What’s So Special About Uruguay?

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Meet Gabriel Oddone, Uruguay’s new finance minister. He’s a Spain-educated economics PhD with thoroughly technocratic views in line with any Canadian or European finance minister. Among his top goals are economic growth, higher central bank reserves, and a smaller fiscal deficit. Now meet Juan Castillo, the new labor minister. Barely high school educated, Castillo was a long-time leader of the country’s national union and currently serves as Secretary General of the Communist Party of Uruguay (CPU). He thinks the Cuban and the Venezuelan regimes are fine forms of governments that need to be preserved and defended across the region. Oddone and Castillo both belong to Uruguay’s governing coalition and meet once a week at the same cabinet meeting without a fuss. But that’s not all. Incumbent and recently elected presidents from different political coalitions typically attend regional summits holding hands and smiling to the cameras. When former presidents Julio Maria Sanguinetti (1985-1990 & 1995-2000) and Jose Mujica (2010-2015) stepped down from their Senate seats in 2020, they chose the same date to send a strong civic education message: you can be political adversaries—in the 1960s Mujica had taken arms against Uruguay’s democratic regime, in which Sanguinetti served as education minister—but at the end of the day a democracy is sustained through dialogue, understanding, and consensus building. That’s what makes Uruguay special—you may stop reading now—the rest is just details. But of course, the devil is in the details and in the case of Uruguay there are some evils built in the system.

➔ Superior Political Culture

Political scientists salivate when talking about Uruguay; they should. Here’s a country whose citizens share core democratic values of liberty, equality, and justice, trust institutions, and act accordingly. Uruguay shows high participation in political and civic processes, featuring a solid institutional stability based on established political parties that uphold political norms and behaviors. Even informal rules sit comfortably alongside formal laws, guiding a healthy environment that encourages cooperation, consensus, and respect for diverse viewpoints. In the heat of political campaigns, when a partisan parade waving flags and blasting horns walks in front of an opposing parade, people respectfully stop and either wave or clap to each other. Even after the end of the military dictatorship (1973-1985), when two popular leaders were allowed to participate in politics again—one following exile, the other imprisonment—both called for peaceful coexistence and consensus building upon their return. Presidential debates are boring low-key affairs.

Indeed, except for the military dictatorship and a short hiatus in the 1930s, Uruguay has had democratic governments since the dawn of the 20^th century. When in 1961 Ernesto “Che” Guevara came to Uruguay—at the peak of his influence and revolutionary fervor—he gave a speech at the University of the Republic and proclaimed: “I know Latin America throughout and I can guarantee you there’s no other place like Uruguay, where you can express your ideas freely. (…) You have something that you must take care of, which is precisely the possibility to express your ideas and the possibility to advance through democratic channels as far as you can go.” This long-established political culture underpins and reinforces Uruguay’s political science 101 definition of a first-class democracy. Every international ranking of democratic quality and citizen support for democracy finds Uruguay among the top fliers. In the Latin America & the Caribbean region, only Costa Rica comes close to Uruguay’s democratic credentials.

Uruguay’s political parties are the crème of the crop. Two of its three leading parties have origins in the 19^th century and have evolved with the times to serve the country’s institutions. The current governing coalition is composed of parties dating back to the early 20^th century, including the aforementioned CPU founded in 1920 (one year earlier than the Communist Party of China). Uruguay’s “particracy” serves as a textbook example of how political parties support and advance democratic regimes by facilitating representation, formulating policies, training leaders, ensuring the peaceful transfer of power, and building consensus-based coalitions. Their legitimacy is reflected in a high percentage of Uruguayan citizens who are either affiliated or actively involved in a variety of activities before, during, and after elections.

But that’s not all: the Uruguayan electoral system allows for direct democracy mechanisms that give regular citizens the power to challenge or approve laws and constitutional reforms. Uruguayans can gather signatures and activate a national vote to partially or totally repeal laws and to amend the constitution. Since the return of democracy in 1985, there have been 17 instances of direct democracy, ranging from questions about state-owned enterprises (SOEs), funds for the judicial system, and giving amnesty to human rights violators during the dictatorship. These direct democracy mechanisms have also allowed the country’s labor union to mobilize their political machine and exert a muscular political influence.

➔ Size and Homogeneity

When asked to name a successful Communist country, Henry Kissinger allegedly said “France.” “Uruguay” would’ve been just as good an answer. The retort is a playful take on a dramatic experience that in real life murdered millions of people. The spirit of the answer takes a benign reading of Communist means and goals and sees a country like France or Uruguay come close to them. How so? In the case of Uruguay, there’s a clear State-centric approach to economic life and social policies that in different configurations have stayed in place for the past 125 years. The late Jose Mujica epitomized the average Uruguayan’s mix of Socialist eat-the-rich and Catholic heaven-is-for-the-poor morality that looks down upon the accumulation and public display of wealth. The State’s centrality in the economy, the political parties’ control in dispensing State jobs and economic largesse, and the national union’s power in influencing private enterprise constitute a combo imbued with this general approach, resembling in many ways a Leninist framework. By the same token, the local phrase lo atamo con alambre used when fixing up something hastily and with inadequate material, denotes a certain Soviet fatalism towards material possessions.

The combo is facilitated by being a small, homogenous, and cohesive population, with deep disagreements only found across soccer identities. Uruguay’s 3.4 million inhabitants are mostly concentrated on a strip of land abutting its southern waterfront. There are roughly four cows per person. Around 90 percent of the population is ethnically white and just a few generations away from Spanish and other European ancestry. Despite 10 percent combined Afro and Indigenous population, Uruguay is not a mestizo country like most of Latin America. In American anthropologist Joseph Henrich’s terms, Uruguay is not totally WEIRD (Western, Educated, Industrialized, Rich, Democratic), but comes close. A popular rock band from the 2000s proclaimed in a song “Don’t mess with me, we are not Latinos, I grew up in the Southern Switzerland.” In addition, few Uruguayans practice or belong to an established religion and those who do are largely Catholics.

The general social congeniality results in high levels of civic trust and low public corruption. The short degree of personal and familial separation between two Uruguayans coupled with the absence of religious, ethnic, or identitarian rifts facilitates high taxation and government spending levels without eliciting sectarian suspicions. A strong sense of community imbues the way citizens operate in public and private settings, creating what a celebrated political scientist called a “buffer society” that prevents political and economic tensions from swelling up into dangerous territory. You can walk into a coffee shop and bump into the President or the Mayor and nobody would blink an eye. Most Uruguayans are middle-class, contributing to low-income inequality as measured by the Gini coefficient. In Uruguay there is no oligarchy or single influential economic group. Nobody knows who the richest person or family is, and no one cares.

➔ Inclusive Welfare State, Mediocre Public Services

Some of the capital city Montevideo’s outer suburbs, places like Cerro Norte or Casavalle, are usually described as a “no-man’s land” where law-enforcement is patchy and social ills are concentrated in stark contrast to Uruguay’s brand of economic equality and social inclusion. These areas have a homicide rate estimated at three times the national average and in line with the world’s most violent spots. Poverty levels, school dropout rates, teen pregnancy, health and nutritional indicators can reach levels comparable to the world’s poorest corners. Many other rural areas in Uruguay share the same social ills, except for the homicide rates. However, rural areas make up the difference with some of the world’s highest suicide rates, reaching 30-37 deaths per 100,000 inhabitants in some areas—the national rate of 25 is the world’s fourth highest (compare to the U.S. rate of 15 or Colombia’s 5).

All Cerro Norte and Casavalle residents share the same welfare state benefits as the rest of the country: they can attend public school and access public healthcare without any direct monetary cost. They also benefit from various insurance schemes for unemployment, workplace injuries, and other social risks. Public housing programs subsidize and support access to affordable housing. When they reach retirement age, the State provides workers with social security benefits such as retirement, disability, and survivor benefits. The mere existence of large pockets of concentrated poverty reveals a clear tradeoff at the base of Uruguay’s welfare state.

The tradeoff is inclusion at the cost of quality. Every citizen regardless of income, educational level, or geographic location gets the same access to public services. And every citizen, if given the chance, would avoid such services and pay for private schooling, health services, or trash collection. The problem is not one of stinginess; over 20 percent of Gross Domestic Product (GDP) goes to social expenditures. Likewise, public services employ a lot of workers. In Montevideo, where half the country resides, trash collection is a perennial problem that has not improved over time. The local municipal government, like many others in the interior of the country, has an inflated workforce tasked with being employed rather than serving their constituents. Likewise, despite doubling spending on public education in the past two decades, Uruguay’s results in the Program for International Student Assessment (PISA) are poor by international standards. Most Asian and Organisation for Economic Co-operation and Development (OECD) countries fare better.

➔ Solid Financial Reputation, Unremarkable Economic Performance

Uruguay’s superior political culture not only shows up in international governance rankings but also has tangible economic effects. In 2002 Uruguay faced one of its worst economic crises ever, with unemployment rates above 25 percent, poverty levels estimated at more than a third of the population, a currency in death spiral following a deep economic recession, and banks’ coffers emptying by the minute. As the country faced the brink of default on its international debts, the political system came together—governing coalition and opposition—to build consensus and provide the political capital necessary for the administration to do what was necessary to repay international debtors. Despite the ill effects of the crisis, Uruguay avoided the worst-case scenario of default, lack of international financing, and years of financial troubles. The system worked, showing that even when confronted with a massive financial crisis it will do the right thing. Today Uruguay’s reputation among international capital markets is excellent; all major credit rating agencies give the country a solid Investment Grade. By 2024, the average interest rate Uruguay paid on its sovereign debt was a low 5.4 percent, reflecting international investors’ strong confidence in the country’s repayment capacity. It helps that Uruguay’s Central Bank has finally figured out how to keep inflation within single digits, having built a reputation for technocratic decision-making not afraid of bold interest rate adjustments when needed.

Uruguay’s GDP per capita, no matter how you measure it, ranks among the highest in Latin America, well above the regional average. Following the sharp decline of 2002, and despite a Covid pause, Uruguay experienced an average 2.2 percent of economic growth. It isn’t a stellar performance but looks good in the Latin American context. Like they say in Uruguay, En el país de los ciegos, el tuerto es rey (Among the blind a one-eyed person is king). When measured against other seeing international success stories, Uruguay’s performance is unremarkable. In less than a century, Uruguay went from having a global top 20 per capita income to middle of the table. Poland, Ireland, Singapore are some of the countries that were poorer than Uruguay in the 1960s but today have higher per capita incomes. New Zealand, a similar country in population and ratio of export animals to citizens, more than doubles Uruguay’s current per capita income. In addition, as a percentage of U.S. per capita income, Uruguay’s peaked in the 1950s at around 50 percent and declined to today’s 25 percent. Oddone’s doctoral thesis studying Uruguayan economic performance in the 20^th century was titled “The Decline.”

The economy’s current state is a mixed picture of long-term challenges and bright opportunities. Economic complexity indexes give the Uruguayan tradable sector a middle-of-the-road grade due to an undiversified export basket. The country sells to the world primarily commodities such as beef, rice, soybeans, and milk plus slightly manufactured wood pulp. Uruguay is also dependent on the influx of Argentinean tourists. In the past couple of decades, the Information and Communication Technology (ICT) sector has become an export star, placing Uruguay among the largest per-capita software exporters in Latin America. Still, ICT only accounts for roughly 15 percent of total export value.

Overall, the Uruguayan trade framework is a protectionist mess. Many decades before Donald Trump, Uruguayan leaders attempted a similar path to economic greatness through protectionism via high import tariffs and non-tariff barriers. It was called Import Substitution Industrialization, but the effect was Import Cancellation and Subsequent Deindustrialization Due to Lack of Export. The remnants of those policies are still part and parcel of the import-export system. Uruguay is a member of the Mercosur agreement with Argentina, Brazil, and Paraguay, which on average taxes imports at 12.5 percent, but countries can go as far as 35 percent. In addition, Uruguay charges a “consular rate” of 5 percent to imports from non-Mercosur countries. Meanwhile, Uruguay does not have free trade agreements with any of the top three economies (U.S., European Union, China). Plus, Uruguay has a high Value Added Tax of 22 percent that the local buyer must pay when purchasing imported products. For example, when importing a car into Uruguay, the buyer must pay various tariffs, taxes, and fees amounting to more than 50 percent of the total cost.

Meanwhile, the non-tradable sector is dominated by SOEs, public services, and a mix of labor regulations and market scale elements that limit efficiencies and raise costs. Construction, real estate, and wholesale trade transactions entail lawyers, notaries, and lots of government paperwork. A local comedian tells the tale of a tax collector who requests a bribe from a business owner to avoid an audit. “But Sir, I’m in full compliance, I saved all the receipts,” pledges the business owner. The tax collector replies, “I know you are not in full compliance because your business is still open.”

➔ The State’s Economic Footprint is Large and Comprehensive

Uruguay is reminiscent of the 19^th century French economist Frédéric Bastiat’s quip that, “The State is the great fictitious entity by which everyone seeks to live at the expense of everyone else.” The Uruguayan State vacuums up a quarter of GDP in tax revenues and dislodges public expenditures worth almost a third of GDP. Around $3 out of every $10 of goods and services produced in Uruguay are spent by the government. Meanwhile, the Uruguayan government employs nearly one out of every four working-age adults, one the world’s largest ratios.

Through SOEs, the Uruguayan State either has full monopoly or controls sizable market shares of the electricity, water, petroleum, cement, alcohol, railways, ports, and telecommunications sectors. For example, a private company cannot produce or distribute electricity directly to customers; it can only sell it to the SOE electricity utility, which has a monopoly over generation, transmission, and distribution. A government committee sets monthly gas prices at the pump and public employees service most gas stations. SOEs manage large budgets that are allocated based on peculiar political calculus; the largest expenditure by the country’s telecom SOE in recent decades was $110 million to build a sports arena. Both the national and the capital city’s governments own and run television channels. What’s more, the main bank, with a market share above 40 percent, is also an SOE. One of its largest borrowers is the country’s most popular soccer team. A different public bank dispenses nearly 80 percent of all housing mortgage credits. And there’s more, the Uruguayan State owns 400,000 hectares of land—almost the size of Rhode Island—through a government agency created in 1948 to distribute land; the total value is estimated at $3 billion. The overall Bastiat formula goes like this: SOEs charge Uruguayan costumers above market prices and reshuffle the rents to the Treasury so it can subsidize public services and hire public employees.

➔ Employment is Expensive

Uruguay is a great place to be employed. Regulations protect you from being fired and when you do, a generous severance package and unemployment benefits awaits—unlike the United States’ at-will employment, in Uruguay employers must provide a valid reason before firing an employee. Employed workers enjoy some of the world’s highest minimum wages as a percentage of per capita income. Mandatory collective wage negotiations set salaries across the country and salary indexation guards against wage decline. At the most recent May Day rally, union leaders demanded a 40-hour work week. The resulting average labor productivity is in the mid-range by global standards, reflecting also that Uruguayans log on average a relatively low number of hours annually.

The trick is to be employed. The current unemployment rate is almost 10 percent and there’s a larger percentage of underemployed workers. Among the youth, unemployment is 25 percent. Uruguay has never in recent memory reached the 4 percent (cyclical) unemployment rate that indicates full employment, instead it has hovered at double digits. Employed women have to spend almost double the time on unpaid work than men, according to the World Bank. Because salaries can be set above productivity levels, they increase economy-wide costs that contribute to many workers struggling to earn above the cost of living. Non-wage labor costs, comprising both employer and employee’s social security contributions, mandatory benefits, and job security provisions, make up almost 50 percent of total employment costs for a salaried worker. Formal private businesses have little say on the type of employment contract or salary level they can offer their workers. Most private companies think twice before hiring due to the costs but are also wary of growing bigger than 20 employees, as it triggers unionization and workers’ involvement in management decisions.

➔ A Demographic Time Bomb Since The Beatles Were Around

Uruguay and Ecuador have similar land areas at 67,576 and 109,484 square miles, respectively. Their demographic outlook cannot be more different. When in 2010 both countries held national censuses, they showed a stark reality: the last time both countries had similar populations was around the 1950s when they reached over 2 million people. The 2010 census showed Uruguay had 3.3 million people and Ecuador 14.3 million. By 2025 their populations are estimated at 3.4 and 18.2 million, respectively.

Uruguayan women have been having children at barely the replacement rate for many decades now. In addition, slow economic growth and 12 years of military dictatorship forced thousands of Uruguayans to emigrate. The long-anticipated outcome has been an aging population. Uruguay’s median age of 36 years is among the world’s oldest. Not counting some Caribbean islands where many U.S. and Canadian retirees reside, only Chile has a higher median age in Latin America. Over 10 percent of the Uruguayan GDP is spent on retirement pensions, among the highest in the region and above the OECD average; they absorb around one of every three pesos the government spends.

➔ The Perils of a Successful Democracy

Uruguay’s democracy delivers; it’s highly responsive to its people’s demands and reflects a superior political culture. Few democracies enjoy the high levels of legitimacy, support, and engagement. Uruguayan policy makers can pass legislation ahead of the global curve. When in 2013 The Economist magazine named Uruguay “Country of the Year,” it highlighted the legalization of both gay marriage and the production, sale, and consumption of cannabis. Policy makers can also direct SOEs to build infrastructure quickly. The Singapore-based Draper Startup House recently called Uruguay an “emerging hub in the global startup ecosystem” and listed “98 percent fiber optic internet coverage and “over 70 percent of government services digitized” as key advantages. Furthermore, Uruguay can sustain policies over a long time; institutional stability is the country’s middle name.

The dark side of Uruguay’s policy consensus and legal certainty is policy stagnation and legal stasis. Like an old person who ran out of tricks, it prefers to rest on its laurels instead of exploring new options. The gradualist approach to policy making means that urgent problems get solved only under mortal threat. Government spending is rigid, with little room for discretionary funds for new programs, and almost impossible to decrease. Although the government’s fiscal deficit has averaged just over 2 percent of GDP since 2000, it has remained stubbornly above 3 percent post-Covid, with projections of similar or higher rates in the future. The national debt-to-GDP ratio has stayed above 65 percent following Covid. Local economists estimate a 2 percent long-term economic growth, which would mean not catching up with the U.S. and other high-income countries. And it also means government debt spiraling out of control, given the demographic challenges.

In 2024, Oddone published a new book titled “The Take Off.” Unlike his previous book based on reams of empirical data, the new one was an exercise in hopeful expectations. Time will tell whether Oddone’s optimism holds. What’s clear is that Uruguay is caught in a trap of its own democratic creation; it’s spawned an idiosyncratic public-policy cocoon, shaped through a free and fair, legitimate, consensus-based, kumbaya-singing institutional process that is not conducive to widespread economic prosperity. Getting out of it will determine the economic fate of its citizens.