In the early twentieth century, Montevideo was home to many small artisanal workshops. These cottage industries were already protected by tariff rates of about 30 percent on most products. Rapid industrial growth did not occur until the 1930s, when the economic crisis caused by the Great Depression forced Uruguay, like other nations, to become more self-sufficient. Industry accounted for only 12 percent of GDP in 1930 but increased to 22 percent by 1955. The most dynamic growth occurred after World War II. During the presidency of "industrial populist" Luis Batlle Berres (1947-51), the government encouraged the development of industry through several policies: multiple exchange rates were introduced to allow manufacturers to import essential machinery at subsidized rates; import tariffs on competing goods were raised to prohibitive levels; and urban wage increases stimulated domestic demand (see Neo-Batllism, 1947-51 , ch. 1). Industrial output doubled during the decade following World War II. The timing of the expansion was favorable. For part of the period, wool exporters earned record profits because cold-weather uniforms were needed for the Korean War. A share of those profits financed the industrial sector's imports of capital equipment.
The industrial boom was short-lived, however. Manufacturing output increased by only 14 percent between the mid-1950s and 1970. For the industries geared to the internal market, the main problem was the small size of that market. The food-processing and textile companies, however, produced goods for export as well as for internal consumption. For these enterprises, the stagnation of the agricultural sector was a serious blow. As M.H.J. Finch argues in his landmark study, A Political Economy of Uruguay since 1870, the lagging supply of agricultural inputs limited manufacturing output. The process of economic decline was circular: the decrease in exports meant lower domestic income and hence lower domestic demand for other manufactured products. Additional factors also contributed to the slowdown, such as the bias against exports, which was the result of an overvalued currency. In sum, import-substitution industrialization allowed manufacturing to increase, but only to a limited extent. More important, the policy insulated the economy and eroded much of Uruguay's capacity to export.
The military government that assumed power in 1973 attempted to revitalize the economy by reemphasizing exports. The government dismantled part of the protectionist structure surrounding industry, lowered trade taxes, and created incentives for nontraditional exports. The results were at first dramatic. Industry grew at a rate of about 6 percent per year from 1974 to 1980. The most dynamic manufacturing growth involved relatively sophisticated goods: electrical appliances, transport equipment, textiles, paper, and nonmetallic minerals. Manufacturers invested in new technology, and labor productivity increased rapidly. Argentina and Brazil became important export markets for manufactures, proving that Uruguayan industry could compete outside of its own borders.
The expansion came to an abrupt halt in 1981, largely because of factors beyond industry's control. Macroeconomic instability-- in part related to developments in the export markets of Argentina and Brazil--pitched the entire Uruguayan economy into recession. The reversal was particularly painful in the industrial sector because manufacturers had borrowed heavily for investments and were overindebted as the recession began. Financial costs actually exceeded labor costs for many manufacturing firms. Thus, lower real wages brought on by the recession were not enough to restore the firms' competitiveness. In 1983-84 the central government stepped in and took over part of the industrial sector's debt. This probably prevented widespread bankruptcies but also increased the public sector's financial burden. The lingering indebtedness of private firms was a major issue for the Sanguinetti government.
Data as of December 1990