Executive summary

In the past three decades, successive governments of Uruguay have declared and proven their long-term commitment to political and economic stability, in a regional environment characterised by strong volatility. The country has consistently scored highly on metrics of quality of democratic processes, transparency and control of corruption. Building on these achievements, Uruguay has also led a stable and prudent macroeconomic policy, and maintained high trade and investment openness.

Supported by favourable external conditions, the period 2004- 2014 was marked by high pace of economic growth, poverty reduction and elevated rates of investment in Uruguay. Yet, more recent years have brought economic deceleration. The country’s GDP and gross capital formation grew more slowly as have the inflows of foreign direct investment (FDI). Uruguay is also grappling with some structural challenges, related to demographic changes, skill gaps and the need to facilitate innovation and strengthen its position in global value chains. The COVID-19 pandemic may accentuate these challenges as the competition for FDI is likely to increase. As such, Uruguay is currently at cross-roads where further reforms are required to facilitate its transition towards innovation, higher levels of wellbeing and sustainable socio-economic development. Several of these challenges can be supported through investment policy reforms and changes to the country’s business climate that are highlighted in this Review.

Uruguay’s regime is open to FDI and retains very few formal restrictions on entry or operations of multinational enterprises. There are currently also no pre-establishment screening requirements for foreign investment in Uruguay. As such, Uruguay scores as one of the most open countries on the OECD FDI Regulatory Restrictiveness Index, not only among emerging but also OECD economies. Uruguay’s domestic legal framework provides protection guarantees for investors consistent with a modern policy regime for investment. The performance of the domestic justice system has also improved significantly over time. As is the case in many other economies, Uruguay also offers foreign investors additional layer of protection through a network of its international investment agreements. As the extent of protection afforded through such agreements is rather extensive, the government of Uruguay could enhance its efforts to clarify, update and otherwise reform existing treaties to manage the associated exposure.

Uruguay also provides generous investment incentives. Free Economic Zones (FEZs) offer a full tax holiday to users for the duration of their contracts. In addition, the use of the COMAP regime, a specific tax incentive scheme under the Law on Investment, has significantly increased since 2007. Yet, the support that an investor may receive in Uruguay depends on the exact timing, location and scheme used at the time of the application for investment support. As such, while transparency of the regime has increased, the government could further increase its regulatory coherence, notably by inscribing investment incentives in the underlying tax laws, and rationalising and phasing-out some of them. Improving monitoring and evaluation of existing incentives can also assist the process of their optimisation and enhance transparency.

The recent exercise in consensus-building around priority activities and investment climate reforms conducted as part of the national strategic planning may help better define the approach towards investment promotion and facilitation. Specifically, identifying key horizontal investment climate reforms has helped clarify responsibilities , set objectives and fix timelines. Regardless of the final institutional set-up to accompany this process, which is currently being articulated, the identification and execution of key crosscutting projects in this area – such as the creation of a Single Window for Investment – should continue. In addition, greater attention needs to be paid to investment facilitation and improving the overall regulatory quality. Business surveys suggest that burdensome administrative procedures– e.g. for obtaining construction permits and registering property – are still an obstacle to doing business in Uruguay. While the country generally shows high levels of transparency and access to information, it lacks an overarching legal basis and institutional solution to enforce uniformly regulatory practices. Hence, besides continuing with the ongoing administrative simplification and digitisation efforts, the government could build on the available international best practices – as highlighted in OECD Recommendation on Regulatory Policy and Governance – to improve its performance in this area.

State-owned enterprises (SOEs) continue to play an important role in the Uruguayan economy and reflect the societal preference, expressed in referenda in mid-1990s. To a large extent, SOEs have managed to break away from political interference, improve governance and management, and boost efficiency. Still, their record in reaching management goals is mixed and there is no hard evidence that it has improved over time. Further reforms are needed to improve their corporate governance, encourage professionalization of boards and increase transparency in the use of resources. Given the dominant role of SOEs in Uruguay’s economy and their influence over the country’s competitiveness, there is value in adopting best-practice models of financial transparency and managerial professionalism, as those identified in the OECD Guidelines on Corporate Governance of State-Owned Enterprises.

Promoting and enabling responsible business conduct (RBC) is also vital to attract and retain quality investment and sustainable development. To a large extent Uruguay has already subscribed to most multilateral instruments underpinning RBC principles and standards embodied in the OECD Guidelines for Multinational Enterprises. Nonetheless, RBC as such is a relatively new concept in Uruguay. There is no comprehensive national strategy on RBC or public policies targeting RBC in specific sectors. RBC-related activities so far have mostly been undertaken by the private sector and civil society. For example, in regards to corporate governance reforms, the government could clarify the requirements on disclosure, including disclosure of non-financial information. Uruguay has also set out the plans for establishing the NCP as required under the OECD Guidelines. It envisions establishing an NCP consisting of an inter-ministerial commission and an Executive Secretariat based in the Ministry of Economy and Finance, assisted by a multi-stakeholder advisory body, by end of 2020. The OECD Secretariat can assist in ensuring its operationalisation.

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