2009 Index of Economic Freedom

Quick Facts

Population:

• 3.3 million

GDP (PPP):

• $33.8 billion
• 7.0% growth
• 3.0% 5-year compound annual growth
• $10203 per capita

Unemployment:

• 9.2%

Inflation (CPI):

• 8.1%

FDI Inflow:

• $1.4 billion

Uruguay's economic freedom score is 69.1, making its economy the 38th freest in the 2009 Index. Its score is 1.2 points higher than last year, reflecting improvements in four of the 10 economic freedoms. Uruguay is ranked 5th out of 29 countries in the South and Central America/Caribbean region, and its overall score is significantly higher than the world average.

Uruguay's poverty level has been reduced by a series of structural reforms undertaken since the 2002 economic crisis. With sound public finance management and monetary stability somewhat restored, the economy has recorded steady economic growth averaging 3 percent over the past five years. Unemployment has dropped to single digits.

Uruguay scores above the world average in most of the 10 economic freedoms. The average tariff rate is fairly low, although non-tariff barriers remain extensive. Regulation needs to be streamlined. The judiciary is independent and corruption-free but subject to bureaucratic delays. The labor market is relatively flexible. Tax reforms implemented in 2007 reduced the corporate tax rate to 25 percent and introduced an income tax with a top rate of 25 percent.

Background Back to the top

With high GDP growth rates, Uruguay has a large middle class and low levels of extreme poverty. President Tabaré Vázquez of the left-of-center Frente Amplio party was elected in 2004. A founding member of MERCOSUR, Uruguay is increasingly trade-friendly. It signed a Trade and Investment Framework Agreement with the United States in January 2007, but pursuit of a free trade agreement with the U.S. has been stymied by other Mercosur members. The economy is based largely on beef and wool exports, but wood and software are gaining export market share. Historically, state involvement in economic activity has been substantial. Private firms have been permitted in some sectors, such as cellular communications, port operations, insurance, and mortgage banking, but further privatization is needed in telecommunications, energy, and public utilities.

Business Freedom 65.6 Back to the top

The overall freedom to conduct a business is limited by Uruguay's regulatory environment. Starting a business takes an average of 44 days, compared to the world average of 38 days. Obtaining a business license requires more than the world average of 18 procedures and 225 days. Closing a business is a fairly easy and straightforward process.

Trade Freedom 83.4 Back to the top

Uruguay's weighted average tariff rate was 3.3 percent in 2006. Import bans and restrictions, import taxes and fees, import registration requirements, some import licensing requirements, and customs delays add to the cost of trade. Ten points were deducted from Uruguay's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 82.2 Back to the top

Major tax reforms were implemented in July 2007. Corporate tax schemes were unified, and the top corporate tax rate is now 25 percent, down from 30 percent. An income tax was implemented with a top rate of 25 percent. Other taxes include a value-added tax (VAT), a capital gains tax, and a property transfer tax. In the most recent year, overall tax revenue as a percentage of GDP was 23.1 percent.

Government Size 76.5 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 28.0 percent of GDP. The state retains considerable control of the economy though monopolies in certain sectors.

Monetary Freedom72.8 Back to the top

Inflation is relatively high, averaging 7.4 percent between 2005 and 2007. Uruguay has eliminated most price controls, but the executive branch fixes prices of certain staples such as milk, and the government influences prices through regulation and/or ownership of numerous state-owned enterprises and utilities, including energy, petroleum products, and telecommunications. Ten points were deducted from Uruguay's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom70.0 Back to the top

In general, foreign capital and domestic capital are treated equally under the law. Foreign investors face few restrictions outside of state-monopoly sectors, and foreign investments are not subject to screening or approval requirements. The bureaucracy is generally transparent but can be cumbersome, and frequent changes in investment-related laws can result in inconsistent administration. Residents and non-residents may hold foreign exchange accounts. There are no restrictions or controls on payments, transactions, transfers, or repatriation of profits. Non-residents may purchase real estate.

Financial Freedom30.0 Back to the top

Uruguay’s small financial system remains vulnerable to heavy government influence. Reform has progressed slowly since a financial crisis that led to the closing of four major banks, and consolidation is resisted by labor unions. The state-owned Banco de la República Oriental del Uruguay is the largest bank, and the state-owned Banco Hipotecario del Uruguay is the leading mortgage lender. The two largest banks account for 55 percent of financial assets. The government-owned Banco de Seguros del Estadoize dominates the insurance sector, accounting for over half of the market. Capital markets are underdeveloped and concentrated in government debt. The two stock exchanges listed 26 firms in 2007, but trading is not active.

Property Rights70.0 Back to the top

Private property is generally secure, and expropriation is unlikely. Contracts are enforced, although the judiciary tends to be slow. The government has established a Settlement and Arbitration Center to improve investment relations. Regulations protecting copyrights appear to be working, but protection of confidential test data from unfair commercial use as required by the World Trade Organization's Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement remains inadequate. Aggressive anti-piracy campaigns have led to several successful prosecutions.

Freedom From Corruption67.0 Back to the top

Corruption is perceived as present. Uruguay ranks 25th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Although Uruguay has strong laws to prevent bribery and other corrupt practices, public surveys indicate a widespread perception of public-sector corruption. Foreign firms have not identified corruption as an obstacle to investment.

Labor Freedom73.7 Back to the top

Uruguay's relatively flexible labor regulations facilitate overall employment and productivity growth. The non-salary cost of employing a worker is low, and dismissing a redundant employee is relatively easy. Regulations related to the number of work hours are not flexible.