The history of supply economies such as Uruguay illustrates the resource curse theory

The history of supply economies such as Uruguay illustrates the resource curse theory.

Uruguay is a Latin American country squashed between Brazil and Argentina, two large and better-known neighbours. Migrant populations arrived mainly from Italy and Germany at the end of the nine-teenth century and the country developed, rather unusually for Latin America, as a country of small farmers with relatively few large estates (haciendas).

Labour was in short supply so wages were high, and family farms tended to dominate. A society developed with a relatively even income distribution and no great distortions of wealth. The only resource was the land, which was plentiful and reasonably fertile. A pastoral economy developed, specialising in production of cattle and sheep for export. Beef, leather and wool were exported in large quantities, mainly to Europe which was still experiencing rapid population growth and rapid industrialisation.

Uruguay flourished in the early twentieth century and was frequently held up as model of Latin American development, much as South Korea is used today as a model of NIC development. However, Uruguay was no NIC. It developed no industries of its own but fulfilled the same function in the world economy as the southern states of the USA had done before and Saudi Arabia does today — the supply of raw materials to a distant market. The wealth created was re-invested in a highly advanced welfare system, health service and infrastructure. This led contem- porary observers to describe ...

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Growth rate 0.77%

Birth rate 17.42 per 1000

Death rate 9.06 per 1000

Infant mortality 14.14 per 1000 live births

Fertility rate 2.37

Literacy 97.3%

Montevideo was the capital and only urban centre with a primacy of x20. Its functions were administra-tive, educational and as a port for trade on which the

country depended. Following the Second World War the Uruguayan ‘miracle’ began to unravel.

The markets disappeared as postwar Europe established a protected trade area (the EEC — the forerunner of the EU) that encouraged increases in farm output within the area but put tariffs on imported foodstuffs.

Competition from other distant suppliers increased, specifically Australia, South Africa and New Zealand.

The emergence of substitute products, especially artificial fibres, further reduced demand.

As the markets disappeared in the 1950s, Uruguay embarked upon a crash industrialisation programme, but it had: no industrial ‘tradition’ and an education system that was geared to producing administrators and not engineers a city without any industrial structure — no work- shops, no ‘culture’ of industrialisation high costs of starting up from scratch, which increases the import bill as machine tools all have to be imported. Thus the industrialisation programme incurred very high costs for few returns, so the following sequence occurred.

The government was obliged to cut back on welfare and education and to increase taxation.

More money was printed, which led to hyper-inflation.

Strikes and civil unrest led to the rise of the Tupamoras guerrilla movement.

1 million people fled into neighbouring countries such as Brazil, as civil war broke out.

In 1973 the military took over.

Uruguay reverted to an export-oriented economy specialising in cheap semi-processed products, e.g. leather goods, for a market largely in Brazil and Argentina.