In 2003, Uruguay went through the steepest economic and financial crisis in recent history, which developed mostly from external factors. Devaluation in Brazil in 1999 made Uruguayan goods less competitive, and an outbreak of foot and mouth disease in 2001 curtailed beef exports to North America. Starting in late 2001, an economic crisis in Argentina undermined Uruguay's economy, with exports to Argentina and tourist revenues falling dramatically. In mid-2002 Argentine withdrawals from Uruguayan banks started a bank run that was overcome only by massive borrowing from international financial institutions. This, in turn, led to serious debt sustainability problems. A successful debt swap helped restore confidence and significantly reduced country risk. Uruguayís economy resumed growth in 2003, with a 2.5% rise in GDP. GDP grew about 12% in 2004 and 5.0%-6.0% growth is expected for 2005.

Uruguayís spectacular recovery over the past couple of years has been based on increased exports, especially to North America. The U.S. became Uruguayís largest export market in 2004, thanks in large part to meat exports. Uruguay enjoys a positive investment climate, with a strong legal system and open financial markets. It grants equal treatment to national and foreign investors and, aside from very few sectors, there is neither de jure nor de facto discrimination toward investment by source or origin.

Uruguay has traditionally favored substantial state involvement in the economy, and privatization is still widely opposed. Recent governments have carried out cautious programs of economic liberalization similar to those in many other Latin American countries. They included lowering tariffs, controlling deficit spending, reducing inflation, and cutting the size of government.

The Lacalle administration implemented a 1991 state company reform law, though privatization was stalled when voters rejected the sale of the state telephone company, ANTEL, in a 1992 referendum. Long-distance calls and data transmission were opened to competition in 2001, but basic telephony still remains a state monopoly. Other former state sectors have been partially liberalized, including insurance, mortgages, road construction and repair, piped-gas distribution, energy generation, water sanitation and distribution, cellular telephony, and airline transportation. Another law, passed in 2000, demonopolized oil refining activities and allowed the state energy company to associate with foreign partners, while still remaining under government control. However, the law was repealed in a popular referendum.