Challenges emerge for Uruguay's recovery.

The most widely covered current news from Uruguay focuses on a dispute between Argentina and Uruguay over the construction of two European Union (EU) financed paper mills. The plants are to be built on the Uruguay River, which delineates the border between Uruguay and Argentina.

Paper mills have a long-standing bad reputation when it comes to impact on the environment. And on the Argentine side of the river, concern over paper mill pollution and a loss of jobs and tourism recently boiled over into protest with the Argentinians blocking an international bridge.

Not incidentally, Argentina's president, while supporting the environmental argument, has been subdued.

The paper mill project would be the largest industrial investment in Uruguay ever, according to an April 12, 2006 report by the BBC News. On the Uruguayan side of the river the government is attempting to enlist the support of the EU (the head of EU trade recently signed on as a partisan) and other governments in the region.

For Uruguay, the stakes are very high, and the situation is complex. For example, a Mercosur press release dated April 26, 2006 said that Uruguay was intending to bring the matter before a mid-May 2006 EU, Latin America summit on investments by the EU in the Latin American region.

Meanwhile, on March 30, 2006, the Associated Press (AP) reported from Montevideo that Uruguay would repay a large part of its debt to the International Monetary Fund (IMF)-which (on March 27, 2006) praised the Uruguayan government for its smooth handling of the crisis of 2002 and the rebuilding of macroeconomic stability in the country.

Similar praise came from the World Bank in an extensive review of Uruguay's economic prospects in the Bank's May 10, 2005 "Country Assistance Strategy for The Oriental Republic of Uruguay 2005 - 2010." In addition to its praise, though, the Bank stressed that the effects of the 2002 crisis were still weighing heavily on the country's economy.

That weight includes the cumulative effect associated with the four year recession that preceded the 2002 crisis. Over the past decade, Uruguay's consumers increased their per capita income by 28.2 percent, or 2.8 percent a year. This according to IMF statistics and including an estimate for 2007. Cumulative GDP growth was 13.9 percent, or 1.4 percent a year for 10 years.

The rate of inflation over the decade increased 85.7 percent-8.6 percent per year. This represents considerable erosion of real income and heavily underscores the World Bank's concern about the continuing impact of the 2002 crisis.

As part of its study of Uruguay's economy, the World Bank surveyed 256 business leaders and key opinion makers and found a atmosphere of optimism in regard to prospects for the future.

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