and Uruguay Table BA40. Uruguay: Capital Rate of Return, 1967-84 Year Overall capital Private capital 1967 4.73 5.90 1968 5.31 6.56 1969 5.74 7.01 1970 6.33 7.62 1971 5.93 7.32 1972 5.60 6.94 1973 6.63 8.20 1974 5.93 7.42 1975 5.92 7.36 1976 6.58 8.00 1977 6.38 7.83 1978 6.82 8.47 1979 7.93 9.99 1980 7.37 9.24 1981 6.96 8.89 1982 5.52 7.20 1983 5.64 7.67 1984 5.76 8.11 Source Camara Nacional de Comerao 1986, tables I and 2. Table B-41. Uruguay: Size Distribution of Farms, Selected Years, 1951-80 1951 1956 1961 1966 1970 1980 Number Thousands Number Thousands Number Thousands Number Thousands Number Thousands Number Thousands Hectares of farns of hectares of farms of hectares of farms of hectares of farms of hectares of farms of hectares offarms of hectares 1-9 22,070 106 25,037 118 25,797 122 23,453 133 22,982 110 18,176 89 10-49 30,681 728 31,594 742 29,747 693 26,411 607 25,330 580 21,326 497 50-99 10,375 732 10,345 731 9,490 674 8,299 585 7,927 559 7,433 530 100-199 7,814 1,103 7,864 1,104 7,387 1,042 6,880 969 6,603 931 6,958 992 200-499 7,241 2,272 7,157 2,236 6,986 2,174 6,808 2,148 6,734 2,133 6,782 2,166 500-999 3,475 2,444 3,528 2,478 3,712 2,609 3,476 2,459 3,626 2,564 3,792 2,682 1,000-2,499 2,452 3,810 1,332 3,794 2,587 3,994 2,654 4,124 2,784 4,305 2,810 4,332 2,500-4,999 763 2,584 807 2,700 891 3,043 898 3,049 869 2,963 930 2,800 5,000-9,999 316 2,065 287 1,892 280 1,857 260 1,717 253 1,641 217 1,421 10,000 and more 71 1,130 68 965 51 780 54 763 55 732 38 519 Total 85,258 16,974 88,019 16,760 86,928 16,988 79,193 16,534 77,163 16,518 68,362 16,027 Gini index 0.8249 0.8287 0.8326 0.8326 0.8239 0.8073 Source: Instituto de Estadfsticas, Censo General Agropecuario del Ministerio de Agricultura y Estadisticas BAsicas del Sector Agropecuario. Table B42. Uruguay: Land Distribution, by Form of Ownership, Selected Years, 1951-80 1951 1956 1961 1966 1970 1980 Form of Number Thousands Number Thousands Number Thousands Number Thousands Number Thousands Number Thousands ownership of farms ofhectares offarms of hectares of farms ofhectares offarms of hectares of farmns ofhectares offarms of hectares Owner 42,840 6,837 43,557 7,044 43,340 7,564 43,656 8,199 45,205 8,700 40,375 8,509 Tenant 30,309 5,692 32,716 5,593 29,303 4,955 22,323 3,910 17,668 3,148 12,077 2,041 Owner/tenant 8,997 4,305 7,315 3,618 7,381 3,925 6,977 3,754 7,395 3,887 7,703 1,735 Other 3,112 140 5,541 505 6,894 544 6,237 671 6,895 782 8,207 3,739 Total 85,258 16,974 89,130 16,760 86,918 16,988 79,193 16,534 77,163 16,517 68,362 16,024 Source: See table B-41. Table B-43. Uruguay: Industrial Firms, by Number of Workers, 1960,1968, and 1978 Number of workers in finn Year and characteristic 1-4 5-9 10-19 20-49 50-99 100-499 500 and more Total 1960 Firms 21,418 2,501 1,247 755 239 180 26 26,366 Workers 33,569 16,526 16,744 22,370 16,262 34,708 29,040 169,219 1968 Firms 27,844 - 573 495 210 - 208 29,330 Workers 69,450 - 8,098 15,273 14,594 - 61,208 168,623 Value of production (thousands of new pesos) 43,021 - 10,216 23,831 25,670 - 103,567 206,305 1978 Firms 6,326 1,867 1,155 741 350 272 39 10,750 Workers 5,331 7,896 11,326 17,555 19,936 44,627 28,728 135,399 Value of production (thousands of new pesos) 778,643 981,246 1,412,495 2,579,603 2,860,550 7,628,940 6,081,641 22,323,118 - Not available. Source: Uruguay, Direcci6n General de Estadisticas y Censos, Censo Economico Nacional, 1968,1979. W. Table B-44. Uruguay: Number of Students, by Level of Education, 1967,1975, and 1984 Type of school 1967 1975 1984 and location Public Private Public Private Public Private Total 430,577 86,519 487,569 99,745 614,303 89,643 Preprimary - - 27,477 12,762 41,073 13,381 Montevideo - - 12,152 9,346 17,744 8,968 Provinces - - 15,325 3,416 23,329 4,413 Primary 280,051 70,283 267,153 55,449 311,580 50,292 Montevideo 94,784 46,821 82,060 37,543 112,343 32,582 Provinces 185,267 23,462 185,093 17,906 199,237 17,710 Specialized and adult - - 6,092 - 5,511 Montevideo - - 1,976 - Provinces - - 4,116 Secondary 92,593 16,236 112,463 31,389 126,329 2,597 Montevideo 48,984 12,070 48,987 25,429 58,485 2,089 Provinces 43,609 4,166 63,476 5,960 67,843 5,079 Polytechnic 31,415 - 37,553 145 55,608 - Montevideo 17,452 - 20,133 - 27,246 - Provinces 13,963 - 17,420 145 28,362 - Teacher training 7,868 - 4,204 - 10,099 - Montevideo 2,245 - 1,531 - 4,102 - Provinces 5,623 - 2,673 - 5,997 - University 18,650 - 32,627 - 64,104 - Montevideo 18,650 - - - - - Provinces - - - - - - - Not available. Source: Uruguay, Direcci6n General de Estadisticas y Censos, Anuario Estadfstico, various years, and Censo Nacional de Poblacio'n y Vivienda, various years. Table B45. Uruguay: Number of Schools, by Level of Education, 1967, 1975, and 1984 Type of school 1967 1975 1984 and location Public Private Public Private Public Private Total 2,169 452 2,723 614 3,101 597 Preprimary - - 538 231 651 239 Montevideo - - 203 136 215 130 Provinces - - 335 95 436 109 Primarya 1,971 347 2,053 255 2,079 242 Montevideo 197 213 202 146 212 130 Provinces 1,774 134 1,851 109 1,867 112 Specialized and adult - - - - 104 - Montevideo - Provinces Secondary 104 105 132 128 152 116 Montevideo 26 42 43 88 38 77 Provinces 78 63 99 40 114 39 Polytechnic 74 - - - 93 - Montevideo 14 - - - 22 - Provinces 60 - - - 71 - Teacher training 20 - - - 22 - Montevideo 1 - - - 1 - Provinces 19 - - - 21 - University - - - - - - Montevideo Provinces - Not available. a. For 1967, includes adult and preprimary schools. Source: Uruguay, Direcci6n General de Estadisticas y Censos, Anuario Estadfstico, various years. (0 350 Costa Rica and Uruguay Table B-46. Uruguay: Dwellings in Montevideo, by Type of Occupation and Income Level Income (unidades Number Tenants reajustables) of dwellings Owners and others 0-19 16.7 5.8 10.9 20-29 32.2 11.9 20.3 30-39 40.0 22.0 18.0 40-49 41.2 17.5 23.7 50-74 92.5 53.7 38.8 75-99 62.7 42.9 20.7 100-124 41.6 29.1 20.7 125-250 66.8 41.4 25.4 More than 250 13.7 8.8 4.9 Source Banco HGpotecario del Uruguay, unpublished data. Table B-47. Uruguay: Labor Force and Social Security Beneficiaries, Selected Years, 1964-83 (thousands of persons) Labor force covered by benefits Labor ilness Child Year force Retirees insurance allowance 1964 977.7 342.2 52.0 284.1 1970 1,047.3 457.8 72.0 334.3 1975 1,110.5 527.7 87.1 335.4 1980 1,182.6 620.4 252.2 484.7 1983 1,242.9 683.4 247.1 454.2 Source Vieytes 1984, pp. 178,182,222, and 228. Statistical Appendix B 351 Table B-48. Uruguay: Central Government Revenues and Expenditures as a Share of GDP, 1961-84 (percent) Year Revenues Expenditures 1961 15.6 16.6 1962 14.4 18.2 1963 14.4 17.3 1964 14.0 16.1 1965 10.6 15.7 1966 12.5 13.8 1967 10.9 14.1 1968 13.0 13.2 1969 12.2 14.7 1970 13.5 15.2 1971 14.0 18.7 1972 13.6 16.1 1973 14.5 15.9 1974 12.9 17.4 1975 12.1 16.5 1976 13.6 16.2 1977 14.8 26.0 1978 14.1 15A 1979 14.6 14.4 1980 16.1 16.1 1981 17.4 17.5 1982 15.2 13.0 1983 15.6 19.6 1984 13.5 18.8 Source: Banco Central del Uruguay, Boletin Estadfstico, various issues. Table B-49. Uruguay: Central Government Revenues, by Source, 1955-67 Source 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 Direct taxes 12.8 14.6 15.3 17.1 16.2 13.6 11.1 10.1 8.6 8.1 7.6 7.1 8.4 On incomes 3.1 2.9 3.0 3.4 5.3 4.9 4.4 4.0 2.6 2.4 2.6 3.9 3.2 On capital 9.7 11.7 12.3 12.6 10.9 8.7 6.7 6.1 6.0 5.7 5.0 3.2 5.2 Indirect taxes 41.3 38.7 37.1 36.9 36.4 33.0 33.7 29.9 27.1 31.5 37.1 37.9 37.9 Taxes on external trade 14.1 14.5 11.2 5.7 5.5 17.4 17.2 13.1 14.6 13.7 10.8 16.1 13.3 Taxes on wages 31.8 32.2 36.4 40.3 41.9 36.0 38.0 46.9 49.7 46.7 44.5 38.9 40.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Based on Banco de la Repdblica Oriental del Uruguay and Banco Central del Uruguay, Cuentas Nacionales, 1965,1968, tables 27 and 3.A.2. Table B-50. Uruguay: Revenues of the Central Government and Municipalities, by Source, 1968-84 (percent) Tax 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 Direct taxes 6.7 8.1 - 10.6 13.3 13.8 13.5 14.0 15.4 15.9 16.5 16.3 18.6 17.9 17.7 17.6 13.1 On incomes 2.9 3.1 - 4.0 4.9 6.1 6.1 5.9 6.5 6.9 7.5 7.7 10.6 8.4 7.2 7.6 5.2 On capital 3.8 5.0 - 6.6 8.4 7.7 7.4 8.1 8.9 9.0 9.9 8.6 8.0 9.5 10.5 10.1 7.9 Indirect taxes 37.2 39.2 - 42.0 38.8 42.2 46.9 50.3 46.6 47.7 47.1 44.1 46.5 48.7 47.7 44.6 49.6 Taxesoninternaltrade 19.2 13.6 - 8.0 10.1 12.4 9.0 6.4 8.2 9.5 8.1 13.0 13.6 11.7 9.5 11.1 10.5 Taxes on wages 36.9 39.1 - 39.4 37.8 31.6 30.6 29.3 29.8 27.0 28.3 26.6 21.3 21.7 25.1 26.7 26.8 Total 100.0 100.0 - 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 -Not available. Source: Uruguay, Oficina de Planeamiento y Presupuesto, various years; for 1968-71, authors' estimates based on the same source. Table B-51. Uruguay: Central Government Consumption Expenditure, by Activity, 1955-61 (percentage of total) Activity 1955 1956 1957 1958 1959 1960 1961 General services 4.8 46.3 47.8 46.2 45.3 48.4 44.6 General administration 7.8 8.0 8.0 8.4 7.1 9.0 9.0 Defense 15.7 15.0 15.8 14.7 15.7 17.7 15.1 justice 4.0 3.9 3.8 3.9 3.6 3.2 3.4 Internal security 11.6 11.3 12.0 12.0 11.9 12.1 10.3 Economic and financial regulation 8.9 8.1 8.2 7.2 7.0 6.4 6.8 Social services 45.3 46.3 45.5 47.3 48.2 45.6 48.2 Education 26.7 27.3 27.4 29.3 29.9 26.6 30.4 Public health 16.6 17.1 16.2 16.3 16.7 17.3 16.3 Social security 1.9 1.8 1.8 1.6 1.5 1.6 1.4 Housing and urbanization 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Economnic services 6.6 7.3 6.6 6.4 6.4 5.9 7.0 Agriculture and fishery 2.9 2.9 2.6 2.6 2.6 2.3 2.5 Mining 0.1 0.4 0.2 0.1 0.2 0.5 0.1 Industry 0.7 1.2 0.9 0.9 0.9 0.8 0.8 Transport and storage 2.0 2.0 1.9 1.9 1.9 1.6 2.9 Communications 0.3 0.3 0.3 0.3 0.3 0.3 0.2 Commerce and other services 0.6 0.5 0.7 0.6 0.5 0.4 0.5 Financial services 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Public debt 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note: Excludes social security and decentralized offices. Source: Banco Central del Uruguay, Cuentas Nacionales, 1965, p. B157. Statistical Appendix B 355 Table B-52. Uruguay: Central Government Expenditure, by Function, as a Percentage of Totals for 1964,1966, and 1968 1964 Function Consumption Subsidies Investment Total General services 47.3 15.5 1.6 34.7 General adminustration 11.6 6.3 - 9.2 Defense 13.0 - - 8.3 Justice 3.7 - - 2.3 Internal security 11.7 - 1.1 7.6 Economic regulation 7.3 9.2 0.5 7.3 Social services 46.9 36.1 13.1 41.2 Education 29.0 0.9 7.8 19.4 Public health 15.2 - 3.3 10.0 Environmental hygiene - 3.6 - 1.0 Social security 2.7 20.9 2.0 7.7 Housing - 10.7 - 3.1 Economic services 5.5 36.3 50.2 17.9 Agriculture and fishery 2.7 1.4 0.3 2.2 Mining Industry 0.6 - - 0.4 Transport and storage 1.7 25.2 49.9 12.2 Communications 0.1 7.5 - 2.2 Commerce and other 0.4 2.2 - 0.9 Financial services 0.1 11.9 35.1 6.2 Public debt 0.1 11.9 35.1 6.2 Total 99.8 99.8 100.0 100.0 1966 Function Consumption Subsidies Investment Total General services 43.6 30.3 4.2 36.9 General administration 10.9 4.6 0.8 8.4 Defense 14.8 0.1 2.5 9.7 justice 3.0 - - 1.9 Internal security 9.7 - 0.7 6.3 Economic regulation 5.2 25.6 0.2 10.6 Social services 51.1 24.2 23.7 41.5 Education 34.9 0.8 17.3 23.9 Public health 14.1 3.6 5.3 9.8 Environrnental hygiene - 0.5 0.2 1.0 Social security 2.1 19.3 0.9 6.8 Housing - - - - (Table continues on thefolloawing page) 356 Costa Rica and Uruguay Table B-52 (continued) 1966 Function Consumption Subsidies Investment Total Economic services 5.2 35.8 34.8 16.1 Agriculture and fishery 2.6 2.9 0.8 2.6 Mining - - - - Industry 0.8 - - 0.5 Transport and storage 1.4 25.6 33.7 10.7 Communications - 6.0 0.2 1.8 Commerce and other 0.4 1.1 0.1 0.5 Financial services 0.0 9.7 37.2 6.2 Public debt - 9.7 37.2 6.2 Total 99.9 100.0 99.9 100.7 1968 Function Consumption Subsidies Investment Total General services 44.6 26.2 11.8 36.5 General administration 12.0 26.2 5.3 13.6 Defense 14.2 - 1.8 9.8 Justice 2.3 - 2.7 2.0 Internal security 12.4 - 1.1 8.5 Economic regulation 3.7 - 0.9 2.6 Social services 49.6 28.8 32.1 43.2 Education 35.5 0.8 24.0 27.4 Public health 12.3 0.1 6.7 9.3 Environmental hygiene - 2.3 0.1 0.4 Social security 1.8 24.1 1.2 5.8 Housing - 1.5 0.1 0.3 Economic services 5.7 32.3 37.8 15.3 Agriculture and fishery 3.3 7.6 3.4 4.1 Mining 0.1 - - 0.1 Industry 0.4 0.3 - 0.3 Transport and storage 1.7 17.9 34.0 9.4 Conmmunications - 6.5 - 1.2 Commerce and other 0.2 - 0.4 0.2 Financial services 0.4 12.7 18.2 5.0 Public debt 0.4 12.7 18.2 5.0 Total 100.3 100.0 99.9 100.0 - Not available. Source: Banco Central del Uruguay, Cuentas Nacionales, 1968. Table B-53. Uruguay: Sectoral Classification of Budgetary Programs, 1974-82 (percent) Sector 1974 1975 1976 1977 1978 1979 1980 1981 1982 Resources Human resources 36.99 39.67 39.81 42.18 40.29 - - - - 1.1.1. Culture and education (01) 15.98 17.29 15.71 16.28 16.12 16.07 14.84 14.77 10.98 1.1.2. Health (02) 8.28 7.44 7.17 6.84 6.64 7.57 6.04 6.53 4.51 1.1.3. Labor and social security (03) 12.39 14.57 16.53 18.32 17.46 17.57 24.98 25.67 28.95 1.1.4. Housing (04) 0.34 0.37 0.40 0.74 0.07 0.04 0.03 0.06 0.05 Subtotal 1.1 - - - - - 41.25 45.89 47.03 44.49 Natural resources (05) 0.56 0.65 0.46 0.91 1.64 1.27 1.27 1.39 0.84 Total 37.55 40.32 40.27 43.09 41.93 42.52 95.58 93.75 45.33 Infrastructure Transport and communications 10.96 4.12 9.23 10.90 10.56 - - - - 2.1.1, Transport (06) 9.89 3.26 8.47 10.14 9.80 9.18 5.24 7.21 5.94 2.2.2. Communications (07) 1.07 0.86 0.76 0.76 0.76 0.93 2.29 0.75 0.65 Subtotal 2.1 - - - - - 10.11 7.53 7.96 6.59 2.2.1. Energy (08) 0.02 0.02 - 0.02 0.04 0.02 1.00 0.03 0.02 Sewerage (09) 0.07 - 0.03 - 0.01 - - 0.17 Urban development (10) 0.82 0.28 0.50 0.23 0.26 0.18 - - - Total 11.80 4.49 9.73 11.18 10.86 10.32 8.53 7.99 6.78 (Table continues on thefollowing page.) Figure B-53 (continued) Sector 1974 1975 1976 1977 1978 1979 1980 1981 1982 Production Agriculture (11) 1.49 1.98 1.65 1.69 1.52 1.88 1.70 1.67 1.09 Industry (12) 0.27 0.23 0.13 0.13 0.14 0.11 0.43 0.11 0.07 Services 3.3.1. Commerce and other services (13) 3.01 1.20 0.45 0.26 0.08 0.08 0.07 0.10 0.10 33.2. Tourism (14) 0.13 0.14 0.10 0.08 0.05 0.10 0.09 0.09 0.04 Subtotal 3.3 - - - - - 0.18 0.16 0.19 0.14 Other rebate certificates 6.19 6.75 11.28 - - - - - - Total 11.18 10.30 13.61 2.16 1.79 2.17 2.29 1.97 1.30 General services Legislation (38) 1.03 0.84 0.60 0.59 0.53 0.45 0.38 0.38 0.27 General administration (31) 6.93 5.42 4.70 5.02 5.44 5.79 4.74 5.00 3.98 Financial adrninistration (32) 2.78 3.38 2.58 10.77 11.13 9.10 8.09 4.57 5.48 Defense and police 22.11 26.50 20.55 20.99 21.87 - - - - 4.4.1. Defense (34) 14.39 15.45 12.10 12.94 14.06 16.56 14.43 16.06 10.82 4.4.2. Internal security (35) 7.72 11.05 8.45 8.05 7.81 7.51 7.68 7.98 6.04 Subtotal 4.4 22.11 26.50 20.55 20.99 21.87 24.07 22.11 24.04 16.86 Justice 2.04 2.59 1.83 1.83 1.81 - - - - 4.5.1. Justice (36) 1.54 2.05 1.36 1.36 1.36 1.28 1.21 1.20 0.92 4.5.2. Electoral justice (37) 0.50 0.54 OA7 0.47 0.45 0.41 1.01 0.34 0.25 Subtotal 4.5 - - - - - 1.69 2.22 1.54 1.17 Foreign affairs (33) 0.94 1.02 1.11 0.98 1.03 1.39 1.28 1.17 0.85 Total 35.83 39.75 31.37 40.18 41.81 42.49 38.82 36.70 28.61 Financial services Banking and insurance - - - 0.01 - - - - - 5.1.1. Banking (51) - - - - - - - 2.25 1.09 5.1.2. Insurance (52) - - - 0.01 - - - - - Subtotal 5.1 - - - - - - - 2.25 1.09 Management of public debt (53) 3.14 4.40 5.02 3.38 3.61 2.50 3.20 2.67 16.89 Total 3.14 4.40 5.02 3.39 3.61 2.50 3.20 4.92 17.98 Nonsectoral expenditures (99) 0.50 0.74 - - - - - - - Total 0.50 0.74 - - - - - - - Grand total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 - Not available. Source: Elaborated with data from Contaduria General de la Naci6n. ('3 (0 360 Costa Rica and Uruguay Table B-54. Uruguay: Total Public Expenditure, by Function, Selected Years, 1972-83 (percentage of GDP) Social Year Defense Education Health security Other Total 1972 1.4 2.3 0.4 12.8 7.7 24.6 1975 2.7 2.6 0.9 10.4 6.4 23.0 1980 2.9 1.9 1.1 10.6 5.3 21.8 1983 2.8 1.6 0.8 13.0 6.7 24.9 Source Based on International Monetary Fund 1980,1983, table 5-7. Table B-55. Uruguay: Social Security Expenditure, Selected Years, 1964-83 (percentage of GDP) Compensation Illness Unemployment Year Retirees per child insurance insurance Total 1964 9.3 0.6 0.1 0.4 10.3 1970 8.5 1.5 0.2 0.3 10.5 1975 7.5 0.6 0.2 0.2 8.5 1980 8.0 0.7 0.4 0.1 9.2 1983 10.7 0.6 0.5 0.3 12.1 Source Vieytes 1984, p. 230. Table B-56. Uruguay: Social Security Revenues, Selected Years, 1964-83 (percent) Subsidiesfrom Year Taxes central government Total 1964 91.6 8.4 100 1970 93.4 6.6 100 1975 73.3 26.7 100 1980 64.8 35.2 100 1983 54.3 45.7 100 Source Vieytes 1984, p. 234. Statistical Appendix B 361 Table B-57. Uruguay: Rediscounts, 1955-71 (millions of pesos) Rediscounts Banco de La Private Year Reptiblica banks Total Issue Percent 1955 50 197 247 474 52 1956 50 252 302 536 56 1957 50 302 352 578 61 1958 40 460 500 732 68 1959 - 339 339 910 37 1960 70 379 449 1,240 36 1961 398 341 739 1,569 47 1962 144 442 586 1,791 33 1963 506 166 672 2,215 30 1964 1,414 279 1,693 3,062 55 1965 4,411 365 4,776 6,085 78 1966 6,176 1,644 7,820 9,286 84 1967 13,412 780 14,192 18,013 79 1968 23,127 664 23,791 31,390 76 1969 - 562 - 50,573 - 1970 38,530 1,910 40,440 56,959 71 1971 64,551 4,442 68,993 84,408 82 - Not available. Source: Banco Central del Uruguay, Boletin Estadistico, various issues. Table B-58. Uruguay: Special Rediscount Lines (Maximum Authorized at Year's End), 1970-76 (thousands of new pesos) Item 1970 1971 1972 1973 1974 1975 1976 Wool 700 700 4,000 8,000 8,800 17,000 35,000 Raw materials 450 450 450 600 1,500 1,500 1,500 Nontraditional exports - 500 500 2,000 4,500 10,500 15,500 Cattle 120 120 120 120 1,200 1,200 1,200 Trade - - - 10,000 10,000 10,000 Sackcloth - 200 270 - 1,600 2,500 - Year-end needs 1,200 1,000 1,400 3,500 5,000 - - Cotton 15 0 0 30 100 300 - Oleaginous seeds 150 400 600 2,000 4,500 6,000 - Hides - - - 420 3,500 - - - Not available. Source, Banco Central del Uruguay, unpublished data. Simon Rottenberg Costa Rica and Uruguay A Comparison of Economic Experience and Policy in Costa Rica and Uruguay In both Costa Rica and Uruguay the state has been active in designing and enforcing policies that have raised the share of manufacturing in national output and have effected income and wealth transfers among segments of the population. Those policies have produced rents for some and have generated rent-seeking behavior. Over the years rent recipients and the larger community have come to regard the rents as entitlements. The policies have also generated economic waste and distortion. They have skewed the structure of yields in diverse economic activities, causing underinvestment in some activities and overinvestment in oth- ers, and have frustrated the pursuit of activities in which the countries have a comparative advantage. The trade policies of both countries have nourished industries and firms that produce consumer goods almost wholly for their small do- mestic markets. Trade policy has affected the structure of input prices in ways that have encouraged capital intensity in production and have enlarged the volume of imports of raw materials and intermediate production goods. In both countries state policies have led to transfers of income from those with earnings from rural activities to those in urban areas. The influence of the electoral system on the direction of this movement has been intensified by the concentration of the population in urban areas- primarily in San Jose in Costa Rica and in Montevideo in Uruguay. The strategies for achieving income transfers have varied over time, but the two countries have applied a more or less common pattern of transfer policies. These include state social security, health, and educa- tion systems; massive proportional employment in the public sector; food subsidies; and policies regarding foreign exchange and commer- cial protection that have worked to the relative disadvantage of rural activities. 365 366 Costa Rica and Uruguay Both countries have undertaken a large number of parastatal ventures. The motives have included keeping alive private ventures that had failed market tests and were threatened with dosure; providing im- proved terms of employment for workers of previously private firms after prolonged and acrimonious labor disputes; and displacing foreign direct investment, especially in public utilities and transport. Parastatals have also been established to undertake activities that private entrepre- neurs have avoided but that government officials nevertheless saw as viable. Not infrequently, the parastatal enterprises are grossly over- staffed, and some suffer continuous losses and add to the public debt. When they have not suffered losses, it is sometimes because of the monopoly rights that they have been granted by the state. Chapter 14 summarizes aspects of the economic experience of Costa Rica, and chapter 15 does the same for Uruguay. Chapter 16 deals with the similarities and differences in the experiences of the two countries and sums up the findings derived from the study. a Costa Rica Costa Rica was initially settled in the sixteenth century by a handful of Spanish agricultural colonists. There were few native Americans, and their numbers were reduced greatly by epidemics shortly after the arrival of the Spaniards (Fern-tndez Guardia 1913). An hacienda economy did not develop. The population grew slowly; in the early eighteenth century, a century and a half after the arrival of the Spaniards, a popu-. lation of only 3,000 occupied a small area of the central plateau. Land was relatively abundant, and property rights were acquired by grants or by exercising squatters' rights. For the fir-st three centuries of its history, well past the achievement of independence in 1821, Costa Rica's characteristic econonmic unit was the farm family that cultivated its own land and produced for its own consumption. In general, there was no wage-labor employment, and income distribution was more or less equal. Material standards of living were low, and Costa Rica is said to have been an agrarian democracy in the sense that there was an equal distribution of poverty. Coffee introduced revolutionary changes (Sehigson 1980; Gudmund- son 1985). Experimental attempts in the colonial period to find commer- cial agricultural crops had failed. Cacao, planted in the tropical lowlands of the Atlantic coastal region in the eighteenth century, fell prey to pirate and Indian attacks. Tobacco, which was in any case vulnerable because it was labor-intensive, did not survive the constraining mercantilist policies of the Spanish metropolitan authority. The colonial goverrnment brought coffee seeds from Jamaica in the early nineteenth century, but development of the crop awaited independence, and the first export shipments occurred only in the 1830s. From then until the 1950s output and exports rose steadily, and for those years the growth rate of the volume of coffee exports was extraordianarly high. In the nineteenth and twentieth centuries road networks were con- structed, a railroad to the Atlantic was built, ox cart transport was replaced by trucks, techniques for processing coffee beans were im- proved, coffee-processing plants decreased in number and increased in 367 368 Costa Rica and Uruguay scale, and competitive bidding for the growers' crops was introduced. Coffee-growing land was traded in a land market, and small plots were consolidated into more efficient larger parcels. As both land prices and wages rose, self-employed smallholders sold their land and opted for more secure wage employment. The risks associated with crop prices and climate were transferred to their employers. Competition for labor in the coffee regions ensured that workers would share in the increased prosperity of the country's coffee economy. Early shipments of coffee to Europe were transported to the Pacific coast and around Cape Horn because there was no passage to the Atlantic. The government contracted for the construction of a railroad to the Atlantic, and the line was completed, after a long delay, in the late nineteenth century. Construction of the railroad was capitalized in part by the grant to the builder of 800,000 acres of land on the Atlantic coast. To complement coffee cargo for the railroad and to put this land to use, banana production was undertaken and flourished. West Indian work- ers who had been brought in to work on the railroad took up wage employment on the banana plantations. Costa Ricans also entered the banana sector as producers and as wage laborers. Costa Ricans living on the central plateau could choose wage employment in bananas as an alternative to working in the coffee harvest or as self-employed subsis- tence farmers. Plant diseases on the Atlantic coast caused banana production to be moved to the Pacific side. Later, when disease-resistant banana varieties were developed, production returned to the Atlantic coast. Over the decades, the North American firm that overwhelmingly dominated banana production and exporting was accused of offensive behavior by trade unions led by the Costa Rican Communist party, by Costa Rican banana producers unhappy about the prices they received for their bananas, and by the government, which wanted a larger share of the company's earnings. There was, furthermore, a generalized com- munity preference for ownership of the country's resources by Costa Ricans-even if these investments were capitalized by borrowing from foreigners-over direct foreign investment. The company has now vir- tually abandoned banana production and is engaged mainly in banana marketing. Political Developments and the Economy Until about 1940 power in Costa Rica was in the hands of the descen- dants of the forty original families who came from Spain in the mid- sixteenth century. These families were the officeholders; they received tracts of land under diverse land distribution policies, and they became the relatively large producers and processors of coffee. As mechaniza- tion in coffee processing progressed and the railroad to the Atlantic was built, coffee culture became less labor-intensive, and a migration from Costa Rica 369 the countryside to the cities occurred. By the first third of the twentieth century, political power had begun to shift to urban residents. The gestalt of the nineteenth century had favored state reticence. The new holders of power-merchants, professionals, urban workers, and, later, industrialists and especially public servants-had a different out- look. They favored an aggressively interventionist state that could serve as an agency for transferring to themselves income that originated in rural areas. In 1940 the new tendency was initiated with the enactment of a social security system, a code regulating the terms of employment and social guarantees. The activity of the state was intensified. The ideological construct that had its genesis in the 1940s has had a powerful influence on the design of policy (Bell 1971). In 1942 Rodrigo Facio, an economist, attacked what he perceived to be the noxious effects of the coffee economy. Facio wrote that a monocultural coffee economy had introduced inequality and political contention and that within that economy, large producers, dispensers of credit, and an oligopoly of coffee processors were breaking the smallholding peasant yeomanry. He proposed that the state intervene with reformist policies designed to restore the homogeneity and egalitarianism that anteceded coffee. He also expressed a nationalist dispreference for foreign investors, espe- cially in the banana zones on the tropical coast (Facio 1947). Facio had a powerful influence on the reformation of public and intellectual opinion in Costa Rica. Over time the output of the Costa Rican economy has become more diversified. The share of coffee and bananas in agricultural output diminished as those of beef, sugar, and other crops rose. The share of agriculture in total output has also decreased as the population has become more urbanized. The relative rise in the size of the urban popu- lation generated a conflict of interest between the rural and the urban sectors concerning public policy. This conflict was settled in the late 1940s when a small-scale civil war was won by those who fundamentally espoused the cause of urban interests, even if their rhetoric contained overtures to the rural peasantry (Arias Sanchez 1971, p. 118). Since then, policy has systematically tended to transfer income and wealth from the rural to the urban sector. The open and liberal ideology that instructed public policy in the nineteenth century has been dis- placed by a nationalist, autarkic, and protectionist doctrine. Since the 1940s its most apparent expressions have been a massive increase in public employment and in the share of the gross product of the economy expended by the government (from World Bank internal documents) and an extensive enlargement of government assertiveness in both production and regulatory activity. The effects have been adverse to economic output, and since Costa Rican experience has shown a correlation between economic growth and equality in the distribution of income, they have predictably been adverse to the achievement of equity. 370 Costa Rica and Uruguay Costa Rica has pursued protectionist import-substituting policies mainly through selective tariffs on imports. High duties have been imposed on consumer goods, largely through the tariff system of the Central American Common Market. The production of manufactured consumer goods has expanded substantially. These goods are sold largely within the country, partly because of persisting impediments to commodity flows among the countries within the regional common market. Prices for these goods are higher than prices for comparable commodities in the international market. The protectionist policies for domestically manufactured goods have been coupled with incentives for the importation of raw materials, intermediate goods, and capital equip- ment for manufacturing industries. Costa Rican policy has tended to induce suboptimal capital intensity in manufacturing. The relative prices of capital and labor have been distorted by the exemption of raw materials, capital equipment, and intermediate industrial goods from the high tariffs imposed by the Common Market on consumer goods; by a tax regime that has selec- tively favored capital investment; by an exchange rate that for a long period benefited capital imports; by the selective rationing of credit even when interest rates were negative in real terms; and by minimum wage laws and payroll taxes for social security and other public sector pur- poses. This generated inefficient factor combinations and diminished output. Since labor was made relatively more costly, employment in manufacturing rose much less rapidly than manufacturing output. The Public Sector The expansion of state activities in the fields of health, education, nutri- tion, social security, and family allowances, in the construction of phys- ical infrastructure, in the employment of large numbers of personnel, and in the operation of state enterprises has been financed by the expansion of the public debt. Costa Rica's per capita external public debt is one of the highest among all low-income countries. The high price of coffee on the international market in the mid-1970s increased public sector receipts and induced a spending spree. Govern- ment policy responded to the enlarged revenue as though coffee prices would always remain high and stable. Later in the 1970s it became clear that the high prices were an aberration. The price of coffee fell, but political expectations did not permit contraction of state activity, and the inflated expenditures were financed by external borrowing. Costa Rican governments have engaged heavily in parastatal ven- tures. The state owns enterprises engaged in public transport, oil refin- ing and distribution, cement and fertilizer production, sugar refining, the marketing of agricultural exports, insurance, and banking. A public investment corporation is increasingly important in manufacturing in- vestment. In 1980 the public sector accounted for one-quarter of national Costa Rica 371 output and four-fifths of gross investment and received two-thirds of increments in domestic credit. The public sector is dearly very large. Nationalized commercial banks hold four-fifths of the assets of the financial system. The state is therefore substantially able to control access to credit. During much of the period 1950-85 real interest rates have been negative, and the nationalized banks have often rationed credit accord- ing to political criteria. A large proportion of employed people in Costa Rica works for the government and the state institutions. In 1950 about one in twenty of all employed people was a public sector employee; by 1980 the proportion had risen to one in five. Several factors combine to account for the large quantity of public employment: a proliferation of public sector activity, a policy of reducing unemployment (especially of people with profes- sional training) through public sector employment, and the political resistance offered by unionized public employees to the shrinkage of public employment. Landownership As in Uruguay, many in Costa Rica believe that too much of the land is held by a few landowners; that there are too many holdings that are too small to permit efficient economies of scale (partly because of the prac- tice of dividing a farm among all the heirs); and that there are deformities in the system of land tenure. In contrast to the situation in Uruguay, a large fraction of the country's population resides in rural areas, and the landlessness of many rural residents, who are regularly or occasionally employed in wage work, is seen as a problem that public policy should address. There is a conviction that the land market is not an efficient instrument for achieving efficient landholding sizes. Squatting on land in the public domain or on privately owned prop- erty is not uncommon (Seligson 1980, ch. 5). Since colonial times it has been a legal method of acquiring prescriptive rights to land. The re- sponse on the part of public policy and civil justice has varied between evicting squatters and entitling them to the properties they occupy. Agrarian reform policy has included colonization schemes and the establishment of communally owned properties. It has had some, but not a significant, effect in altering tenure systems and the structure of the size distribution of land. Manufacturing and Diversification Costa Rica's entry into the Central American Common Market in 1963 had the perverse effect of closing, rather than opening, the country's economy (Lizano and Sagot 1984). The common market raised high barriers to the region's trade in import-substituting goods with the rest of the world while it nominally opened trade within the region. Large 372 Costa Rica and Uruguay increases in intraregional trade were frustrated by poverty and political disorder among the countries of the region and by members' use of policy strategies that impeded free trade even among themselves. The highly protective barriers of the regional system fostered the establish- ment and growth in Costa Rica of manufacturing firms that mainly produced consumer goods for the domestic market. These were, for the most part, high-cost firms that could not compete successfully in rest-of- the-world markets and would be unable to survive without protection. Proprietors of physical and human assets specialized to manufactur- ing activities have formed coalitions that have achieved considerable influence over the design of public policy (Arias Sanchez 1971). They have been able to transform privileges generated by public policy into entitlements and to make permanent policies that were initially intended to be transitory. Real resources are consumed in the systemic entrench- ment of protectionist policies and in "game-playing" for manufacturing incentives that are not uniform among industries. The urge to diversify the economy and to lessen reliance on coffee and bananas took the form, in Costa Rica, of the subsidization not only of manufacturing but also of other agricultural crops. This was partly because a large part of the Costa Rican population consists of a smallholding peasantry. Grains, dairy, cotton, and fishing were pro- moted. Export constraints and price controls were imposed on beef and sugar to benefit domestic consumers; prices of those products were lower in domestic markets than in export markets. The controls had adverse effects on output in those parts of the agricultural sector. Uruguay Overall, since 1950 public economic policy in Uruguay has led to the stagnation of economic output without bringing about much improve- ment in the average material condition of life of the Uruguayan people. Uruguay's resource endowment is a powerful explanatory variable for understanding its economic performance and policy. Its climate, soil, and topography give Uruguay a comparative advantage in the produc- tion of livestock. The country has almost no mineral resources, and when the Spaniards arrived, they found the area thinly populated by fierce native Americans who were not a sufficiently large or tractable labor force for an hacienda economy. Cattle were introduced by the Spaniards in the early seventeenth century. From then until well after independence (gained in the early nineteenth century), much of the land area was public domain, and cattle, running wild, were hunted and slaughtered mainly for their hides. Gradually, the land passed into private hands as large grants were made to early settlers and to favorites of the civil authorities. Tracts tended to be subdivided over time in a secondary land market, but large properties appropriate for raising livestock remain the dominant form of land tenure. For generations much of the land was in the public domain but was put to private use. Land titles were insecure, the boundary lines defining the limits of property were uncertain, and properties were unfenced. The country was a quasi commons. Later, a market developed for beef, in addition to hides. Jerked beef was produced by saladeros to feed Cuban and Brazilian slaves. When refrigerated shipping facilities became available, chilled and frozen beef was exported to Europe and North America. Sheep, raised mainly for their wool, began to complement cattle in ranching output in the mid- nineteenth century. With time, land titles became more secure. Markets for beef and wool expanded, and technological improvements in steel production reduced the relative price of wire fencing. These developments raised the return 373 374 Costa Rica and Uruguay on investments in fencing and in genetic improvement and made possi- ble the introduction of technological advances in livestock production. Until the beginning of the twentieth century authority in the country- side was exercised by caudillos who ruled by coercion and violence. Competition for power among the caudillos sometimes reached the di- mensions of civil war. This often led to expropriation or destruction of the assets of the ranchers and discouraged rural investment. Livestock production is not labor-intensive. The Uruguayan country- side has therefore always been thinly populated, with a large proportion of the population concentrated in Montevideo.' The fencing of ranching properties in the late nineteenth century reduced even further the need for rural labor and accentuated the concentration of the population. In the early twentieth century changes were successfully made in the form of political expression. Violence was displaced by periodic elections and political campaigning for office. To secure consent for this trans- formation required various arrangements to permit the sharing of spoils. The replacement of the decentralized authority of the caudillos by the central authority of the state implied a large role for the state. This tendency was first informed by the values of Jose Batlle y Ordonez and was later accentuated by the ideological vision of the country's intellec- tual dasses. The principle that spoils should be shared implied that the state would become a generator of spoils. In diverse ways, the state produced rents and rationed their distribution. The principle also fragmented the struc- tural organization of the state and induced the formation of narrow special-interest constituencies that competed for rents. Urban concentration and the development of a class of professional politicians whose livelihoods and futures depended on winning votes combined to give the urban population an advantage in the competition to influence public policy. The result has been that for a long time income and wealth have been deliberately transferred from those engaged in rural production to those engaged in urban economic activities. This has been done largely through macroeconomic policies-monetary, com- mercial, and exchange rate policies, the subsidization of manufacturing and of food staples, the operation of parastatal enterprises, and unpro- ductive public employment. The explicit and implicit taxation of rural ventures and the distribution of their revenues among urban residents have discouraged investment and technological progress in the country- side, produced stagnation in the livestock sector, fostered questionable urban economic activity, distorted prices and the allocation of resources, and diminished the aggregate output of the economy and the real income of the population. Political Developments In the colonial period the Spanish colonial administrations were able to exercise authority in and near the centers in which they sat, but they were Uruguay 375 not able to control the interior hinterlands. All of Uruguay was "interior" to the viceregal capital in Buenos Aires. "Rules" governing relationships in the interior were defined by a combination of informal consensus, informal contract, and the exercise of coercive power. The system was generally characterized by order,but competitive claims were frequently settled by violence. This system survived into the period of Uruguayan independence. Authority was exercised by a set of local and regional caudillos whose authority was generally recognized by the populations of their respec- tive localities and regions and who enforced their authority by means of violence. Coercion and private power were in part inputs into produc- tion and in part constraints that economic agents dealt with through strategies of adjustment and avoidance. Coercion and violence were instruments of competitive strategy. Coalitions of caudillos formed. The exercise of decentralized private power had a great effect on economic performance in Uruguay because the countryside was a quasi commons. Ranching properties were unfenced, titles were not secure, and livestock strayed. Property rights were defined by possession, and the work force in rural areas had both to carry out productive activities and to defend cattle against thievery. Conflicting claims to property and other rights were frequent, and judicial authority for the settlement of claims did not extend effectively to the interior. Private property rights in what had been public domain put to private use were legally defined for the first time with the adoption of the C6digo Rural in the late 1870s. Wire fencing of rural properties was introduced in the 1870s. Fencing encouraged ranchers to improve their stock by importing pedigreed animals and practicing selective breeding. To remedy the occasionally disorderly and violent competition for power in the countryside, decentralized authority had to be replaced with centralized authority, and adversaries who had been in violent confrontation for generations had to be reconciled. This was done by establishing centralized political institutions that would permnit the shar- ing of power and spoils among onetime adversaries. The extension of the rail and communication systems in the late nineteenth century facilitated the centralization of authority. Those de- velopments were made possible, in part, by technological advances in the making of steel that diminished its real price. The State and Redistribution Centralization implied an active state that would do much, employ many people, and have large expenditures. An enlarged role for the state implied the growth of a class that would be mainly devoted to political work. Power sharing within the government implied that employment in the public sector would be an instrument for transferring income to those who were politically active or who had the proper political con- nections. 376 Costa RiCa and Uruguay Full-time professional politicians are vulnerable to constituent pres- sures for the adoption of policies that generate rents. They do not have other sources of support, and their primary sources of income depend on their achieving victory in elections. The state became an instrument for transferring income and wealth. Rent seeking and special-interest pressure groups developed. As the state created transfers of income and wealth and opportunities for capturing rents, narrow segments of the population exploited those opportunities at the expense of society as a whole. Output of commodi- ties and services was adversely affected, and real household income diminished. Resources were put to suboptimal use. There is a high degree of urban concentration in the spatial distribu- tion of population and of voters. Today, less than 10 percent of the economically active population works in rural activities-a much lower proportion than in most Latin American countries. Transfers of income and wealth have almost always been from the rural to the urban sector, mainly through low domestic beef prices, explicit income transfers such as payments to pensioners and others, and policies that relatively bene- fited those with physical and human capital specialized in urban activ- ities such as manufacturing. The result has been underinvestment in rural activities-in which Uruguay has a comparative advantage-and overinvestment in urban activities. The Livestock Sector The control and reduction of the domestic price of beef is an important component of Uruguayan policy for the transfer of income from rural to urban areas. Beef has been important in Uruguayan consumption for a long time. A few hundred cattle and horses were introduced in the early seventeenth century and were permitted to run wild. By the end of the first quarter of the eighteenth century millions of cattle were roaming on unfenced land with ill-defined titles. Cattlemen lived nomadic lives (Pendle 1963, ch. 7). In the early nineteenth century it was reported that "the constant diet of the people, morning, noon, and night, is beef." Animals had other uses; furniture consisted of animal skulls and stretched hides, dwell- ings were made of hides, and dried animal carcasses were used for fuel (Street 1959, p. 9). Today, beef provides more than a third of Uruguayan caloric intake and accounts for a large fraction of food expenditures. Uruguay has a comparative advantage in the production of livestock products and their processed derivatives. Its resource endowments are sufficient-if not frustrated by policy-to supply goods both for high domestic consumption and for an export trade that could finance im- ports and greatly improve the material standard of living. Public policy has, however, intensively taxed rural output, encouraged land-intensive resource combinations in the countryside, and severely depressed rural Uruguay 377 productivity and output. Uruguay's beef output has stagnated over the past several decades, while other important beef-producing countries have greatly increased their output. Because the production of cattle and cattle by-products is a large fraction of total economic output, stagnation in the beef sector has generated stagnation in the economy as a whole. Real income per capita has remained constant in recent decades. From the late nineteenth century until about 1930 the Uruguayan economy expanded, led by exports of livestock products. During the Great Depression of the 1930s the government strongly extended and magnified a policy of protecting domestic manufacturing industry, with the apparent intent of diversifying output to avoid the effects of price fluctuations in the international market for beef. This fostered the establishment and survival of high-cost firns that were unable to compete successfully in export markets but instead produced import- substituting goods for the domestic market. The protectionist policies that gave rise to these firms were perpetuated by the political pressures exerted by interested groups, whether owners or employees of the enterprises. An important public policy instrument that has taxed the livestock industry has been tariff protection for manufacturing. This policy has raised the real wages of labor in relation to the price of meat, induced the use of labor-saving methods in the livestock sector, and contributed to low levels of investment and productivity in that sector. Tariff protec- tion for manufacturing has effected income transfers within Uruguayan society; exporters of livestock products have lost and manufacturers have gained. Intensive consumers of imported goods have been losers, and consumers who spend a relatively large fraction of their incomes on meat have been gainers because policy has driven down the price of meat. The income transfers implied by tariff protection for manufactur- ing, however, have tended to diminish output and yields in the livestock sector. Livestock is produced in Uruguay by labor-saving, land-intensive methods. Almost all land was brought into production in the nineteenth century, and so the supply of land has been fixed for a long time. The light, thin soils are more suited for grazing than for alternative agricul- tural uses. Fertilizers and seeded pastures are little used. Because the livestock sector has been heavily taxed, the price of land has been low in relation to the prices of other inputs with which it is combined (Sapelli 1985, pp. 173,175). Taxation has prompted the intensive use of land in production and has discouraged the improvement of pastures. As a consequence, the animals are fed excdusively on natural pasture and receive inadequate nutrition. The result is that they gain weight slowly and take longer to raise to slaughter weight. The output of meat per animal and per acre is low, the age of heifers at first calving is high, and cows' fertility is low. By these measures, Uruguay is less efficient by far 378 Costa Rica and Uruguay than other important beef-producing countries. This situation arises because the distortionary price structure has discouraged investment in the livestock sector. Another effect of feeding cattle on natural pasture is a large variation in the seasonal pattern of slaughter. Slaughter rates are high in the months just preceding winter, when pasture is thin. As a consequence, the capacity of the meat-processing industry must be high in relation to the annual slaughter. Uruguay's protective commercial policy in the two decades from the mid-1950s through the mid-1970s diminished by one-half the size of the cattle herd and the slaughter rate (Sapelli 1985, ch. 2). Those commercial policies, although distortionary and costly in real terms for the economy as a whole, persist because they lower the cost of meat for domestic consumption. A coalition of consumers presses for their retention. Some sense of the depressive effect of public policy on Uruguay's beef sector can be gained by comparing the relative prices of steers on the hoof and of ranching inputs in Uruguay and other countries. In the mid-1970s in Uruguay the equivalent, in steers on the hoof, of a 35-40 horsepower tractor was five times as much as in the United States and ten times as much as in France. Phosphoric anhydride costs four times as much, in steers on the hoof, in Uruguay as in the United States and seven times as much as in France. For gas and oil the exchange rate, in steers on the hoof, was more than eight times higher in Uruguay than in the United States and France (Reca and Regunaga 1978). Technical deficiencies and underinvestment in the Uruguayan cattle economy have often been ascribed to the failure of livestock proprietors to engage in maximizing behavior. According to Hanson, Lack of enterprise was characteristic of the hacendados [large landown- ers]. They were for the most part content with the easy enjoyment of their large properties. Nature had generously provided splendid con- ditions for a thriving pastoral economy and the estancieros [large ranchers] were loathe to abandon for more intensive operations their crude pastoral regimen in which mediocre animals were bred on natural grasses for low-grade markets.... The Uruguayan estancieros lagged behind even the similarly unenterprising Argentine stockmen. (Hanson 1938, p. 6.) Similarly, Finch wrote that Uruguayan rural stagnation is believed to be the result of the "concentration of landownership among a small number of families ... that has produced a class of wealthy and tradition-oriented agricultural producers who are not profit-maximiz- ers, or who admit noneconomic considerations into their calculations of cost and profit" (Finch 1981, p. 114). A large part of the intellectual community of Uruguay has come to believe that nonmaximizing behavior on the part of large landowners, the size distribution of land (much of which is held in very large properties), Uruguay 379 and the prevailing forms of land tenure, including much absentee own- ership, combine to explain the low productivity of rural Uruguay. There are no significant differences in yields, however, when farms are differ- entiated by size and form of tenure. Rather, since public policy has imposed heavy explicit and implicit taxes on the livestock economy, the failure to invest more heavily in that sector is consistent with principles of rational, maximizing behavior by landowners. In addition, there is an active land market in Uruguay, and one would expect that if land were inappropriately distributed among owners, or if parcels were inappro- priate in size, or if forms of tenure were inappropriate, those deficiencies would be corrected by land market transactions. Under the circumstances-a large urban population, elected office- holders who depend on their political careers for their livelihood, and the importance of beef in household consumption and expenditure-a political imperative for officeholders is to stabilize and keep down the level of domestic beef prices. The government intervenes actively to achieve that objective. The relevant instruments of policy are export taxes on beef, the manipulation of the foreign exchange rate, price controls at various levels of the beef market, and quantity controls on slaughter, exports, and consumption. The total effect of these policies has been the subsidization of domestic beef consumption and heavy taxation of beef production. State Intervention and Public Enterprises Throughout most of the nineteenth century Uruguay's public policy was relatively noninterventionist, in part because the government was un- able to exercise its authority in the countryside. Occasional civil distur- bances interfered with the pursuit of productive ventures, but the exercise of private power kept this disorder within tolerable limits. Real income grew, and large numbers of immigrants were attracted to the country. During most of the period a uniform, relatively low tariff was imposed on imports to provide public revenues. In the third quarter of the century it came to be widely believed that ranching could not provide employment for a growing population, and policy began to change. In the 1870s the tariff was made somewhat protectionist for domestic manufacturing. Nonuniform tariffs were imposed, and duties were raised on finished goods and diminished on raw materials and capital goods. The tradition of active government in Uruguay dates from the early twentieth century when, for the first time, civil disorder was overcome and real central governing authority was established in Montevideo. Its main progenitor was Jose Batlle y Ordonez, a political journalist and newspaper owner. Batlle served two terms as president, but he domi- nated politics even when not in office, and his influence continued to be felt, through batllista factions in the political parties, long after his death. 380 Costa Rica and Uruguay His proposals-many of which were adopted-induded state monopo- lies in insurance and in electric power, a labor code, unemployment compensation, a state mortgage bank, state railways, state monopolies in the production of alcohol and tobacco, protection for Uruguayan industry against foreign competition, old-age pensions, family allow- ances, a workmen's compensation system for injuries suffered on the job, and compensation for discharged workers. This system of welfare policies anteceded by decades those of other countries (Hanson 1938). Batlle opposed inequality in the distribution of income and proposed state action to redress it. He opposed foreign investment in public utilities and in manufacturing and favored displacement of foreign investors by the state. The Uruguayan government nationalized foreign meat-packing plants in favor of public plants, which became technologically ineffi- dent. These plants would not have been able to survive in a market with no subsidization, open competition, and freedom of entry. But they were a source of public employment, and to ensure their continued operation without large open subsidies, the government administered price con- trols to enlarge the operating margins of all meat-packing plants, con- trolled entry into the industry, and gave one of the state plants a monopoly of the Montevideo market. When in the late 1970s free entry into meat packing was permitted, the public plants were dosed. In the late nineteenth century a state bank was established. Over time, the state took over or established ventures in power generation, railroad transport, insurance, telephone communications, petroleum refining, and cement and alcohol manufacturing. Protective labor legislation was enacted much earlier than in other countries, and a social security system was set up and was gradually broadened in scope. A system of institutionalized wage boards, established by law, has distorted the relative prices of production inputs and fostered capital intensity. The system was set up in the 1940s with the intention of improving living standards for workers' families. Because the system determines nominal wages without addressing the phenomena that would cause real wages to rise, it has had perverse effects. Combined with that policy were others that imposed payroll taxes to provide annuities to retired persons and others who qualified and that treated capital imports preferentially with respect to tariffs and exchange rates. In sum, the policies raised the price of labor and lowered that of capital. Distorted factor combinations followed from the distorted factor prices. Protectionism Protection of manufacturing in Uruguay was sometimes explicit, some- times the implicit consequence of policies intended for other purposes. The protectionism introduced in the third quarter of the nineteenth century was intensified by exchange controls applied in the Great De- Uruguay 381 pression and was further intensified after World War II by exchange controls intended to slow the rate at which foreign currency reserves were being run down. Import substitution in manufacturing made great progress in the 1950s, but because of the small size of the Uruguayan market, opportunities had been exhausted before that decade came to an end (Anichini, Caumont, and Sjaastad 1978). Note 1. Concentration in Montevideo dates from the beginning of settlement. Montevideo is a natural port superior to those in neighboring countries. In the nineteenth century it was an important entrep6t for goods in transit to Argentina and Brazil. The Comparison The sections below present some of the similarities and differences seen in the two countries discussed in this study and present its findings. Similarities Costa Rica and Uruguay are both small countries with small popula- tions. (Costa Rica's mid-1985 population was 2.6 million and Uruguay's was 3 million; Tilak 1988, table 1.) Both have homogeneous populations of Westem European descent. The proportions of people of native Amer- ican or African descent are trivial, and the countries have escaped the troubles of ethnically based claims and counterclaims. Neither country has substantial mineral resources, and the prime endowments of both are land and the human capital that they have been able to develop. The real incomes of both populations depend heavily on output and prices of agricultural or pastoral commodities, large proportions of which are exported to other countries. Prices of exported commodities have fluctuated with some volatility over time. Costa Rica, after unsuc- cessful experiments with tobacco and cacao, became a substantial pro- ducer of coffee in the mid-nineteenth century and of bananas from late in that century. From early in the period of European settlement, Uru- guay has engaged in livestock raising, first for hides and later, in re- sponse to opportunities opened by technology, for beef. From the middle of the nineteenth century wool has been an important complement to cattle products. Both countries account for only a small fraction of world output and trade in their important export commodities.' Uruguay's share in the world export trade in meat has diminished over time; its proportions of world exports of canned meat and of beef and veal carcasses were sharply lower in the 1960s than in the years just before World War II. When measured by the standards of their respective regions, the people of both countries are quite well off. Income is less unequally distributed in Costa Rica and Uruguay than in other poor countries (table 382 The Comparison 383 16-1). Infant mortality and illiteracy, which tend to be concentrated in the poorest segments of the population, can be read as indicators of the extent of poverty. Both countries come off well with respect to those measures. Measure Costa Rica Uruguay Infant mortality, 1984 (deaths per thousand 18.4 30.4 live births) Percentage of population 15 or older who are 11.6 6.1 illiterate (mid-1 970s) In Costa Rica, although the majority of the population is rural, the San Jose Metropolitan Area alone accounts for a large part of the population. In Uruguay, too, from the beginning of European settlement, a very large fraction of the population has resided in Montevideo. In 1985 the population of Costa Rica was 44.5 percent urban; in 1983 the population of Uruguay was 84.3 percent urban (United Nations 1988, table 6). Both Costa Rica and Uruguay have exhibited a certain ambivalence about direct investment by foreigners. Although foreign investment has been acceptable in a formal and legal sense, foreign firms that have become large in scale have encountered formidable opposition, decade after decade. The rhetoric of the opposition has taken a similar nationalist form in both countries. In response, foreign firms have almost com- pletely withdrawn from banana production in Costa Rica, and British and North American companies have withdrawn from meat-packing in Uruguay. British investors in public utilities in Uruguay were bought out after World War II by the Uruguayan government, which, to do so, drew down its sterling reserves in Britain that had been blocked during the war. Table 16-1. GNP per Capita and Percentage Shares of Income, by Population Quintile, Costa Rica and Uruguay, Various Years Gross national product per capita Costa Rica Uruguay U.S. dollars, 1985 1,300 1,650 Average annual growth rate (percent), 1965-85 1.4 1.4 Percentage shares of income, Costa Rica Uruguay by population quintiles (1971) (Montevideo, 1984) Bottom 20 percent 3.3 7.9 2nd 20 percent 8.7 7.7 3rd 20 percent 13.3 14.4 4th 20 percent 19.8 23.6 Top 20 percent 54.8 46.4 Source GNP, Tilak 1988, table 1; shares, Tilak 1988, table 3. 384 Costa Rica and Uruguay Foreign investment has rendered services to the people of both Costa Rica and Uruguay. North American investment in railroad construction and banana production in Costa Rica greatly diminished transport costs for exported coffee and transformed the coastal lowlands, where virtual wasteland became the site for production of a thriving export crop. British and North American frigorfficos in Uruguay opened export mar- kets for chilled and frozen beef and expanded marketing opportunities for the livestock industry beyond hides, grease, and jerked beef. British public utilities and railway investment provided essential infrastructu- ral services. Since large-scale foreign investment is vulnerable to nation- alistic pressures, the income streams they yield their owners must be discounted at a high rate, and this may explain what appear to be occasional "subsidies" to encourage these ventures. Finally, Costa Rica and Uruguay are somewhat alike in their geo- graphic isolation; that is, both are distant from the main centers of the world economy in Western Europe and the Pacific Rim. Although Costa Rica is closer than Uruguay to North America, the absence of transport facilities meant that for much of its early history as a coffee exporter it had to ship from the Pacific side around Cape Horn. Differences The topographies of the two countries are very different. Costa Rica is mainly mountainous and temperate, although there are important trop- ical lowlands on both coasts. Uruguay is flat and has a temperate climate. Costa Rica's concentration on tree crops and Uruguay's specialization in livestock derive from this difference. In Costa Rica land is held in small plots, especially on the central plateau; in Uruguay land is held in larger plots appropriate for stockraising. The 1983 crude birthrate was 30 per 1,000 in Costa Rica and 18.2 per 1,000 in Uruguay. (In that year the natural rate of population increase was 26.1 per 1,000 in Costa Rica and 9 per 1,000 in Uruguay; United Nations, 1985, table 19.) The table below shows the percentage age compositions of the populations.3 Age Costa Rica (1985) Uruguay (1980) 14 years and younger 36.6 27.0 15-64 years 58.9 62.6 65 years and older 4.5 10A Thus, the rate of natural increase is much higher in Costa Rica than in Uruguay, and the median age of the population is much lower. This means that transferring income from the younger working-age popula- tion to elderly retirees through the social security system is much more feasible for Costa Rica than for Uruguay. The viability of the Uruguayan system will become more and more questionable with the passage of time. The Comparison 385 Costa Rica and Uruguay differ in one other significant respect: Costa Ricans consume a trivially small fraction of the country's output of coffee and bananas, whereas beef is important in the Uruguayan diet and a very large proportion of the country's beef output is consumed domestically. These differences in domestic consumption patterns affect the prospects for export earnings. Findings Some salient conclusions can be drawn from the combined economic experience of Costa Rica and Uruguay. Law and Policy Both Costa Rica and Uruguay have developed intensive income transfer institutions and protective labor laws that have raised the price of labor. Both have subsidized the importation of physical capital. Thus, both have distorted the relative prices of inputs and have generated socially inappropriate factor combinations in production that have brought about an excess of capital intensity, at least in their manufacturing sectors. Both have favored their urban sectors at the expense of their rural sectors, thus imnpeding those sectors in which they have a comparative advantage. Both have installed selective policies of protection that have grossly expanded the domestic production of manufactured goods for domestic markets. Both have mismanaged their foreign exchange markets. Both have experienced large public fiscal deficits. Both have run up large public sector debts, implying intergenerational transfers that, if not somehow adjusted, will greatly burden their people in the future. Both have engaged in extensive public enterprise ventures that have been kept alive even when they have been clear failures, in response to political pressures not to dismiss the ventures' employees. Both exhibit inflated employment in their public sectors. Economic growth is promoted by an open economy. The rise in the relative standard of living of the populations of both countries to levels substantially higher than those in other countries of their regions oc- curred mainly in periods when policy did not skew the structure of output. During these periods coffee and bananas in Costa Rica and livestock in Uruguay developed into their economies' major sectors, and the gains from the improvements in economic performance were spread widely among the people. When, in Uruguay, public policy began imposing burdens on those sectors through strategies that sought to alter the composition of output, "traditional" activities stagnated, as did the economy as a whole. Resources were wasted, rents and rent seeking were generated, and the real income of the people was adversely af- fected. In Costa Rica coffee output rose continuously despite similar policies because the cartelization of the international coffee market produced rents for coffee growers. The burden of rural taxation fell on 386 Costa Rica and Uruguay rents, and the relatively untaxed residuum of payments for the services of coffee inputs made it feasible to continue expanding investment in coffee mainly by improving yields.4 Nonetheless, it is likely that the real incomes of the Costa Rican people would have increased even more without the policies of rural taxation that were applied. Almost invariably, policies that reduced the openness of the econo- mies sought a relative rise in the resources allocated to the manufactur- ing sector. The policies were nonneutral in their effects within that sector, either intentionally or inadvertently. In Uruguay superficially uniform policies gave differential effective protection to different industries. In Costa Rica economic policies encouraged capital intensity in factor combination and favored capital-intensive industries. Policies often were not uniform across manufacturing industries. Industries were rank-ordered for the receipt of favored tariff and tax treatment and of rationed credit from nationalized banks when real interest rates were very low or even negative. Those industries that processed Costa Rican raw materials were given privileged positions. Price support policies favored rice over other crops. The aggressive behavior of the state authorities has, in both countries, reflected the tradition of dose control derived from the practices of the Spanish colonial administration-even though both countries were in the backwaters of their colonial administrative regions and escaped the full force of those controls. It also reflects the populist agendas of single powerful political figures-Jose Figueres in the mid-twentieth century in Costa Rica and Jos6 Batlle y Ordonez in the early twentieth century in Uruguay-and the powerful counsel of the national intellectual and academic communities and of the professional staffs of the international agencies. That counsel has been homogeneous in urging state action. Aggressive behavior reflects, in addition, the high discount rates of political officeholders who must stand for periodic elections in demo- cratic systems. For most of their recent histories both countries have had electoral systems in which all adults are qualified to vote, many partici- pate, several parties campaign, campaigns are active, majorities rule, and voting results are honored. Elections are usually contested by two main parties (or coalitions of parties), both of which tend to offer what are, in the political contexts of their countries, similar centrist programs. Left-oriented parties usually draw little support but have sometimes had disproportionate influence because they have engaged in demonstrative or violent behavior or have formed temporary ad hoc coalitions with another party to constitute a majority. In both countries an earlier liberal ideology was replaced by the ideology of social democracy. With the altered outlook the state became aggressively interventionist and an instrument for producing rents and administering transfer payments. Whereas before the change advantage had been sought in markets, it was now sought by soliciting the favor of the state. The Comparison 387 The high intensity of state activity seems to have persisted and ex- panded because of the consequent opportunities for the capture of rents. Rent-seeking segments of the populations have managed political af- fairs, broadly defined, so as to keep and enlarge those opportunities. International Trade The similarities in the public policy regimes of Costa Rica and Uruguay are striking. Both have a comparative advantage in the production of specialized agricultural or pastoral commodities that face import con- straints in international markets. Neither is an important participant in those markets. But although their market shares are small, export mar- kets are important to them; exports of their main agricultural products are large fractions of their economies' outputs. Both Costa Rica and Uruguay face constraints in international markets in exporting their main agricultural commodities. West Indian produc- ers and countries covered under the Lome Convention have preferential access to the U.K. banana market. Coffee exports to the principal coffee- consuming countries have been subject to export quota constraints under the terms of the International Coffee Agreement, which has been renewed periodically. Sugar imports into the United States are subject to national quotas. Many European countries give preferential access to their markets to domestic and Commonwealth beef. The United States forbids the importation of unprocessed beef from countries in which certain animal diseases are endemic. These constraints have generated searches for second-best market outlets. Costa Rica now sells its quota allowances of coffee to Interna- tional Coffee Agreement countries and ships the surplus to Eastern European countries to be sold at lower prices than under the Agree- ment. Uruguayan beef is shipped to Brazil, the Middle East, and the Far East in larger quantities than previously. Both countries, moved by the desire to minimize the costs of transport and transactions, have responded to some degree to opportunities for economic integration within their respective regions. Uruguayans emi- grate to Argentina, and Argentines invest in Uruguayan properties. This is a "'natural" response to opportunity. Costa Rica engages in a some- what active commerce with other Central American countries, in large part because of incentives created by the formation of the Central Amer- ican Common Market (CACM). The high barriers to trade with the outside world imposed by the CACM have mainly worked to increase Costa Rica's industrial production for the domestic market, partly because incomes are higher in Costa Rica than in other Central American coun- tries and because individual member countries of the CACM still put barriers in the way of regional commerce across their borders. It is questionable whether the increased trade within the Common Market is welfare-maximizing. 388 Costa Rica and Uruguay Distribution Policy in both Costa Rica and Uruguay has been explicitly redistributive in recent decades. Earlier, before redistributive policies began to be applied, improvements in living standards were achieved by permitting relatively unregulated play for venturesomeness. In both countries the explicit formulation of redistributive policies has had depressive effects on economic growth. A somewhat greater measure of equality in the distribution of income has been achieved at the expense of real output and income. Both Costa Rica and Uruguay (Economic Commission for Latin Amer- ica 1985a, p. 15) use social security systems as part of their redistributive policy. In Uruguay not only retired persons but also those dismissed without fault and women who withdraw from employment to have children qualify for lifetime annuities, even if the beneficiaries subse- quently find employment. In both countries the systems are unfunded. Because of differences in birthrates and in the age composition of the populations, the social security system is a much heavier burden on the working population in Uruguay than in Costa Rica. In Costa Rica redis- tribution occurs informally, within the family. Since Costa Rica's birth- rate is much higher, its population is much younger. Thus, the main redistributive burden on the producing segment of Costa Rican society is consensual, and the recipients are the young. In Uruguay the burden is coerced, and the recipients are older. The cost is sufficiently heavy in Uruguay that it has for decades been mitigated by postponing pre- scribed changes in benefits and by delaying the certification of appli- cants for social security benefits. This compensates somewhat for the traditional generosity in the administration of social security and for the systemic tendency to favor politically well-placed applicants in ra- tioning pension rights. In Uruguay the number of social security beneficiaries is one-half the size of the labor force. In a recent year public expenditures were one- quarter of GDP, and more than half of all public expenditures went for social security. Only half of social security revenues are derived from social security taxes, and the taxes are frequently evaded. The residuum is provided by subsidies from the central government, but payments are often long delayed and are sometimes not forthcoming at all. People are given an incentive to retire from work early in life, when they are still hale and productive, or to receive pension payments illegally while they are working in the black economy. Thus, Uruguay is heavily engaged in the income redistribution business in ways that generate inefficiency. Costa Rica has recently begun to encounter the "Uruguayan problem" in the administration of social security as an institution for effecting transfer payments. The number of working contributors to the system, in relation to the number of pensioners, declined from 157 in 1960 to 17 in 1983. Between 1970 and 1983 the number of old-age pensioners The Comparison 389 increased by a factor of ten. Life expectancy rose by thirteen years during the same period, greatly expanding the pension payment liability of the system. The prospects of the social security system are not bright, and it is expected to confront, before too long, deficits that will have to be met by diminishing pension payments, by increasing contributions (thus raising the price of labor in relation to other inputs), or by augmenting the revenues of the system with contributions from the general revenues, which would further complicate public finances. The comparative advantage of Costa Rica in the production of coffee and of Uruguay in the production of livestock meant that, at interna- tional prices for those commodities, many producers earned rents. Those rents could be taxed away, and they were-through export taxes, the management of exchange rates, and protectionist policies for manufac- turing activities. Taxation of agriculture was redistributive in its intent and in its effect and was responsive to the political power of urban voting populations in both countries. The taxation of agriculture and the redistributive income and wealth transfers from rural to urban sectors were "safe" policies in that, since it was rents that were being taxed away, the burdened sectors would not shut down. In Costa Rica coffee output could be expanded through new plantings on land that had not been used for coffee production, as well as through increased yields. In Uruguay virtually all the land was already employed in livestock pro- duction as early as the nineteenth century. Further expansion of the area devoted to livestock was not possible, and taxation of ranching de- pressed the rate of return on investment to a level that foreclosed more intensive exploitation of ranchlands. Thus, the output experiences of the main commodities differed in the two countries; beef output stagnated in Uruguay, but coffee output rose in Costa Rica. Stagnation Beginningin the 1950s Uruguay experienced economic stagnation. Costa Rica followed some three decades later. In both countries stagnation was produced by the active pursuit of redistributive policies and of policies that sought to change the composition of economic output and production inputs in ways that flew in the face of the countries' compar- ative advantages. Those policies distorted relative prices and deformed systems of incentives. The effects of badly designed policies are felt with lags. One reason is that it is not clear at first whether the policies will be short- or long-lived and whether they will be applied consistently. Another is that the effects of the policies are cumulative. It must be remembered that although similar policy sets were adopted in the two countries, they were initiated at different times-in the early twentieth century in Uruguay and four decades later in Costa Rica. This time difference partly explains the difference in the onset of adversity. 390 Costa Rica and Uruguay Rural-Urban Transfers Over time, Costa Rica became more urbanized, and urbanization in Uruguay has been intense. These tendencies, when combined with democratic and majoritarian electoral systems, explain the existence in both countries of redistributive public policies. In both countries, al- though the forms of redistribution are somewhat different, income is transferred from rural to urban areas. Both countries have extensive social security, health, education, and welfare systems that are vehides for those transfers. Since beef is a staple of the Uruguayan diet, keeping its domestic price low is an important instrument of income transfer in Uruguay, but there is no comparable political imperative in the case of coffee and bananas in Costa Rica. In both countries the rural sectors are not without influence on policy, and they have institutional instruments for making their influence felt. But they are outnumbered by middle- and working-class urban dwell- ers, who use the political parties, as well as more specialized institutions, as vehides of influence. The urban capacity to siphon off income pro- duced in the countryside is somewhat more evident in Uruguay, which is more intensively urbanized than Costa Rica. Changes in governing party lead to only peripheral, not radical, changes in policy, partly because the parties strive to satisfy the greatest number of voters and partly because attempts to diminish rents encounter resistance when privileges come to be seen as entitlements. Although the time trends and the degree of population concentration are different for the two countries, for the past several decades urban residents have been able to capture part of the wealth of the country- side. The countryside has responded to diminished incentives by pro- ducing less. Protectionism Protection of domestic industry from foreign competition is not new in Costa Rica and Uruguay. In Uruguay it dates from the middle of the nineteenth century, but in earlier periods it was mainly a means for raising public revenues, a large fraction of which was derived from import duties. In more recent decades its purposes have been different in both countries, the magnitude of protection has been enlarged, and the universe of intended beneficiaries has been less uniform and more selective. These changes were generated in part by a shift from direct to indirect taxation as the public service employees developed talents and skills. They were also generated by a flawed conviction that public servants had enough information and foresight to distinguish those economic activities thatwould survive, if protected in their infancy, from those that would fail when finally exposed to open, unprotected compe- tition with foreign goods. The main genesis of the changes, however, was The Comparison 391 in a set of ideas that came to dominate intellectual thought, were pro- moted by the academic community and the community of international civil servants, and were seized on by some economic actors to tilt policy design so as to produce rents for themselves at the expense of other elements in the population. Those ideas induded the notions that * Comparative advantage does not explain the international divi- sion of labor * Economic diversification is preferable to specialization * The terms of international trade run persistently against primary producers * The only, or at least the most efficient, defense against fluctuating prices for primary products in international markets is to diversify economic activity * Manufacturing is inherently preferable to primary production as a vehide for improving the material standard of living of the people * If manufactured goods are being imported for domestic con- sumption, and if within the country there exists or can be constructed the capacity to produce those goods, they should be produced domes- tically, even if their producers could not survive market competition without very strong import constraints. Costa Rica and Uruguay both adopted policy sets framed by those prescriptions. (In Costa Rica constraints on entry of nonregional goods were intensified by the formation of the Central American Common Market.) In recent decades manufacturing output has risen as a fraction of total economic output. That change in the composition of output has been celebrated in both countries. The import constraints have tended to survive longer than would seem appropriate for an infant industry rule, and they have been selective and nonneutral in their effects. Those who possess physical and human assets that are specialized for the production of protected commodities have exerted political pressure to ensure the survival of the policies and the enlargement of the rents they generate. Aggregate economic output, however, has been adversely affected by the policies, which have brought about income and wealth transfers at the expense of other segments of the population and of the communities as a whole. In both Costa Rica and Uruguay there is a widespread expressed preference for "nontraditional" over "traditional" products and exports. Both countries have sought to change the structure of production and of exports through combined systems of taxes and subsidies. The tradi- tional export products-coffee and bananas in Costa Rica, beef and wool and their derivatives in Uruguay-came to be traditional precisely be- cause they were able to establish themselves and grow in open interna- tional competition. Clearly, therefore, trade experience demonstrated that these were the products in which the countries had comparative advantage. By intentionally seeking to diminish their relative impor- 392 Costa Rica and Uruguay tance, the Costa Rican and Uruguayan governments engaged in a pro- cess of moving resources from more to less productive uses. The nominal defense for.those policies was that diversification of output and exports was a hedge against the wide fluctuations of the prices of traditional commodities in intemational markets. Hedges with lower social cost-for example, appropriately timed sequences of saving and dissaving-were given insufficient attention. That exemplary hedge requires, of course, the ability to make sophisticated estimations of market prospects, but both countries had long and intensive inter- national trading experience in their traditional commodities, and the avoidance of estimational error should have been within their grasp. The saving-dissaving hedge also requires the discipline to hold the reins on expenditure when prices and revenues are high, and it is here that such a hedging policy might have run into trouble. To sum up, the particular redistributive policies of Costa Rica and Uruguay, as their governments pursued their perceived mission as welfare states, distorted incentives and adversely affected the progress of their economies and the mean incomes of their people. Notes 1. In 1984 Costa Rica produced 2.4 percent of world coffee output. In that year Uruguay had 0.78 percent of the world's cattle and 2 percent of its sheep; in 1984-85 Uruguay produced 2.8 percent of the world's wool (United Nations 1985, tables 83, 86, and 89). 2. The illiteracy figures are for 1973 (Costa Rica) and 1975 (Uruguay). For infant mortality the source is United Nations 1988, table 9. For illiteracy the source is United Nations 1985, table 59. 3. The source for the table is United Nations 1988, table 7. 4. Costa Rica's coffee output increased from 80,000 metric tons in 1975 to 124,000 metric tons in 1984 (United Nations 1985, table 83). 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Index Acci6n Democrata (Costa Rica), 73 Argentina: disequilibrium of exchange Adelantos (Costa Rica), 65,69 rates between Uruguay and, 196, 278, Age (Costa Rica), 18-19,38,77,94,106; 282; imports from Uruguay to, 238; in- comparisons with Uruguayan, 384, flation imported to Uruguay from, 278; 388; income distribution, 56,58 informal trade between Uruguay and, Age in Uruguay, 207,384,388 235; joint venture between Uruguay Agriculture (Costa Rica), 8-10,21,25-26, and, 290; stagnation and relations 57; CACM, 88-91; comparisons with with, 231, 235,238; and comparison Uruguayan, 387,389; development with, 255 and, until 1950, 62, 73; economic prog- Army- in Costa Rica, 7; in Uruguay, 205- ress and, 126,132, 134-35; fiscal crisis 06 and, 106-08,115-16, geography and, Asociaci6n Nacional de Fomento 16; growth and, 28,30-34,38-39; his- Econ6mico (ANE), 23,26,90-91,104 torical perspective on, 367,369-70,372; Asociaci6n Rural del Uruguay (ARU), 208 income distribution and, 44,46-47,49, 51,53; modernization of state, 75-76, Baldomir, Alfredo, 218,299 78,85-86; protectionism and, 94-95, Bananas in Costa Rica, 11, 16,25,95,107; 97,136,138-39; redistribution of comparisons with Uruguayan, 382-83, wealth and, 139,141,143; stagnation 385,387,390,391; economic progress and, 123-24 and, 129-30,132,134-38,140; growth Agriculture (Uruguay), 188; comparisons and, 29,33; historical perspective on, with Costa Rican, 387,389; economic 368,372; income distribution and, 47, growth and, 192,194-95,197; eco- 53; labor conflicts and, 66-68; labor nomic policy and, 300-01, 303; histori- unions and, 25-26; modernization of cal background to, 208,214-15,219-20; state and, 75-76, 85, 89; population historical perspective on, 377, 378; oil growth and, 17-18 shock and, 277-78,282,284,289; politi- Banco Central del Uruguay (Bcu), 275 cal economy and, 250-57; political Banco de la Reptiblica, 244-45,280 events and, 230,238-39; population Banco de Repuiblica Oriental del Uru- and, 230; stagnation and, 232-35, guay (BRou), 213,256 247 Banco Hipotecario, 280 Alcohol production in Uruguay, 223-24, Bankruptcy in Uruguay, 196, 213,257 237 Banks, nationalized. See Nationalized Alleviation of poverty in Costa Rica, 125- banks 26,138-40 Banks (Costa Rica), 7,19-20,36; compari- Alliance for Progress, 91,100,137,239, sons with Uruguayan, 386; economic 247 progress and, 132-33, 135,141; fiscal American Federation of Labor in Costa crisis and, 114,121-22; modernization Rica, 26 of state and, 81, 85, 90; protectionism ANCAP, 213,216,224 and, 100,104 407 408 Costa Rica and Uruguay Banks (Uruguay): comparisons with Cacao in Costa Rica, 33,60-61, 68,367, Costa Rican, 386; economic growth 382 and, 193,196; historical background to, CACM. See Central American Common 213,226; oil shock and, 263,281,287; Market (cAcm) in Costa Rica political economy and, 257-58, 259; Caja Costarricense de Seguro Social stagnation and, 230,239 (ccss), 81, 83-84, 92,102-05 Batlle, Jorge, 240 Calder6n Guardia, Rafael, 26,131; mod- Bathle, Jose, 214-16, 228, 294, 296 ernization of state and, 76, 82-83, 85, Batlle, Lorenzo, 205-06 93; political parties, 22-23; reforms, 72- Batlle, Luis, 239 73 Batlle y Ordonez, Jose,374,379,386 Campesino, 68 Batllismo, 238 Cantones, 19 Batilista (Uruguay), 216-18,380; oil shock Capital accounts in Uruguay, 269-70 and, 263; stagnation and, 228,238,241 Capital (Costa Rica), 138-40,142,370; Beans in Costa Rica, 116 comparisons with Uruguayan, 385, Beef (Costa Rica), 33,47,95; comparisons 386; development and, until 1950, 62, with Uruguayan, 382,384,385,387, 67; economic progress and, 126-27, 389, 390, 391; economic progress and, 130,132; fiscal crisis and, 111-12,114, 135-36,138; fiscal crisis and, 108,117, 118,121,123; growth and, 28,33,36 118; historical perspective on, 369,372 Capital goods in Uruguay, 271-72 Beef (Uruguay): comparisons with Costa Capital (Uruguay): comparisons with Rican, 382, 384,385,387,389,390,391; Costa Rican, 385-86; economic growth economic conditions and (1930-55), and, 190-92,194-97,200; economic pol- 219-20,224; economic growth and, icy and, 301,303,306; external influ- 192, 194; economic policy and, 296, ences and, 278,280,283; historical 300, 303; historical background to, 207, background to, 211, 224-26; historical 211-13; historical perspective on, 373, perspective on, 380; oil shock and, 267- 376-79; oil shock and, 267,282,290; po- 70,272,275,288,291; political econ- litical economy and, 251, 253,256,257; omy and, 254,257-59; stagnation and, stagnation and, 233,237 234,237,244-45 Bienefticios in Costa Rica, 93,117; develop- Carazo, Rodrigo, 110 ment and, until 1950,65-66,68-69; eco- Carballo, Vega, 69-70 nomic progress and, 129,137 Catholic Church: in Costa Rica, 22,24, Berreta, Tomas, 230 26, 72-73, 82; in Uruguay, 214 Birthrate, 388; in Costa Rica, 18; in Uru- Cattle in Costa Rica, 9, 16,25,46,117, guay, 265 134,382 Blanco party in Uruguay, 193,288; eco- Cattle (Uruguay), 187; comparisons with nomic policy and, 294,296-97; Great Costa Rican, 382; economic conditions Depression and, 298,301-02; historical and (1930-55),219-20; economic background to, 205-06,214-18,225; po- growth, 192; historical background to, litical events and, 238-39,241; stagna- 204,207-08,211-12; historical perspec- tion and, 228-30,244,246-48,255 tive on, 373,376-78; stagnation and, Blue-collar workers in Costa Rica, 84 231,234-35,251-54,257 Borb6n, Jorge, 89-91 Caudillos, 205,208,294,296,373,375 Bordaberry, Juan Maria, 242-43,249-50 ccss. See Caja Costarricense de Seguro So- Brazil: economic conditions (1930-50), cial Central America: development 204-05, economic policy and, 305; oil and, until 1950,59,62,67,71; economic shock and, 266-67,277; stagnation progress and, 135-36,140; fiscal crisis and, 235,238,255 and, 108,110,123; modernization of Bureaucracy (Costa Rica), 11, 70,102, state and, 78,87,90; population 110; economic progress and, 135,141, growth and, 17; protectionism and, 96, 143; structural transformation and, 36, 98,103 38 Central American Common Market Bureaucracy (Uruguay): historical back- (cACM) in Costa Rica: compared with ground to, 206,210,226; oil shock and, Uruguayan, 387-89; economic prog- 271; political economy and, 254 ress and, 135-36, 138, 141; fiscal crisis Index 409 and, 107,124; growth and, 29-31; his- 95-96,136-38; redistribution of wealth torical perspective on, 370-71; income and, 140-43; reforms and, 73-74; social distribution in,44, 47; modernization contract and, 63-66; structural transfor- of state and, 75, 85,87-91; private sec- mation and, 38 tor groups and, 24; protectionism and, Collusion in Uruguay, 260 94,96-98; structural transformation Col6n, 5,42,77,98-99,114,133 and, 37-39 Colonization in Costa Rica, 59-63,76,93 Central Bank (Costa Rica), 41,99,142; fis- Colorado party in Uruguay: economic cal crisis and, 116-17,119-20; govern- growth and, 193; economic policy and, ment and, 19-20; modernization of 294-95,297,301-04; historical back- state and, 81, 93 ground to, 205-06,214-16,225; oil Central Bank (Uruguay): economic shock and, 267; stagnation and, 228- growth and, 192; oil shock and, 268, 30,238-42,248 270,279,287-88; stagnation and, 247, Comisi6n de hnversiones y Desarrollo 249 Econ6mico (ciDE), 246-48,250,266 Centralization in Uruguay, 375 Commerce in Costa Rica, 21, 39 Certificado de abono tributario (cAT), 98- Commodity prices in Costa Rica, 97,98 99 Communism in Costa Rica, 81 Chamber of Agriculture in Costa Rica, Communist party: in Costa Rica, 22-27, 25,132 68,73,132; in Uruguay, 239 Chamber of Commerce in Costa Rica, 24, Competition (Costa Rica), 7,83,91,120; 104,132,134 comparisons with Uruguay and, 390- Chamber of Industry in Costa Rica, 27, 91; economic progress and, 132,136, 119; economic progress and, 132,134, 141; protectionism and, 96-97 136; modernization of state and, 83,86- Competition (Uruguay), 187,196,218-19, 88, 90; private sector groups and, 24 225; comparisons with Costa Rican, Christian Democrats: in Costa Rica, 21, 390-91; economic policy and, 294-95, 24; in Uruguay, 239 301, 304; historical perspective on, 380; Church: in Costa Rica, 22,24,26,72-73, oil shock and, 272,274,278,281,284; 82; in Uruguay, 214 political economy and, 233,235,237, ca E. See Comisi6n de Inversiones y 254 DesarrolloEcon6mico Confederations in Costa Rica, 25 ciX in Costa Rica, 98-99 Consejo Nacional de Producci6n (CNP) in Civil service in Costa Rica, 92 Costa Rica, 116-17 Civil war in Costa Rica, 75-76,78-79,81, Consejo Nacional de Salarios (National 91,131,133,369; in Uruguay, 188,205, Wage Council) in Costa Rica, 112-13 215,294-95,374 Constitutional Assembly in Costa Rica, 92 Class in Costa Rica, 70, 74 Constitution in Uruguay, 216-17, 263; Clientelism in Uruguay, 243,299-300 economic policy and, 294,297-98,302; Closure of economy in Uruguay, 192, stagnation and, 228,240 212,225,281,304,366 Construction in Uruguay, 195 CODESA. See Costa Rican Development Consumer goods, 365; in Costa Rica, 141, Corporation 212, 221, 370,372; in Uruguay, 233, Coercion in Uruguay, 375 253,255 Coffee in Costa Rica, 8-9,11,16,21,25; Consumer price index (cPI): in Costa CACM and, 89-91; development and, Rica, 41,99,121 until 1950,67-71; economic develop- Consumer prices: in Costa Rica, 116-18; ment and, 62-63; economic progress in Uruguay, 194,267,270 and, 128-32,143; fiscal crisis and, 107- Consumption (Costa Rica), 9,367; com- 08,110,117,124; growth, 28-29,31,33, parisons with Uruguayan, 385,391; fis- 36; historical perspective on, 367-70, cal crisis and, 117; growth and, 31-34, 372; income distribution and, 44,46, 36; income distribution and, 44,49; 49,53; industrialization and, 85,87; larger government (1950s) and, 134, larger government and (1950s), 132-35; 143-44; protectionism and, 96,98 modernization of state and, 75-77,79, Consumption (Uruguay), 224; compari- 93; prices and, 41; protectionism and, sons with Costa Rican, 385,391; histori- 410 Costa Rica and Uruguay cal perspective on, 378; oil shock and, 20; protectionism and, 100-01; redistri- 268,270,275; political change and, 288, bution of wealth and (1970s), 142-43 291; political economy and, 233,253, Cotton in Costa Rica, 134-35,138 256 cPL See Consumer price index Conveci6nNacionaldeTrabajadores Credit (Costa Rica), 20,41,57,369,371; al- (CNT), 239-40 location policies and, 114-15; develop- Cooperatives in Costa Rica, 133,138 ment and, until 1950, 62,65,69,73; Coparticipation in Uruguay, 206,225,297 economic progress and, 129,135-37, Corn in Costa Rica, 116-17 142,143; fiscal crisis and, 116,118-24; Costa Rica: bananas in, until 1950,67-68; modernization of state and, 80-81, 85, CACm, 88-91, CODESA (1963-73), 100-01; 93; protectionism and, 97,99 CODFSA (1973-85),118-20; coffee in, Credit (Uruguay), 192,226; external influ- until 1950,61-66; colonial legacy in, ences on, 278-79,281; oil shock and, until 1950,59-61; compared with Uru- 268,270-71,282,286,291; political guay, 365-66,382-92; credit (1973-85), economy and, 233,244,257-58 114-15; crisis in, 5-6,143-44; determi- Crops (Costa Rica), 4,23,25,58,61; com- nants of growth in, 32-33; develop- parisons with Uruguayan, 386; fiscal ment in, until 1950,59; domestic crisis, 115; geography, 16; historical savings in, 36-37; economic progress perspective on, 367-68,372; larger gov- in, 128-31; egalitarianism in, until ernment (1950s) and, 134-35,137-38; 1950,68-70; external shocks in (1973- modernization of state and, 75-76,85; 85), 108-09; factor market interven- protectionism and, 95. See also specific tions in (1973-85),111-12; financial crops deepening in (1963-73),99-100; finan- Crops (Uruguay), 220; compared with cial system in (1973-85),121-23; fiscal Costa Rican, 386; stagnation and, 232, crisis and (1973-85),106-08; geogra- 234, 243, 252 See also specific crops phy of 15-16; government of, 19-21; Cuba, oil shock and, 266 growth record of, 28-32; growth-with- Cuban Revolution, 239,241 equity outcomes in, 125-28; historical Currency in Costa Rica, 5 perspective on, 367-68, industrializa- Currency (Uruguay), 287,291,381; eco- tion of, 85-88; initial conditions in, 6-9; nomic policy and, 295,300-01, 304; ex- labor force in, 38-40; labor unions in, ternal influences and, 27741; 25-27; landownership in, 371; larger historical background to, 210, 219-20; government in (1950s), 132-35; legacy manufacturing and, 284; oil shock and, (of 1940s), 131-32; manufacturing in, 267-71, 282; stagnation and, 244,249, 371-72; modernization of state and 252,255,258,259 (1950-63), 75-77,92-93; nationalized Current accounts in Uruguay, 269-70 banking in, 77-81; openness in, 33-35; organization of, 11-13; political devel- Dairy products: in Costa Rica, 25,135; in opments in, 368-70; political-economic Uruguay, 220,232-34 interactions in, 9-10; political economy Debt (Costa Rica), 73,101,133,370; com- of crisis in, 10-11; political parties in, parisons with Uruguayan, 366,385; cri- 21-24; population growth in, 16-19; sis and, 5-6,106,112; growth and, prices in, 41-42,115-18; private sector 28-29,31; modernization of state and, groups in, 24-25; protectionism in, 94- 76,84 99,136-39; public sector in, 370-71; re- Debt (Uruguay): comparisons with Costa distribution of wealth in (1970s), Rican, 366,385; economic growth and, 139-43; reforms in, until 1950,72-74; 195-96, 199; oil shock and, 280-81, 287- resources of, 15-16; social security in, 88; political economy and, 233,237, 81-84,101-105; stagnation and (1973- 244-45,258; stagnation and, 237 85), 123-24; state role in, until 1950, 70- Defaults in Costa Rica, 114-15 72; structural transformation in, 37-38; Deficit (Costa Rica), 34,40,97; compari- successes of, 3-5; wage policies in, sons with Uruguayan, 385; crisis, 6,112 (1973-85),112-14 Deficit (Uruguay): comparisons with Costa Rican Development Corporation Costa Rican, 385; economic growth (CODESA), 19; fiscal crisis and, 110, 118- and, 193-94,196; economic policy and, Index 411 301,303,305; external influences and, Economic growth (Uruguay), 188-96; 277,280-81; oil shock and, 267-70,286; compared with Costa Rican, 388; his- stagnation and, 239,242-45,248,258 torical background and, 209-10,219, Deflation in Uruguay, 218,253,279-80 221,227; household income distribu- Demand factors in Uruguay, 284-85 tion and, 197-200; manufacturing and, Democracy (Costa Rica), 6-7,11,21,367; 283,285; oil shock and, 263, 267,273- compared with Uruguayan, 386; devel- 75,277; political change and, 288,291; opment and, until 1950,59-61, 64,69- social indicators and, 200-03; stagna- 70, 72, 74; economic progress and, tion and, 228,232-33,258 128-30; fiscal crisis and, 110; income Economic policy (Uruguay), 294-95,304- distribution and, 52; modernization of 07, 373; Great Depression and, 298- state and, 78; political parties and, 23; 304; modern democracy and, 295-98 successes and, 3-4 Economies of scale: in Costa Rica, 66, Democracy (Uruguay), 188; compared 129; in Uruguay, 251, 259 with Costa Rican, 386; economic Economies of scope, 10,125 growth and, 193, 196; historical back- Economy (Costa Rica), 3, 7-12,15,20; ba- ground to, 205,214-16; modern, 294- nanas and, 67-68; CACM and, 89-91, 300,304,306-07; oil shock and, 263, CODESA and, 118,120; coffee and, 61- 286-88, 292; stagnation and, 228-29, 63,65; compared with Uruguayan, 231,241,243 385-86,389,391-92; economic condi- Demographics: in Costa Rica, 18; in Uru- tions and, 75,77-78,129-30; crisis and, guay, 206-07,265,273,306 5-6; egalitarianism and, 69-70; fiscal Depreciation in Uruguay, 190,269-70, crisis and, 106-11,113; historical per- 271,277-78 spective and, 367-72; income distribu- Depression, Great. See Great Depression tion and, 43,46,52; larger government Depression in Uruguay, 195-96,279-81 (1950s) and, 132-34; legacy 1940s and, Deregulation in Uruguay, 267 131-32; modernization of state and, 75, Desarrolista, 248 83,85,92; nationalized banking and, Devaluation (Costa Rica), 143; fiscal cri- 78-81; political parties and, 23-24; pop- sis and, 111-12,121-23; protectionism ulation growth and, 17; private sector and, 99 groups and, 24; progress and, 125-26, Devaluation (Uruguay): economic 144; protectionism and, 94,96-97,99- growth and, 193,195-96; economic pol- 102,104,136-39; redistribution of icy and, 301, 304; oil shock and, 269, wealth and, 139-40,142; reforms and, 278-0, 287; political economy and, 73-74; stagnation of, 123-24; state role 252,257-58; stagnation and, 244,248- in, 70-71; successes of, 4 49 Economy (Uruguay), 187-89; analysis of, Diputado, 19,22-24,102 269-73; comparisons with Costa Rican, Direcci6n General de Estadistica y Cen- 385-86,389,391-92; conditions under s0S (IGEc), 275 (1930-55), 219-20; conditions under Discount rate, 254,259,386 (1955),232,234-35,237; external influ- Division of labor in Costa Rica, 60,69,71, ences on, 277-81; historical back- 391 ground to, 206-13,216,374-75,377-79; Dollar, 196,277 income distribution and, 260-61,275- 77; inflation and, 256-60; oil shock Echandi, 77,84,87-90,134-36 and, 264-66,287,291-92; performance Ecological zones in Costa Rica, 15-16 of, 273-75,282-83; political events and, Economic Commission for Latin America 237-39,241-42,250-53; reforms of (ECLA): in Costa Rica, 85,87,89, 100, (1959),255; rural-to-urban transfers 135,142; in Uruguay, 239,247-48,253, and, 253-55; social security and, 261; 266 stagnation of, 229-32,243-45,247-49; Economic growth (Costa Rica), 28,39, tariffs and, 255-56; trade policy and, 369; compared to Uruguayan, 388; 281-82 growth record and, 28-32; income dis- Education (Costa Rica), 10, 16,110,370; tribution and, 46,48; openness and, 33, compared with Uruguayan, 365,390; 35; progress, 125,127-28 development and, until 1950,70-73; 412 Costa Rica and Uruguay economic progress and, 126-27,129, Equity (Costa Rica), 3,6,8-11,369; devel- 132,140; growth and, 32,36-37,39; in- opment and, until 1950,59,64; eco- come distribution and, 48,52-54,56; nomic progress and, 125-28,141,144; initial conditions and, 7-8; moderniza- fiscal crsis and, 110,116; moderniza- tion of state and, 75,77; population tion of state and, 79, 81 growth and, 18; protectionism and, Ethnicity in Costa Rica, 16,68,78,130, 104; successes of, 4 382 Education (Uruguay), 265,290,295; com- Europe, 71,187,205-07,230,382,387 pared with Costa Rican, 365,390; eco- European Community (Ec), 192,194,238, nomic growth and, 197,200-01; 267,278 historical background to, 208-09,214, Exchange rate (Costa Rica), 365,385; cri- 226; stagnation and, 228-29, 231-32, sis of, 111-12,121,144; govermment 236,261 and, 20; modernization of state and, Egalitarianism in Costa Rica, 5,8,369; de- 88; prices and, 42; protectionism and, velopment and, until 1950, 61, 64,66, 97-99 68-70; economic progress and, 126, Exchange rate (Uruguay), 365,385; condi- 139; fiscal crisis and, 106,108; income tions (1930-55), 219,226; economic distribution and, 43,49 growth and, 191-97; external influ- Elections (Costa Rica), 7,19,131; com- ences on, 278-80, 292; financial cnsis pared with Uruguayan, 386,389-90; and, 287-88; historical perspective on, development and, until 1950, 71, 73; 374,378-81; manufacturing and, 283- modernization of state and, 79,92; po- 84; oil shock and, 267-70,271,274-75; litical parties and, 22-24 political change and, 291-92; political Elections (Uruguay), 188,292,376; com- economy and, 252-53,257; stagna- pared with Costa Rican, 386,389-90; tion and, 233,235,238-39, economic growth and, 193,196; eco- 244-49 nomic policy and, 294,296-98,301-04, Expansionism (Uruguay), 188; economic 307; historical background and, 205, conditions and (1930-55), 221,224,226; 215-16; social policies and, 214-16 economic growth and, 193,196; eco- Electricity (Costa Rica): economic prog- noniic policy and, 296,300-01,305-06; ress and, 127,134; income distribution oil shock and, 268, 278, 280, 283, 288, and, 56-57; modernization of state 291; political economy and, 233,243, and, 78-79,93 251,260 Electricity in Uruguay, 213,237,240,281 Exports (Costa Rica), 8-9,21, 23,25,28; El Salvador, 62,85,88 comparisons with Uruguayan, 382, Emigration (Uruguay): economic growth 384,387,391-92; development and, and, 191,195; oil shock and, 265, 273- until 1950,59,62,65-69; economic 74,285 progress and, 129-33,135,140,143; fis- Employers (Costa Rica), 53,66,368; fiscal cal crisis and, 106-12,116-18; historical crisis and, 1 11; modernization of state perspective on, 367,370,372; income and, 81-82; protectionism and, 95, 111 distribution and, 47,58; modernization Employment See Labor of state and, 76,78,80,85,89; openness Entitlement in Costa Rica, 11 and, 33-34; protectionism and, 95-96, Entrepreneurs (Costa Rica), 23,96; devel- 98-99,136-38 opment and, until 1950,70,73-74; do- Exports (Uruguay), 187,237-38,377; mestic savings and, 36-37; economic comparisons with Costa Rican, 382, progress and, 132-33,137,142-43; 384,387,391-92; economic growth moderization of state and, 79,85,90 and, 192,194-97; economic policy and, Entrepreneurs (Uruguay), 208,212,266; 295-96,300,303-06; external influ- economic policy and, 301, 303; stagna- ences and, 277-78,280; financial crisis tion and, 231, 240, 248, 250, 254 and, 288-89; historical background to, Equality (Costa Rica): development and, 209-11,217,219,221,226; manufactur- until 1950,59-61,70; economic prog- ing and, 283-5; oil shock and, 267, ress and, 126,128-29; historical per- 270-75,282-83; political economy and, spective on, 367,369 252-53,256-57; stagnation and, 228, Equality in Uruguay, 197 233,243-46 Index 413 External shock (Costa Rica): economic General Integration Treaty in Costa Rica, progress, 125,141-42; fiscal crisis and, 88 108-09 General Workers Union in Costa Rica, 25 External shock (Uruguay), 189; economic Geography of Costa Rica, 15-16 growth and, 192,194-95; economic pol- Gestido, Oscar, 240-41,248 icy and, 294,298,301, 303-04,307; oil GNP. See Gross national product (GNP) in and, 277-81, 288; stagnation and, 243-44 Costa Rica Gold in Uruguay, 210,225,249,256,300 Faci6, Gonzalo, 81 Government agencies in Costa Rica, 52, Faci6, Rodrigo, 369 70, 75; fiscal crisis and, 108,110, 119, Factionalism in Uruguay, 296-97,302,306 124; redistribution of wealth and, 142- Factor market interventions in Costa 43 Rica, 111-12 Government (Costa Rica): comparisons Fallas, Carlos Luis, 68 with Uruguayan, 366,388,392; eco- Family allowances program (asignaciones nomic progress and, 129,132-37,139; familiares) in Costa Rica, 140 expenditures and, 143; fiscal crisis and, Family labor in Costa Rica, 129-30 107,110,113,120-21; historical per- Farms (Costa Rica), 8,15-16,25,116; de- spective on, 370-71; population velopment and, until 1950,60,63-66, growth and, 19-21; protectionism and, 68-69; economic progress and, 128-29, 97,104-05 136; historical perspective on, 367-68; Government expenditures (Uruguay), income distribution and, 46,58; mod- 236-37,260; economic growth and, ernization of state and, 76,90 193-94,196,201; economic policy and, Farns in Uruguay, 379 299-301, 303, 305; oil shock and, 268, Figuers, Jose, 23,386; economic progress 270,272,289-91 and, 131,134,140; fiscal crisis and, 110, Government (Uruguay), 265,282,285, 118; modernization of state and, 75,77, 288; comparisons with Costa Rican, 79-81, 86-87; reforms and, 73-74 366,388,392; economic growth and, Financial deepening in Costa Rica, 99- 192-93,196; economic policy and, 296, 100,121 300; external influences on, 277,279, Financial repression, 141, 259 280; historical background to, 205-06, Fiscal policy in Uruguay, 244-48,259 210,212,214,218; historical perspec- Flores, Venancio, 205 tive on, 376-77,380; idealogy and, 231- F.o.b. prices, 194,245,271 32; oil shock and, 263,270-72, 276; Foreign borrowing, 110,121,123,143 political economy and, 250,252-54, Foreign exchange rate. See Exchange rate 257; stagnation and, 228-29,244,247- Foreign investment (Costa Rica), 73,78, 248 100,110; comparisons with Uru- Great Depression in Costa Rica, 66,68- guayan, 366,383-84; economic prog- 69,130 ress and, 132,134 Great Depression (Uruguay): economic Foreign investment (Uruguay), 296,380; conditions and (1930-55),216,218-19, comparisons with, Costa Rican, 366, 225-27; economic policy and, 298-306; 383-84; historical background to, 209, historical perspective on, 377,381; stag- 214; stagnation and, 235,237 nation and, 232, 237, 253, 256, 260 Foreign savings (Costa Rica), 9-11, 33- Green revolution in Costa Rica, 32-33 34, 36; economic progress and, 126-27, Gross domestic investment in Costa Rica, 141,143-44 36,124 Free trade: in Costa Rica, 91, 96, 98,372; Gross domestic product (GDP) in Costa in Uruguay, 229, 232,255 Rica, 4,37-38,41; comparisons with Frente Amplio (FA) in Uruguay, 241 Uruguayan, 388; economic progress Frigorifico Nacional, 212,224 and, 132,135, 138, 142; fiscal crisis and, 106-08,119,121,124; growth and, 28- Garr6n, Hernan, 88 31, 33, 36; income distribution and, 44, GDP. See Gross domestic product 46; modernization of state and, 75-76; Gender in Costa Rica, 38,54,56 protectionism and, 94-96,99 414 Costa Rica and Uruguay Gross domestic product (GDP) in Uru- Immigration (Uruguay), 187,296; histori- guay, 188,270,272,287; comparisons cal background to, 206-07,209, 211, with Costa Rican, 388; economic condi- 218,379; stagnation and, 230-31 tions and (1959), 232-33,236; economic Imports (Costa Rica), 24,28,31,370; com- growth and, 190,194-97,198-200; eco- parisons with Uruguayan, 365,390-91; nomic policy and, 305-06; external in- development and, until 1950,62-63, fluences and, 279-81; historical 67; economic progress and, 133-36, background to, 209-10,220-21; manu- 140,144; fiscal crisis and, 110-12,117; facturing and, 283-84; oil shock and, modernization of state and, 76, 86,89; 267-68,275,282; political change and, openness and, 33-34; protectionism 289-90; political economy and, 253, and, 95-99 256,258; stagnation and, 243,245,249 Imports (Uruguay), 188,286,288; com- Gross national income in Costa Rica, 29- parisons with Costa Rican, 365,390- 31 91; economic conditions and (1930-55), Gross national product (GNP) in Costa 219-20, 226; economic growth and, Rica, 29-31, 33 190,192-96; economic policy and, 298- Growth-with-equity in Costa Rica, 6,59, 301, 303, 305; historical background to, 64,125-28 209-10,212, 226; historical perspective Guatemala, 62,84,87,91 on, 377,379,381; manufacturing and, Guerra Grande in Uruguay, 205 283-85; oil shock and, 267,272,274, Guerrillas in Uruguay, 242,263,301-02 279-82; political economy and, 253-54, 256,258; political events and, 237-38; Haciendas (Costa Rica), 65-66,69 stagnation and, 231-33,235,244-47, Health (Costa Rica), 16,32,36,56,370; 249 comparisons with Uruguayan, 365, IMPROME in Uruguay, 272 390; economic progress and, 126-27, Incentives in Uruguay, 272,389,392 139-40; modernization of state and, 77- Income (Costa Rica), 3,5,10,23,99; com- 78, 81-82; protectionism and, 103-04 parisons with Uruguayan, 385-86,390, Health (Uruguay); compared with Costa 392; economic progress and, 131-32, Rican, 365,390; oil shock and, 290; so- 135,139,143; fiscal crisis and, 106, 110, cial indicators and, 200-02; stagnation 113,121; growth and, 28-31,33,42, and, 228, 231, 236 125, 127; modernization of state and, Heriandez, Alfredo, 102 78,83,86,88 Herrera, Luis Alberto de, 228-29,238-39 Income distribution (Costa Rica), 43-44; Hess, Raul, 91 alleviation of poverty and, 57-58; com- Hidalgos in Costa Rica, 62 parisons with Uruguayan, 365,382, High-income households in Costa Rica, 385,388-89,391; earnings inequality 54,56-57,83,103 and, 52-53; economic progress and, Home ownership in Costa Rica, 56-57 126,128,130, 138, 144; fiscal crisis and, Honduras, 87 108,113-14; household income (1960s) House of Representatives in Uruguay, and, 44-45; household income (1970s) 205,215 and, 48-50; household income (1980s) Housing: in Costa Rica, 57,77-78,135, and, 50-52; historical perspective on, 140; in Uruguay, 196-97, 202-03,280 367,369; redistribution of wealth Human capital (Costa Rica), 9-10,32-33, (1970s) and, 140,142; standard of liv- 71; comparisons with Uruguayan, 382; ing and, 54-57; structural transforma- economic progress and, 126-27,132, tion and, 45-48; taxation and, 53-54 140; fiscal crisis and, 110, 118 Income distribution (Uruguay), 188-89; comparisons with Costa Rican, 365, Ideology in Uruguay, 374,386; oil shock 382, 385,388-89, 391; economic growth and, 265-66; stagnation and, 231-32, and, 190,194,197-99; economic policy 241 and, 296, 306; historical background to, Illiteracy in Costa Rica, 77,108,136,140, 210, 216, 226; historical perspective on, 383 374,376-77,380; oil shock and, 266, Immigration in Costa Rica, 17,62 275-77,286-87,290; political economy Index 415 and, 250,252-54,255,260-61; stagna- tion of state and, 78-79; protectionism tion and, 245 and, 101-02,104 Income tax: in Costa Rica, 131,134,144; Infrastructure in Uruguay, 298 in Uruguay, 194,215,245,272 Institutions (Costa Rica), 6-11, 26,371; Income (Uruguay), 217-18, 301,379; com- coffee, 61-62,66; comparisons with parisons with Costa Rican, 385-86, 390, Uruguayan, 390; development and, 392; oil shock and, 265, 269, 281; stag- until 1950,69,71-72,74; economic nation and, 232,259 progress and, 126-28,130-31; fiscal cri- Independence: in Costa Rica, 62,64,367; sis and, 108,110,118,120; government in Uruguay, 204-07,375 and, 19-21; growth, 29,38,40; income Indians in Costa Rica, 16-17,59-61 distribution and, 49,56; larger govern- Industrialization (Costa Rica), 23-24,47, ment (1950s) and, 133-34; moderniza- 96,107; modernization of state and, 75, tion of state and, 75,92-93; 85-91; reforms and, 73-74; structural nationalized banking and, 78-80; politi- transformation and, 37-38 cal parties and, 22-23; protectionism Industrialization in Uruguay, 229 and, 95,100,102,104,136,138; redistri- Industry (Costa Rica), 21,30,49; compari- bution and, 141-43; social security sons with Uruguayan, 386,391; fiscal and, 81, 83-84 crisis and, 115,120; historical perspec- Institutions (Uruguay): comparisons tive and, 369, 372; structural transfor- with Costa Rican, 390; economic policy mation and, 37-38 and, 294,296-98,306; historical back- Industry (Uruguay), 195, comparisons ground to, 208-09; oil shock and, 265, with Costa Rican, 386,391; economic 270,291; stagnation and, 236,240,242, conditions (1930-55) and, 219,223-24, 245,251 226; economic policy and, 300,303-04; Intellectuals in Uruguay, 265-66 historical perspective on 377-78, 380; Interest rates (Costa Rica), 19, 81, 97; com- oil shock and, 271-72,275,285; politi- parisons with Uruguayan, 386; fiscal cal economy and, 252-54,257-58; polit- crisis and, 112,114-15; historical per- ical events and, 238,240; stagnation spective on, 370-71 and, 230-34,244-45 Interest rates (Uruguay), 233,235, 248, Inequality (Costa Rica), 5,61; economic 257-58,259; comparisons with Costa progress and, 139,144; income distri- Rican, 386; economic conditions and bution and, 43,45,52-53 (1930-55), 226; economic growth and, Inequality (Uruguay), 197,306,380; oil 192,194-96; oil shock and, 268-70, 272, shock and, 275-76; stagnation and, 234 278-281,288 Infant mortality: in Costa Rica, 54, 77,95, International Monetary Fund (IMF), 244- 383; in Uruguay, 202,261, 383 45,248 Inflation (Costa Rica), 3,41, 73,76,370; Interventionism (Costa Rica), 23,101, crisis and, 5-6; fiscal crisis and, 111-15, 369; comparisons with Uruguayan, 117,121,123-24; income distribution 386; economic progress and, 131-32, and, 44,49; protectionism and, 99, 104 142; fiscal crisis and, 110-12,115,118; Inflation (Uruguay): economic growth modernization of state and, 79, 87,90- and, 192-94; economic policy and, 299, 91 301, 304-05; historical background to, Interventionism (Uruguay), 298,300; 210,219, 226; oil shock and, 268-69, comparisons with Costa Rican, 386; 277-79, 281, 283; political change and, economic conditions (1930-55) and, 291-92; politics and, 238-39,241, 249, 216,218,223-24; oil shock and, 272, 256-60; stagnation and, 233,235,243- 282,291; stagnation and, 231, 238,241, 45,247-50 260 Infrastructure (Costa Rica), 9-10, 18, 62- Investment (Costa Rica), 9,97; compari- 63, 67; economic progress and, 126-30, sons with Uruguayan, 366,383-86, 132, 136,140; fiscal crisis and, 110, 118; 389; development and, until 1950,62, historical perspective on, 370; income 65,73; economic progress and, 126-27, distribution and, 46, 58; larger govern- 129, 132, 134,140; fiscal crisis and, 111- ment (1950s) and, 133,135; moderniza- 12,118,119, 123; growth record and, 416 Costa Rica and Uruguay 33,35; modernization of state and, 78, Labor (Uruguay), 188,264-265,288; com- 80 parisons with Costa Rican, 365-66, Investment (Uruguay): comparisons 388, 391; economic conditions (1930- with Costa Rican, 366, 383-86, 389; eco- 55) and, 221, 223; economic conditions nomic conditions (1930-55) and, 219, (1959) and, 234-37; economic growth 224-26; economic growth, 190-92,195; and, 194,197,199-201; economic pol- economic policy and, 2%, 299-301, icy and, 296, 301, 304-05; external influ- 305; historical background and, 209, ences and, 277,280; historical 211, 213-14; historical perspective on, background and, 207,210,215,226-27; 374,377,380; oil shock and, 267-69, historical perspective on, 373-77,380; 272-73,280,282; political change and, manufacturing and, 282-83,285; oil 289-90; political economy and, 250-52, shock and, 267,272-75, 277, 282; politi- 258; stagnation and, 237,243,247,255- cal economy and, 257-61; stagnation 57 and, 230-31,239-41,248 Italy, 206 Land (Costa Rica), 5, 9, 53; coffee and, 61, 63-66; comparisons with Uruguayan, Jimenez, Manuel, 91,136 382,384; development and, until 1950, Jimenez, Ricardo, 67-68 60-61, 63-64, 67, 69, 73; economic prog- Job creation in Costa Rica, 140 ress and, 128-29,139,142; fiscal crisis Job opportunity in Uruguay, 191,195 and, 117,123; geography and, 15-16; Junta (Costa Rica); economic progress growth and, 32-33; historical perspec- and, 131, 133; fiscal crisis and, 118; tive on, 367-68; modernization of state modernization of state and, 77-81, 84, and, 76,79,93; ownership and, 371 92 Land (Uruguay): comparisons with Costa Rican, 382,384; economic condi- Keith, Henry M., 67 tions (1930-55),219-20; economic Keith, Minor C., 67 growth, 192,195; historical back- ground to, 204,207,209-11, 216, 226; Labor (Costa Rica), 8-9,60; CODESA, 118- historical perspective on, 373,377; 19; comparisons with Uruguayan, 365- ownership, 378-79; political economy 66, 388, 391; conflicts with, 67-68; and, 250-52,254,259; stagnation and, crops and, 61, 65-68; and determinants 230,234-35,245 of growth, 32-33; economic progress Latifundio in Uruguay, 250 and, 126-29; egalitarianism and, 68-69; Latin American Free Trade Agreement evolution of, 38-40; factor market inter- (LAFrA), 192,238,243 ventions and, 111-12; fiscal crisis and, Latorre, Lorenzo, 205,208-09,212,253, 106-08,113,115,123; historical per- 295 spective on, 367-70; income distribu- Law, 385-87 tion and, 44,46-48,52-53,58; larger Leather in Uruguay, 233-34 government (1950s) and, 132,134-35; Legislation (Costa Rica), 6-7, 19-21; mod- modernization of state and, 76-77,81- ernization of state and, 78, 85, 87, 89 84, 88; protectionism and, 94-95,97, Legislation in Uruguay, 240-42 102,104-05,138-39; redistribution of Legislative Assembly (Costa Rica), 100- wealth and, 139-40; reforms and, 72- 05; fiscal crisis and, 120; modernization 74; state role and, 70-71 of state and, 77, 87, 91 Labor unions (Costa Rica), 25-27,3940, Liberalism in Costa Rica, 7,11, 21, 24; de- 52,371; economic progress and, 139, velopment and, until 1950,63,71-72, 143; fiscal crisis and, 110,113; modern- 74; economic progress and, 129, 131; ization of state and, 81; protectionism modernization of state and, 79, 87,92 and, 97 Life expectancy: in Costa Rica, 18, 77,95, Labor unions (Uruguay), 215,301-04; 108,136,140,389; in Uruguay, 202 economic growth and, 193, 197; oil Liga Federa de Acci6n Ruralista (LFAR), shock and, 263, 265, 276, 285, 288; polit- 238 ical events and, 239-42; stagnation Literacy: in Costa Rica, 54; in Uruguay, and, 231-32,235,248,258 201,261 Index 417 Livestock (Uruguay), 187,382,384,389; 136, 143; modernization of state and, economic conditions (1930-55) and, 78,80 219-20; economic policy and, 295,300; Middle class in Uruguay, 213,230-31,390 historical background to, 208, 211-12, Middle-income households: in Costa 216, 226-27; historical perspective on, Rica, 56-57; in Uruguay, 53-54,127,290 373-79; oil shock and, 282; political Migration: in Costa Rica, 17-18,39,44, economy and, 252-53; stagnation and, 63,67,368; in Uruguay, 229-30 228,233-34,243 Military coup (1874), 294-95 Loans in Costa Rica, 114-15,118,122 Military in Costa Rica, 71 Lobbying: in Costa Rica, 98,104,116,136, Military (Uruguay): economic growth 143; in Uruguay, 260,299,303 and, 196; economic policy and, 295, London Interbank Offered Rate (uLoR), 303,307; historical background to, 279 205-06,208,215; oil shock and, Low-income households: in Costa Rica, 263-65,288-92; stagnation and, 240, 53-54,58,83,113,141; in Uruguay, 242-43 192,203,290 Milk, 77,117,233-34 Lujan, Mario, 82 Minifundia in Costa Rica, 65,79 Minifundio in Uruguay, 250 Macroeconomics: in Costa Rica, 43,109, Minimum wage: in Costa Rica, 112,139- 119,124-125,141; in Uruguay, 255, 41,370; in Uruguay, 213,231,261 267,285 Ministry of Agriculture in Costa Rica, 25 Madrigal Nieto, Rodrigo, 86,91 Ministry of Defense in Uruguay, 289 Management in Uruguay, 241,264,301, Mobility in Costa Rica: occupational, 43, 303 138; social, 4,10,43,64, 110,127 Manufacturing (Costa Rica), 9,26,37,70; Modernization (Costa Rica), 23,48,100; comparisons with Uruguayan, 365, economic progress and, 133,139,142; 385-86,391; economic progress and, fiscal crisis and, 106,113,118 132,134-35,138,141,143; fiscal crisis Modernization in Uruguay, 208-09,212, and, 106,111,113,115,124; growth re- 214,245 cord and, 28, 30-31, 33-34, 39; histori- Monetary aggregates in Costa Rica, 120 cal perspective on, 370, 372; Monetary policy in Costa Rica, 99 modenization of state and, 76,85,90; Monetary policy (Uruguay), 225-26,270, protectionism and, 96-97 278,301-02; economic conditions Manufacturing (Uruguay), 190; compari- (1930-55) and, 219,226; economic sons with Costa Rican, 365,385-86, growth, 192-94; historical perspective 391; economic conditions (1930-55) on, 374; oil shock and, 268-69; political and, 220-23,225-27; economic policy economy and, 256-58,260; stagnation and, 300,303-04; historical perspective and, 241, 244-45,247,249 on, 374,376-77,379-80; oil shock and, Money supply: in Costa Rica, 99,121; in 272-73,275,277,283-86; political econ- Uruguay, 244,269 omy and, 253-54,256; stagnation and, Monopoly in Costa Rica, 96,117,137,366 230,232-36,243-44 Monopoly (Uruguay), 366,380; economic Marketing: in Costa Rica, 66,69; in Uru- policy and, 297-98,301; historical back- guay, 261 ground to, 213,216,223-25; oil shock Martinez Lamas, Julio, 220 and, 281, 291; stagnation and, 232-33, Mas, Rovira, 133 237,239 Meat (Uruguay), 187,377-78,380,382- Montevideo, 218-19, 365,383; economic 83; stagnation and, 232-34,237,252, policy, 295-96; historical background 255-56 to, 204-07,210,213,226; historical per- Medidas prontas de seguridad (MPs), 239- spective, 374,379; oil shock and, 291; 41,248,263 political events, 238,241; stagnation, Mercantilism in Costa Rica, 60,62,128, 228-31,233-34,236 367 Mora, Juan Rafael, 71 Middle class (Costa Rica), 23,26,36,105, Mortality in Costa Rica, 16, 18 390; development and, until 1950, 69- Movimiento de Liberaci6n Nacional 70, 74; economic progress and, 132-33, (MLN), 241 418 Costa Rica and Uruguay Nardone, Benito, 230 background and, 205,215,217; oil National Banking System in Costa Rica, shock and, 263-64; stagnation and, 19 235,240-42 National Bank in Uruguay, 213 Partido Communista. See Communist Nationalism, 100-01,142,231,369,3S3-84 party Nationalized banks (Costa Rica), 84-85, Partido Liberaci6n Nacional (PNL), 21-24, 89,371, 386; economic progress and, 119-20;CACM and, 88,90-91; develop- 131,133-34,137,141; modernization of ment and, until 1950, 61, 70-71, 74; eco- state and, 75, 77-81, 89, 93 nomic progress and, 133-36,138,142; Nationalized banks in Uruguay, 213 industrialization and, 87-88; modern- Nicaragua, 71, 87 ization of state and, 77,80, 84,92; pro- Nominal assets in Uruguay, 259 tectionism and, 96,100-02 Norms of reciprocity in Costa Rica, 129 Partido Unidad Social Cristiana, 21 Nutrition in Costa Rica, 16,56-57 Parties, political. See Political parties Pensions (Costa Rica), 39,103, 140,388- Obreg6n, Enrique, 102 89; modernization of state and, 81-82, Occupational mobility in Costa Rica, 43, 84 138 Pensions (Uruguay), 215,289,376,380, Oduber, Daniel, 84,86-88, 110,116, 118, 388-89; stagnation and, 229,261 140,142 Personal services in Costa Rica, 37,39 Office of Planning and Budget (oPP), 266 Peso; depression and, 195-96; economic Oil refining: in Costa Rica, 370; in Uru- policy and, 300-01, 304; historical back- guay, 221,237 ground to, 209-10, 225; oil shock and, Oil Shock (Costa Rica), 94; fiscal crisis 277-78,281,287; stagnation and, 245- and, 108,113,116,118; growth and, 29, 46,248-49,256 33,36,40; income distribution and, 44, Picado, Teodoro, 22,26,73,76,131 49 PLN. See Partido Liberaci6n Nadonal Oil shock (Uruguay), 188,194,265,270, Police force in Uruguay, 206,208,218 282; capital accounts and, 269-70; cur- Political instability: in Costa Rica, 73; in rent accounts and, 269-70; economic Uruguay, 193,209 analysis and, 266-67; economic perfor- Political parties (Costa Rica), 7,21-24, mance and, 273-75, 282-83; economic 110, 386,390; labor unions and, 27, policy and, 303-04; external influences modernization of state and, 79; re- and, 277-81; financial crisis and, 286- forms and, 73-74. See also specific politi- 88; ideology and, 265-66; income distri- cal parties bution and, 275-77,285; long-run Political parties (Uruguay), 188,379,386, reforms and, 270-73; manufacturing 390; economic conditions (1930-55) and, 283-85; military and, 263-65; po- and, 214-18, 225; economic growth litical change and, 288-92; stabilization and, 193,196; economic policy and, and, 268-69; trade policy and, 281-82 294-97,302,304,307; oil shock and, Openness (Costa Rica), 385-86; economic 267,288; stagnation and, 228, 230,232, progress and, 126, 130,136, 140; fiscal 237-43. See also specific political parties crisis and, 107-08; growth and, 33-35; Political stability in Costa Rica, 6,8-10, protectionism and, 96,99 74-75,110; economic progress and, Openness in Uruguay, 276,306,385-86 127-28,130; population growth and, Orlich, Francisco, 136-37 17; protectionism and, 94; successes Overvaluation in Costa Rica, 111-12 and, 3,5-6 Overvaluation (Uruguay), 196; oil shock Politics (Costa Rica), 3-6,16,37,52,59; and, 278-80,292,294; stagnation and, coffee and, 61-63,65; comparisons 235,239,249,252 with Uruguayan, 385-87,389,391; eco- nomic conditions and, 8-9; economic Pacheco, Jorge, 241-42,249,302 progress and, 125, 129, 131-32,144; Padillo, Guillermo, 82 egalitarianism and, 68-70; fiscal crisis Paraguay, 205,294 and, 109-11,118-20; growth and, 32, Parliament (Uruguay): economic policy 35; historical perspective on, 368-70, and, 295,297-98,302,307; historical 372; modernization of state and, 78-82, Index 419 84,87,90; organization of, 11-12; par- nornic progress and, 128-29, 131, 133; ties and, 23-24; political economy of fiscal crisis and, 110,120; government crisis and, 1 0-11; population growth and, 21-22; modernization of state and, and, 17; protectionism and, 96-97,101- 78-79 04, 137-38; redistribution of wealth Power (Uruguay), 188, 295; historical and, 141-42; reforms and, 72-73; state background to, 208-09,218; historical role in, 70-72; successes of, 37 perspective on, 375 Politics (Uruguay), 237-43; comparisons Presidency: in Costa Rica, 22-23,92; in with Costa Rican, 385-87,389,391; eco- Uruguay, 205,217,228,297-98 nomic conditions (1930-55) and, 216- Price instability in Uruguay, 192,226, 18,225; economic growth and, 192-93; 392; economic policy and, 301-02,305; economic policy and, 294-301, 304, oil shock and, 264,281,288,291; stag- 306-07; historical background to, 205- nation and, 239,243,256 06, 208, 212, 216, 227; historical per- Price policy (Costa Rica): comparisons spective on, 374-77,379; oil shock and, with Uruguayan, 386,389; fiscal crisis 263-66,288-92; political economy and, and, 110,124; historical perspective on, 250-61; stagnation and, 288-29,231- 370,372; structural transformation 32,247 and, 37-38,40-42 Population (Costa Rica), 4-5,8-9, 16, 33; Price policy (Uruguay), 220,224; compar- coffee and, 63-64,66; colonial legacy isons with Costa Rican, 386, 389-90; and, 59-60; comparisons with Uru- economic growth and, 193-94,197; guayan, 365, 382-83,388-91; develop- Great Depression and, 299,301; histori- ment and, until 1950,67,69; economic cal perspective on, 379-80; oil shock progress and, 126-29, 132, 135,144; fis- and, 272-75,282, 283; stagnation cal crisis and, 106-08; historical per- and, 232-33, 239-41,244, 248-49, 251, spective on, 367,369,371-72; income 258 distribution and, 43-44,46, 54, 56-57; Price stability in Costa Rica, 73,112,114, labor force and, 38-39; protectionism 120, 133 and, 94-95,103,136,139; redistribution Price stability (Uruguay), 194-96,300; of wealth and, 139-41 economic conditions (1930-55) and, Population growth (Costa Rica), 16-19, 219, 225-26; historical background 28, 31-32; economic progress and, 132; and, 210,215; stagnation and, 241, 255, fiscal crisis and, 123; modernization of 259 state and, 88; protectionism and, 101 Private sector (Costa Rica), 24-27,64, Population growth in Uruguay, 209-10, 366; economic progress and, 132,134- 229-31,265 35, 138,142,144; fiscal crisis and, 108, Population (Uruguay), 187-88,190,265, 111, 118-21,122-23; modernization of 306; comparisons with Costa Rican, state and, 76, 80; protectionism and, 365, 382-83, 388-91; historical back- 95,101 ground to, 206-08,212,214-16; histori- Private sector (Uruguay), 285,291; com- cal perspective on, 373-76,379; parisons with Costa Rican, 366; eco- stagnation and, 228-31,235-37 nomic conditions (1959) and, 235-36; Poverty (Costa Rica), 3,5,78,367,372; al- economic policy and, 299-301, 305; fi- leviation of, 57-58,125-26,128,138-40, nancial crisis and, 287-88; historical 144; development and, until 1950,59- background to, 213-14, 224; oil shock 61, 63; earnings inequality and, 52-53; and, 266, 268, 270, 273-74, 278; political fiscal crisis and, 106,108; household in- economy and, 253,257-258,260-61; come (1960s) and, 44-45; household in- stagnation and, 230,239,245,247,249 come (1970s) and, 48-50; household Producer prices in Costa Rica, 117 income (1980s) and, 50-52; income dis- Productivity (Costa Rica), 37, 46, 60, 62, tribution and, 43-44; standard of living 95, 392; economic progress and, 126, and, 54-57; structural transformation 128,132-33,141; fiscal crisis and, 106- and, 45-48; taxation and, 53-54 07,113,123; growth and, 32-33,36; Poverty in Uruguay, 200,234,261 modernization of state and, 76, 79 Power (Costa Rica), 6-7,96,369; develop- Productivity in Uruguay, 191, 274,377, ment and, until 1950, 63, 65, 69-71; eco- 379,392 420 Costa Rica and Uruguay Proletariat in Costa Rica, 26, 61, 65; in litical change and, 288,289-91; politi- Uruguay, 231; cal economy and, 254,257,260; politi- Property rights: in Costa Rica, 21, 71, 110, cal events and, 239-40; stagnation, 127-28,367; in Uruguay, 207-08,211, 228-31,235-37,239-40 216,295,298,375 Protectionism (Costa Rica), 9-11,29,94- Quotas (Uruguay), 195,219,267,387; eco- 95; CODESA, 100-01; comparisons with nomic policy and, 298,301; stagnation Uruguayan, 385,389-91; development and, 246,255 strategy and, 96-98; economic prog- ress and, 126-27, 131-32, 136-39; finan- Railroad: in Costa Rica, 67,93, 118,368, cial deepening and, 99-100; fiscal crisis 384; in Uruguay, 213,224,384 and, 107,111, 116-18,124; historical Ranches in Uruguay, 187-88,389; histori- perspective and, 370,372; political par- cal background and, 205,208; histori- ties and, 23; private sector groups and, cal perspective and, 373-74,378; 24; redistribution on wealth and, 141- stagnation and, 234,250 42; reforms and, 74; social security Ranchos in Costa Rica, 77 and, 101-05; structural transformation Real bills doctrine in Uruguay, 226 and, 37-38; trade policies and, 98-99 Real effective exchange rate in Uruguay, Protectionism (Uruguay), 192,267; com- 195 parisons with Costa Rican, 385,389- Real estate in Uruguay, 195 91; economic conditions (1930-55) and, Recargos in Uruguay, 271 218-21; economic policy and, 296,298, Recession: in Costa Rica, 110,121; in Uru- 300,306; historical background to, 209, guay, 253,279-82,287-89,302 212,214,216; historical perspective Reciprocity in Costa Rica, 71,74 and, 377,380-81; stagnation and, 237, Recovery in Uruguay, 195 253,255-56 Redistribution (Costa Rica), 23,388-90, Public expenditures in Costa Rica, 53-54, 392; economic progress and, 139-44; 110-12,200,202-03,388 fiscal crisis and, 110-11; taxation and, Public sector (Costa Rica), 11,18-19, 26, 53-54 70; CODESA, 118-19; comparisons with Redistribution (Uruguay), 276,388-90, Uruguayan, 365,385,390; economic 392; economic policy and, 296,299; his- progress and, 127,131-32,143; finan- torical perspective on, 214,375-76 cial system and, 121,123; fiscal crisis Refinidora Costarricense de Petr6leo and, 108, 110, 112,113-14,124; growth (REcOPE), 118 record and, 29,32,35-36,41; historical Reforms (Costa Rica): development and, perspective on, 369-72; income distri- until 1950,72-74; economic progress bution and, 49, 52-58; labor force and, and, 131; historical perspective on, 369, 39-40; larger government (1950s) and, 371; modernization of state and, 76; 132,134-35; modernization of state protectionism and, 102-04 and, 75-77, 79, 82, 84, 91; political econ- Reforms (Uruguay): economic conditions omy of crisis and, 10-11; political par- (1930-55) and, 217; economic growth ties and, 23-24; protectionism and, 95, and, 193-96; economic policy and, 296, 97-98, 100-02, 105,136, 138; redistribu- 306; oil shock and, 263,267-68,270-73, tion of wealth and, 140,142-43; struc- 277,284; stagnation and, 242,245,255 tural transformation and, 37-38 Reintegros (Uruguay): oil shock and, 271 Public sector (Uruguay): analysis of Relative factor endowments in Costa (1955-73),243,246,249; comparisons Rica, 29,37,124 with Costa Rican, 365,385,390-91; eco- Reserve requirements in Uruguay, 268, nomic conditions (1930-55) and, 216- 270 19,223-27; economic growth and, Resource allocation in Uruguay, 305, 374; 192-94,197; economic policy and, 296- historical background to, 210,219; oil 301, 303-05; external influences and, shock and, 270,274; stagnation and, 280-81,283; historical background to, 255,259 213-16; historical perspective on, 374, Resource reallocation in Uruguay, 195 375-80; manufacturing and, 285; oil Resources: in Costa Rica, 15-16; in Uru- shock and, 264-65, 267-68,270,272; po- guay, 373 Index 421 Revaluation in Uruguay, 278 Social policy: in Costa Rica, 23, 79, 90, Rice in Costa Rica, 25, 116-17,142,386 133; in Uruguay, 214-16,297,303,306 Rural areas (Costa Rica), 23,26,369; alle- Social programs: in Costa Rica, 51, 56,97, viation of poverty and, 57-58; compari- 104,106; in Uruguay, 290 sons with Uruguayan, 365,385-86, Social reforms in Costa Rica, 70, 72 389-90; development and, until 1950, Sodal security (Costa Rica), 26,369; com- 60-61,64, 69-70, 74; economic progress parisons with Uruguayan, 388-90; de- and, 131-32,136,139,141,144; growth velopment and, until 1950,72-74; and, 33,39; income distribution and, domestic savings and, 36-37; economic 44,46,49-51, 53; modernization of progress and, 130-31,133,139-40; fis- state and, 75-78, 83, 89; population cal crisis and, 108,111; income distribu- growth and, 17-18; protectionism and, tion and, 53,59; modernization of state 94-95,103; standard of living and, 54, and, 75,81-85,90-91; protectionism 56-57 and, 95,101-05 Rural areas (Uruguay), 197,226,374-79; Social security tax in Costa Rica, 370,388 comparisons with Costa Rican, 365, Sodal security tax (Uruguay), 233,236; 385-86,389-90; economic policy and, economic growth and, 194-96,200; oil 295-96,300-01; historical background shock and, 267,270,278-79,288,292 to, 205,208, 211-12; oil shock and, 264, Social security (Uruguay), 380; compari- 285; political economy and, 250,253- sons with Costa Rican, 388-90; eco- 55; stagnation, 229-32,238,241 nomic conditions (1930-55) and, 214, 218, 226; economnic policy and, 296, San J6se, 383 299-300, 304; oil shock and, 265, 289- Santos, Maximo, 206 90; stagnation and, 228-31,236-37, Savings (Costa Rica), 35-37,384,392; eco- 260-61 nomic progress and, 126,141, 143-44; Sodal services: in Costa Rica, 37; in Uru- fiscal crisis and, 112,121; protection- guay, 236-37,260 ism and, 99-100 Social stability in Uruguay, 231 Savings (Uruguay), 191, 226,306,384, Sodal status in Costa Rica, 142 392; oil shock and, 268,288 Social structure in Costa Rica, 59, 62 Self-employment in Costa Rica, 83,104, Sodety (Costa Rica), 4,7-8,11,16,27, 139-40,368 106; comparisons with Uruguayan, Self-sufficiency: in Costa Rica, 116, 128; 388; development and, until 1950,59- in Uruguay, 220 61, 64, 70-71; economic progress and, Senate in Uruguay, 205,215,217-18,298 126,129-30,132,136,144; moderniza- Seregni, Liber, 241 tion of state and, 79; population Sheep in Uruguay, 187,207,210,220,234, growth and, 18; private sector groups 373 and, 24; redistribution of wealth and, Skilled labor in Uruguay, 191,235-36, 139-40 260,275,285 Sodety (Uruguay), 217, 226,234; compar- Slaughterhouses in Uruguay: historical isons with Costa Rican, 388; economic background to, 211-13, 219-20, 378; policy and, 294, 299-300; historical per- stagnation and, 231, 233, 235, 237, 243, spective on, 376-77; oil shock and, 266, 257 292; stagnation and, 239,243,260-61 Social classes in Uruguay, 229-31 Sodoeconomic indicators in Costa Rica, Social democrats (Costa Rica), 73-74; eco- 34 nomic progress and, 131-32,134,142; Soil in Costa Rica, 15-17 modernization of state and, 78-79,92 Soley, Tomas, 82 Social factors in Uruguay, 263, 265-66, Solidarism in Costa Rica, 131-32 274 Sol6rzano, Franklin, 84 Social indicators: in Costa Rica, 75,77,94, Sorghum in Costa Rica, 117 132; in Uruguay, 200-03 Spain, 204, 206, 373, 375, 386 Social instability in Uruguay, 193,195 Spanish population in Costa Rica, 59-61 Socialist party in Uruguay, 239 Squatters in Costa Rica, 371 Social mobility in Costa Rica, 4, 10,43, Stability, 125-27,231; See also Political sta- 64,110,127 bility 422 Costa Rica and Uruguay Stabilization (Uruguay), 248-49,302; oil Tariffs (Uruguay): comparisons with shock and, 267-69,277-80, 281; politi- Costa Rican, 386; economic growth cal change and, 289,292 and, 192,194-95; economic policy and, Stagnation (Costa Rica), 28,385,389; fis- 295,299; historical background to, 209, cal crisis and, 123-24; protectionism 212,218-19,224,226; historical per- and, 96 spective on, 377,379-80; oil shock and, Stagnation (Uruguay), 188, 228; analysis 271-72,281-84; stagnation and, 233, of (1955-73), 243-49; comparisons with 245-46,253-56 Costa Rican, 385, 389; economic condi- Taxes (Costa Rica), 10, 12,370; compari- tions and (1930-55), 216,219-20; eco- sons with Uruguayan, 91, 386,388-89; nomic growth, 190,193,200; economic credits and, 98; development and, policy and, 300-01,305; historical per- until 1950, 61-62, 67-68, 73; economic spective on, 373-74,377-78; idealogy progress and, 128,130,132,134-36, and, 231-32; initial conditions and 140; fiscal crisis and, 111-12,121; incen- (1955), 232-37; oil shock and, 264,277; tives and, 112; income distribution political economy, 250-61; politics and, 53-54; modernization of state (1955-73), 228-29,23743; population and, 80,82-83,86-88,91; protection- and, 229-31 ism and, 97-98,102-04 Standard of living (Costa Rica), 6,10, Taxes (Uruguay): analysis of (1955-73), 367,391; growth record and, 28,31; in- 245,247,248; comparisons with Costa come distribution and, 54-57 Rican, 91, 385-86,388-89; economic Standard of living (Uruguay), 226,376, growth and, 192,194; economic policy 391; economic growth, 200, 203; stagna- and, 296-97,301; historical back- tion and, 231 ground to, 212,215-16,223,226; histor- Steel in Uruguay, 375 ical perspective on, 377,380; oil shock Strikes: in Costa Rica, 68,84,143; in Uru- and, 267,270-72,282,285; political guay,193,239-40,301 change and, 288,291; political econ- Structural transformations (Costa Rica), omy and, 251-56, 258-59; social classes 28, 37-38, 70, 94, 107; economic prog- and, 230,233,236-37,240 ress and, 129, 135, 139; income distribu- Technology (Costa Rica), 11-12, 118,382; tion and, 45-48 development and, until 1950,60,62, Subsidy (Costa Rica), 10,12,25,57,372; 66; economic progress and, 125-26, comparisons with Uruguayan, 365, 130,132,134; growth and, 32-33 384,388,391; economic progress and, Technology (Uruguay), 373-75,380,382; 132,136-37,142; fiscal crisis and, 110, economic policy and, 299-300; histori- 111,114-15,120 cal background and, 208,211, 216; stag- Subsidy (Uruguay): comparisons with nation and, 251,260 Costa Rican, 365,384,388,391; eco- Telecommunications: in Costa Rica, 78, nomic conditions and (1930-55), 219, 93; in Uruguay, 224,229,237,281 224,226; economic growth and, 193, Terra, Gabriel, 217-18,298-99 195,203; economic policy and, 299, Textiles in Uruguay, 235 302,305; historical perspective on, Tobacco: in Costa Rica, 61-62,93,367, 374,380; oil shock and, 267,271,274, 382; in Uruguay, 234,382 282,285,290; stagnation and, 244,254, Topography, 384 257 Trade (Costa Rica), 5, 8, 21, 37,51, 60; Subsistence economy in Costa Rica, 60 comparisons with Uruguayan, 365, Sugarcane in Costa Rica, 25,134 382,387,391-92; economic progress Sugar (Costa Rica), 33,47,95; economic and, 125,128,136,138,140-41; fiscal progress and, 135-36,138; fiscal crisis crisis and, 107-09,110,121; growth re- and, 117,118; historical perspective on, cord and, 28-31, 33; historical perspec- 369,372 tive on, 371-72; modernization of state Sugar in Uruguay, 220, 233,387 and, 87,90; protectionism, 96,98-99; surplus, 76 Tariffs (Costa Rica), 112, 136,370,386; Trade (Uruguay), 376; comparisons with private sector groups and, 24, protec- Costa Rican, 365, 382,387,391-92; eco- tionism and, 97-98 nomic conditions and (1930-55),204, Index 423 210,218-23; economic growth and, 26; economic conditions in (1955-73), 194-95, 203; economic policy and, 294, 232-37; crisis in, 193-95; demographic 298-300,304,306; oil shock and, 267, changes in, 206-07; depression in, 195- 269,272,277-78,280,284; policy and, 96; economic developments in (to 281-82; political change and, 288-89; 1890),207-10; economic developments political economy and, 253-55; politi- in (to 1930),210-13; economic growth cal events and, 238-39; stagnation and, in, 190-92; economic performance of, 229,232,235,243-44 273-75,282-83; economic policy in, Triple Alliance in Uruguay, 205,294 294-95,304-07; electoral politics in, Tupamaro, 241 214-16; external influences over, 277- 81; financial crisis in, 286-88; Great De- Ulate, Otilio, 22-23, 73, 75-76,93,133,135 pression in, 298-304; historical Underemployment in Costa Rica, 40,46, background to, 204,226-27; historical 49,139 perspective on, 373-81; household in- Unemployment (Costa Rica), 3,5,76, come distribufion in, 197-200; ideol- 371; economic progress and, 139,144; ogy in (1955-73),231-32; income fiscal crisis and, 112,114; growth re- distribution in, 260-61,275-77,285-86; cord and, 28,39-40; income distribu- independence in, 204-06; inflation in, tion and, 44,46,48-49,51-52; 256-60; long-run reforms in, 270-73; protectionism and, 97,104 manufacturing in, 283-85; modem de- Unemployment (Uruguay), 196,299,380; mocracy in, 295-98; oil shock in, 263- economic conditions and (1930-55), 70; policy in (1955-73), 251-53; 217-18; oil shock and, 275,282,285; political change in, 193,288-92; politi- stagnation and, 229,236-37,243 cal events in (1955-73), 237-43; pov- Union of Chambers in Costa Rica, 25 erty in, 200; protectionism in, 253; Unions. See Labor Unions reforms in, 255; rural-to-urban trans- United Fruit Company (Costa Rica), 131, fers in, 253-55; social indicators in, 200- 137 03; social security in, 261; stagnation United States Agency for International in, 228-31,250-51; tariffs in, 255-56; Development (usAIw), 20 trade policy in, 281-82 Urban areas (Costa Rica), 23, 369; allevia- Utilities (Uruguay), 194,214,224,366, tion of poverty and, 57-58; compari- 380; oil shock and, 264-65,267,290-91; sons with Uruguayan, 365,383,385, stagnation in, 231, 237,239 389-90; development and, until 1950, 64, 74; economic progress and, 131-32, Value added tax (VAT) in Uruguay, 194- 139, 144; fiscal crisis and, 107-08,113, 95,272,285 118; income distribution and, 44,48- Vegh Villegas, Alejandro, 267,277 51,53; modernization of state and, 77, Venezuela, 48 80,82-84,88; population growth and, Viera, Feliciano, 216 17-18; protectionism and, 94-95; stan- Violence in Uruguay, 375,386 dard of living and, 54,56-57; struc- tural transformation and, 38-39 Wages (Costa Rica), 5,368; development Urban areas (Uruguay), 187; compari- and, until 1950,65-66, 69, 73; economic sons with Costa Rican, 365,383,385, progress and, 129,134,139-41,143-44; 389-90; economic conditions and fiscal crisis and, 107,112-14; growth re- (1930-55), 210,212,214-16,221, 224, cord and, 28,36,39,40-41; income dis- 226; economic growth and, 193,201; tribution and, 44,48,51-53; economic policy and, 296,300-02,306; modernization of state and, 82-84,86, historical perspective on, 374,376,379; 91; protectionism and, 98,103-105. See oil shock and, 263, 265, 291; political also Minimum Wage economy and, 253-55,257; stagnation Wages (Uruguay), 266,275-76,280; eco- and, 228-31,234,238-39 nomic conditions and (1930-55), 215, Uruguay, 187-89; agriculture policy and, 218,223; economic growth and, 191- 282; analysis of (1955-73), 243-50; com- 94,196-97,198-99; economic policy pared with Costa Rica, 365-66,382-92; and, 298-303; historical perspective on, economic conditions in (1930-55), 216- 377,380; manufacturing and, 285; oil 424 Costa Rica and Uruguay shock and, 267,269-70,272-73,282; polit- 390,392; economic policy and, 296, ical change and, 288-89,292; political 305; stagnation and, 228-29, 231, 236 economy and, 255-56,258,260-61; polit- Wheat: in Costa Rica, 117; in Uruguay, ical events and, 240-41; stagnation and, 230, 220-32 235-37,247-49. See also Minimum wage Wholesale price index (wpi) in Costa Walker, William, 71 Rica, 40 Water: in Costa Rica, 15-16,56-57,78, Wool (Uruguay), 192,194, 220, 282, 127; in Uruguay, 213,224,229,237,240 373,392; economic policy and, 300; Welfare (Costa Rica), 71; comparisons political economy and, 251, 257; with Uruguayan, 387,390,392; eco- stagnation and, 232-33, 237-38, nomic progress and, 126,131, 141; 243-45 fiscal crisis and, 110-11 Working class: in Costa Rica, 23,390; in Welfare (Uruguay), 210,216,275,380; Uruguay, 193, 390 comparisons with Costa Rican, 387, World Bank, 137 Rottenberg and THE WORLD BANK others Costa Rica and Uruguay are both formerly successful agricultural econ- omies whose development has been startlingly similar in the twentieth century. Both achieved prosperity on the basis of the growth and export 0 of primary products, and of democratic forms of government. But taxa- tion and interventionist social policy redistributed earnings to their urban sectors and the consequent decline in the viability of their agricul- tural sectors eroded the fiscal base of both countries. As a result, both became vulnerable to external shocks. In Uruguay a balance of payments crisis was triggered by the large oil price increases of the early 1970s. Costa Rica, a decade later, suffered when voluntary lending to Latin t 1 America was brought to a halt by the world debt crisis. This book explores the circumstances that led to the crises of the early 1970s in Uruguay and of the early 1980s in Costa Rica. The first part shows how the private management of the coffee economy in Costa Rica was absorbed into a parastatal system. The second examines how the livestock economy in Uruguay degenerated into stagnation between 1957 and 1973. A third part compares the experiences of the two coun- tries. This volume is the fifth emerging from the comparative study "The Political Economy of Poverty, Equity, and Growth," sponsored by the World Bank. Each volume provides both a historical narrative and a deeper explanation of how and why a selected pair of countries had their particular experiences of growth and income distribution between 1950 and 1985. Other volumes in the series compare Malawi and Madagascar, Egypt and Turkey, Brazil and Mexico, and Sri Lanka and Malaysia. Simon Rottenberg is a professor of economics at the University of Massachusetts at Amherst. Cover design by Walton Rosenquist OXFORDUNIVERSITrYPRESS 90000> 9 780195 20883 ISBN 0-19-520883-8 Oxford