Paradigm Shift: Reforming Argentina’s Current Economic Model

Over the last few decades Argentina’s economic history has been characterised by a series of boom-and-bust cycles, which has resulted in sluggish growth and weaker gains in both total and per capita GDP figures. A recent economic history full of instability has not helped the country achieve steady economic development. These vicious cycles have led to higher volatility across all economic domains, resulting in six banking crises and four devaluations since the 1970s.  

In December 2015 the Cabinet of President Mauricio Macri took office with a clear objective in mind: changing once and forever Argentina’s development paradigm by enacting the necessary reforms. In doing so President Macri can lay the foundations for a sustained and durable growth cycle in the country, which should extend through the coming decade. 

Such a growth model would help Argentina’s return to the global markets, as well as sustain the recovery of export and investment levels, further interest in innovation, an intelligent integration into global value chains, and increased public and private research and development (R&D) expenditures. The series of events that Argentina will host in the coming months, such as the World Trade Organisation Ministerial Conference, or the G20 and B20 summits in 2018, are the first of many actions that signal Argentina’s return to the global spotlight. 

Since May 2017 Oxford Business Group (OBG) has conducted an in-depth macroeconomic review of Argentina through regular conversations with hundreds of business leaders, government officials and members of civil society. During that time, we have noticed the widespread commitment from the social, economic and entrepreneurial worlds to make the aforementioned virtuous growth cycle possible.

OBG identified the need to lower Argentina’s high costs in a number of areas – primarily, labour, taxation, transportation and logistics – to help the country gain a comparative advantage vis-à-vis more investment-friendly regional neighbours, turning Argentina into a more appealing destination for foreign and local investors, and capitalising on all the country’s comparative advantages, including natural resources and an excellent human capital. An improvement in investment-friendliness and a reduction in the cost of doing business can ignite a noticeable increase in investment inflows, and only through high and sustained investment levels can Argentina fully accomplish this growth model change.

To facilitate dialogue and establish a platform for the exchange of ideas, OBG organised a roundtable in the facilities of the Buenos Aires Stock Exchange, with the aim of stimulating an open discussion on ways to reduce costs in the areas that make Argentina less competitive. Our “Argentina Roundtable 2017: Reducing Argentina’s Extra Costs” took place on December 4. 

The panel was made up of Claudio Zuchoviki, capital markets manager at the Buenos Aires Stock Exchange; Diego Coatz, executive director of the Unión Industrial Argentina; Daniel Funes de Rioja, B20 chair and president of the Food Processing Producers’ Chamber; Dante Sica, director of ABECEB; and Daniel Herrero, president of Toyota Argentina.

Over 50 C-level executives attended the event, and nearly every participant agreed on the critical importance of the reforms. The consensus was that without these changes to the business climate, it would be difficult to establish the type of long-term growth and attract the investment needed to help the shift from dependence on commodities to value-added products in the export base.

The panel called on all relevant players to help change Argentina’s current economic and working mindsets; thoroughly reform the education system and labour structures to respond to the needs of the Fourth Industrial Revolution; maintain the reforms momentum but apply a more gradual approach where necessary; and improve the collaboration and dialogue between the entrepreneurial world and the rest of the society. Some of the most significant observations and suggestions made during the panel included:

•    The first results from the reforms have arrived faster than initially expected. In less than 24 months the country has passed from being excluded from international capital markets and having to resolve debt payment issues with vulture funds, to organising high international impact events such as the WTO Ministerial Conference, the G20 and B20 Summits, and being a regional forerunner for OECD accession. The organisation of such events also contributes to a cultural mindset change in Argentina.

•    The full application of the rule of law, and more specifically the protection of local and international investors remains an indispensable component in terms of making the country an appealing investment destination. 

•    Argentina has a heterogeneous economic structure, with high-productivity sectors responsible for 20% of the national GDP, less-productive formal activities comprising roughly a third of GDP and a large informal sector producing more than 40% of national produce. Raising productivity levels will entail increasing R&D expenditure, currently at 0.7% of GDP, to 2 to 3%, with a more equal private-public funding share.      

•    Infrastructure, the capital markets, international commerce, taxation and labour competitiveness are set to be major areas of reform. Underinvestment in infrastructure results in a $100bn opportunity window, particularly in energy, rail and maritime infrastructure. Trade figures with the rest of the world, currently at a low 7-9% of GDP, should ideally increase to half of the GDP. The fiscal system needs to be improved and harmonised so it can help combat existing distortive and regressive features. 

•    The labour market will naturally respond to the needs of the digital economy, thus labour legislation should follow the lead. Its reform should include a bureaucratic simplification in order to increase formality levels in the country, integrating new forms of employment, and taking into consideration the impact of migration. Similarly, the education system should adapt and reform itself to better respond to the needs of an always-evolving labour market. 

•    The successful integration of Argentinean small and medium-sized enterprises (SMEs) into global value chains will also prove crucial during this reform period. Innovative and highly productivity SMEs could export or integrate the production changes of large companies in the country. For SMEs to succeed in this task, better education and additional financial instruments are key in this process.

As discussed in OBG´s first roundtable in Argentina, the country faces significant challenges in the near future. The successful implementation of the proposed reforms is essential to ensuring sustained growth.