Long‐run growth and productivity changes in Uruguay

Purpose - The economic performance of Uruguay in the last 50 years has been disappointing. Annual growth in labor productivity has been lower than the rest of the Latin American economies and well below that East Asian and OECD countries. Out of the 0.9 percent of annual growth in productivity, total factor productivity (TFP) accounts for around 45 percent, which confirms the key role TFP plays in economic growth. The paper aims to discuss the issues. Design/methodology/approach - The authors decompose the change in productivity into four sources: an utilization effect, a reallocation effect, a markup effect, and effect of technical change. Findings - In the 1985‐1994 period, there is an appreciable increase in productivity levels. On the other hand, the 1995‐1999 period productivity increased by a mere 0.8 percent per year. The high increase in productivity between 1985 and 1994 is explained by the relatively high and sustained technical change of Uruguayan firms as well as the relocation of inputs between and within industries. The process of relocation seems to lose momentum – or may have been completed – in the late 1990s. Research limitations/implications - This paper uses data only from the manufacturing sector. It would be desirable to include all other sectors of activity. Practical implications - A study of the contribution to growth of different determinants suggests two important conclusions. First, that government policies are at the base of growth instability. Second, that reforms have been the source of higher than predicted growth in the 1970s and 1990s, pointing to the need of deepening such reforms. Originality/value - This paper decomposes the productivity change in four main sources and performs a contrafactual exercise of the impact of several policies on output growth. Therefore, researchers interested in development issues, policy makers and international multilateral organizations are likely to find it useful.