Since 1989, the government of Argentina has embraced privatization along with dramatic policy reforms; in contrast, the government of Uruguay refrained from passing such legislation. The 1990s have brought to Argentina a new environment for entrepreneurship, greatly favoring the development of growth-oriented innovative entrepreneurs. The result is that while Uruguay has an abundance of smaller-scale informal micro-enterprises with a focus on substance, Argentina developed a highly visible and important entrepreneurship sector focused on innovation and change. Although Uruguay has natural resources similar to those of Argentina, innovative entrepreneurs and economic development have generally been seriously stunted by excessive government intervention as well as by high inflation. Following the success of Argentina in liberalizing its economy and stabilizing its currency, unsuccessful attempts were made in Uruguay to decrease the role of government, resulting in an envi! ronment in which countless individuals engage in micro-enterprise for subsistence. However, given the constantly increasing money supply, high inflation, a record trade imbalance, and a growing government deficit, the environment in Uruguay is not conducive to innovative entrepreneurship in the Schumpeterian sense.

This global perspective is based on a naturally occurring experiment. Since 1989, the government of Argentina has embraced privatization along with dramatic policy reforms; in contrast, the government of neighboring Uruguay refrained from passing such legislation. Both countries were in a similar situation during the economically turbulent 1980s, but the following decade brought to Argentina a new environment for entrepreneurship, greatly favoring the development of growth-oriented innovative entrepreneurs. The result is that while Uruguay has an abundance of smallerscale informal micro-enterprises with a focus on subsistence, Argentina developed a highly visible and important entrepreneurship sector focused on innovation and change. In Argentina, entrepreneurs are known as hijos del vigor; literally "sons of strength." By contrast, instead of strengthening its entrepreneurs, the Uruguayan Tax Reform Act of 1995 created a new tax on formal entrepreneurship, thereby creating! an additional incentive to remain small and informal.

There are virtually no indigenous peoples in either Argentina or Uruguay. Both nations are therefore more homogenous than are their neighbors; 85 percent of Argentina's population is white, similar to the 88 percent in Uruguay. Spanish is the official language of both Argentina and Uruguay. Literacy rates are extremely high-95 percent in Argentina, and 96 percent in Uruguay. The cultures of Argentina and Uruguay are also very similar; both are heavily influenced by European settlers.

At the turn of the century, Argentina was the world's tenth largest trading nation; only five countries had a higher per capita income. During the 1950s, Argentina enjoyed the status of one of the wealthiest countries in the world, while Uruguay had the highest per capita income in Latin America. Both exported produce as well as commodities. However, prosperity eventually gave way to the economic disarray of hyperinflation and constant currency devaluations.

As the currencies of both Argentina and Uruguay were constantly losing value, the cost of foreign debt increased. The rising cost of imports further complicated matters. Prices would change within the time it took to finalize a business transaction. At a restaurant, patrons would decide to pay for the entire meal before eating, because prices might increase before the end of the meal. Such inflation impedes entrepreneurs]lip and all business enterprise; under conditions of great uncertainty, a business plan loses meaning.

Beginning in 1989, Argentina (but not Uruguay) introduced measures to control inflation and massive decapitalization, which in turn allowed the development of an environment favoring innovative entrepreneurship in the Schumpeter (1912) sense. The result is that Argentina, with its growing economy, is attracting entrepreneurs who contribute to further economic development, while Uruguay is experiencing a negative net migration as people flee the economic hardships which plague that nation. The Economist reported, "...there are probably more Uruguayans outside the country than in .... Everyone with any get-upand-go has got up and gone" (1990, p. 38). By the middle of 1995, Argentina was experiencing deflation, while monthly inflation in Uruguay hovered at 3 percent.

Cantillon (1755) studied individuals who were self-employed for subsistence-people who were in the business of survival. Kirzner (1973) viewed entrepreneurs as individuals who were selfemployed as a result of having identified opportunities for arbitrage. In both cases, the focus was on individuals reacting to an existing disequilibrium. In contrast, Schumpeter (1912) was interested in entrepreneurs whom he described as causing a disequilibrium (by introducing an innovation), creating employment, and benefitting therefrom. The field research resulting in this essay suggests that while Argentina has succeeded in its experiment to encourage Schumpeterian entrepreneurship, the situation in Uruguay is better described as one of informeal subsistence enterprise.

Uruguay: The Statist Economy

During the early twentieth century, Uruguay exported considerable quantities of leather and meat, principally to the United Kingdom. Profits were redistributed by the Uruguayan government, providing state jobs and hefty pensions. Thus, reliance on a welfare state became the basis of Uruguayan life, with 60 percent of the population receiving money from the state. In time, the government could no longer afford its spending.

Having promised to jump-start the economy, in March 1990 Luis Lacalle was elected to the presidency of Uruguay. Keen on liberalization with a common market, his intentions were to lower tariffs, increase foreign investment, and sell inefficient state enterprises. In August 1990, he sent a bill to Parliament proposing an end to government monopolies in alcohol production, casinos, insurance, ports, and telecommunications. At the time, privatization advisor Conrad Hughes was trying to steer the country away from dependence on cattle to a more diversified service economy relying on banking and insurance. However, in December 1992, a referendum rejected reform. An aging population, accustomed to Latin America's oldest welfare system, was reluctant to risk its safety net. Consequently, Uruguay is among South America's most taxed nation, and it became even more so in April 1995 when VAT and income tax rates were both raised.

In Uruguay, much emphasis is placed on regulating business; one out of four jobs involves working for the government, resulting in the public sector employing more people than does any other sector in the country. Manufacturing, for instance, provides only 19 percent of the jobs in Uruguay. Because the large bureaucracy is a burden on formal enterprise in Uruguay, considerable business is conducted in the informal (undeclared) economy. Meanwhile, the bureaucracy tries to justify its existence and in so doing has caused a proliferation of civil servants, departments, and regulations, which together hamper formal entrepreneurship in Uruguay. Furthermore, the Tax Reform Act of April 1995 introduced a new tax on formal small business. All this has contributed to the establishment of a large sector of informal, subsistence-level micro-enterprises.

Argentina: The Experiment

During the late 1970s, the streets of Buenos Aires were full of military men with German shepherd guard dogs; infl:ation (at 0.4 percent in 1973) was of little concern. Democracy was reinstated in 1983, but in the absence of budget control and a stable currency, the economy collapsed as market forces were distorted by government intervention. Firms adjusted prices each day at lunchtime. The streets became crowded with money changers known as cambistas.

During the 1980s, retail prices in Argentina grew at an average annual rate of 400 percent, and while inflation was running at 197 percent. In July 1989, Carlos Sail Menem became president of Argentina. His platform of economic reform involved the implementation of a bold experiment of economic reform, including privatization, inflation reduction, and apertura (liberalization of markets).

Argentina privatized industry in three ways: (1) the sale of assets; (2) employee ownership; and (3) contractual agreement. Stocks of state-held companies were sold, thereby raising capital for the government to decrease the deficit, and indirectly reduce inflation. An example is the case of Entel, the state-owned telecommunications company which was privatized by means of an international corporate bid in 1990, at which time Telecom Argentina and Telefonica de Argentina S.A. paid $214 million U.S. in cash as well as $5 billion in bonds.l Also during the early 1990s, the government proceeded to privatize the Buenos Aires subway, as well as passenger and freight railway services, formerly operated by the state railroad Ferrovias. Rail routes were awarded to five international consortiums which injected new capital, and according to a World Bank observer, services have improved while prices have been reduced. This has facilitated business travel as well as the transport of fr! eight, indirectly helping entrepreneurs.

In certain cases, including those of Telecom Argentina and Telefonica de Argentina S.A., employee stock ownership plans were implemented. The logic here is that equity participation may increase employee motivation, contributing to productivity and therefore competitiveness. This, in turn, results in better service for the public, including entrepreneurs.

In some instances, it was recognized that private enterprise could be more efficient than a government department. Therefore, public works were contracted out to private firms. For example, when it was decided to modernize and widen the navigable waterway between the Parana River and the Punto Indio Channel, it was agreed that the supervision of these works, along with operations and maintenance of the waterway, would be contracted out to private business. This meant increased opportunities for entrepreneurs. Privatization resulted in six positive events for Argentina:

(1) The conversion of state-owned firms raised $24 billion (U.S.).

(2) The state is no longer responsible for deficits of newly privatized enterprises.

(3) Economic stabilization was rein

force.

(4) Efficiency improved within formerly state-owned enterprises. Labor productivity in manufacturing, for example, rose by 42 percent between 1991 and 1994.

(5) Privatization of utilities improved efficiency. For instance, the cost of electricity is down by a third (in real terms) since privatization. This has particularly benefitted entrepreneurs in manufacturing.

(6) There is increased use of technological innovations. In telecommunications, for example, Movicom had been competing with Movistar and Compania de Telefonos Interior, each providing cellular phone service, and by 1995 Argentina had well over seven cellular subscribers per 1,000 inhabitants, while Uruguay had less than three.2

The inflation-reduction strategy involved a three-pronged approach to indirectly control prices: (1) reducing the rate of increase in the money supply; (2) pegging the currency to the U.S. dollar; and (3) increasing revenue through increased tax enforcement. President Menem shrunk the money supply to an amount backed by foreign cash and gold reserves. One year after the annual adjusted rate of inflation pegged at 20,266 percent in March 1990, Domingo Cavallo launched the currency convertibility plan. In April 1991, the exchange rate of the austral was frozen, linking it to the U.S. dollar. This anchored expectations. In January 1992, the peso was introduced, equal to 10,000 australs, and pegged again against the LI.S. dollar. The new monetary base was completely backed by the central bank's gold and foreign exchange reserves. Even when Argentina's trade surplus dropped in July 1995, the government remained committed to a pegged currency. Finally, nonproductive civil servant! s were laid off and subsequently retrained to serve as tax inspectors, performing such tasks as curtailing tax evasion. Thus, tax collection was increased from the 20 million residents who routinely evaded tax payments.

Apertura is the term used by President Menem to describe the liberalization of markets. It used to be that Argentina, like Uruguay, had high tariffs on imports; Juan Peron had implemented these measures to protect his inefficient firms. The Menem government reduced import duties from above 50 percent to the 10 percent range. Numerous non-tariff barriers were eliminated as well. This opened up Argentina to competition from abroad, giving consumers more choice, and necessitating more efficiency and innovation among Argentine producers.

In 1991, the Mercosur free-trade area was conceived, at which time trade hetween Argentina and Brazil was only $3 billion LI.S. By 1995, Mercosur became a custom union (with a common external tariff) linking 200 million consumers (representing an annual GDP of $800 billion) across Argentina Brazil, Paraguay, and Uruguay. Trade between Argentina and Brazil was already <iS $8 billion and growing, as each of the two countries specialized in that which it had a comparative advantage. (Argentine manpower is 50 percent more expensive than that inBrazil but energy is consideraly less expensive in Argentina.) Argentina. with apertura, was on its way to becoming a leading exporter of industrial goods as well as the dairy, granary, and livestock center of Mercosur.

While Uruguay today continues to produce mostly for its domestic market, apertura has resulted in Argentina becoming more involved in international business. While the northern countries of South America trade mostly with the Americas, Argentina trades mostly with Eu]-ope. Not only has trade opened up, but other sectors too. Government direction of credit was ended with the deregulation of the financial sector, and interest rate controls were lifted. Other laws deregulated the construction industry.

Argentina successfully privatized nearly all federally-owned enterprises including more than 150 companies, oil fields, ports and road facilities. Inflation was controlled, and the economy liberalized. With the simultaneous reduction of bureaucratic intervention, all of this has encouraged the repatriation of capital, the influx of foreign funds, and investment in the domestic economy as well as powerful domestic spending. This, along with infrastructure improvementS, has led to an environment increasingly conducive to entrepreneurial activity.

The massive privatization program made possible improvements in the infrastructure. The Argentine telephone system, for example, had been in disarray during the 1980s; service was poor the company was corrupt, and entrepreneurs waited between five and ten years to obtain at telephone. During the four years following successful privatization in 1990, the degree of network digitalization (which relates to service quality) more than doubled from 14 percent to 33 percent. The average waiting period for repairs fell by about 80 percent, while the ratio of lines to workers incl-eased by Xl() percent, and the number of phone lines in Argentina increased 28 percent (Solanet 1994). In 1995 a phone could be installed in Argentina within 72 hours of its being requested, and in November of that year, the price of a new line was reduced by 50 percent.3 Most importantly, although the telephone system was a drain on the public coffers up to 1990, it is now profitable and contributing to t! he economy directly by paying taxes as well as indirectly through improving communications.

In contrast, in 1994, Uruguay had 337,000 telephones (10.5 per 100 inhabitants), with the overall call-completion rate being only 35 percent. The waiting time for telephone installation in Uruguay exceeds one year, and once installed the typical telephone line in Uruguay is out of service a couple of weeks annually (World Bank 1994).

Entrepreneurs in Argentina also benefit from a better road infrastructure than do their Uruguayan counterparts. Private funding has provided new multi-lane highways in Argentina. In contrast only 13 percent of the roads in Uruguay are paved, and of these, many are in need of improvements in order to make transportation within the country more efficient.

Sources told the author that for the first decade after the privatization program in Argentina spending on privatized public services exceeded an average of $1 billion (U.S.) annually. Such infrastructure improvements increase the ease with which entrepreneurs can conduct business. In contrast, according to unpublished sources at the World Bank, a third of all firms inUruguayreport that infrastructure inadequacies impede their ability to do business effectively. Unreliable electric power delays production, and distribution is hindered by inefficient transportation. Another problem cited in Uruguay is high taxes, which, although avoided hy most informal enterprises, amount to high obligations for formal firms.

In Argentina,inefficient state-owned enterprises were transformed from a cash drain on public coffers to sources of revenue; this has eliminated the need to raise taxes on businesses. As detailed Solalnet (1994), privatization has reduced government spending in Argentina hy $4 billion (U.S.) annually. Simultaneously, entrepreneurs benefit from an infrastructure improved via privatization.

Railway productivity since privatization increased 500 percent. Meanwhile, the electric companies reduced their workforce by 26 percent while sales increased 8 percent. Thermal power availability increased from 43 percent to 75 percent, while the ratio of employees to megawatts was reduced by 50 percent. Privatization introduced new values to a society which was previously unaccustomed to conservation.

Also important is the infusion of entrepreneurial talent into new ventures. The Argentine government cut almost half a million jobs, while private companies also reduced their number of employees in order to compete profitably. The formerly state-owned oil company, Yacimientos Petroliferos Fiscales (YPF), was among the many enterprises privatized in 1993. The proceeds int`used over $3 billion (lT S.) into the national treasury, helping reduce their deficit. The new management of YPF increased net profitability by 176 percent, but in so doing reduced its employees from 51,000 in 1990 to 6,500 in 199474 Some of these former employees became entrepreneurs and focused their energies on new ventures. With the new Argentine currency stable, and inflation reduced, the chances of success for entrepreneurs have increased.

It should be mentioned, however, that while ln(nII mom and pop shops do well in Uruguay, their existence is threatened in Argentina. During the el-ra of hyper-inflation, the distribution system was a great source of profit for small-scale retailers. In Argentina, 200,000 mom and pop operations enjoyed margins well in excess of 50 percent; according to informants wishing to remain anonymous, most such businesses paid little if any income tax at the time. More recently, the appearance of Carrefour (from France). Makro (from the Netherlands), and WalMart (from the U.S.) have been a concern to smaller enterprises, because economies of scale allow for profitability at margins of about 10 percent.

Conclusion

At the risk of hurting very small enterprises in Argentina, reform in that country has transformed the business environment into one which encourages innovative entrepreneurship and economic growth. Although Uruguay has natural resources similar to those of Argentina, innovative entrepreneurship and economic development have generally been seriously stunted by excessive government intervention as well as by high inflation. Following the success of Argentina in liberalizing its economy and stabilizing its currency, unsuccessful attempts were made in Uruguay to decrease the role of government, resulting in an environment in which countless individuals engage in micro-enterprise for subsistence. However, given the constantly increasing money supply, high inflation, a record trade imbalance, and a growing government deficit, the environment in Uruguay is not conducive to innovative entrepreneurship in the Schumpeterian sense.