Despite the stability of its finances and institutions, the South American country faces a high cost of living and a complex tax regime that are a topic of debate for the left- and right-wing candidates facing off on November 24.
Uruguayans have a date with history this Sunday, the 24th. The second round of the presidential elections for the 2025-2030 term will be held on that day. The country, dominated by a strong two-party system, will have to choose between the conservative Álvaro Delgado, from the ruling Partido Nacional, and the social democrat Yamandú Orsi, from the leftist coalition Frente Amplio.
Orsi, a history professor and former mayor of the department of Canelones, won the first round with 43.92%, catapulted by the key support of former president José Mujica (2005-2010), as well as a platform based on youth employment and the fight against citizen insecurity. For his part, Delgado, a veterinarian by profession and former secretary of the Presidency, came in second place (26.82%) with the promise of continuing the work of the outgoing government of Luis Lacalle Pou.
It is no surprise that Uruguay is the star performer among Latin American countries. For example, the NGO Freedom House gave it a score of 96/100 in its democracy index this year, thanks to the strength of its institutions and civil liberties, even surpassing developed countries such as the United States (83/100) and the United Kingdom (91/100).
If we analyze the economic sphere, the Uruguayan nation also boasts notable figures: in April 2024, the World Bank estimated that only 6% of the population lives below the poverty line. Likewise, more than 60% of its citizens belong to the middle class and the nominal value of the minimum wage is equivalent to US$ 556, only surpassed by Costa Rica at the regional level. Finally, in October, annual inflation stood at a moderate 5%.
However, Uruguay is still a developing country, plagued by problems such as the high cost of living, the low representation of vulnerable populations and the precariousness of its drinking water supply. The latter problem became evident in 2023, when three years of drought brought the Paso Severino dam, the main freshwater reserve in the city of Montevideo, the country's capital, to historic lows. Uruguayans were then forced to consume bottled water and the government to rely on desalination of water from the Río de la Plata.
Although the return of the rains in December helped alleviate the crisis, the impact on the country's finances was far from negligible: the Uruguayan economy grew by only 0.4% in 2023 due to the decline in agricultural production. On the other hand, the World Bank estimates that this year there will be a rebound effect that will lead to growth of 3.4%, thanks to the rise in exports and private consumption.
THE BALANCE OF THE LACALLE ADMINISTRATION
The alternation between stability and transitory crises demonstrates the ups and downs that Lacalle Pou's government has experienced in economic matters. The president took office in March 2020 and from the start, he had to deal with the high fiscal deficit left by the previous government, as well as the start of the COVID-19 pandemic. There was then a 15% cut in public spending and, unlike other Latin American countries, Uruguay did not resort to mandatory confinement, thanks in large part to the early detection of infections.
Thus, the country was a pioneer in the return of in-person classes (June 2020) and the arrival of coronavirus vaccines (February 2021). “Although in that year, COVID spread and the highest number of deaths occurred. The management of the vaccines also had its ups and downs, but in general, the rapid reach of the campaign gave the president high approval at the beginning,” declared Gabriela Mordecki, economist and associate professor at the Institute of Economics of the University of the Republic (Uruguay), for AméricaEconomía .
On the other hand, unemployment insurance helped to partially reduce the impact of unemployment in the country. This resource consists of a temporary subsidy provided by the Social Security Bank (BPS) to formal workers who lost their jobs or experienced a reduction in their working hours or income. “While people could not be employed, they declared unemployment insurance and then, little by little, they returned to work,” adds Mordecki.
However, the economist acknowledges that the economic crisis resulting from the pandemic also wreaked havoc on income distribution. A study by the National Institute of Statistics of Uruguay (INE) revealed that in 2022, poverty reached 10.1% of the population. This represented an increase of 1.3 percentage points over 2019.
More recently, the rise in inflation in neighboring Argentina brought unforeseen consequences for the Uruguayan economy. “There was a very strong price difference with Argentina that affected the flow of tourists. In addition, Uruguayans went out en masse to buy goods such as hygiene and cleaning products on the other side of the border. This caused commercial activity to fall sharply, because what they spent there, they no longer spent here,” says Mordecki. After Javier Milei came to power in Argentina at the end of 2023 and the subsequent devaluation of the Argentine peso, shopping tourism lost its appeal and domestic consumption recovered.
Perhaps the most striking sign of Uruguay's economic recovery is the opening of the country's third pulp mill, operated by the Finnish company UPM. This factory employs 7,000 people and produces a material that is hailed worldwide as the ideal substitute for plastic. But UPM has not been free of controversy.
It is worth noting that in the last year, the Lacalle government has imposed seven sanctions on the Nordic company for a total of US$ 270,000 for failing to comply with environmental regulations such as exceeding the limit on the production of toxic compounds such as ammonium and chloride.
THE HIGH COST OF LIVING
Although currently, there is a more noticeable problem for the average citizen. In February 2024, the think tank Centro de Estudios para el Desarrollo (CED) published a report that revealed this alarming fact: some 600 products were 27% more expensive on average than in the Charrúa country, compared to 43 nations. Thus, products in Uruguay cost 80% more than in Mexico and 20% more than in Brazil and Argentina.
This problem is attributed to factors such as the small scale of the domestic market (3.4 million inhabitants in 2023), the high dependence on imports, restrictive fiscal policies, as well as the strength of the Uruguayan peso against other currencies in the region.
“There are some sectors based mainly on imports, because the market is small and this allows a few companies to monopolize the purchase and distribution of certain products such as personal hygiene products. Thus, if you cross the border with Brazil, the same tube of toothpaste costs three times less than in Uruguay,” explains Mordecki.
Other sectors such as the automotive industry are affected by the high tax burden. In this regard, the economist points out that in addition to the value added tax, there is also the specific internal tax, which is applied to luxury goods and makes vehicles even more expensive.
“There are taxes that should be reconsidered by the government. For example, bottled water has a special tax, which was temporarily removed during the drought, because demand increased and the salt water coming out of the tap could not be boiled. It worked at the time, but then the previous regime was reverted to,” says Mordecki. But, on the other hand, the analyst maintains that the cost of living in Uruguay should be tempered with positive points such as the high minimum wage and the social welfare state, which helps to offset liabilities.
WHAT DO THE CANDIDATES PROPOSE?
Looking ahead to the runoff on November 24, the table seems to be set for anyone. In addition to the high percentage obtained by the opposition candidate Orsi, there is the high approval of President Lacalle (50%, according to the pollster Equipos Consultores) and the sum of votes from the Colorado Party, which could tip the balance in favor of Delgado. It is worth asking then what both candidates propose to counteract the high cost of living in the country.
Álvaro Delgado offers to reduce the procedures for imports as a promise to lower the cost of goods and services. “It is a policy that needs further study. It may allow a reduction in prices, but it would not be something instantaneous, because there are many vested interests in the middle beyond the companies. I can mention the customs brokers who are dedicated to intermediating imports and raising the price,” Mordecki clarifies.
The National Party's programme also includes liberalisation of fuel imports, which would make petrol cheaper in a country that lacks oil fields. Although the economist points out that this is an idea proposed at the time by Lacalle and that it could not be fulfilled.
The underlying issue is Ancap, the public company that exercises a monopoly on the import, processing and distribution of fuels. Therefore, implementing Delgado's proposal would imply an opening to private investment in a sector that brings large dividends to the public treasury.
“Fuel refining brings profits to the State, which would disappear if we imported already refined fuels, and there is no guarantee that their prices would be lower. It is a proposal that is more in line with the liberal discourse of the National Party, rather than being realistic,” adds Mordecki.
As expected, Yamandú Orsi, from the Frente Amplio, is betting on a more statist discourse. One of his proposals is the revision of the country's tax schemes so that they are adapted to a "new global tax context." This would have a "structure of incentives for multinational companies to pay in Uruguay." Although Mordecki clarifies that this is not a response to a local decision, but to a recent request from the OECD, which requires countries to impose a minimum tax rate of 15% on multinationals.
“Of course it would be interesting if some companies chose to pay the 15% tax that is being discussed, because it would give the country some considerable extra income. But the Frente Amplio's proposal is more in line with trying to generate mechanisms or incentives for these companies to adhere to the measure, rather than forcing them to do so,” he says.
In addition, in the face of the cost of living, the left proposes increasing the purchasing power of workers, especially those who earn less than 25,000 Uruguayan pesos a month (US$ 588). To which Mordecki responds that they should return to the mechanisms of collective bargaining, which the Frente Amplio already applied during the governments of Tabaré Vásquez and José Mujica. Under this scheme, the State sits down to negotiate with the workers, represented by their unions, and the companies, represented by their organizations.
Over the past two decades, this approach has been instrumental in raising the minimum wage by sector and at the national level in the country, which has resulted in a decline in poverty. “But for this to be successful, the economy has to grow at rates greater than 1%, because otherwise companies cannot grant differential increases without profits,” explains Mordecki.
