ARGENTINA COUNTRY ECONOMIC MEMORANDUM A n w rowth hori on Improve fiscal policy, open markets, and invest in human capital A NEW GROWTH HORIZON FOR ARGENTINA A © 2024 The World Bank Group 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank Group with external contributions. “The World Bank Group” refers to the legally separate organizations of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). 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Because The World Bank Group encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given and all further permissions that may be required for such use (as noted herein) are acquired. The World Bank Group does not warrant that the content contained in this work will not infringe on the rights of third parties, and accepts no responsibility or liability in this regard. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. COUNTRY ECONOMIC MEMORANDUM A new growth horizon Improve fiscal policy, open markets, and invest in human capital November 2023 Contents Acknowledgments vii Executive Summary 1 Abbreviations 11 1 An Overview of Argentina’s Economic Performance 14 1.1. Growth has stalled 14 1.2. Macroeconomic volatility, influenced by a procyclical fiscal policy, constrains growth 20 1.3. Public policy constrains private investment, hindering growth 26 1.4. Argentina has decoupled emissions from growth, but emissions intensity is a challenge 37 1.5. Policy recommendations 40 References 42 2 Enhancing Trade Integration for Competitiveness and Growth 44 2.1. Export performance is disappointing 44 2.2. Trade costs and frictions limit Argentina’s export potential 50 2.3. Towards a gradual process of trade integration 61 2.4. Policy recommendations 74 References 77 3 Upgrading and Using Human Capital for Inclusive Growth 83 3.1. The labor market is characterized by increasing levels of precariousness, low productivity, and modest skill levels 83 3.2. The future of work is changing the demand for skills 88 3.3. Argentina’s human capital needs to adapt to the changing world of work 93 3.4. Policy recommendations 105 References 110 4 Biotechnology and Automobiles 4.1. Biotechnology: Driven by scientific excellence but constrained by an emerging skill mismatch 116 4.2. Automobiles: Long industrial tradition weakened by macroeconomic instability and distortive trade policy 129 References 135 List of Figures Figure 1 Argentina’s income is increasingly falling behind high-income economies 2 Figure 2 High fiscal procyclicality is fueling macroeconomic volatility 3 Figure 3 Argentina has one of the largest public sectors 4 Figure 4 The number of exporters has declined since its peak in 2006 5 Figure 5 Argentina has lost market shares in international markets in all sectors (2012-19) 6 Figure 6 Human capital is the most important component of Argentina’s total national wealth 8 Figure 1.1 Argentina’s GDP is diverging from the highest-income countries… 16 Figure 1.3 Argentina has seen the most years of recession in the world 16 Figure 1.2 ... and its growth dynamics are weaker than most peers 16 Figure 1.4 Argentina is among the top countries for its human development 17 Figure 1.5 There is a high variation of income across provinces 18 Figure 1.6 Poorer regions’ labor productivity is catching up with faltering richer regions 18 Figure 1.7 Argentina’s workers are concentrated in low productivity sectors 19 Figure 1.8 Gains in GDP per capita came from employment growth, not labor productivity 19 Figure 1.9 Growth is explained by labor and capital accumulation 20 Figure 1.10 Total factor productivity has stagnated 20 Figure 1.11 Output volatility is high 21 Figure 1.12 Argentina has more natural capital per person than some of its peers, driven by abundant agricultural land 22 Figure 1.13 However, overall wealth is comparatively lower than some of its peers 22 Figure 1.14 Los shocks favorables en los términos de intercambio están asociados a una expansión de los sectores comercializables y no comercializables, distintos de las materias primas 24 Figure 1.15 Argentina’s extreme macroeconomic volatility is linked to high fiscal procyclicality 25 Figure 1.16 Argentina is one of the few countries to have deepened its procyclicality 26 Figure 1.17 Domestic bank credit to Argentina’s private sector is lower than regional peers 27 Figure 1.18 Credit to the public sector is larger in Argentina than in peer countries 28 Figure 1.19 Argentina sees multiple changes to export duties every year 29 Figure 1.20 Consumption growth trends exceed GDP growth trends prior to crises 29 Figure 1.21 Domestic absorption is elevated and has increased, driven by imports 32 Figure 1.22 Argentina’s savings rate is lower than its peers 33 Figure 1.23 Gross domestic savings are entirely driven by the private sector 33 Figure 1.24 The current account deteriorates during expansions 34 Figure 1.25 The real exchange rate usually suffers a marked depreciation after a period of appreciation 34 Figure 1.26 Argentina’s private sector has a positive net international investment position 35 Figure 1.27 The high net credit position contrasts with peer countries 35 Figure 1.28 Argentina’s total investment rate is low 36 Figure 1.29 Foreign direct investment does not offset low investment, unlike in peers 36 Figure 1.30 R&D spending is low in the international context 37 Figure 1.31 Per capita capital stock has also shown slow growth 38 Figure 1.32 GHG emissions have declined in the last decade 39 Figure 1.33 Emissions decline has been driven by the forestry sector 39 Figure 1.34 Emissions intensity remains higher than most peers 40 Figure 2.1 Argentina’s trade-to-GDP ratio is one of the lowest in its income group 45 Figure 2.2 Trade openness is well below potential 45 Figure 2.3 Argentina has lost market share in all its export categories 46 Figure 2.4 Trade’s contribution to GDP has declined 46 Figure 2.5 Argentina has been losing global market share 46 Figure 2.6 Non-differentiated products represent most of Argentina’s exports 49 Figure 2.8 Backward participation in GVCs has declined 49 Figure 2.7 High-tech exports make up a tiny and slow-growing share 49 Figure 2.9 The number of new exporters has constantly declined since 2002 50 Figure 2.10 High exit rates mean that the number of exporters has declined 50 Figure 2.11 Tariffs in Argentina are higher than most of its comparator countries 51 Figure 2.12 Non-tariff measures are significant 53 Figure 2.13 Reductions in tariff lines subject to quantity controls have been reversed 53 Figure 2.14 Argentina has fewer trade agreements than comparators 55 Figure 2.15 Trade within Mercosur is below other blocs 55 Figure 2.16 Argentina is behind in its adoption of the Authorized Economic Operator program 57 Figure 2.17 Argentina’s logistic performance is below most of its peers… 59 Figure 2.18 …and has declined over time 59 Figure 2.19 Liberalization of trade could be gradual for certain areas 64 Figure 2.20 The EU-Mercosur FTA would improve output, real income and trade 64 Figure 2.21 The effects of the trade liberalization would vary across sectors 65 Figure 2.22 Food and agriculture would drive export expansion 66 Figure 2.23 The EU-Mercosur FTA would increase wages of both skilled and unskilled workers 67 Figure 2.24 The agreement is likely to be pro-poor… 67 Figure 2.25 … and have progressive distributional effects 68 Figure 2.26 Service exports growth has stalled, but KIS is increasing its share 69 Figure 2.27 KIS represents more than half of Argentina’s service exports... 71 Figure 2.28 …mainly led by computer services 71 Figure 2.29 Domestic services make up a higher share of exports than peers... 72 Figure 2.30 … and the share has increased 72 Figure 2.31 Barriers to digital trade are high 73 Figure 3.1 Labor productivity in Argentina has remained stagnant 84 Figure 3.2 Sectoral productivity growth is trailing peers 84 Figure 3.3 Within-sector reallocation has contributed negatively to growth 85 Figure 3.4 Labor market improvements have stalled since 2010, reflected in unemployment rates… 86 Figure 3.5 …and underemployment rates 86 Figure 3.6 Informality has stopped declining… 87 Figure 3.8 Employment growth has been concentrated in the public sector… 87 Figure 3.7 …ranking Argentina mid-table among comparators 87 Figure 3.9 …which is among the highest of comparator countries 87 Figure 3.10 The education levels of Argentina’s workforce have increased... 88 Figure 3.11 …but tertiary rates are declining among younger people 88 Figure 3.12 Argentina’s workforce is less educated than its aspirational peers 89 Figure 3.13 Argentina is also behind most of its aspirational peers for workforce skills 89 Figure 3.14 Emerging jobs are in digital technologies while manual tasks are becoming redundant 90 Figure 3.15 Argentina has lower shares of jobs at risk from automation in the region 91 Figure 3.16 Argentina has fewer digital skills than comparators 91 Figure 3.17 Technology skills are strong in Argentina, but adoption of disruptive technology skills is behind 92 Figure 3.18 Argentina’s 15-year-olds score below most comparators for all subjects 95 Figure 3.19 Argentina’s 15-year-olds are rarely high-scoring 96 Figure 3.20 Proficiency levels of Grade 6 students in reading, % of total 97 Figure 3.21 …mostly affecting students of lowest socioeconomic status 97 Figure 3.22 ompletion of tertiary education is lower than peers’ 98 Figure 3.23 Argentina’s tertiary education performs well for business-relevant skills 98 Figure 3.24 Argentina has lower TVET enrolment than some peers… 99 Figure 3.25 …and comes last for the share of STEM and ICT graduates 99 Figure 3.26 Human capital is also significantly underutilized 100 Figure 3.27 Female labor participation is lower than male 101 Figure 3.28 he female/male labor participation gap is larger than many comparators 101 Figure 3.29 Women with young children are less likely to participate in the labor market than those without 102 Figure 3.30 Women workers tend to be more educated… 102 Figure 3.31 …but they are underrepresented in high level jobs 102 Figure 3.32 Women dominate in domestic service, education and health jobs 103 Figure 3.33 Young people find it harder to access the labor market 104 Figure 3.34 Youth unemployment is higher than in most comparator countries 104 Figure 3.35 A large share of young people are not in employment, education or training 105 Figure 3.36 outh are more likely to be in precarious jobs 105 Figure 4.1 Most biotech companies in Argentina are innovative and vertically integrated, with a good number of start-ups 117 Figure 4.2 Map of the Argentinean biotech ecosystem 121 Figure 4.3 The automotive industry has seen a 10-year contraction 132 List of tables Table 1 What policies could help Argentina to reduce the income gap with developed economies in the medium term? 10 Table 1.1 Argentina has experienced frequent policy changes since 1990 30 Table 1.2 Policy recommendations 41 Table 2.1 Textiles and food products have the highest tariffs 52 Table 2.2 La adopción de la Ventanilla Única de Comercio Exterior ha sido lenta 56 Tabla 2.3 Policy recommendations 75 Table 3.1 Women in the ICT sector have more non-technology skills than men 103 Tabla 3.2 Policy recommendations 109 Table 4.1 Most biotech companies are pharmaceuticals and providers of R&D services 118 Table 4.2 Biotech projects are dominated by the health sector 119 Table 4.3 Small biotech companies make the greatest R&D effort 120 Table 4.4 Diagnostic kits for COVID-19 developed through public-private partnerships 127 Table 4.5 Terminals produce all types of vehicles, with recent specialization in pick-ups 130 Table 4.6 Automotives experienced an important investment cycle between 2017 and 2021 133 Acknowledgments This Country Economic Memorandum was prepared by a multi-Global Practices team (Agriculture and Food; Climate Change; Education; Energy and Extractives; Environment, Natural Resources and Blue Economy; Finance, Competitiveness and Innovation; Poverty and Equity; Macroeconomics Trade and Investment; Transport; Urban Development, and Water) led by Sonia Araujo (Senior Economist) under the guidance of Robert Taliercio (Regional Director), Doerte Doemeland and Jorge Araujo (Practice Managers), Marianne Fay, and Jordan Schwartz (Country Directors). Jose Daniel Reyes (Senior Economist) led the completion of the report. Peer reviewers of the Concept Note stage were Sebastian Eckardt, Shwetlena Sabarwal and Stephane Hallegatte. Peer reviewers at the Decision Review Stage were Abla Safir, David Oliver Treguer, Kevin Carey, Richard Record and Susana Moreira. Close collaboration with the International Finance Corporation (IFC) underlies this report, including Ariel Jose Chirom, Luciana Harrington, and Valeria di Fiori. The team is also grateful for insightful suggestions and comments provided by other World Bank colleagues, including Bill Maloney, Daniel Lederman, Alejandro Espinoza Wang, and Xavier Cicera. Yanina Budkin provided outstanding guidance on external relations, while Adriane Landwehr and Geraldine Garcia provided stellar project support. The team is grateful for close research collaboration with Ariel Coremberg (University of Buenos Aires), Guido Sandleris (Torcuato Di Tella University), Francisco Ballester, Frederico Filippini (Torcuato Di Tella University), Juan Carlos Hallak (CONICET and University of Buenos Aires), Danilo Turpkin (University of Buenos Aires), Victoria Luca (CONICET and University of Buenos Aires), Belén Bentivegna (CONICET and University of Buenos Aires).The team is also grateful to the Development Data Partnership and LinkedIn for support with data and analysis. The team benefited from helpful conversations with Andrés Malamud, Daniel Artana, Daniel Heyman, Eduardo Levy Yeyati, Emanuel Alvarez Agis, Fernando Navajas, Guido Sandleris, Juan Carlos Hallak, Marcello Capello, and Marina dal Pogetto, as well as members of many civil and sector associations. Very special thanks are due to Secretary of Economy Policy, Joaquin Cottani, who provided comments to the last version of the report. The team also thanks Fernando Morra, former Secretary of Economic Policy, for his intellectual leadership in the design of the report. The team is also grateful for valuable input provided in several meetings discussing progress and brainstorming analysis with the team at the Ministry of the Economy and the Ministry of Foreign Affairs, especially Enrique Agustín Hurtado. The report was edited by Fiona Hinchcliffe. Florencia Micheltorena designed the report. A NEW GROWTH HORIZON FOR ARGENTINA vii List of contributors The table below lists core chapter authors including World Bank Group staff and consultants: Chapter Core team 1 Sonia Araujo, Julian Folgar and Belen Olaiz with inputs from Charl Jooste, Pui Shen Yoong, Ariel Coremberg, Danilo Trupkin and Juan Carlos Hallak 2 Jose Signoret, Daniel Saslavsky, Israel Osorio-Rodarte, Sonia Araujo, Andre Barber, Jose Barbero, Juan Carlos Hallak and Shunko Rojas 3 Harry Moroz, Helena Rovner and Maria Jose Vargas Mancera 4 Lilia Stubrin (biotech) and Sebastián Brusa and Dante Sica (automotives) viii A NEW GROWTH HORIZON FOR ARGENTINA Executive Summary A rgentina’s production capabilities, Yet Argentina has struggled to achieve sustained characterized by its abundant natural growth. The country was the seventh wealthiest capital assets and well-educated nation in the world in 1918. Economic success workforce, have the potential to drive sustained was driven by an open economy and progressive and inclusive economic growth. Argentina is immigration policies. Weakening economic home to diverse natural resources, including the performance in the last century caused its income world’s second-largest deposits of lithium, and the to fall below high-income country levels (Figure 1), second-largest gas shale and fourth-largest shale oil resulting in Argentina being demoted to middle- reserves. Its fertile land makes it a major agricultural income status in the 1960s. Persistent economic producer, ranking third in soybean production instability and inefficient policies have hindered worldwide. Human capital is rooted in its historically development, with the country’s annual gross high-quality education and health services, as well domestic product (GDP) growth rate averaging as notable achievements in knowledge-intensive only 1.8 percent over the past half century, well sectors such as research and innovation. below the Latin American average of 3.2 percent. If Argentina had grown at the same rate as the rest of Latin America, its GDP per capita would have been 60 percent higher today, approaching the level of Poland. A NEW GROWTH HORIZON FOR ARGENTINA 1 Although growth accelerated in the first decade fiscal procyclicality have contributed to a cycle of of the 21st century following the debt default in booms and crashes. Volatility is also driven by an 2001 and propelled by the commodities super- increasing overreliance on primary commodities. cycle, it was short-lived. Favorable global liquidity Stubborn and high inflation in addition to abrupt conditions supported growth, leading to expanded changes in exchange rates reduce planning real incomes and reduced poverty and income horizons for long-term investment and impede inequality. However, like some other Latin American the development of capital markets. Second, countries, Argentina failed to use these favorable restrictive trade policies, in place partly because tailwinds to improve fiscal policy or enact structural of macroeconomic imbalances, prevent Argentina reforms to increase productivity, diversify exports, or from leveraging its vast comparative advantages to foster overall external competitiveness. Such policies reap the benefits of international trade. Third, while could have sustained growth after the commodity human capital is among Argentina’s greatest assets, super-cycle ended. Instead, the second decade of the its quality is gradually declining. Without corrective 21st century was characterized by low growth, with policies, the skills of the country’s workforce could five years of GDP contraction and an average annual fall rapidly behind those demanded by a dynamic, growth rate of 1.4 percent (excluding 2020). Today, technology-driven, knowledge-intensive global Argentina’s GDP per capita is close to its 2007 level. economy. This report identifies three key constraints to The report presents three suggestions to help sustaining growth in Argentina. First and foremost, Argentina tackle these development challenges macroeconomic volatility is largely responsible for and close the income gap with high-income poor growth outcomes: high policy uncertainty and economies over the medium term: Figure 1 Argentina’s income is increasingly falling behind high-income economies F1 Argentina’s per capita GDP as a % of the high-income country average (1900-2022) 120 100 95 89 84 80 77 60 60 66 43 40 40 34 35 30 20 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Source: Data from Maddison Project Database (2020) and The Conference Board (August 2023). Note: High-income economies are the UK, US, Norway, Switzerland, Australia, Denmark, Sweden, Germany, Canada, and the Netherlands. The 2019-2021 data was estimated using changes in GDP per capita from the Conference Board database. 2 A NEW GROWTH HORIZON FOR ARGENTINA 1. Reducing fiscal procyclicality productivity growth is, on average, negative. Formal would ease macroeconomic volatility job creation is slow, and the stagnant private and encourage investment, a key sector offers limited opportunities for the country’s large and diverse labor force. Women and young driver of long-term growth people are especially vulnerable to unemployment, underemployment, and informality. High macroeconomic volatility is hindering growth and eroding human development. Since 1950 Fiscal procyclicality, combined with policy Argentina has spent 15 years in recession, making uncertainty, leads to frequent economic booms it the country with the most economic recessions and busts. Public expenditure in Argentina is one of globally, followed by Congo, Chad, Ukraine, and the most procyclical in the world (Figure 2). During Venezuela. On average, each recession lasted 1.6 commodity price booms, public spending increases years and saw GDP decline by 4 percent annually. steeply. Once the commodity price cycle ends and Crisis periods coincided with the presence and the economy starts contracting, public spending build-up of macroeconomic imbalances. Repeated becomes unsustainable, forcing sudden policy macroeconomic crises have led to a cumulative reversals that amplify the economic downturn and deterioration of the well-being of the population, ignite political crises. Additionally, unsustainable particularly the most vulnerable. Since 2015, fiscal policy puts pressure on the monetary policy, Argentina has dropped four positions on the World leading to increased inflation and contributing Bank’s Human Capital Index rankings. Income levels, to a more volatile economic environment. Policy living standards, and the quality of public services uncertainty further exacerbates macroeconomic have declined. Employment is heavily concentrated volatility. Multiple overhauls of the exchange- in low-productivity sectors, and within-sector Figure 2 Figura 2. High fiscal procyclicality is fueling macroeconomic volatility Fiscal cyclicality and GDP volatility, 2000-2021 1 Pro-cyclical Nicaragua 0.8 Uruguay Latvia Ukraine Hungary Greece Argentina Ecuador Romania 0.6 Bosnia & Montenegro Serbia Croatia Herzegovina Brasil Colombia Iceland Lithuania Bolivia Belarus Estonia 0.4 Russia Albania Fiscal cyclicality Moldava 0.2 Sweden Bulgaria Chile Honduras Panama Poland Portugal Turkey Ireland 0 Netherlands Czech Rep. Mexico Spain North Macedonia Slovak Rep. Indonesia Costa Rica El Salvador Slovenia Peru -0.2 South Africa Italy India New Zealand Finland Norway Israel -0.4 Guatemala Counter-cyclical Korea France Paraguay United States Austria -0.6 Luxembourg Australia Denmark Switzerland BelgiumGermany United Kingdom -0.8 Canada Singapore Japan -1 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 Less volatile GDP Volatility More volatile Advanced countries Emerging countries Source: OECD Stats, IMF, World Bank. Note: Fiscal cyclicality is measured as the correlation between the cyclical component of real spending and real GDP. GDP volatility is measured as the standard deviation of the annual growth rate for each country. A NEW GROWTH HORIZON FOR ARGENTINA 3 rate regime, constant shifts in trade policy, the Employment in the public sector has swollen from privatization and renationalization of public utility 3 million people in 2006 to nearly 5 million in 2021, companies, and continual changes to the tax positioning the country as one with the largest code and regulatory policies have all undermined share of public sector employment, yet the sector market expectations and hindered investment. has the lowest productivity (Figure 3). Productivity Finally, a complex business environment hampers has stalled in agriculture, and is on a downward the development of manufacturing and services, trend in industry and services. Meanwhile formal inhibit export diversification, and undermines the private sector job creation has stagnated, reducing economy’s resilience to shocks. opportunities for labor reallocation. Procyclicality discourages long-term investment Increased investment would have a large impact – a key driver of economic growth. During on potential GDP. At 20 percent of GDP, Argentina’s expansions, the public sector captures most of investment levels are lower than aspirational peers the credit from the financial sector, crowding out such as Poland, Malaysia, and the Republic of Korea. private investment. During these episodes, national Macroeconomic stability would reduce the country’s consumption and investment increase rapidly, risk premium and bolster investor confidence, outpacing income growth. A sharp increase in thereby increasing private investment. In addition, imports causes the current-account balance to reducing price distortions and rigidities would deteriorate, prompting currency depreciation and a improve the allocation of resources within sectors, balance of payments adjustment. The high and rapid generating significant productivity grains. Currently, pass-through effect of exchange-rate depreciation within-sector productivity growth is very low in most boosts inflation, causing real wages to decline and sectors, suggesting a substantial misallocation of leading to a deep recession. Trade barriers prevent resources, driven by large distortion that prevent exports from reacting to the depreciating exchange their efficient reallocation. rate, aggravating the crisis. The resulting cycle of sudden expansions and deep crashes severely discourages long-term investment that is vital to Figure 3 Figura 3. boost productivity. In fact, despite its abundant Argentina has one of the largest public sectors natural resources, Argentina has the seventh lowest investment rate in Latin America (20 percent of GDP Public sector employment, as percentage of total employment in 2021) and one of the lowest rates of Foreign Direct Investment (1.4 percent in 2021). 35% Low levels of investment contribute to low and 30% stagnant labor productivity. Labor productivity 25% measures the amount of output produced per unit of labor and, therefore, is an indication of the efficiency 20% with which workers contribute to the economy. Higher labor productivity goes hand in hand with 15% higher profits, wages, and economic growth. In 10% a macroeconomic context marked by persistent cyclical volatility, Argentina’s labor market has 5% performed poorly, and employment remains heavily concentrated in low productivity sectors, although 0% Australia Slovakia Polond Argentina Uruguay Malaysia Chile Brazil Mexico Thailand Philippines Indonesia Singapore there are some differences across sectors. The productivity of workers in professional services is more than double that in non-tradable services, Source: ILO STAT. Note: Singapore figure is for 2021. but the latter employ twice as many workers. 4 A NEW GROWTH HORIZON FOR ARGENTINA 2. Deepening trade integration Amidst an ongoing decline in competitiveness, this could bring more jobs and increase situation can be attributed to five key drivers: the variety and affordability of intermediate and consumption i) High trade costs pose an undue burden on Argentinian firms and stymie foreign products investment. Average tariffs are high, standing at more than double those of other economies Argentina’s competitiveness in global markets in the region. As part of MERCOSUR, Argentina has declined over time. The country is close to adheres to a common external tariff which is international markets, compared to countries high by international standards. The average at the same level of development. Additionally, tariff Argentina imposes on countries outside international trade decreased from 42 percent of MERCOSUR is 13.4 percent. In comparison, tariffs GDP in 2002 to 34 percent in 2022. The number of in the Pacific Alliance countries are on average exporters decreased by around 30 percent during 5.3 percent. Non-tariff measures (NTMs) also this period (Figure 4). Argentina lost ground in global add to trade costs. Most products are subject to markets across all economic sectors (Figure 5). many NTMs, which include technical measures The export basket is increasingly concentrated in – such as sanitary and phytosanitary and commodities and the country has few linkages with technical barriers to trade – and non-technical global or regional value chains. Persistent economic measures aimed at control the quantity or the volatility, recurring macroeconomic imbalances (high prices of exports and imports, such as licenses inflation, multiple exchange rates, and insufficient or bans. While some of these regulations may reserves accumulation), and frequent shifts in policy have legitimate reasons, such as regulating trade direction hinder the establishment of the stable to protect the safety and health of humans, business environment required for long-term private animals, plants and the environment, others may investment in exporting sectors. Figura 4 Figure 4 The number of exporters has declined since its peak in 2006 16 35 14 30 Average Entry and Exit Rates (Percenage) Number of exporters (thousands) 12 25 10 20 8 15 6 10 4 2 5 0 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Exporters Entry rate Entry rate Source: World Bank based on Dirección General de Aduanas. Note: The entry rate is defined as the number of new exporters as a share of all exporters. Similarly, the exit rate is the ratio between the number of firms exiting the export market and total exporters. A NEW GROWTH HORIZON FOR ARGENTINA 5 Figura 2.3. Figure 5 (2012-2019) has lost market shares in international markets in all sectors (2012-19) Argentina 10 8 Chemical, rubber, Average annual changes in world’s exports plastics and 6 Food, beverages Agriculture, hunting, fuel products and tobacco forestry and fishing Transport 4 equipment Basic metals and (percentage) 2 fabricated metal products 0 Manufacture of coke, -2 refined petroleum products and nuclear fuel -4 Mining and quarrying -6 (non energy) -8 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 Change in Argentina’s share of world export (in percentage points) Source: World Bank. Note: The figure compares world demand growth across industries (Y-axis) with Argentina’s market share growth in these industries (X-axis) between 2012 and 2019. The size of the bubbles represents the share of respective industries in Argentina’s exports. be put in place for protectionist reasons. The participation in trade agreement in recent current array of NTMs in Argentina is equivalent decades. Intra-regional trade in MERCOSUR to an additional tariff rate of 22 percent. The is one of the lowest in the world, reflecting the most widespread non-technical NTMs are non- protectionist nature of some NTMs, which are automatic licenses, affecting all products and not covered by the agreement. The eight trade enacted to control the quantity of imports given agreements in force are relatively simple, covering the fragile foreign exchange situation. Finally, only tariff liberalizations and the elimination of temporary export bans, imposed to control certain non-tariff barriers. Deep agreements domestic prices, and export taxes, imposed due go beyond these traditional areas, and include to fiscal considerations, further undermine export provisions related to, inter alia, investments, competitiveness. services, intellectual property rights, and the environment. The agreement between Numerous capital and import controls ii) MERCOSUR’s and the European Union, which is complicate trade. Established to stabilize yet to be ratified, would be the first deep trade macroeconomic variables, these measures agreement. Simulations presented in this report restrict access to imports of cheaper and better suggest that the agreement would boost food intermediate inputs, increasing the costs of and agriculture exports, while manufacturing business, and reducing the competitiveness exports would decline. While the contraction in of Argentinian firms. They ultimately reduce manufacturing activity is modest, policies could investment in exporting sectors, export growth be put in place to facilitate shifts in the labor and diversification away from commodities. market. Overall, the agreement positive impact on trade and output would increase wages both iii) Few and shallow preferential trade agreements for skilled and unskilled labor. The distributional limit regional integration. Contrary to the effects of the agreement would also likely be pro- global trend, Argentina has not increased its poor, with especially positive implications for poor 6 A NEW GROWTH HORIZON FOR ARGENTINA urban households. Finally, the approval of the coordinated with macroeconomic reforms, and agreement could open the door to modernizing include mitigation measures to offset transition MERCOSUR’s regulatory framework and the costs. Addressing lingering macroeconomic negotiation of similar agreements. imbalances is a necessary condition for the internationalization of the economy. More trade Trade compliance procedures at the border iv) integration would entail changes in relative prices, are cumbersome, increasing time and cost which could trigger a reallocation of production for traders. The lack of simplified procedures factors that entail efficiency gains but also and streamlined processes at ports prevents the adjustment costs. While overall productivity is seamless flow of cargo in and out of Argentina. expected to increase, thereby contributing to One of the key weaknesses is the lack of a economic growth, some workers may be affected. functioning “Foreign Trade Single Window”. Protecting workers through active labor-market Single windows are used worldwide to speed up policies (such as job search assistance and training) export and import procedures by allowing firms and passive policies (including income support and to submit all necessary documentation through social insurance programs) can prove effective to a single platform. By providing certainty and minimize adjustment costs. transparency to firms, particularly exporters, over the various procedures they will need to follow for trading, they encourage them to venture into 3. Nurturing human capital is critical exporting. While most countries in Latin America in an evolving world of work have made substantial progress in implementing single windows, Argentina is one of the latest Argentina’s human capital is the most important adopters. Currently, only 30 percent of border component of its national wealth, but its Human agencies participate in Argentina’s single window, Capital Indicators (HDI) have been worsening over compared to 100 percent in Colombia, Costa time. While Argentina’s human capital indicators are Rica, and El Salvador. Additionally, it is still not comparable to those of Chile, one of Latin America’s possible to submit all the required documentation most dynamic economies, they are declining. through this mechanism. Although access to education has increased in recent decades, educational outcomes are deteriorating v) Deteriorating port infrastructure and logistical and started doing so prior to the pandemic. High connectivity lead to inefficiencies. Argentina’s dropout rates mean that on average, students in logistic performance index ranking declined from Argentina complete fewer years of schooling than 45 in 2007 to 73 in 2023, out of 139 countries. their counterparts in peer countries. In contrast Investments are needed to improve waterway to peers and global trends, the share of tertiary infrastructure and operating conditions. Railways graduates among young people is lower than among are another transport priority area as freight older cohorts. More than two-thirds of 15-year-olds rail is vital to ship bulk commodities with low lack basic proficiency in standardized international marginal value by weight, such as soybeans. A tests, and more than half lack basic proficiency in comprehensive overhaul of Argentina’s railroads science and reading, a much higher share than peer would require significant financial resources and countries. The COVID-19 pandemic has deepened may not be feasible in the near term. Expanding these challenges. Indicators of basic cognitive skills digital networks along corridor and rural areas have worsened significantly, especially among would enlarge export opportunities and support the poorest households. Closing the gap between competitiveness. enrollment and completion rates both at secondary and tertiary levels would accelerate human capital The process to deepen Argentina’s integration formation and reduce the intergenerational to the global economy should be gradual, well- difference in tertiary education. A NEW GROWTH HORIZON FOR ARGENTINA 7 Figura 2.26. Figure 6. Human capital is the most important component of Argentina’s total national wealth Wealth per capita, constant, Argentina, 2018 (US$) 140 120 100 80 60 40 20 0 1995 2000 2005 2010 2015 2018 -20 Produced capital Human capital Natural capital - renewable Natural capital - nonrenewable Net foreign assets Total wealth Source: World Bank (2021). The Changing Wealth of Nations. Human capital is underutilized in Argentina. global comparators. The informality rate is close The utilization-adjusted Human Capital Index to 50 percent, far higher than the levels of most (UHCI), which assesses how inefficiencies disrupt comparable countries. Women’s participation the deployment of human capital in labor markets, in the labor force is relatively low at about 45 is nearly 40 percent lower than the non-adjusted percent, indicating that women’s human capital Human Capital Index (HCI), a measure of the human is particularly underutilized. The public sector’s capital that a child born today could expect to acquire large and growing share in total employment at age 18 based on their health and education). The likely compounds the inefficient distribution of gap between these two measures in Argentina is the the workforce, which is heavily skewed toward highest among comparator countries, suggesting low-productivity sectors. Moreover, workers have that human capital is not deployed productively in the steadily shifted from more to less-productive country. Additionally, women face more significant sectors, suggesting that the misallocation of barriers than men in deploying their human capital: human capital is worsening over time. This the female UHCI is lower than the male UHCI despite results in declining labor income and increasing the female HCI being higher than the male HCI in poverty. Argentina. ii) The nature of work is changing. At the sectoral There are three key reasons behind the level, private sector employment has shifted away underperformance in human capital and its from industry and towards services. Employment utilization: in industry declined from around one-third of all jobs in 1991 to around one-fifth in 2019. At the i) The labor market is stagnant. Argentina has same time, jobs in services rose from two-thirds of been unable to foster a healthy and competitive total employment in 1991 to nearly four-fifths in labor market where workers can optimize the 2019. Occupations are also evolving significantly, use of their skills. The unemployment rate is particularly in the direction of digitally intensive high and volatile, and long-term job creation jobs. Occupations involving digital technologies has been slow by the standards of regional and are growing quickly, along with the digital skills 8 A NEW GROWTH HORIZON FOR ARGENTINA that are required in these positions. Qualitative Argentinean manufacturing sector, representing 3.2 evidence collected from senior executives by the percent of biotech sales in 2019, compared to 1.35 World Economic Forum shows that a combination percent for the average Argentinean manufacturing of technical (e.g. digital) skills and socioemotional firm. Most biotech companies are innovative and skills (e.g. teamwork) is increasingly important vertically integrated, with a good number of start- for organizations in Argentina. However, evidence ups. Addressing emerging shortages of human the same survey also shows that Argentina is capital, such as in bioinformatics, will be important to lagging comparators on even basic digital skills. keep up with global trends. Macroeconomic stability, Analysis for this report shows that Argentina along with the elimination of import restrictions, underperforms on the disruptive technology skills would ease the difficulties of doing business in closely associated with the future of work, such Argentina, particularly for those ventures that are as artificial intelligence. inherently risky and that depend on key strategic import inputs (reagents, for example). iii) Inability to adapt quickly is leading to a skills mismatch. Firms in Argentina are struggling to The automobile industry has a long industrial find workers with the right skills. Approximately tradition but has experienced a contraction over 40 percent of firms surveyed in the World the last decade driven by macro instability and Bank’s 2017 Enterprise Survey reported an distortive trade policy measures. There are 10 inadequately educated workforce as a major terminals, located in three provinces (Buenos Aires, constraint. This compares to a LAC average Córdoba, and Santa Fe), which produce all types of 29 percent. Argentina has the third-highest of vehicles: cars, utility vehicles, pick-ups, trucks, rate of “qualification mismatch” among G-20 and buses. Jointly they have an installed capacity countries. While skills shortages are modest of approximately one million units and generate compared to other G-20 members, Argentina is around 28,000 direct jobs. In addition, around 400 still experiencing these shortages for many high- supplier companies account for another 37,000 level cognitive and social skills, such as reasoning jobs. The country has specialized in recent years in abilities and complex problem solving, and for the manufacturing of medium size pick-ups (load digital economy skills such as computers and capacity of up to 1 ton). Pick-up exports represent electronics. 63 percent of foreign vehicle sales, positioning the country as the fifth-largest producer of medium pick- Macro stability, a competitiveness-friendly ups in the world. However, due to macroeconomic business environment that supports global instability and distortive trade policies, the industry integration, and the availability of the right human has been experiencing a contraction over the last skills are critical to support knowledge-intensive decade. The sector is highly challenged by the sectors that could contribute to sustained long- eruption of a global process of technological change. term growth. An exploration of the situation of This process confronts the country with the need to biotechnology and automobiles, two sectors in which revamp its systems in an unfavorable context for Argentina has a comparative advantage, reveals investment. Industrial projects need macro stability, how constraints in these areas negatively affect long-term policies, and predictable and stable competitiveness: regulatory frameworks. Argentina is a regional leader in biotechnology, A comprehensive policy package could help and ranks 12th in the world for the number of Argentina to reduce the income gap with the biotech companies; however, a skills mismatch is developed world over the medium term. This endangering its competitiveness. The sector has approach depends on successful tackling the an estimated turnover of US$2.1 billion (0.5 percent pressing macroeconomic imbalances in the short- of GDP) and employs around 50,000 workers. R&D term. A predictable, stable, and credible exchange activities in biotech are well above the average for the rate policy along with low inflation and a return A NEW GROWTH HORIZON FOR ARGENTINA 9 to fiscal sustainability is a necessary condition for the report (summarized in table 1) need therefore be any structural reform aimed at boosting long-term coordinated with urgent reforms to address existing growth. The policy recommendations presented in macroeconomic imbalances. Table 1 What policies could help Argentina to reduce the income gap with developed economies in the medium term? Policy recommendation Timeline Objective 1. Reduce fiscal procyclicality to ease macroeconomic volatility 1.1 Tackle the procyclicality of social benefits Reform the pensions indexation formula to better protect the real value of benefits from unexpected shifts in inflation ST Avoid relying on ad-hoc pensions moratoriums by better aligning contribution to benefits ST 1.2 Strengthen the fiscal framework Implement effective fiscal rules for sustainability, with specific guidelines for prudent public staffing policies MT Strengthen traditional automatic fiscal stabilizers such as unemployment insurance and the personal income tax MT Objective 2. Gradually increase integration with the rest of the world 2.1 Enhance the provision of public goods to help local firms become more competitive Facilitate access to credit ST Strengthen the national productive development plan ST Strengthen the trade and investment promotion agency ST 2.2. Reduce trade costs Implement the revision of the MERCOSUR Common External Tariff ST Limit to the minimum tariff lines subject to non-automatic licenses MT Reduce export taxes MT Ratify the Free Trade Agreement with the EU MT 2.3 Improve trade facilitation Increase the number of accredited authorized economic operators ST Accelerate the implementation of the “Ventanilla unica de Comercio exterior” ST Revamp the “Exporta Simple” program to reduce transportation costs and support SMEs ST Prioritize the implementation of the open access mechanism for railways MT Objective 3. Nurture Human Capital for changing needs 3.1 Foster Human Capital Development Enhance teacher training by focusing on the knowledge, pedagogical skills, and socio-emotional competencies that teachers ST need to be effective Making assessment tools available to teachers so they can diagnose students in real time and implement corrective measures ST when necessary Intensifying the use of assessment and information systems by school staff to identify early deficits and design programs and MT interventions for corrective actions 3.2 Modernize labor market programs Complement the pensions reform with a more robust unemployment insurance system ST Redirecting active labor market programs towards employability and skills development by enhancing coordination, ST monitoring, and evaluation, and relying more on beneficiary profiling to determine needs Note: The table lists the priority policy options identified by the report. A comprehensive list of policy option by theme is presented at the end of each chapter. ST= short-term (<2 years); MT=medium-term (3-5 years). 10 A NEW GROWTH HORIZON FOR ARGENTINA Abbreviations AAICI National Investment and Export Promotion Agency (Agencia Argentina de Inversiones y Comercio International) ADEFA Automobile Manufacturing Association (Asociación de Fabricantes de Automóviles) AEO Authorized Economics Operators AfCFTA African Continental Free Trade Agreement AFIP Federal Tax Administration (Administración Federal de Ingresos Públicos) ALMPs Active labor market programs ANMAT National Administration of Medicines, Food and Medical Technology (Administración Nacional de Medicamentos, Alimentos y Tecnología Médica) AR$ Argentine peso Bn Billion CAB Argentina Biotech Chamber (Cámara Argentina de Biotecnología) CAPEX Capital expenditure CCDR Country Climate and Development Report CEM Country Economic Memorandum CET Common external tariff CNG Compressed natural gas COFEMA Federal Environmental Council (Consejo Federal de Medio Ambiente) CONICET National Scientific and Technical Research Council (Consejo Nacional de Investigaciones Científicas y Tecnológicas) DBF Dedicated biotechnology firms DJAI Anticipated imports sworn statements (Declaraciones juradas anticipadas de importación) ECLAC Economic Commission for Latin America and the Caribbean EFTA European Free Trade Agreement EGW Electricity, gas and water EMPRETECNO Program to Promote Technology-Based Companies EPH Encuesta Permanente de Hogares (Permanent Household Survey) EPL Employment protection legislation ESID Survey on R&D of Argentine Business Sector (Encuesta sobre I+D del Sector Empresario Argentino) EU European Union EVs Electric vehicles FDI Foreign direct investment FODER Fund for Renewable Energies Development (Fondo para el Desarrollo de Energías Renovables) FONARSEC Argentine Sectoral Fund (Fondo Argentino Sectorial) FONCYT Scientific and Technological Research Fund (Fondo para la Investigación Científica y Tecnológica) A NEW GROWTH HORIZON FOR ARGENTINA 11 FONDCE National Fund for Entrepreneurial Capital (Fondo Fiduciario para el Desarrollo del Capital Emprendedor) FONTAR Argentine Technological Fund (Fondo Tecnológico Argentino) FTA Free trade agreement GDP Gross domestic product GHG Greenhouse gases GIC Global Investment Competitiveness Report GPV Gross production value GRPs Good regulatory practices GTAP Global Trade Analysis Project GVC Global Value Chains HCI Human Capital Index HDI Human Development Index HHI Herfindahl-Hirschman Index HS Harmonized System ICT Information and Communication Technology IDB Inter-American Development Bank ILO International Labor Organization INDEC National Institute of Statistics and Census (Instituto Nacional de Estadística y Censos) INGEBI Research Institute in Genetic Engineering and Molecular Biology (Instituto de Investigaciones en Ingeniería Genética y Biología Molecular) INTA National Institute of Agricultural Research (Instituto Nacional de Investigaciones Agropecuarias) IPR Intellectual property rights IT Information technology ITC International Trade Center LAC Latin America and the Carribean LNG Liquefied natural gas LPI Logistic Performance Index Maas Mobility as a service MERCOSUR Mercado Común del Sur MFN Most favored nation MINCyT National Ministry of Science, Technology and Innovation (Ministerio Nacional de Ciencia, Tecnología e Innovación) MT Million ton MTEySS Ministry of Labour, Employment and Social Security (Ministerio de Trabajo, Empleo y Seguridad Social) MUS$ Million US dollars NAFTA North America Free Trade Agreement NEET Not in education, employment or training NTM Non-tariff measures NTFC National Trade Facilitation Committee OECD Organisation for Economic Co-operation and Development 12 A NEW GROWTH HORIZON FOR ARGENTINA OEDE Employment and Business Dynamics Observatory (Observatorio de Empleo y Dinámica Empresarial) O&G Oil and gas PISA Program for International Students Assessment PPPs Public-private partnerships RIAs Regulatory impact assessments R&D Research and development R&D&I Research, development and innovation SACU Southern African Customs Union SENASA National Service of Agrifood Health and Quality (Servicio Nacional de Sanidad y Calidad Agroalimentaria) SMEs Small and medium enterprises STI Science, technology and innovation SSCs Social security contributions SIMI Imports Monitoring System (Sistema Integral de Monitoreo de Importaciones) SIRA Argentine Republic Imports System (Sistema de Importaciones de la República Argentina) SMATA Automobile transport mechanics and related workers union (Sindicato de mecánicos y afines del transporte automotor) SOE State-owned enterprise SPS Sanitary and phytosanitary STEM Science, technology, engineering, and mathematics TBT Technical barriers to trade TCF Trillion cubic feet TFP Total factor productivity TiVA Trade in value added TVET Technical and vocational education and training UHCI Utilization Adjusted Human Capital Index UNCTAD United Nations Conference on Trade and Development UNESCO United Nations Educational, Scientific and Cultural Organization US$ US dollars VUCE Foreign Trade Single Window (Ventanilla Única de Comercio Exterior) WDI World Development Indicators WEF World Economic Forum WTO World Trade Organization A NEW GROWTH HORIZON FOR ARGENTINA 13 1 CHAPTER An Overview of Argentina’s Economic Performance 1.1. Growth has stalled Argentina’s historical growth performance is disappointing. Rather than catching up with countries with higher living standards, Argentina has been left behind. At the beginning of the 20th century its per capita gross domestic product (GDP) was in line with the richest economies’ average (95 percent in 1908), yet in 2022 it represented barely a third (Figure 1.1) In fact, during the first three decades of the 20th century, Argentina outgrew Canada and Australia in terms of population, total income, and per capita income. In1913, it was the world’s 10th wealthiest country in per capita terms. Today, with a per capita gross national income (GNI) of US$11,620 (in 2022, Atlas method), the country is classified as an upper-middle income country by the World Bank.1 Argentina’s fall from high-income to middle-income status makes it unique among the set of middle-income economies, the rest of which have risen to middle-income from lower-income status. 1  In calculating gross national income (GNI) per capita in U.S. dollars for operational and analytical purposes, the World Bank uses the Atlas conversion factor instead of market exchange rates. The purpose is to reduce the impact of exchange rate fluctuations in cross- country comparisons of national incomes. The Atlas conversion factor for a given year is the average of a country’s exchange rate for that year and the two preceding years, adjusted for the difference between the rate of inflation in the country and international inflation. More information on this methodology can be found at https://datatopics. worldbank.org/world-development-indicators/sources-and-methods. html 14 A NEW GROWTH HORIZON FOR ARGENTINA BOX 1.1. ARGENTINA’S BENCHMARK COUNTRIES Benchmarking country performance with relevant peers helps to elucidate important characteristics, trends, and constraints to growth. In this Country Economic Memorandum, Argentina is benchmarked against three comparator groups: i) Regional peers: The largest Latin American economies (Brazil, Mexico, Chile, Colombia, Peru and Uruguay) whose growth models and comparative advantages differ. ii) Structural peers: Countries whose geographies and structural characteristics are similar to Argentina but have managed to upgrade to high-income status: Australia, Malaysia, Poland and South Korea. Australia is a resource-rich economy with similar land and population conditions to Argentina. Malaysia and Poland sustained higher growth rates than Argentina, enabling them to overcome the “middle income trap”. South Korea represents a successful story of structural transformation. iii) Aspirational peers: the group of mainly highly developed OECD countries. At the beginning of the 20th century Argentina shared high levels of prosperity with the most developed countries in this group (Figure 1.1). Benchmarking is contemporaneous, meaning that Argentina is benchmarked to peers in the same year. Owing to methodological breaks in many official data series, country benchmarking typically starts in 2004, or 2006, depending on data availability. Consistent with stagnant growth following the recovery from the global financial crisis, a structural break in GDP data series is observed in 2011. For this reason, Argentina is often benchmarked for the period starting in 2012. The country’s economic performance is also out-performed by other Latin American countries meager when contemplating the last two decades. such as Colombia, Chile, Peru, and Uruguay (Figure 1.2). The country has shown poorer growth dynamics than most of its peers (Box 1.1), which is surprising given Years of recession have undermined growth. the low base of GDP at the beginning of the 2000s For a third of the last 70 years, the Argentinean because of the 1999-2002 convertibility crisis.2 economy suffered annual contractions of close to During 2003-2021, its structural peers converged 4 percent. It is the country with the highest number with US and OECD upper middle-income country of years in recession in the world, followed by levels. South Korea and Poland saw the greatest Congo, Chad, Ukraine, and Venezuela (Figure 1.3). convergence rates. Compared to its regional peers, Its number of years in recession far exceeds that of Argentina out-performed Mexico and Brazil, but was other countries in Latin America. 2  Following a three-year economic recession, by end 2001 and beginning of 2002 the Convertibility regime -adopted a decade earlier- was abandoned and the peso devaluated. Besides, the country entered into a default on its foreign debt. In this context, in 2002 the economy contracted 10.9 percent and inflation increased to 41 percent and the poverty rate climbed to 57.5 percent in October of that year (national poverty line). A NEW GROWTH HORIZON FOR ARGENTINA 15 Figure 1.1 Figure 1.2 Argentina’s GDP is diverging from the highest- ... and its growth dynamics are weaker than most income countries… peers GDP per capita as a percentage of the rich economy average Argentina and comparators GDP per capita versus upper-middle (1900-2021) OECD average. In percent and change in percentage points (2003-2021) 94.0 120 90.7 81.1 95 25.3 24.9 100 89 84 62.4 80 50.0 56.2 77 45.6 60 13.8 66 13.7 60 28.5 11.5 42.1 10.9 39.1 37.3 37.0 36.3 35.8 35.4 43 34.7 40 7.7 29.7 28.3 40 34 26.5 24.9 20.8 35 3.7 18.2 3.3 30 1.6 20 -1.5 0 Poland South Korea Uruguay Malaysia Peru Chile Colombia Argentina Australia Brazil Mexico 1900 1908 1916 1924 1932 1940 1948 1956 1964 1972 1980 1988 1996 2004 2012 2020 2003 2021 2021 vs 2003 (sec. axis) Source: World Bank based on data from Maddison Project Database (2020) Source: The Conference Board Total Economy Database: Output, Labor and and The Conference Board (April 2022). Note: Rich economies are Australia, Labor Productivity, 1950-2022. Note: 2021 vs 2003 represents the difference in Canada, Denmark, Germany, Netherlands, Norway, Sweden, Switzerland, the the ratios between each country’s per capita GDP and the upper-middle OECD UK and the US. The 2019-2021 data was estimated using changes in GDP per economies’ average. capita from the Conference Board database. 1.3 Figure 3. Figure Argentina has seen the most years of recession in the world Years in recession, as a percentage of total years (1950-2022) 35% 33% 30% 29% 25% 20% 19% 18% 15% 15% 14% 14% 13% 13% 10% 7% 7% 5% 3% 0% Argentina Chad Venezuela Moldova Turkmenistan Zimbabwe Lebanon Angola Iran Belarus Romania Azerbaijan Estonia Lithuania Madagascar Russia Niger Tajikistan Armenia Greece Iceland Mali Rwanda Slovak Republic Bolivia Poland Switzerland Cambodia Czech Rep. Mozambique Portugal Tunisia Uzbekistan Burkina Faso Finland Mexico Namibia United AE Belgium Ethiopia Italy Morocco United Kingdom Dominican Rep. Jordan Malawi Malta New Zealand Botswana Mauritius Singapore Austria Canada Costa Rica Hong Kong Tanzania Vietnam Bahrain Guatemala South Korea Israel Colombia Source: Conference Board Total Economy Database: Output, Labor and Labor Productivity, 1950-2022. 16 A NEW GROWTH HORIZON FOR ARGENTINA Argentina outperforms its regional peers on Figure 1.4 human development indicators. Argentina is among the highest scoring countries on the Human Argentina is among the top countries for its human Development Index (HDI), which summarizes development F1-4 countries’ achievements in terms of a long and HDI 2019 healthy life, knowledge, and having a decent standard of living (Figure 1.4). This reflects Argentina’s Australia 0.94 investment in welfare and distributive policies since South Korea 0.92 the beginning of the 20th century, financed by OECD 0.90 Very high HD 0.90 revenues from its vast natural resource wealth. Its Poland 0.88 decades of prosperity at the turn of the 20th century Chile 0.85 gave Argentina a pioneering role in Latin America Argentina 0.85 for universal public service provision in education Uruguay 0.82 and health. Argentina still enjoys the dividends of Malaysia 0.81 this past prosperity, reaping the benefits in certain Europe & Central Asia 0.79 areas of social and human development. Along Mexico 0.78 with Chile, Argentina outranks its other regional LatAm & Caribbean 0.77 peers, but is behind its structural and aspirational Brazil 0.77 countries (except Malaysia). However, HDI have been High HD 0.75 decreasing lately (see Chapter 3). East Asia & Pacific 0.75 World 0.74 Regional disparities within Argentina are South Asia 0.64 substantial, especially when compared to more Medium HD 0.63 Sub-Saharan Africa 0.55 developed countries. Although regional income gaps Least developed countries 0.54 exist across all countries, they are particularly acute Low HD 0.51 in Argentina, leading to large differences in material living standards and well-being. Whilst amongst EU countries the ratio between the regions with the Source: UNDP 2020. Note: maximum=1; minimum=0. highest and lowest GDP per capita averaged 2.4 in 2018, it was 6.2 in Argentina in 2021 (Figure 1.5). This backdrop of “frontier retreat”, the poorest northern reflects large differences in regional productivity, as provinces (Formosa, Jujuy, Corrientes, Chaco, and well as in the delivery of public services. Santiago del Estero) saw a timid convergence with the leaders, improving their average productivity The poorest provinces saw their productivity at the margin (2.7 percent annual average, Figure converge with the richest provinces between 2004 1.6). A common feature of all provinces with falling and 2021 as the latter faltered. The provinces with productivity is the declining share of the tradable the highest labor productivity are rich in oil, gas, sector; the rest have managed to maintain their and agricultural land (Chubut, Neuquén, Santa Cruz, initial shares. Tierra del Fuego, and La Pampa).3 However, these provinces accumulated a productivity decline of 10.2 The contribution of labor productivity to percent between 2004 and 2021, equivalent to an growth has been modest, as most workers are average annual decrease of 0.6 percent. Against this concentrated in the least productive sectors. 3  Methodology adapted from OECD (2016). See Araujo and Olaiz (2022). A NEW GROWTH HORIZON FOR ARGENTINA 17 Figure 1.5 Figure 1.6 There is a high variation of income across provinces Poorer regions’ labor productivity is catching up with faltering richer regions Per capita GDP by province, in thousand constant 2004 AR$, Average annual growth rate of labor productivity in percent, 2004 vs 2021 2004-2021 36.3 5% 29.2 4% 24.0 3% 25.0 2% 19.0 1% 16.1 0% 13.2 12.7 12.6 11.2 -1% 11.3 8.0 10.9 10.7 9.6 9.8 9.1 -2% 8.4 8.0 7.5 7.4 7.0 6.4 6.1 5.9 -3% -4% -5% CABA T. del Fuego Santa Cruz Neuquén Chubut La Pampa Santa Fe Córdoba Total país Entre Ríos San Luis Río Negro Buenos Aires Sgo del Estero Mendoza San Juan La Rioja Catamarca Chaco Salta Jujuy Tucumán Corrientes Misiones Formosa Formosa T. del Fuego La Pampa Jujuy Corrientes Chaco Sgo del Estero Córdoba Entre Ríos Buenos Aires Santa Fe Tucumán Salta CABA San Luis Misiones San Juan Río Negro Neuquén Mendoza La Rioja Chubut Catamarca Santa Cruz 2004 2021 Frontier Catching-up Keeping pace Diverging Source: World Bank based on INDEC and CEPAL-MECON. Note: AR$=Argentinian Source: World Bank based on INDEC, Labor Ministry, and CEPAL-MECON. Note: peso; CABA= Buenos Aires Autonomous City. productivity is measured in constant 2004 AR$. Argentina’s labor productivity is below the average re-ignite growth, the non-tradable sector could for its regional and structural peers, and it has capture an increasing share of workers (Beylis et fallen 7 percent since 2012.4 Most workers are al., 2020). Against this background, Argentina has concentrated in low productivity sectors such not progressed its structural transformation in as the public sector, construction, wholesale and recent years, highlighting that resources are not retail, and manufacturing.  Meanwhile the sectors being reallocated to their most productive uses. with the highest value added per worker, such as Decompositions of per capita income growth in professional services – a tradable sector – have Argentina for the period 2006 to 2019 indicate only played a limited role in employment (Figure that the largest gains in GDP per capita came 1.7). This tendency has strengthened over time, from the increase in employment, while labor with employment dynamism growing in lower productivity contributed negatively (both within productivity activities. The lackluster performance and across sectors). In comparison, in Poland, of labor productivity in the public sector and other Malaysia, Brazil, Australia, and Latin America and non-tradable services is particularly worrisome, the Caribbean as a whole, within-sector changes given that this sector has steadily increased its were the largest driver of per capita income in all employment share. In the absence of reforms to cases (Figure 1.8). 4  In 2022, Argentina’s labor productivity (measured as output per employed person in 2021 international dollars) was more than 40 percent lower than for Poland and Korea, and more than 50 percent lower than for Australia. It was also 20 percent lower than for Malaysia and Chile and 8 percent lower than for Uruguay. Only Mexico underperformed Argentina (The Conference Board Total Economy Database). 18 A NEW GROWTH HORIZON FOR ARGENTINA Figure 1.7 Figure 1.8 Argentina’s workers are concentrated in low Gains in GDP per capita came from employment productivity sectors growth, not labor productivity Labor productivity and employment by sector, 2021 Decomposition of growth in per capita VA. Annual variation in percentage points, 2006-2019 5.0 Government Poland 4.5 Total=3.9% 4.0 Malaysia Total=3.3% 3.5 Brazil Millions of people 3.0 Total=1.0% 2.5 Other Transport Australia non-tradable services 2.0 & comunic. Total=1.1% Professional 1.5 services Industry LatAm & Caribbean Commerce Total=1.2% 1.0 Agro Argentina 0.5 Construction Mining + EGW Total=0.2% 0.0 0 50 100 150 200 250 -1 0 1 2 3 4 5 Thousands ARS of 2004/employee Annual change (percentage points) Within-sector productivity Static reallocation Dynamic reallocation Employment rate Participation rate Demographic change Source: World Bank based on INDEC and Ministry of Labor. Note: Private Source: World Bank Job Structure Tool. Note: Cross-country regression model employment is estimated by combining formal private sector employment (data originally developed by Loayza et al (2005) to describe LT growth in LAC. from Ministry of Labor, Employment, and Social Security) with the informality Improved subsequently by Araujo et al (2014). rate (from the permanent household survey – EPH). Public sector employment was taken directly from the EPH. Value added is measured as output per employee. EGW: Electricity, gas & water. Other non-tradable services: Real estate, financial intermediation, education, social and health services. Other: community, social and personal service activities. A longer-term perspective confirms that private and public, have been sub-par. Argentina’s Argentina’s growth is driven by factor per capita capital stock continues to be low, lagging accumulation instead of total factor productivity, behind structural and regional peers. Additionally, which shows a downward trend. Labor and capital human, physical, and financial capital were not accumulation have supported output growth (Figure allocated efficiently across sectors – despite factor 1.9). The capital-output ratio followed a positive accumulation, total factor productivity (TFP) has not trend during the 1950-1974 period, thanks to the increased and remains at 1950s’ levels (Figure 1.10).5 dynamics of capital accumulation. Even though Lackluster TFP dynamics persist even after adjusting capital accumulation has been the main contributor for input utilization effects owing to exacerbated to long-term growth, its level and dynamics, both cyclical volatility (Araujo and Coremberg, 2023). 5  Total-factor productivity describe the relationship between output in real terms and the inputs involved in its production. A NEW GROWTH HORIZON FOR ARGENTINA 19 Figure 1.9 Figure 1.10 Growth is explained by labor and capital Total factor productivity has stagnated accumulation Source of GDP growth (1950-2021). Index 1950=1 1950-2021 9 1.1 K1950=1 8 1.0 7 6 0.9 Y1950=1 5 0.8 4 L1950=1 1950-2021: -0.1% annual 3 0.7 2 TFP 0.6 1 0 0.5 2006 2006 2002 2020 2002 2020 1990 2010 1990 2010 1966 1986 1994 1998 2014 2018 1966 1986 1994 1998 2014 2018 1950 1950 1962 1982 1962 1982 1954 1958 1954 1958 1970 1970 1974 1978 1974 1978 Source: Araujo and Coremberg (2023). Note: Y=GDP; K=Capital; L=Labor; Source: Araujo and Coremberg (2023). TFP=Total Factor Productivity 1.2. Macroeconomic volatility, and You (2019) find that, on average, a 50 percent influenced by a procyclical fiscal decrease in volatility increases annual per capita policy, constrains growth growth by 0.25 percentage points. An important channel for the negative impact of volatility on The main reason behind Argentina’s poor economic growth is investment: the greater the volatility performance is the sustained presence of high in output, the more uncertain future demand levels of volatility. Since the second half of the last becomes, and therefore, the less willing firms are century, average annual GDP growth has been only to undertake long-term investment decisions 2.5 percent (Figure 1.11). During that time, Argentina (Rafferty, 2005). Hnatkovska and Loayza (2003) has experienced several periods of economic also find that macroeconomic volatility and long- instability, having gone through 15 recessions. The run economic growth are negatively related and average duration of the recessions was 1.6 years, that this negative link is exacerbated in countries with an average annual decline in GDP of close to 4 that are poor, institutionally underdeveloped, percent in each case. Crisis periods coincide with the undergoing intermediate stages of financial presence and built-up of macroeconomic imbalances. development, or unable to conduct countercyclical fiscal policies. There is a large literature suggesting a negative link between volatility and growth, magnified High economic dependence on commodities by the absence of countercyclical fiscal policies plays a critical role in volatility. With a territory and low levels of financial development. Ramey of 2.8 million square kilometers, the extraordinary and Ramey (1995) find evidence that countries with fertility of Argentina’s land makes it one of the most higher volatility experience lower growth. Barroso important agricultural producers in the world. Its 20 A NEW GROWTH HORIZON FOR ARGENTINA Figure 1.11 Output volatility is high Annual GDP growth and HP-Filter (%) (1951-2022) 15 0 GDP (YoY % change) -10 10 -20 -30 5 -40 0 -50 HP Filter -60 -5 -70 -80 -10 -90 -15 -100 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Source: World Bank, based on The Conference Board and IMF (WEO). Note: The HP filter remove the cyclical component of the GDP and determines the change in the trend level overtime. The gray shade represent economic crises. fertile agriculture land gives Argentina greater per country’s main source of wealth, the export basket capita natural capital than most of its peers (Figure remains dominated by commodity exports, with 1.12). Its beef and soybean industries perform at about 70 percent of goods exports and 60 percent the technological frontier, using some of the most of total exports associated with agriculture and modern practices in the world. Some producers energy (Chapter 2). Therefore, foreign exchange are world leaders in genetics, farm machinery, and accumulation and fiscal revenues, directly via export innovation. The country also has abundant natural taxes but also indirectly via input-output links of the energy resources and a world-class potential for agriculture sector, are very volatile, being subject solar and wind energy. It has the second biggest to sharp fluctuations in terms-of-trade and in shale gas reserves globally and the fourth largest response to climate events. For example, during the oil reserves. However, Argentina’s main source of last severe drought in 2018, crop production fell 17 wealth is its human capital. Below-par accumulation percent and the agricultural sector was responsible of physical and human capital explains the country’s for half of the economic contraction registered that difference in wealth accumulation compared to its year (-2.6 percent of GDP). On average, commodity higher-income peers (Figure 1.13).6 price shocks are associated with almost 40 percent of fluctuations in Argentinean output growth post- Commodity price and supply shocks are 1950, also explaining 40 percent and 60 percent of associated with heightened volatility in the variation in consumption and investment growth, Argentina. Even though natural capital is not the respectively (Drechsel and Tenreyro, 2017). 6  For more details on Argentina’s wealth composition and accumulation over time, see Araujo and Yoong (2023). A NEW GROWTH HORIZON FOR ARGENTINA 21 Figure 1.12 Figura 1,12, Argentina has more natural capital per person than some of its peers, driven by abundant agricultural land Riqueza natural per cápita, US$ constantes, Argentina y países de comparación (2018) 20,000 17,332 15,215 15,000 12,717 13,059 11,185 10,000 7,203 7,025 5,000 0 Argentina Brazil Mexico Poland Malaysia UMIC OECD Forests, timber Forests, ecosystem services Fisheries and mangroves Sub-soil assets Protected areas Cropland Pastureland Natural capital Source: World Bank Group (2021), Changing Wealth of Nations. Figura 1.13 Figure 1.13. However, overall wealth is comparatively lower than some of its peers Per capita wealth, constant US$, Argentina and peer countries, 2018 (US$) 1,000,000 800,000 600,000 400,000 200,000 0 Mexico LAC Brazil Argentina Polonia Upper Malaysia South OECD Australia Region middle-income Korea (200,000) Produced capital Human capital Natural capital Net foreign assets Source: World Bank Group (2021), Changing Wealth of Nations. Note: LCR=Latin America and Caribbean Region. 22 A NEW GROWTH HORIZON FOR ARGENTINA High dependence on commodity exports and weakens the competitiveness of the country’s associated macroeconomic instability are a exports and causes the economy to focus on the common feature of many emerging economies. production of non-tradable domestic goods and Commodities represent about 71 percent of total services. Both transfers shrink production in the now export value in emerging economies, on average, lagging traditional export sector. The lack of export compared to only 29 percent in developed countries. dynamism results in low and poor economic growth, In contrast, their share in aggregate imports is very and a low level of output from factories and industrial similar across both groups, at 33 percent and 31 facilities, as well as a decrease in employment. percent, respectively. These differences affect their response to changes in the international relative The evidence for the existence of Dutch disease prices of commodities and manufactures, amplifying effects in Argentina is mixed. Its booms have been business cycle volatility. For instance, an increase in associated with real appreciation of the currency, the relative price of commodities boosts the value of and negatively associated with the trade and the production and exports in emerging markets, while current account balances, as predicted by the reducing the relative price of goods imported by “disease”. Also as expected, improvements in terms these economies, triggering an economic boom. In of trade have been associated with increases in developed economies, in contrast, an increase in the real GDP, investment, consumption, employment, value of production and exports tends to be offset and foreign direct investment. However, responses by an expansion in the value of imports, thus having to terms-of-trade shocks seem to be magnified in a minimal impact on aggregate economic activity Argentina compared to other commodity exporters (Kohn et al., 2018). Although emerging economies are (Araujo, Hallak and Trupkin, 2023). Argentina tends to generally more fragile than developed ones, pointing experience greater real exchange rate appreciation, to development challenges associated with export accompanied by a broader deterioration of the diversification and quality upgrading, Argentina’s trade and fiscal balance, and an excessive response volatility and frequency of boom-and-bust cycles are in private consumption. However, there are no much greater than for other emerging economies. significant differences in exports and foreign direct investment. As predicted by the Dutch disease, Natural resource abundance has also been improvements in terms of trade are associated with associated with the “natural resource curse” and investments in the non-tradable sector, though “Dutch disease” phenomena. The resource curse mainly in the non-commodity tradable sector which refers to the observation that countries with great competes with imports. In fact, following a favorable natural resource wealth, but which lack a diversified terms-of-trade shock, the share of value-added and export base, tend to grow more slowly than resource- employment in the non-commodity tradable sector poor countries (Sachs and Warner, 2001; Mien and increases more than in the non-tradable sector Goujon, 2022). Similarly, Dutch disease is generated (Figure 1.14). by the long-term overvaluation of the currency following a natural resource discovery, which leads Escaping the “natural resource curse” hinges to large inflows of foreign currency, a sharp surge on good macroeconomic and structural policies. in natural resource prices, foreign assistance, or Natural resources do not need to determine a foreign direct investment (Mien and Goujon 2021). country’s structure of production or exports. In fact, These contribute to an appreciation of the real natural resources can act as a catalyst for economic exchange rate through a rise in domestic prices or development when there is an enabling environment in the nominal exchange rate. This appreciation that allows for the accumulation of knowledge for A NEW GROWTH HORIZON FOR ARGENTINA 23 Figure 1.14 Figura 1.14. Los shocks favorables en los términos de intercambio están asociados a una expansión de los sectores comercializables y no comercializables, distintos de las materias primas A) Value added B) Labor C) Capital formation 20 20 40 30 15 15 20 Percent Percent Percent 10 10 10 5 5 0 0 0 -10 VA-X VA-M VA-NC Labor-X Labor-M Labor-NC Capital-X Capital-M Capital-NC Source: Araujo, S., Hallak, J.C. and D.R. Trupkin (2023). The Impact of Commodity Price Cycles on Argentina’s Economy and its Sectoral Composition. Note: This figure plots the percentage change in (a) value added, (b) labor, and (c) gross fixed capital formation, after a favorable terms-of-trade shock, by sector (X=exports; M=non-commodity tradable sector, competing with imports; and NT=non-tradables), using the UN industrial classification, ISIC, for all economic activities. Agriculture, fishing and mining are included in the exportable sector; manufacturing in the importable sector; and construction, commerce, services and others are classified in the non-tradable sector. The horizontal lines represent the percentage change in the average detrended terms of trade between regimes. economic innovation and provides an adequate level busts. It is widely confirmed by the literature that of infrastructure quality (Lederman and Maloney, developing countries tend to be more volatile and 2007). Lessons can be learned from resource-rich run more procyclical fiscal policies than advanced countries that have avoided the unwanted effects economies (Galeano et al., 2021; Frankel, Vegh and of an unexpected increase in rents when a resource Vuletin, 2013).7 Argentina stands out globally for boom or other inflows of foreign currency occur. having the most volatile GDP and for being among In particular, a long-term countercyclical fiscal the countries running the most procyclical public policy and a strategy for saving excess income spending policies (Figure 1.15). Moreover, Argentina help to counteract the effects of currency inflows, is one of the few countries that has deepened by withdrawing the excess foreign currency from the procyclicality of its fiscal policy over the last circulating in the economy (Frankel, 2012). Countries decade, potentially exacerbating volatility (Figure such as Botswana (diamonds), Chile (copper), 1.16). By contrast, many developed and developing and Norway (oil) offer examples of successful countries have switched from being procyclical to management of natural resource revenues through countercyclical. In Latin America, Paraguay and special fiscal institutions such as sovereign or Mexico are two such examples. stabilization funds. High fiscal procyclicality in Argentina is Highly procyclical fiscal policies are linked with concentrated on the spending side. Overall public economic volatility, as they amplify booms and spending in Argentina appear to positively co-move 7  A variable is called procyclical (countercyclical) if it fluctuates in a way that is positive (negative) correlated with business cycle fluctuation in GDP. 24 A NEW GROWTH HORIZON FOR ARGENTINA Figure 1.15 Figura 1.15. Argentina’s extreme macroeconomic volatility is linked to high fiscal procyclicality Fiscal cyclicality and GDP volatility, 2000-2021 1 Pro-cyclical Nicaragua 0.8 Uruguay Latvia Ukraine Hungary Greece Argentina Ecuador Romania 0.6 Bosnia & Montenegro Serbia Croatia Herzegovina Brasil Colombia Iceland Lithuania Bolivia Belarus Estonia 0.4 Russia Albania Fiscal cyclicality Moldava 0.2 Sweden Bulgaria Chile Honduras Panama Poland Portugal Turkey Ireland 0 Netherlands Czech Rep. Mexico Spain North Macedonia Slovak Rep. Indonesia Costa Rica El Salvador Slovenia Peru -0.2 South Africa Italy India New Zealand Finland Norway Israel -0.4 Guatemala Counter-cyclical Korea France Paraguay United States Austria -0.6 Luxembourg Australia Denmark Germany Switzerland Belgium United Kingdom -0.8 Canada Singapore Japan -1 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 Less volatile GDP Volatility More volatile Advanced countries Emerging countries Source: World Bank, based on Végh, Lederman and Bennett (2017). Leaning Against the Wind. Fiscal policy in Latin America and the Caribbean in a historical perspective. with the business cycle in a deterministic manner, and, only partially, by its “quantities” effect (i.e. how with traditional automatic stabilizers having a minor the number of beneficiaries evolved vis a vis the role and a weak overall effect. In particular, the two business cycle), too. Interestingly, while indexation most important items of public spending, such as rules typically prevent social security spending to pensions and the wage bill, have been the main drivers be procyclical in most countries, the Argentine case of aggregate fiscal procyclicality in recent decades. seems to show the opposite. The design and the Although conventional literature suggests that there erratic implementation of indexation rules have fueled are no objective reasons for these spending items to rather than contained procyclicality. Accordingly, behave countercyclically, there is a vast consensus protecting the real value of benefits with a well- that these items should be executed in a neutral way designed, predictable, and stable indexation formula, concerning the business cycle. as well as implementing reforms to reduce the need for exceptional measures, such as moratoriums, is Argentina is among the countries with the most crucial for mitigating the procyclicality of pension procyclical pension spending during the past spending in Argentina. decades, which is the main contributor to overall fiscal procyclicality. The evidence for Argentina The public wage bill is strongly procyclical, driven shows that the public spending in all the main by both “price” and “quantity” effects. Compared pension schemes has been strongly procyclical and to its regional and global peers, Argentina stands determined by its “price” effects (i.e. how the real out for having a large public wage bill. Furthermore, value of benefits evolved through time -indexation-) the paper shows that Argentina’s wage bill is largely A NEW GROWTH HORIZON FOR ARGENTINA 25 Figura 1.16. Procyclicality Figure 1.16 of fiscal policy (1990-2010 and 2011-2021) Argentina is one of the few countries to have deepened its procyclicality 1 New procyclical Still procyclical Ukraine 0.8 Argentina Ecuador Russia 0.6 Turkey Colombia Ireland Greece Honduras 0.4 Brazil Bolivia Hungary Chile Corr (spending, GDP) 2011-2021 Iceland Estonia Latvia 0.2 Croatia Romania Costa Rica Panama 0 Moldova Netherlands Mexico Poland Albania Bosnia and India Sweden Portugal Lithuania Herzegovina Bulgaria -0.2 Czech Republic El Salvador Slovenia New Zealand Italy Spain -0.4 Slovak Rep. Indonesia Luxembourg Finland North Macedonia Denmark Frane Norway -0.6 Belgium Germany Korea Australia Guatemala -0.8 Austria Paraguay Singapore Switzerland United Kingdom Still countercyclical Canada Japon New countercyclical -1 -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 Corr (spending, GDP) 1990-2010 Advanced countries Emerging countries Source: World Bank estimates based on Végh, Lederman and Bennett (2017). Leaning Against the Wind. Fiscal policy in Latin America and the Caribbean in a historical perspective. procyclical, even compared to global and regional greater fiscal space to guarantee wage stability standards. Moreover, the number of public servants during crisis situations and adopting institutional (“quantities” effect) as well as their average wage and regulatory innovations to guide personnel hiring (“price” effect), behaved in a very procyclical manner policies would greatly benefit the state and help in recent decades, at both levels of government reduce procyclicality. (national and subnational). The significant increase in public employment during the period 2002-2015, 1.3. Public policy constrains private almost doubling the number of public servants investment, hindering growth across all levels of government, is part of the explanation. In addition, the increasing and volatile In addition to contributing to the volatility of the inflationary phenomena over the past two decades economic cycle, financing recurring fiscal deficits have contributed significantly to wage bill cyclicality, crowds out credit to the private sector. Access as public wage negotiations are typically not to credit is very limited for the Argentinian private perfectly aligned with inflation. Therefore, creating sector. Domestic credit to the private sector stands 26 A NEW GROWTH HORIZON FOR ARGENTINA Figure 1.17 Figura 1.17 Domestic bank credit to Argentina’s private sector is lower than regional peers % of GDP (2000-2022) 80 70 60 50 40 30 20 10 80 2000 2005 2010 2015 2020 Argentina Brazil Mexico Colombia Uruguay Source: World Bank and Central banks; Argentina 2018-2002: BCRA, INDEC. at 10.6 percent of GDP in 2022, the lowest level in Credit scarcity is also driven by the lack of access Latin America (Figure 1.17). For most countries in the to international financial markets, as well as a lack region, the ratio fluctuates between 28 percent in of domestic resources in the financial sector owing Uruguay to 72 percent in Brazil. Credit to Argentina’s to a tendency to overspend that curbs domestic private sector is also well below that in Central Europe savings. But it is also due to a crowding out effect by economies (50 percent in Poland and 53 percent in the public sector, resulting from the size of the public the Czech Republic), and even further below the fast- deficit to be financed. growing countries in Asia (134 percent in Malaysia). Levels as low as Argentina’s can only be found in much The public sector captures most of the credit less developed countries (17 percent in Pakistan and available in the economy. Total credit granted to 16 percent in Madagascar).8 However, Argentina’s the Argentinian non-financial sector (companies, ratio was not always so low. In the 1990s, its domestic households, and public administration) by domestic bank credit to the private sector was comparable to and foreign lenders represented 104 percent of GDP Mexico, Colombia, and Uruguay. A first explanation in September 2022 (Figure 1.18). This is the lowest for the reduction of credit is the weak demand from proportion in the peer group, except for Mexico (82 businesses, itself also a consequence of persistent percent). However, it is not much lower than the macroeconomic instability. Many businesses are shares observed in Turkey, Poland, and Colombia. informal, and stagnant growth and volatility do not More striking, though, is the distribution of this credit encourage them to expand their activities via credit. in Argentina, which differs significantly from all the 8  The average for the group of countries of which Argentina is part in terms of per capita income (upper middle income, according to the World Bank classification) was 144% in 2020. A NEW GROWTH HORIZON FOR ARGENTINA 27 Figure 1.18 Credit1.18. Figura to the public sector is larger in Argentina than in peer countries Total credit by sector, September 2022 % of GDP % of total credit 300 90 80 250 79.1 70 200 60 50.5 52.0 49.3 43.3 50 150 35.8 48.3 32.6 40 100 23.4 30 18.5 32.3 16.4 20 50 10 0 0 Argentina Brazil Chile Colombia Mexico South Malaysia Thailand Czech Poland Turqkey South Korea Rep. Africa Credit to general government Credit to households Credit to non-financial corporations General government’s share (rhs) Source: Bank of International Settlements. other countries. Of the credit available, about 80 should have expanded gradually with the creation of percent was captured by the public administration, the Mercosur block in 1991, but this objective never compared to a maximum share of around 50 percent materialized due to the implementation of a growing in other countries (49 percent in Brazil and 51 import control system (temporarily liberalized at the percent in Mexico). Some countries see much lower end of 2015). The privatizations of utility companies shares (16 percent in Korea and 18 percent in Chile). in the 1990s turned into nationalizations from the In Argentina, companies only receive 17 percent of middle of the 2000s and were then superseded by total credit. a public-private partnership (PPP) system that did not prosper. Argentina went from a “mostly Large and continuous shifts in economic policy, at free” economy in 1995 to a “largely controlled” one, both the macro and micro levels, are an additional according to the index of economic freedom.9 Federal source of volatility. Since 1990, Argentina has moved tax and budget rules have been frequently modified. from a very rigid exchange rate regime (convertibility The changes in the regulations for export duties are system established in 1991) to a controlled exchange particularly striking. On average, between 2002 and rate, then to a dual exchange rate regime, then to 2021, there were five regulatory changes per year for a flexible exchange rate. Today it has a multiple export duties, and this average rose to seven over exchange rate regime (Table 1.1). International trade 2018-2021 (Figure 1.19). 9  The Heritage Foundation https://www.heritage.org/index. 28 A NEW GROWTH HORIZON FOR ARGENTINA Figure 1.19 Figure 1.20 Argentina sees multiple changes to export duties Consumption growth trends exceed GDP growth 1.19. Figura year every Figura 1.20. trends prior to crises No. of changes (2002-2021) Annual % change of GDP and private consumption, in local currency at constant 2015 prices (1960-2021) 14 8% 12 6% 10 4% 8 2% 6 0% 4 -2% 2 0 -4% 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2002-2021 average 5 2018-2021 average 7 GDP Private consumption Source: World Bank based on CERA. Source: World Bank based on. The persistent volatility causes economic agents years, the largest increase in domestic absorption to lose confidence in the economy’s ability to occurred between 2003 and 2017, when it expanded generate stable growth in the long term. This by 19 percentage points of GDP, reaching a peak reduces the incentives to look beyond short-term of 105 percent in 2017. The share of imports in gains, curbing long-term investment decisions– absorption also increased sharply during that particularly in those projects that are more period, by 8 percentage points, up to 14 percent of uncertain. This exacerbates commodity dependence the absorption (Figure 1.21). From 2018 onwards, still further, increasing consumption and spending in domestic absorption reversed its positive trend, the short term and also contributing to boom-and- reducing its weight in GDP to represent 98 percent bust shocks. Over the past 60 years, trend growth in in 2021. In the same vein, imports reduced their consumption has exceeded trend growth in GDP in weight in absorption, standing at 12 percent in 2021. the periods leading up to crises (Figure 1.20). It should be noted that most imports (76 percent in 2021) are destined for the production process: they Argentina’s absorption rate has historically been are intermediate and capital goods. This, in turn, may high and is increasingly explained by intermediate reflect the restrictions that govern foreign trade, imports. Absorption refers to the total level of protecting some sectors that produce final goods spending that occurs in an economy regardless of and limiting imports to those strictly necessary for the origin of goods and services. Over the past 50 the production process. A NEW GROWTH HORIZON FOR ARGENTINA 29 30 Table 1.1 Argentina has experienced frequent policy changes since 1990 Foreign Labor/ social Privatizations/ Fiscal policy Export taxes Monetary policy Foreign policy Pricing policy exchange policy security reforms nationalizations 1990- - Financial Administration Law - Elimination of - New Central - Convertibility Law - Mercosur (Treaty - Pension reform - Privatizations and - Pricing 1999 (1992). export taxes on all Bank Charter (Currency Board, of Asunción, 1991). (creation of start of concessions: deregulation. - Pacto Fiscal I and II (1992 and cereals (1991). (1991). 1991). - Argentina, individual telephone, airline, 1993). founding member retirement and road concessions - Fiscal Solvency Law (1999). of the WTO (1995). accounts, AFJPs). (1990); railway (1991); A NEW GROWTH HORIZON FOR ARGENTINA - Compromiso Federal 1 water and sanitation (1999). (1992); electricity and gas companies (1992); YPF national oil company (1993); postal service (1997). 2000- - Federal Commitment for - “Fiscal - “Corralito” - End of Currency - US, Japan, and - Labor reform - Revocation of - Government 2009 Growth and fiscal discipline devaluation” (2001). Board and EU file complaints (2000). railway concession intervention in (2000). “Impuestazo” (2000). (Import taxes and - Asymmetric devaluation (2002). with WTO against - New Labor Law (2004). the statistics Federal Commitment 2 (2000). export subsidies). conversion of Argentina for revokes the - Start of series of agency (INDEC) - Zero Deficit Law (2001). - Reimplementation dollar assets/ import restrictions. 2000 reform nationalizations of over inflation Second addendum to the of export duties liabilities (2002). (2004). previously privatized methodology Federal Commitment for (2002). - “Unification” of enterprises: water (2007). Growth and fiscal discipline pension system services in greater (2001). with assets of Buenos Aires (2006); External debt default (2001). private National Airline - Agreement between the funds transferred (2008); YPF oil Nation and the Provinces on to the state (2008). company (2012); the financial relationship and Railways (2015). bases of a Federal Tax Sharing Regime (2002). - Fiscal Responsibility Law (2004). - Debt exchange with private external creditors (2005). Table 1.1 Argentina has experienced frequent policy changes since 1990 (cont.) Foreign Labor/ social Privatizations/ Fiscal policy Export taxes Monetary policy Foreign policy Pricing policy exchange policy security reforms nationalizations 2010- - Debt exchange with private - Reduction in - Reform of - Exchange rate - Import - Reform of the - Public-Private - New pricing 2019 creditors holdouts (second export taxes (2016). Central Bank reunification (2015). restrictions (2012). Pension System Participation Law agreement phase, 2010). - Reimplementation Charter (2012). -Reimplementation - Reduction of (changes in the (2016). scheme (“Precios - Financing of the fiscal of export duties of exchange import restrictions formula used to - Sale of the state’s Cuidados”, 2013). deficit by the Central Bank of (2018). controls (2019). (2016). calculate benefits, shareholding in - New Supply Law Argentina (2012). - Accelerated 2017). non-strategic energy (2014). - Default on restructured debt process for OECD assets, such as power - Pricing following a court ruling in New adherence (2017- plants (2017). deregulation. York (2014). 2018). Elimination of - Agreement with holdouts - EU-Mercosur partial subsidies (2016). agreement (2019). to public utilities - Public utility price increases (2016-2017). (2016). - New Antitrust - Fiscal Consensus (2017, 2018, Law (2018). and 2019). - Freeze prices for 6 months (2019). 2020- - Fiscal Consensus 2020 - Increase in - Tightening of - Import - Reform of the - Revocation - Extension 2022 (2020). soybean and exchange controls restrictions (2021- Pension System of Transener of pricing sunflower export (2020-2022). 2022). (changes in the and Dioxitek’s agreements duties (2020). formula used to privatizations (2021). (“Precios - Increase in calculate benefits, Cuidados”, soybean products 2021). 2020/2022). export duties (2022). A NEW GROWTH HORIZON FOR ARGENTINA 31 Figura 1.21. Figure 1.21 Domestic absorption is elevated and has increased, driven by imports In local currency, at constant 2015 prices (1992-2021) 105% 105% 16% 14% 100% 98% 14% 94% 95% 11% 13% 96% 12% 12% 90% 12% 11% 85% 10% 85% 80% 8% 80% 76% 6% 75% 6% 71% 4% 70% 69% 2% 65% 60% 63% 0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Absorption/GDP (main axis) Intermediate and capital goods imports share in total imports (main axis) Imports/absorption (sec. axis) Source: World Bank based on United Nations Statistics Division (UNSD) and INDEC. Note: Absorption refers to the total level of spending that occurs in an economy regardless of the origin of goods and services. Intermediate and capital goods imports = intermediate goods + capital goods + parts of capital goods. The flip side of high domestic absorption is a increase due to the rise in demand for imported low savings rate (Figure 1.22). Between 2011 and goods for both consumption and production. Second, 2019 the savings rate represented 17.5 percent of growing aggregate demand exerts pressure on the GDP in Argentina, one of the lowest of its peers, market for non-tradable goods, increasing their except for Brazil (17.3 percent). It was less than half relative price, which leads to a real appreciation that the average savings of South Korea (35.4 percent) further increases imports. As exports are primarily and was also well below Malaysia (32.7 percent), dominated by commodities, which are taxed at the Australia (25.8 percent), Mexico (22.9 percent), border, they are generally unable to keep up with the and Poland (22.6 percent). The savings rate in rapid increase in imports, leading to a deterioration Argentina is not only low – it is also entirely driven of the current account (Figure 1.24). by the private sector, since the public sector has negative savings (Figure 1.23). This process generally comes to an end when the rest of the world refuses to continue financing The tendency to overspend is even greater during Argentina’s current account deficit. As a result, expansions, with procyclical policies that lead there is a marked depreciation of the exchange rate, to consumption and investment (both public a drastic increase in inflation, a large drop in real and private) growing faster than income. In wages and a deep recession that reverses the current the external sector, this is reflected in an increase account and wipes out a large part of the welfare in imports through two channels. First, imports benefits in the period of expansion.10 These boom- 10  For more on stop-and-go cycles see, for example, Gerchunoff and Llach (2007), Heymann (2007), Albrieu and Fanelli (2008) and Gerchunoff and Rapetti (2016). 32 A NEW GROWTH HORIZON FOR ARGENTINA Figure 1.22 Figura 1.22. Figure 1.23 Figura 1.23. Argentina’s savings rate is lower Gross domestic savings are entirely driven by the than its peers private sector Gross domestic savings, % of GDP, 2011-2019 average Gross domestic savings, % of GDP (2016-2019) 35.4% 32.7% 25.8% 22.9% 22.6% 19.4 18.2 17.3% 17.5% 16.7 16.5 -2.3 -2.6 -4.7 -3.7 BRA ZAF ARG COL CRI LCN URY POL MEX AUS TUR RUS IND THA MYS IDN KOR 2016 2017 2018 2019 Public Private Source: WDI (WBG). Note: Gross domestic savings are calculated as GDP minus Source: INDEC. final consumption expenditure (total consumption). The green bars identify the comparator countries. and-bust episodes in turn result in underinvestment Argentina’s productive structure means that in natural capital (which takes time to reap rewards) exports are not very sensitive in the short run. and in an increase in extractive policies to generate Commodities are the main tradable goods produced short-term liquidity (contributing to the liquidation domestically. Since these activities are mainly of assets and even illegal extraction). As the economy insensitive to RER movements, low aggregate grows and the current account deteriorates, the elasticities are the expected result of their large external restriction begins to operate and usually share of the productive structure. As most of causes a marked depreciation of the real exchange Argentina’s main agricultural products are already rate (RER). After a period of appreciation, the RER near the technological frontier, there is less room usually suffers a marked depreciation (Figure 1.25). to boost production capacity via higher short-term Adverse climate events or commodity price shocks profitability. Consequently, sharp RER adjustments may trigger such crises, given Argentina’s low export do not substantially foster exports in the short competitiveness. Large devaluations are defined as term, and most of the adjustment occurs through those in which the depreciation of the exchange rate imports. However, low aggregate elasticities do in one year is greater than one standard deviation: not imply that the RER is neutral to growth. On since 1950, Argentina has seen five such episodes, the contrary, a large proportion of differentiated each of which generated important economic products and labor-intensive manufacturing goods contractions (a 5 percent decrease on average). are quite elastic to the level and stability of the RER (Palazzo and Rapetti 2023). Over time, repeated These episodes of depreciation have seen boom and bust cycles coupled with RER swings have economic activity contract significantly as impeded the economy from shifting from primary A NEW GROWTH HORIZON FOR ARGENTINA 33 Figure 1.24 Figure 1.25 The 1.24. account deteriorates during expansions current Figura The real Figura exchange rate usually suffers a marked 1.25. depreciation after a period of appreciation Correlation between current account (% of GDP) RER Index (1950-2021) and GDP growth (1950-2021) 4% 60 3% 50 2% CA mean change per cycle 40 1% 0% 30 -1% 20 -2% 10 -3% -4% 0 -10% 0% 10% 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 GDP average annual growth rate per cycle Source: Ferreres and Instituto Nacional de Estadística y Censos (INDEC). Note: Source: Central Bank of the Republic of Argentina (BCRA). Note: RER= real Each dot is a period of consecutive growth or contraction of economic activity, exchange rate. A real depreciation of the peso is shown as an increase in the in percentage (x-axis), and the corresponding change in the current account index. balance, in percentage points of GDP (y-axis), all expressed in annual averages. and homogeneous to differentiated and labor- peer countries. In fact, only Argentina and Malaysia intensive goods, encouraging economic agents to were net creditors to the rest of the world in 2021. focus on activities with larger expected returns, The remaining comparators were net debtors, led such as resource extraction, and sectors protected by Australia, where the credit position of the private from international competition. sector is negative and equivalent to 34 percent of GDP (Figure 1.27). High volatility translates, in turn, into a high net liquid position for the private sector. Argentina is a When investors and consumers face situations of net creditor to the rest of the world, mainly because high uncertainty regarding the future evolution of of the significant positive net position of its non- aggregate demand and employment, they prefer to financial private sector. As of the fourth quarter of stay liquid. This situation is similar to episodes when 2021, the country’s net creditor position was US$ developed countries suffer long periods of recession 77,568 million, which represents 16 percent of GDP. and uncertainty (as was the case for the financial Families and companies (excluding the financial crisis of 2008-2009), although in those cases sector) maintained a positive net international families and companies demand local currency. On investment position (excluding direct investment) the other hand, in Argentina, macroeconomic stress of 56 percent of GDP (US$ 273,695 million in 4Q- situations usually lead to abrupt depreciation of the 2021, Figure 1.26). This high net credit contrasts with peso and acceleration of inflation. Therefore, to meet 34 A NEW GROWTH HORIZON FOR ARGENTINA Figure 1.26 Figure 1.27 Argentina’s private sector has a positive net The high net credit position contrasts with peer Figura 1.26. Figura 1.27. international investment position countries Net international investment position of families Net international investment position of families and companies (excluding direct investment). and companies (excluding direct investment). In US$ billions and % of GDP (2006-2021) In US$ billions and as % of GDP (2021) 70 258 274 400 60 66% 56.2 234 50 & # ! $ 56% 200 52% 40 192 64 -182 -548 30 ! $ & 0 167 155 154 274 148 20 146 -39 37% 17.2 137 % # ! $ 124 107 33% -200 10 29% 30% 28% -216 26% -250 25% 26% 101 24% 23% 24% 24% 24% 0 84 86 -400 -5.8 ! $ % 76 -10 -13.4 -13.8 -14.0 -20 -600 # ! $ -30 -33.5 !" -800 Argentina -40 Malaysia Poland Brazil South Korea Mexico Australia 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 US$ billions % of GDP (sec. axis) US$ billions % of GDP (sec. axis) Source: World Bank based on INDEC (Balance of Payments and International Source: World Bank based on IMF and INDEC. Investment Position). the objective of increasing its liquidity position in the is only 9 percent of GDP, while in Brazil it exceeds face of uncertainty, the private sector turns to the 70 percent, and 92 percent in the European Union dollar or other hard currencies, which are safer than (World Bank Group, 2020a). the peso as a reserve of value and which therefore provide better coverage against depreciation and Low investment is not offset by high foreign inflation. direct investment (FDI), unlike other peer countries with low investment rates, such as The result is a low investment rate. Argentina Brazil. After the commodities super-cycle ended, the has the seventh lowest investment rate in Latin Argentine domestic investment rate began to show America, and is among the countries with the lowest a downward trend (from an average of 17.1 percent of investment rate in the world (ranked 124 out of 171 GDP between 2003 and 2012 to 15.1 percent between countries, IMF 2022). The country’s investment rate 2013 and 2020). Although this negative trend was stood at 20 percent of GDP in 2021, in line with the replicated in most comparator countries (except regional average of 18 percent, but below the world for Malaysia), in those cases an increase in FDI was average of 27 percent and the Asian emerging observed, which partially offset the fall. However, country average of 39 percent (Figure 1.28). In the this did not occur in Argentina, where FDI fell from same vein, the depth of the financial system is low: representing 2.3 percent of GDP in 2003-2012 to 1.5 credit granted to the private sector in Argentina percent in 2012-2020 (Figure 1.29). A NEW GROWTH HORIZON FOR ARGENTINA 35 Figura 1.28. Figure 1.28 Argentina’s total investment rate is low Total investment as % of GDP and global ranking (2021) 45 Investment, % of GDP Global ranking (sec. axis) 0 39.2 22 28 36 33.3 35 28.6 27.1 27 72 70 85 20.3 20.2 94 96 97 100 101 18 105 123 124 128 130 134 9 138 140 149 150 0 175 Asia economies Republic Bolivia El Salvador LatAm Argentina Colombia Costa Rica Brazil Uruguay Guatemala Mexico Honduras Paraguay Ecuador Peru Emerging Emerging Panama Dominican ASEAN-5 World Chile Nicaragua Source: IMF (2022), World Economic Outlook, October 2022. Figura 1.29. Figure 1.29 Foreign direct investment does not offset low investment, unlike in peers Gross fixed capital formation vs FDI, in % of GDP 35% Gross fixed capital formation FDI, net inflows (sec. axis) 4.5% 30.5% 30.0% 4.0% 30% 25.1% 3.8% 27.1% 3.4% 3.5% 3.5% 24.6% 3.3% 3.4% 21.4% 25% 18.4% 18.7% 22.3% 2.9% 21.6% 3.0% 3.0% 20.4% 2.7% 2.7% 20% 17.1% 2.5% 2.5% 16.9% 2.3% 15.1% 15% 2.0% 1.5% 1.5% 10% 1.0% 1.0% 5% 0.7% 0.5% 0% 0.0% Average 2003-2012 Average 2013-2020 Average 2003-2012 Average 2013-2020 Average 2003-2012 Average 2013-2020 Average 2003-2012 Average 2013-2020 Average 2003-2012 Average 2013-2020 Average 2003-2012 Average 2013-2020 Average 2003-2012 Average 2013-2020 South Korea Malaysia Australia Mexico Poland Brazil Argentina Source: World Bank Group (2020a) World Development Indicators. 36 A NEW GROWTH HORIZON FOR ARGENTINA Figura 1.30. Figure 1.30 R&D spending is low in the international context Domestic gross expenditure on R&D, in % of GDP, 2010 and 2019 4.9 2018 2010 4.5 3.4 3.3 2.8 2.8 2.6 2.2 2.1 2.0 1.9 1.9 1.5 1.4 1.2 1.1 1.4 1.3 1.0 0.9 0.8 0.6 0.5 0.5 0.5 0.3 0.2 Israel South Korea Switzerland Sweden Japan Austria Germany Denmark USA Belgium Finland OECD France Netherlands China Norway Iceland Slovenia Czech Republic Singapore Australia Canada Hungary Estonia Italy New Zealand Spain Luxembourg Poland Greece Ireland Russia Croatia Turkey Lithuania Slovak Bulgaria Latvia Malta Cyprus Romania Argentina Ukraine Chile Mexico Colombia Brazil Costa Rica Egypt India Kazakhstan Malaysia Saudi Arabia South Africa Portugal Source: World Bank estimates based on OECD (2021), OECD Science, Technology and Innovation Outlook 2021: Times of Crisis and Opportunity. Low investment is reflected in Argentina’s low this virtuous process of dynamic reallocation of levels of innovation and R&D spending – sources resources which would allow it to achieve higher and of sustained high growth rates in developing sustained growth rates. economies. Since the 1980s, high R&D intensity, as well as a strong share of business spending Within this framework, the capital stock per on R&D, have become characteristics of high- person has grown very slowly in Argentina, growth developing economies, playing a key role showing even poorer behavior than the regional in a country’s ability to move into higher income average. Between 1960 and 2019, Argentina categories (Primo Braga et al., 2009; Gurcanlar et increased its capital per capita at a rate of just 1.2 al., 2020). Investment and innovation allow for the percent per year. This figure is half the OECD average production of new ideas and technologies, opening (2.3 percent per year) and is even lower than the up commercialization opportunities which translate regional average (1.9 percent, Figure 1.31). into positive dynamic growth benefits. These occur via the reallocation of resources to growing firms, 1.4. Argentina has decoupled a process that can account for as much as half of emissions from growth, but economic growth (Andrews and Criscuolo, 2013). In emissions intensity is a challenge Argentina, R&D represented barely 0.5 percent of GDP in 2019, well below its comparator countries, Greenhouse gas (GHG) emissions have decreased especially South Korea (at 4.6 percent of GDP, Figure over the last decade, driven by a deceleration in 1.30). This limits the potential for setting in motion deforestation. The largest contributors to Argentina’s A NEW GROWTH HORIZON FOR ARGENTINA 37 Figure 1.31 Figura 1.31. Per capita capital stock has also shown slow growth In billions of 2017 US$ PPP (1960-2019) 120,000 1961-2019 2019 YoY % chg. Avg. vs 1960 100,000 2.3% 274.3% 80,000 3.6% 697.8% 60,000 3.5% 652.6% 40,000 1.9% 236.9% 20,000 1.2% 101.6% 0 1960 1962 1964 2196 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Argentina OECD New HICs Dynamic Asia Regional (without Argentina) Source: World Bank estimates based on IMF Investment and Capital Stock Dataset, 1960-2019. GHG emissions are the agriculture and energy 10 percent, a process driven entirely by agriculture sectors (Figure 1.32). GHG emissions reached 366 and forestry and other land uses in the context of million tons of carbon dioxide equivalent (MtCO2e) in deceleration in deforestation (Figure 1.33); emissions 2018, according to the latest available information.11 from other sectors remained stagnant or even The energy sector represents half of total emissions increased.12 Emission reductions were achieved at (51 percent), including the energy sector (16 the same time that the agriculture sector expanded percent), transport (14 percent), manufacturing and increased its participation in total value-added.13 and construction (9 percent), burning fuels by other However, further mitigation gains could be obtained sectors (9 percent) and fugitive emissions (3 percent). from this sector, as sustainable soil practices could In turn, the agriculture sector is responsible for 39 increase carbon sequestration. In addition, options percent of emissions, comprising livestock activities are available for reducing the emissions intensity (22 percent), as well as agriculture, forestry, and of the livestock sector, including improving pasture other land use (17 percent). Between 2012 and 2018, quality, animal health and grazing management the total reduction in overall GHG emissions reached (World Bank Group, 2022). 11  Data from the National Inventory of Greenhouse Gas (GHG) Emissions published by the Government of Argentina in 2021, with data up until 2018. 12  The reduction of GHG emissions in the agricultural sector followed the enactment in 2007 of Forestry Law 26,331, protecting 80 percent of native forests and paving the way for a reduction in deforestation. However, if the analysis is undertaken using 2010 as the base period, the reduction in overall GHG emissions is lower (2 percent), because of the increase in emissions between 2010 and 2012. According to Egolf (2017), there is evidence of an increase in forest fires in the period 2009-2011, during the transition period following the approval of Law 26,331 (World Bank Group, 2022). 13  Agricultural value added increased at an average annual rate of nearly 4 percent between 2012 and 2017 (before the contraction registered in 2018 in the context of a severe drought). In this period, the share of the sector (in AR$2004) increased from 7.6 percent to 9 percent. 38 A NEW GROWTH HORIZON FOR ARGENTINA Figure 1.32 Figure 1.33 GHG emissions have declined in the last decade Figura 1.32. Emissions decline has been driven by the forestry Figura 1.33. sector MtCO2e by sector (1990-2018) Contribution to GHG emissions variation, percentage points (2012-2018 450 2 1.0 0.7 0.7 0.2 0.1 400 0 -0.2 -0.3 -0.3 350 -2 Percenrage points 300 -4 250 -6 200 -8 150 100 -10 -10.2 50 -12 -12.0 0 -14 1992 1994 2012 2014 2016 2018 Industrial processes and product use Livestock Waste Manufacturing and construction Fugitive emissions* Burning fuels by other sectors Energy industries Transport Agriculture, forestry and o.l.u TOTAL 1990 1996 1998 2010 2000 2002 2004 2006 2008 Agriculture, forestry and other land uses Transport Fugitive emissions from solid fuels and gas and oil ind. Livestock Manufacturing and construction Industrial processes and product use Energy Industries Burning fuels by other sectors Waste TOTAL Source: World Bank, based on data from GoA (2021), Inventario Nacional de Source: World Bank based on data from GoA (2021), Inventario Nacional de Gases de Efecto Invernadero. Gases de Efecto Invernadero. Note: *Fugitive emissions from solid fuels and gas and oil industry; o.l.u=other land. GHG emissions have decoupled from economic 1.34). The international benchmark shows Argentina activity and emission intensity has declined, but ranking mid-table for emissions intensity for all remains high. In the period 2000-2018, Argentina countries for which information is available (nearly decoupled its GHG emissions from its economic 190), but showing improvements since 2010.14 Going activity. GHG emissions increased less than GDP forward, there are concerns over whether further over the period, indicating a reduction in emissions reductions are attainable, particularly if gains in intensity (ratio between GHG emission and GDP) deforestation reach a ceiling. Making efforts to invert of 29 percent. During the period 2012-2018, GDP the trend across all sectors would diversify emission only increased 0.6 percent, but emissions declined, reductions and ensure they do not depend on a leading to a reduction in emission intensity of 11 single driver (World Bank Group, 2022). In this sense, percent. Even so, Argentina has a higher emission boosting GDP growth will mean obtaining efficiency intensity than all its peers, except Malaysia (Figure gains, reducing emissions per unit of output. 14  For international comparisons of emissions intensity, data is taken from Climate Watch Data Explorer (World Resource Institute), which reports Argentina’s emissions intensity at 771.6 tCO2e per million of GDP in 2018 (higher than the figure reported by the Government of Argentina of 515 tCO2e per million of GDP measured in 2004 AR$). A NEW GROWTH HORIZON FOR ARGENTINA 39 1.34. Figura 1.34 Figure Emissions intensity remains higher than most peers Emissions (tCO2e) per GDP unit, 2018 1400 1200 tCO2e/million GDP 1000 800 600 400 200 0 OECD Europe and Central Asia South Korea Australia Mexico Poland LAC East Asia and Pacific Brazil Argentina Malaysia South Asia Source: Climate Watch-World Resource Institute (WRI). 1.5. Policy recommendations to restore fiscal sustainability while curbing procyclicality. Simultaneously, strengthening To foster sustainable growth and mitigate traditional automatic fiscal stabilizers such as economic volatility, it is imperative to curtail fiscal unemployment insurance system and the personal procyclicality and reestablish fiscal policy as a income tax assumes vital importance in enhancing key instrument for macroeconomic stabilization. the overall resilience and adaptability of fiscal policy On the spending side, which has emerged as the to economic shocks. primary contributor to fiscal procyclicality in recent decades, it is crucial to address the procyclical bias Boosting GDP growth will also require reducing in key budgetary components, notably pensions and emissions per unit of output. There are the wage bill. In particular, reforming the pension opportunities for decarbonization (climate change indexation formula to safeguard the real value mitigation) across the whole-of-the economy, as of benefits against unexpected shifts in inflation detailed in World Bank Group (2022). 15 Regarding becomes paramount in mitigating fluctuations. the energy sector, it is crucial to develop a Moreover, a more comprehensive pensions reform is consistent medium-term plan that include also critical to better align contributions to benefits relationships between electricity production, oil and avoid relying on ad hoc pensions moratoriums. and gas extraction and transport electrification, to Furthermore, implement effective fiscal rules, with progressively phase out thermal power production specific guidelines for prudent public staffing policies, and scale up renewable. In addition, short term including institutional agreements with subnational options for energy efficiency can be adopted in administrations, emerges as a critical instrument the residential, commercial, manufacturing and 15  The World Bank Country Climate and Development Report for Argentina provides details on decarbonization priorities. See section 3.2 (World Bank Group, 2022). 40 A NEW GROWTH HORIZON FOR ARGENTINA public sectors, for which is important to strengthen and methane emissions, while the adoption of regulations for new buildings and implementing sustainable soil management practices could efficiency standards for appliances and heating also mitigate national agricultural emissions systems. Emission efficiency gains can also be and energy-efficient cold chains and storage achieved in agriculture through the adoption of can reduce food loss and waste, energy use, and climate-smart agriculture practices for reducing therefore emissions. Finally, on the transport emissions and increasing carbon sequestration, sector, there are opportunities for efficiency gains while maintaining the competitiveness and leading in the freight sector - including the improvement position that the country has as food exporter. of multimodality, upgrading the freight railways, Improving pasture quality, animal health, and improving the efficiency of road logistics and grazing management could reduce both CO2 improving freight transport access to urban ports. Table 1.2 Policy recommendations 1. Reduce fiscal procyclicality • Reform the pensions indexation formula to better protect the real value of benefits for unexpected shifts in inflation. • Avoid relying of ad hoc pension moratoriums by better aligning contribution to benefits. • Implement effective fiscal rules for sustainability, with specific guideline for prudent public staffing policies. • Strengthen traditional automatic fiscal stabilizers, such as unemployment insurance and personal income tax. 2. Reduce emissions intensity • Develop a consistent plan for the energy sector while adopting short term energy efficiency measures and standards in the residential, commercial manufacturing and public sectors. • Adoption of climate-smart agriculture practices for reducing emissions and increase carbon sequestration. • Obtain efficiency gains in the transport freight sector through upgrading the freight railways, improving the efficiency of road logistics and improving freight transport access to urban ports. 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Government of Argentina. Araujo, Sonia and Pui Shen Yoong. 2023. “Measuring Gurcanlar, Tugba, Alberto Criscuolo, Daniel Gomez Gaviria natural capital in Argentina and incorporating it in and Xavier Cirera. 2020. Spurring Innovation-Led growth analysis”. CEM Technical Background Paper, Growth in Argentina: Performance, Policy Response, unpublished. and the Future. The World Bank Group. Barroso, Rafael and Chenli You. 2019. Country Economic Heymann, Daniel. 2007. “Macroeconomía de las Promesas Memorandum for Sao Tome and Principe - Background Rotas.” (Macroeconomic of broken promises). Revista de Note 1: Economic Growth and Volatility in São Tomé and Economía Política de Buenos Aires 2:27–53 Príncipe. The World Bank Group. Hnatkovska, Viktoria and Norman Loayza. 2003. “Volatility Beylis, Guillermo, Roberto Fattal Jaef, Michael Morris, and growth”. Policy Research Working Paper Series 3184, Ashwini Rekha Sebastian, and Rishabh Sinha. 2020. The World Bank Group. 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Southern Economic Journal, 71(3): 582-591. Ramey, Garey and Valerie A. Ramey. 1995. “Cross country evidence on the link between volatility and growth”. National Bureau of Economic Research Working Paper, 4959. Sachs, Jeffrey and Andrew Warner. 2001. “The curse of natural resources”. European Economic Review 45(4- 6): 827-838. United Nations Development Programme (UNDP). Human Development Report 2020: The Next Frontier: Human Development and the Anthropocene. UNDP, 2022. Végh, Carlos A., Daniel Lederman and Federico R. Bennett. 2017. Leaning Against the Wind. Fiscal policy in Latin America and the Caribbean in a Historical Perspective. The World Bank Group. A NEW GROWTH HORIZON FOR ARGENTINA 43 2 CHAPTER Enhancing Trade Integration for Competitiveness and Growth 2.1. Export performance is disappointing Argentina has much to gain from integrating into the world economy. International trade can help raise growth and improve living standards. Greater trade integration can boost productivity by shifting production toward sectors and firms with greater comparative advantage and higher efficiency, expanding the extent of markets and creating opportunities for overall output and employment. Trade liberalization also makes a wider range of intermediate inputs available, lowering costs and increasing firm competitiveness, and enhancing investment, technological spillovers, innovation, and other dynamic effects that can accumulate over time. For consumers, greater trade integration can also lead to lower prices and a wider and increasing variety of goods and services, leading to higher real incomes and a greater choice of consumption goods and services. 44 A NEW GROWTH HORIZON FOR ARGENTINA However, Argentina has one of the most closed Figure 2.1 trade regimes in the world. The country has one of Argentina’s Figura 2.1. trade-to-GDP ratio is one of the lowest Figura 2.2. the lowest trade-to-GDP ratios globally—a measure in its income group of trade openness. It is also one of the lowest among countries with comparable income levels (Figure 2.1). Trade to GDP and income per capita, 2019 Observed vs. pr And while geography partly explains Argentina’s low openness ratio, its trade openness is still 43 400 2 percent below its predicted value after controlling 1.6 Ln(Observed trade) - Ln(Predicted trade) for geographic remoteness and other factors 1.2 300 determining trade flows (Figure 2.2). 0.8 0.4 Percent Argentina’s trade performance has tended to 200 0 deteriorate over time, and the country has lost -0.4 competitiveness in global markets. Even though -0.8 100 global demand has grown for Argentina’s main -1.2 export sectors in a period marked by stagnant -1.6 Argentina growth in Argentina (e.g food, beverages and 0 -2 6 7 8 9 10 11 12 6.5 tobacco and agriculture, forest and fishing, Figure Log of GDP per capita (PPP adjusted) 2.3). Yet, Argentina’s has lost market share across Source: Estimaciones del Banco Mundial basadas en los IDM. the board. Its overall share of trade in GDP has in general declined in recent decades, reaching its lowest point in 2015 (Figure 2.4). More recently this Figura 2.1. Figure 2.2 Figura 2.2. measure has started to climb, but is still below its Trade openness is well below potential historical average. The most recent three-year Trade to GDP and income per capita, 2019 Observed vs. predicted trade by per capita GDP average (2019-2021), at 32 percent, is about 10 percentage points below the average for the early 400 2 2000s. Argentina has also been losing its global 1.6 market share, especially since 2009, as its exports VNM Ln(Observed trade) - Ln(Predicted trade) 1.2 have300 grown at a lower rate than global exports 0.8 (Figure 2.5). THA MYS 0.4 CHL PHL PER BRA HUN CZE Percent SVK KOR 200 0 LVA EST Although the weak export performance can be IDN POL -0.4 CRI partly explained by the boom-and-bust nature of COL URY ARG HRV -0.8 commodity 100 price movements, volume exports have -1.2 also underperformed (Box 2.1). In the most recent -1.6 years (2018-2019), exports in Argentina Argentina grew 0 -2 somewhat 6 faster 7 than 8 global 9 exports. 10 While has 11 this12 6.5 7.5 8.5 9.5 10.5 11.5 seen it gain some lost terrain, the cumulative losses Log of GDP per capita (PPP adjusted) Ln(GDP PPP per capita, 2019) over the last decade dominate overall. Source: Hallak and Araujo (2021). Note: The figure compares Argentina’s observed foreign trade with its foreign trade as predicted by a gravity equation that includes usual controls such as GDP and GDP per capita, bilateral distance among trading partners, indicator variables for country pairs that share a border, a common language, or a colonial heritage, as well as an indicator variable for landlocked countries. Country’s income level is measured by per capita GDP in purchasing power parity terms. A NEW GROWTH HORIZON FOR ARGENTINA 45 2.3. Figura 2.3 Figure Argentina has lost market share in all its export categories (2012-2019) 10 8 Chemical, rubber, Average annual changes in world’s exports plastics and 6 Food, beverages Agriculture, hunting, fuel products and tobacco forestry and fishing Transport 4 equipment Basic metals and (percentage) 2 fabricated metal products 0 Manufacture of coke, -2 refined petroleum products and nuclear fuel -4 Mining and quarrying -6 (non energy) -8 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 Change in Argentina’s share of world export (in percentage points) Source: WITS, World Bank Group. Note: The figure compares world demand growth across industries (Y-axis) with Argentina’s market share growth in these industries (X-axis). World demand has growth for all industries above zero on the Y-axis (e.g. food, beverages and tobacco). World demand has shrunk for those industries below zero on the Y-axis. The size of the bubbles represents the share of each industry in Argentina’s exports. PP=percentage points. Figure 2.4 Figure 2.5 Figura 2.4. Figura 2.5. Trade’s contribution to GDP has declined Argentina has been losing global market share % share of trade in GDP in Argentina (2002-2021) Argentina’s export growth as % of world growth (2006-2020) 45 40 30% 35 20% 30 10% 25 Percent 0% 20 -10% 15 -20% 10 5 -30% 0 -40% 2008 2010 2012 2014 2016 2018 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Change in Argentina’s Change in world export growth export growth Source: World Bank Group WDI. Source: World Bank Group Measuring Export Competitiveness. 46 A NEW GROWTH HORIZON FOR ARGENTINA BOX 2.1. ARGENTINA’S EXPORT PERFORMANCE IS WEAK, AS MEASURED BOTH BY VALUE AND QUANTITY Argentina’s export basket remains concentrated in agricultural and other natural resource- based products. Primary agricultural products represent nearly 30 percent of total exports, while manufactured agriculture-based products represent slightly below 40 percent, and oil and energy about 6.5 percent. The soy sector (soybeans and related products, such as soy oil and soybean flour) is the largest, accounting for 27.5 percent of total exports in goods in the past five years. Cereals (mainly corn and wheat) are the second largest export, having increased their share in total exports from 13 to 18 percent between 2017 and 2021. Commodity exports are more susceptible to price volatility than other products. Their performance in terms of export value can be attributed in part to the sharp drop in prices at the end of the commodity super cycle.16 However, Argentina’s exports have also deteriorated when measured by volume. Figure B.2.1.1 shows the volumetric evolution of Argentinean exports since the mid-1990s, while Figure B.2.1.2 compares growth in export quantities over the last decade. Figure B.2.1.1 Figure B.2.1.2 Figura B.2.1.1 Growth and B.2.1.2 in export volumes have deteriorated... …Figura is sluggish compared to other countries (1994-2020) % export growth by volume (2007–2019) 120 100 95 87 85 100 80 70 80 61 Index (2007=100) 60 57 57 % change 51 60 48 54 45 40 37 37 40 28 29 23 19 21 21 20 20 13 8 1 0 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Argentina Chile Costa Rica OECD Brazil Malaysia Thailand Hungary Indonesia Uruguay Philippines Colombia Croatia Estonia Czech Rep. Slovenia Peru Slovakia Mexico South Korea Poland Latvia Quantities Real exchange rate Source: UNCTAD. Source: UNCTAD. 16 16  A sustained period of high commodity prices, including oilseeds and cereals of which Argentina is a major exporter, took place in the beginning on the 2000s. This period came to an end in the beginning of the 2010 decade. A NEW GROWTH HORIZON FOR ARGENTINA 47 Argentinean exports are dominated by several metrics, Argentina is behind other countries homogeneous products with little scope for in value chain formation, and its participation differentiation. Commodities continue to make up in GVCs is particularly low in terms of backward the bulk of Argentina’s exports. About three-quarters linkages, which are typically associated with of Argentina’s exports consist of homogeneous learning and technological upgrading. The share of goods that compete with prices in global markets high technology exports in Argentina is one of the and are susceptible to price volatility (Box 2.1). The lowest of its peers (Figure 2.7). In 2015 foreign value country’s exports of both differentiated and non- added accounted for only 7 percent of Argentina’s differentiated products have stagnated over the last gross exports, significantly below the share in more decade (Figure 2.6). Not being able to diversify its GVC-integrated LAC economies such as Mexico (36 exports to more differentiated products exposes the percent).19 Forward trade linkages, measured as the country to external shocks and exacerbates macro- share of exports that Argentinian domestic value economic vulnerabilities (Chapter 1). For instance, in added represents in foreign exports, are somewhat both 2019 and 2009, agricultural goods (principally larger, having attained 16.6 percent in 2015. The oilseed products, beef, and cereals) were the main largest sectoral components in this metric relate exports. While the export value of the top agricultural to value added in the chemical sector (e.g., the products has grown in the last decade, the values production of petroleum products and alcohols) and for others have fallen, increasing the concentration foodstuffs (e.g., soybean products) that are used as of exports among these principal exports. Vehicles inputs in other countries’ exports. are Argentina’s top differentiated manufacturing export (discussed in detail in Chapter 4), and exports GVC linkages have also declined in the last decade, have grown at an average annual rate of 9 percent from an already low base. Backward participation – doubling their export share.17 In general, however, in GVCs in 2015 was lower than a decade earlier, as export products are highly concentrated in primary Argentina’s exports used fewer foreign inputs (Figure and resource-based products, and this trend has 2.8). This trend is observed across all economic increased over time.18 sectors. Transport equipment (vehicles) and electronics are the sectors with the largest share of Participation in global value chains (GVCs) global inputs embedded in Argentina’s exports; yet is low. GVC-related trade offers countries new these are also the sectors with the largest drop in opportunities to integrate into the global economy, GVC participation. Forward linkages have remained providing entry points for higher value-added relatively more stable, with just a modest decrease exports of manufactured goods and services, from 17.4 percent in 2005 to 16.6 percent in 2015, helping developing countries reduce their reliance as exports continue to be dominated by basic on exports of unprocessed primary products. Yet, by commodities. 17  This category refers to trucks, which are mostly exported to Brazil. 18  For example, Argentina has become relatively less complex according to the Economic Complexity Index, where it has fallen from position 36 to position 53 over the period 2000-2020 (see Annex 2A). 19  Some non-OECD countries are included in the OECD’s trade in value added (TiVA) database (https://www.oecd.org/sti/ind/measuring- trade-in-value-added.htm). Other LAC countries with TiVA data include Brazil, where foreign value added in gross exports was 13 percent in 2015, Chile (14 percent), Colombia (13 percent), and Costa Rica (18 percent). All show higher GVC participation than Argentina. 48 A NEW GROWTH HORIZON FOR ARGENTINA Figure 2.6 Figure 2.7 Figura 2.6. Non-differentiated products represent most of Figura 2.7. exports make up a tiny and slow-growing High-tech Argentina’s exports share Exports by di erentiation (2007-2020) As % of manufactured exports, average and change (2012-2021) in pp 100 60 55 Average 2012-2021 (Percent of manufactured exports) 80.000 50 45 40 Growth 2012-2021 (Percentage points) 75 35 30 60.000 25 % non-di erentiated 20 USD millions 15 50 10 40.000 5 0 -5 -10 25 20.000 -15 -20 -25 -30 0 0 -35 -40 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ARG AUS BRA COR MEX MYS POL OCDE Nuevos PIA Asia dinámica ALC Di erentiated Non-di erentiated % Non-di erentiated Average 2012-2021 Growth 2012-2021 (sec. axis) Source: World Bank estimates based on Dirección General de Aduanas and Source: World Development Indicators. Bernini et al. (2018). Figura 2.8. Figure 2.8 Backward participation in GVCs has declined Foreign value-added content of Argentina’s exports (2005 and 2015) 30 2015 2005 25 20 15 10 5 0 Total Manufacturing Agriculture Mining Food and beverages Textiles and apparel Wood and paper Chemicals Basic metals ICT and electronics Machinery Transport Other manuf. Source: OECD Trade in Value Added Database. A NEW GROWTH HORIZON FOR ARGENTINA 49 Figure 2.9 Figure 2.10 Figura The 2.9. number of new exporters has constantly Figura 2.10.rates mean that the number of exporters High exit declined since 2002 has declined New firms per million inhabitants (1998-2015) Number of exporters and average entry and exit rates 140 16 35 120 14 30 Average Entry and Exit Rates (Percenage) New firms per one million inhabitants Number of exporters (thousands) 12 100 25 10 80 20 8 60 15 6 40 10 4 20 2 5 0 0 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Exporters Entry rate Exit rate Source: Licetti et al. (2018), Strengthening Argentina’s Integration into the Source: World Bank based on Dirección General de Aduanas. Global Economy: Policy Proposals for Trade, Investment, and Competition. World Bank Group. The number of exporters has been declining over 2.2. Trade costs and frictions limit time. At the micro level, the number of exporting Argentina’s export potential firms per capita has decreased continuously since the early 2000s (Figure 2.9). By 2015, the density of Argentina has several trade frictions that create exporting firms (i.e., the number of firms for the level an anti-export bias. These frictions affect the of population) was about a third of what it was a country’s competitive position on international decade earlier. As a result of this decline, the number markets and its prospects for export growth and of exporters per capita in Argentina is now among upgrading away from a limited number of traditional the lowest in the region, while the country had one exports. As mentioned above, distance to markets of the highest number of exporters per capita in the and other geographic conditions can translate LAC region in the early 2000s (Park et al., 2019). into high transportation costs. But Argentina’s The decline in exporting firms, which also holds in underperformance in trade goes beyond these absolute terms, can be tracked to a dramatic fall in factors. Its lack of trade facilitation measures entry rates for the period 2008-2019 relative to the affects the time, costs, and predictability of trade previous decade, to the point that the exit rate now operations at the border, further decreasing national exceeds the entry rate (Figure 2.10). competitiveness. There are a series of other trade 50 A NEW GROWTH HORIZON FOR ARGENTINA policy measures that further hinder the country is close to 15 percent and most products in the sector from greater integration into global markets and (about 88 percent) face tariffs of at least 10 percent. create an anti-export bias, including tariff and non- tariff measures that distort relative prices at home While the Mercosur common external tariff versus abroad. There are also information frictions was reduced in 2022, there is still room to and coordination failures that could be addressed modernize the tariff schedule to bring it closer to through more effective export promotion support. regional averages. In July 2022, Mercosur partners agreed to the first significant tariff reform since 2.2.1 A complex array of tariff and non- the incorporation of the common tariff scheme in tariff measures increase cost and time 1995. This reform implied the reduction of tariff in for traders Argentina for about 71 percent of tariff lines with non- zero duty rates.21 The resulting tariff is on average Tariff barriers are high in Argentina – more than 10 percent lower. While this is a welcome reform, double the level in other economies in the region, performed in a horizontal way, there is still room for such as those in the Pacific Alliance. As part of further negotiations to bring the average tariff closer Mercosur, since 1995 Argentina – along with the other Mercosur parties – has applied a common external tariff to imports from outside the bloc. The tariff Figure 2.11 scheme is high by international standards. On a most Figura 2.11. Tariffs in Argentina are higher than most of its favored nation basis, Argentina imposed an average comparator countries tariff of 13.4 percent in 2020. In comparison, tariffs Average MFN tari , in percent in the Pacific Alliance countries are on average 5.3 percent (Figure 2.11). 20 Argentina’s tariffs are among 16 the highest, along with Brazil and South Korea, of 14 its comparators. Furthermore, the common external tariff has stayed high for a long time, contrasting 12 with the experience of other countries that have 10 been reducing tariffs unilaterally. Mexico is a case in point: the country had average tariffs comparable to 8 Percent those of Argentina in 2008, but by 2016 had reduced 6 them by about half. The average tariff in Argentina 4 is in double digits in 10 out of 16 broad sectors of the tariff schedule (Table 2.1). The highest rates are 2 in the textiles and apparel and footwear sectors, 0 Argentina Brazil Chile Colombia Costa Rica EU Indonesia Malaysia Mexico Peru Philippines South Korea Thailand Uruguay Vietnam where average tariffs are around 26 percent. Not only is the average tariff high in these sectors, but nearly all products within these sectors face double- digit tariffs. Another sector with high levels of tariff Source: WTO/ITC/UNCTAD (2021), World Tariff Profiles, 2021. Note: MFN=most protection is food products, where the average tariff favored nation. 20  The Pacific Alliance is a trade bloc integrated by Chile, Colombia, Mexico and Peru. 21  All Mercosur countries reduced duties in 2,124 tariff lines from 2 percent to zero and reduced duties by 10 percent for another 4,762 tariff lines. Each country separately reduced tariffs by 10 percent in additional tariff lines (between 1,106 and 1,430). Argentina did not cut tariffs on additional products. A NEW GROWTH HORIZON FOR ARGENTINA 51 Table 2.1 Textiles and food products have the highest tariffs Average MFN tariff in Argentina by sector Av. Tariff % products with t>10% 01-05, Animal prod 9.4 6.7 06-15, Veg. prod 8.7 4.8 16-24, Food prod 15.3 88.3 25-26, Minerals 3.5 0.0 27, Fuels 0.3 2.3 28-38, Chemicals 7.3 29.1 39-40, Plastic, rubber 12.9 74.6 41-43, Hide and skins 12.8 39.1 44-49, Wood, paper prod 9.6 51.1 50-63, textiles and articles 26.1 94.0 64-67, Footwear, headgear 25.6 100.0 68-71, Stone, ceramic, glass 11.1 49.0 72-83, Base metals 12.0 69.8 84-85, Machinery, elect equip 11.5 64.1 86-89, Vehicles and transport 13.9 74.8 90-99, Misc 15.1 75.9 Source: World Bank estimates from TRAINS data. to that of regional peers. Furthermore, the revision excessively used in Argentina. While these technical excluded several sensitive products, predominantly regulations may impact trade flows, their stated in the textile and apparel, footwear, automotive, and intent is often to protect human or animal health, dairy sectors. Given that some of these products are workplace safety, the environment, or consumers. high-tariff goods, this reduction is increasing tariff On the other hand, NTMs such as quantity and price dispersion. These remaining distortions should be controls could interfere with the market pattern of taken into consideration in subsequent reforms. trade more directly. And in terms of this type of NTM, again Argentina shows an unusually high frequency In addition to tariffs, most import products in ratio, with about 65 percent of imports subject to Argentina are subject to non-tariff measures some quantity or price controls. (NTMs) that can add significant trade costs. According to UNCTAD data, most imports in Non-Tariff measures are not only prevalent Argentina are subject to technical measures— in Argentina – they can significantly restrict such as sanitary and phytosanitary measures and imports. On average, these measures raise the trade technical barriers to trade—across most products cost of imported goods as much as if the average (Figure 2.12). This is the highest frequency ratio of all extra tariff was 22 percent, based on price-gap peers, suggesting that these technical measures are estimations (Licetti et al. 2018). Similar to tariffs, 52 A NEW GROWTH HORIZON FOR ARGENTINA Figure 2.12 Figure 2.13 2.12. measures are significant Non-tariff Figura 2.13. in tariff lines subject to quantity controls Reductions Figura have been reversed Products subject to NTMs by type of NTM and peer country, Non-automatic import licenses in Argentina in percent 100 1.800 30 90 1.600 25 80 1.400 70 1.200 20 60 Tari lines 1.000 Percent Percent 50 15 800 40 600 10 30 400 20 5 10 200 0 0 0 Technical measures Quantity and price control 2016 2017 2018 2019 2020 Argentina Brazil Chile Costa Rica Non-automatic licenses Paraguay Peru Uruguay Share of imports (sec. axis) Source: World Bank estimates based on UNCTAD TRAINS-NTM data. Source: World Bank estimates based on Ministry of Production, Resolution 5/2015 and modifications. the largest restrictions are in manufacturing, where protected industries to the expense of economic the ad valorem equivalent on non-tariff measrues is welfare. Between 2012 and 2015 all merchandise about 26 percent.22 Together with tariffs, which are imports required import licenses.23 By the end of already high, the presence of these regulations can 2016, following the introduction of the Imports bring the trade cost of tariff and non-tariff measures Monitoring System (Sistema Integral de Monitoreo de close to 35 percent. Importaciones, SIMI), close to 1,600 tariff lines were affected, representing 25 percent of trade. Further Quantity controls for imports are prominent revisions brought this requirement down to close in Argentina. Import control in Argentina has to 1,200 tariff lines in 2018 and 2019 (Figure 2.13). been increasing in the last four years, driven by However, this downward trend in the number of macroeconomic constraints, and reflected in very products subject to non-automatic import licenses low levels of international reserves. While non- was reversed in 2020, as a strategy to halt the drain automatic licenses are justified for certain imports on foreign reserves. In October 2022, the SIMI system for safety reasons, such as hazardous imports, the was replaced by a new one, SIRA, consisting of a list of tariff lines subject to licenses includes goods case-by-case evaluation of import orders managed from tariff-protected sectors, such as textile and jointly by the tax collection agency, the Secretary apparel, machinery and equipment, paper products, of Trade, and the Central Bank (CB). This has led in and furniture. These controls, therefore, benefited practice to further import restrictions. 22  The ad valorem equivalent (AVE) of an Non-Tariff Measures represents the approximately additional costs that complying with the regulation entails for traders, as a share of the value of the product. See Cadot et at (2018) 23  This import licensing regime, known as the Declaración Jurada Anticipada de Importación (DJAI), was considered to be highly restrictive and non-transparent, and was challenged and determined to be WTO-inconsistent by the WTO Appellate Body in 2015. A NEW GROWTH HORIZON FOR ARGENTINA 53 Argentina has also been a major user of export for soybeans, 12 percent for corn and wheat, 4.5 taxes. Following the economic crisis of 2001, the and 3 percent for basic and intermediate industrial government of Argentina established an ad-valorem inputs respectively, and 5 percent for services.29 On tax on all exported products in 2002. 24 25 While the average, export taxes have reverted to their high measure was intended to be transitory, it remained 2015 levels. Several modifications to export taxes largely unchanged until the end of 2015, making have been made since 2020, which can be broadly Argentina one of the few countries to apply this characterized as raising or maintaining rates on soy tax widely. In 2015 export taxes accounted for products and other crops, while reducing rates or about 7 percent of total tax revenues, while import eliminating export taxes altogether in manufacturing duties represented less than half of that, at about 3 and non-crop agricultural products (“productos de percent.26 Argentina is one the countries to tax their las economías regionales”), as well as allowing for exports the most, both in terms of the number of reductions of exceptions according to firm size, products taxed as well as the average duty rate.27 favoring small and medium-sized enterprises (SMEs). Recognizing their negative impact on exports, export Export taxes on almost all goods were eliminated taxes for services have been eliminated since or reduced in 2016, but were increased again January 2022. The volatility of export taxes stems in 2018. In 2016 export taxes were eliminated for primarily from their use to reinforce federal revenue about 98 percent of tariff lines subject to such duties, collection during crises, via several decrees, as this is though they remained for certain products including the only tax collected by the federal government not soybeans and soybean products (soybean meals and subject to revenue-sharing federal rules. oil), certain fuel products (coal, gas, and biodiesel), skins and leather, and scrap paper and metals. These 2.2.2 Regional trade agreements are few products represented Argentina’s main exports. and relatively shallow Overall, the trade-weighted average export tax rate fell by nearly half, from close to 16 percent in 2015 Argentina has sat at the margins of regional to close to 8 percent in 2017. In 2018 export taxes integration arrangements, lagging behind peers were increased for all exports in Argentina as a fiscal in market integration and value chain formation. measure. Export taxes for biodiesel increased to 15 In contrast to the general trend around the world, percent, and as part of the package of measures the country has not increased its participation in to accelerate fiscal consolidation, all exports were preferential trade agreements in recent decades subject to a new tax of 12 percent.28 This tax was (Figure 2.14). Part of this reflects Mercosur in addition to any other applicable export taxes, membership, which limits Argentina’s ability to for example 18 percent for soy products and 15 negotiate bilateral trade agreements on its own, percent for biodiesel. In December 2019, export taxes having to seek consensus and coordination with all increased even further, with rates of 33 percent members (Gonzalez, 2021). 24  An ad valorem tax is based on the assessed value of a product, usually stablished as a percentage. 25  Resolution 11/2002 of the Ministry of Economy and Infrastructure. 26  Based on statistics from the Ministry of Finance (“Informe sobre la Recaudación Tributaria”). 27  Consolidated data on export taxes across all countries and products is less readily available than for import tariffs. Laborde, Estrades, and Bouët (2013) provide a recent compilation of 60 countries. Argentina has the second largest average export tax rate (9.1 percent) after Russia. 28  Decree 793/2018. For most products (9,669 tariff lines listed in Annex 2A), the export tax should be the lower of 12 percent or of 3 pesos per dollar of the FOB value of exports. For the remaining roughly 600 products, the tax should be the lower of 12 percent or 4 pesos per dollar of exports. 29  The export tax on services was eliminated in January 2022 with the goal of increasing jobs in the sector and inflows of foreign currency. 54 A NEW GROWTH HORIZON FOR ARGENTINA Figure 2.14 Figure 2.15 2.14. has fewer trade agreements than Argentina Figura within Mercosur is below other blocs Trade2.15. Figura comparators Number of trade agreements currently in force Intra-bloc trade as share of total trade, in percent 50 80 46 40 60 Number of trade agreements 30 30 22 40 20 20 20 14 15 15 15 15 11 12 20 10 8 8 9 0 0 EU Nafta Asean AfCFTA Mercosur Argentina Uruguay Brazil Philippines Indonesia Thailand Costa Rica Colombia Malaysia Vietnam Peru South Korea Mexico Chile EU Source: WTO. Source: Capital Economics and IMF. Argentina has also tended to negotiate shallower behavior – lack many other provisions generally agreements than regional peers outside of included in deep agreements that could be beneficial. Mercosur. For example, the scope of Argentina’s These include public procurement regimes, local agreements, such as those signed with India and content and export performance requirements for the Southern African Customs Union (SACU), is foreign direct investment, liberalization of trade in only partial, covering mainly tariff liberalizations services, and intellectual property rights (Hofmann and the elimination of certain non-tariff barriers. et al., 2017). Other provisions that could improve Deep free trade agreements (FTAs) go beyond these Argentinian firms’ position in foreign markets include traditional areas, and include provisions related to, customs simplification and trade facilitation; these inter alia, investments, services, intellectual property are also missing from most of these agreements.31 rights, the environment, etc. For example, about half of the agreements signed by Chile are deep trade Trade within MERCOSUR is also impaired. Not agreements with the European Union, United States, only is the MERCOSUR bloc one of the most closed Japan, Australia, New Zealand and other developed regimes for its trade with third countries, intra- economies.30 In Argentina, even the deeper free trade MERCOSUR trade is also affected by a number of agreements – such as those signed with Egypt and internal trade frictions related to NTMs. Non-tariff Israel that include elements such as the elimination of barriers in Mercosur are prevalent and restrictive, export taxes and the assessment of anticompetitive especially in Brazil and Argentina, and many of 30  Developed countries more commonly negotiate this type of agreement. 31  Lee et al. (2021) find that trade facilitation provisions improved the export performance of Peruvian firms participating in GVCs, increasing their probability of exporting, as well as their export values. A NEW GROWTH HORIZON FOR ARGENTINA 55 these measures affect intra-zone Mercosur trade. trading and therefore encourage them to venture As a result, the share of trade within Mercosur is low into exporting. Most countries in Latin America have by global standards. Nearly 16 percent of Mercosur made substantial progress in advancing VUCEs. exports are destined to other MERCOSUR nations Estimates show that the implementation of the (Figure 2.15). This is well below the 64 percent of VUCE in Costa Rica increased exports by 71 percent exports of EU nations that go to other members of between 2007 and 2013 by increasing the number that bloc, as well as the corresponding figures for of foreign buyers (Volpe Martincus, 2016). Sales per the NAFTA and ASEAN blocs. It is even below the buyer also increased, with larger impacts for firms 19.9 percent of African exports destined for other that, because of nature of their exports, required African nations currently negotiating the African permits from more public entities. Continental Free Trade Agreement (AfCFTA). Despite its importance for trade facilitation, 2.2.3 Trade compliance procedures tend development of the VUCE has not progressed as to be cumbersome much as expected in Argentina. The country is one of the latest adopters of the VUCE project within Lack of simplified procedures and streamlined the region, and lags behind most other countries processes at ports prevents the seamless flow in its implementation (Veiga and González, 2021). of cargo in and out of Argentina. One of the most In particular, it is still not yet possible to submit important ways to improve this would be the creation all the required documentation through VUCE, and of the “Foreign Trade Single Window” (known by its customs’ and VUCE’s systems are not yet sufficiently Spanish acronym, VUCE). VUCEs are used worldwide interconnected. In fact, only 30 percent of border to speed up export and import procedures by allowing agencies have participated in Argentina’s VUCE, firms to submit all necessary documentation through compared to 100 percent in countries like Colombia, a single platform. They provide certainty and Costa Rica, and El Salvador, and only 5 percent of transparency to firms (particularly exporters) about export procedures were covered by the single window the different procedures they will need to follow for (Table 2.2). Table 2.2 La adopción de la Ventanilla Única de Comercio Exterior ha sido lenta Situación de los regímenes de ventanilla única de comercio exterior (2015) Border agencies Of which in SW % Export procedures Of which in SW % Argentina 40 12 30 245 12 5 Chile 21 11 52 50 43 86 Colombia 21 21 100 - - - Costa Rica 16 16 100 105 105 100 Ecuador 24 20 83 142 138 97 El Salvador 9 9 100 54 42 78 Honduras 11 9 82 - 8 - Paraguay 15 13 87 46 44 96 Peru - 21 - - 260 - Trinidad and Tobago 18 16 89 - 38 - Uruguay 24 9 38 100 36 36 Source: Volpe Martincus (2016), Out of the Border Labyrinth: An assessment of trade facilitation initiatives in Latin America and the Caribbean. Inter-American Development Bank. 56 A NEW GROWTH HORIZON FOR ARGENTINA In addition to bureaucratic procedures, firms that the AEO program created in 2011 induced a 73% participating in foreign trade face regular increase in exports between 2011 and 2014. In the shipment controls and screening due to security case of Colombia, although launched more recently and legality concerns. These customs interventions (in 2015), the AEO program is also associated with may generate additional trade costs, undermining better export performance in terms of export value, products’ competitiveness. The Authorized Economic number of destinations, and number of products. Operator (AEO) is an international program used to reduce these costs for eligible firms based on Other standard trade facilitation regimes are also requisites such as financial solvency and compliance lagging behind, particularly those targeted at new with customs requirements, taxes, and security exporters. One notable example is the simplified standards. Firms included in AEO programs receive regime for small exports, Exporta Simple. This regime several benefits in terms of trade facilitation, such as facilitates and speeds up the export process for new less frequent inspections, quicker processing times exporters sending very small shipments through for shipments, and simplified procedures for export international couriers. Volpe Martincus (2016) finds or import operations. In Argentina, the AEO program that the implementation of this program in Peru was launched very recently – October 2017 – and helped create new exporters, and those that later by 2020 included only 49 firms. Other countries, became regular exporters increased in size, survived including some in the region, have longer standing longer, and diversified their export destinations. programs, and some – such as Mexico and Brazil – Despite being a key instrument for lowering cover a substantial number of firms (Figure 2.16). In entry barriers for new exporters, in Argentina its the case of Mexico, Volpe Martincus (2016) estimates implementation is only incipient. Launched officially Figure 2.16 Figura 2.16. Argentina is behind in its adoption of the Authorized Economic Operator program Number of AEOs, 2020 1200 1.057 915 840 800 701 Number of AEOs 470 430 384 400 276 200 145 165 118 130 46 49 65 70 19 30 32 38 0 Chile Costa Rica Estonia Croatia Latvia Argentina Uruguay Vietnam Slovakia Slovenia Malaysia Colombia Peru Czech Rep. Thailand Hungary Indonesia Brazil South Korea Poland Mexico Source: World Customs Organization and European Commission. A NEW GROWTH HORIZON FOR ARGENTINA 57 in December 2017, Exporta Simple allows firms to 2.2.4 Lagging port and connectivity export up to US$ 15,000 per shipment and up to systems is a hindrance for US$ 600,000 annually. The latest data (October competitiveness 2019) shows that the platform was used by around 1,500 users to export US$ 2 million per month International comparisons show Argentina’s (Fernández, 2021). However, since 2020 the use of logistics performance to be intermediate, and the this regime has declined, in part because exporters country is progressively falling in the rankings. shipping through this platform have been required to The Logistic Performance Index (LPI) shows that pay export taxes previously exempt for this regime Argentina fell from a ranking of 45 in 2007 to 62 in (the exemption was reinstated in late 2021). 2018 and is behind Brazil, Mexico, and Chile, as well as most countries in Europe and Asia. 32 However, it is Simplified regimes for temporary admission are similar to many other countries in the region (Figure also lacking. Trade facilitation regimes for importing 2.17). Argentina’s LPI score in 2018 was significantly goods for processing and re-exportation do not lower (at 59 percent) than the score for Germany, the work fluidly or have not been yet implemented in top performer. Argentina. One salient case is the ATA carnet, an international document used to allow duty-free Lack of infrastructure investment has dented temporary importation of goods that will be used Argentina’s logistic competitiveness. The LPI score and re-exported without transformation within only shows a minor decline from 3.1 in 2010 to 2.9 12 months of entering the country. The imported in 2018 (Figure 2.18). The main reason for the fall in goods can be used to produce exportable products its rank position is the relative improvement of other such as advertising films, for organizing artistic and countries during the period. Argentina’s ranking in sporting events, or simply as commercial samples. the LPI has declined across various components. This international document has been signed by 87 The main decline is in customs procedures (where countries and territories – including Brazil, Chile, and there is ample room for improvement as discussed Mexico – but not by Argentina. If it did so, it would above). However, its infrastructure ranking has also facilitate exports in sectors such as audiovisual been declining. As a consequence of Argentina’s services that often require the temporary entry of fragile macroeconomic conditions, investment in imported equipment. public infrastructure –including export-related infrastructure such as ports, roads, river dredging, The effectiveness of the national trade facilitation and railways – has been limited. Trains are slow and committee (NTFC) seems to be limited. The unreliable, and only used to transport commodities NTFC was created in 2019, following commitments in bulk. Ports are expensive and roads require made by the country to the WTO Trade Facilitation investment in maintenance and upgrading. Digital Agreement. However, so far, its operability has been connectivity is also behind that of neighboring very limited. Political support will be necessary for countries. Public investment efficiency gains could it to fulfill its important role of linking public actors be achieved through public investment management with each other and with private stakeholders. that focuses in particular on strategic planning for 32  LPI data are gathered through a worldwide survey of logistics professionals on how easy or difficult they experience trade logistic along six dimensions: 1) The efficiency of customs and border management clearance; 2) The quality of trade- and transport-related infrastructure; 3) The ease of arranging competitively priced international shipments;.4) The competence and quality of logistics services; 5) The ability to track and trace consignments; 6) The frequency with which shipments reach consignees within the scheduled or expected delivery time. Then, data is aggregated on a single indicator (score), allowing for comparisons between countries, regions, and income groups. Rankings are based on this indicator (being 1 the country with highest score). The overall LPI score is a more telling indicator than the LPI rank, because scores are more accurate and provide a better basis for comparison over time (Arvis et al, 2018). 58 A NEW GROWTH HORIZON FOR ARGENTINA Figure 2.17 Figure 2.18 2.17. logistic performance Argentina’s Figura is below most of has declined over time …and2.18. Figura its peers… Logistic Performance Index (2018), % of highest performer score LPI score and ranking for Argentina 2007 2010 2012 2014 2016 2018 90 0 3.2 Country performance as % of highest performer score 82 84 80 79 10 3.1 75 76 69 71 72 72 72 20 70 66 67 3.0 62 63 64 59 59 61 30 60 56 57 2.9 53 53 40 LPI Score LPI Rank 50 50 2.8 40 60 2.7 30 70 2.6 20 80 10 90 2.5 0 100 2.4 Uruguay Peru Costa Rica Latvia Argentina Philippines Colombia Brazil Slovakia Mexico Croatia Indonesia Malaysia Vietnam Estonia Slovenia Chile Thailand Hungary Poland South Korea Czech Rep. Customs Infrastructure Services LPI Total Score (sec. axis) Source: Arvis et al. (2018), Connecting to Compete 2018: Trade Logistics in the Source: Arvis et al. (2018), Connecting to Compete 2018: Trade Logistics in the Global Economy. World Bank Group. Global Economy. World Bank Group. Note: A decline in the score and ranking implies a worse performance. resource allocation, and which frames decisions Improvements are needed to enhance waterway within a medium-term perspective (World Bank infrastructure and operating conditions. The Group, 2021; IMF, 2022). Plata and lower Parana waterway must offer channels with adequate depth, width, and waiting The navigation system performs unevenly and maneuvering areas. The improvements made across various areas of activity. Travel speeds on in recent decades were adequate to manage the waterways is slow, especially for bulk carriers and progressive increase in the country’s foreign trade tankers. The country is also going backwards in its flows. However, several next steps are needed to integration of its liner services within global maritime address deficiencies in nautical access to river ports networks: in the UNCTAD connectivity ranking33, the and the loss of direct line services. These include country has fallen from position 34 to 57 in the last increasing the draft allowed in the waterways, 15 years. The performance of the container terminals new crossing sections, and new anchorage areas. is mixed; its operational performance is generally The country also needs a strategic plan that goes low when compared to with other ports of reference. beyond the Puerto Nuevo terminals in the Buenos The main reasons are the inadequate configuration Aires port for the future movement of containerized of the port space, outdated infrastructure, and an cargo, taking into account the multiple terminals inefficient use of existing resources (or insufficient in the area, the current restrictions (on nautical cargo). The ports dedicated to agri-bulk, on the other access, maneuvering areas, dockside depths, yards, hand, are generally very efficient. etc.), the outlook for demand, and trends that will 33  UNCTAD Liner Shipping Connectivity Index , https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx. A NEW GROWTH HORIZON FOR ARGENTINA 59 condition activity, particularly the behavior of the associated logistics are increasingly managed line services market. through digital processes that require high quality digital infrastructure covering the main nodes and Railways are an important component of the most important freight corridors with quality Argentina’s logistics system, particularly apt for service (bandwidth, latency). Digital tracking and transporting bulk volumes, but are performing inventory management are key components of the well below potential. Half of the 15,000 km modern transfer of goods between countries and operational network is operated by three private clients. IT technologies are key to digitalize and freight concessionaires, with the other half run by automate operations, as well as to enhance security. a state-owned enterprise (SOE) that covers the The country should continue the expansion of fiber narrow-gauge system and two private concessions optics networks and internet coverage in the main that were reverted to the government. Altogether, logistics corridors and rural areas, particularly the system moves 5.2 percent of the total domestic outside of the Pampas region. High level IT services in tons-km, mainly grain and byproducts, as well as the main hubs will be key for enhancing connectivity minerals and construction materials, all as bulk between all components of the global supply chain. cargo. The railways could make a useful contribution to reducing logistics costs, particularly in a context Enhancing, improving, and preserving the road of growing grain and minerals exports. network would also benefit trade logistics. Roads are essential for all freight movements in the country The country is in the process of establishing a (domestic, exports, imports, in transit), as well as for new open-access regulatory model governing passenger transport. Road transport is present in around 60 percent of railway freight, but is facing most parts of the supply chains that deliver export a headwind. The regulatory model is facing several products. Action should focus on adding capacity to difficulties. These include the access charge private some primary links, generating B-trains corridors, operators will have to pay to the SOE managing the creating a robust rural roads improvement program, rail network and an investment plan to enhance and conserving bridges.34 infrastructure condition to allow for a complete open access model. The few results obtained so far and the Air freight in Argentina, both international and proximity of the termination of private concessions domestic, is limited. Before the pandemic the risk weakening railway management instead of value of goods transported by plane represented improving it, at a time when it needs it most. A 3 percent of exports and 11 percent of imports. particularly critical issue is the massive investment Exports in 2021 reached 81,700 tons (77,700 tons of in infrastructure required as a precondition for imports)35. Air freight is mostly carried in the holds implementing and ensuring the safe, efficient, and of passenger planes (around 80 percent). The main reliable operation of the open-access model. goods transported are pharmaceutical products, electronics, auto parts, fresh products (fruits, fish Argentina is also facing the challenge of improving and shellfish), special cargo (satellites, jets, etc.) its digital infrastructure. Digital infrastructure is and express mail and packages. Express transport needed for digital trade (or trade that occurs over is one of the segments with the greatest prospects digital networks). And logistics chains and their on the world market, based on the development of 34  B train means a combination of vehicles composed of a truck tractor and a semi- trailer, followed by another semi-trailer attached to the first semi-trailer. 35  The sources is the National Civil Aviation Adminitration (Administracion Nacional de Aviacion Civil), December 2021 Monthly Report, https://datos.anac.gob.ar/estadisticas/. 60 A NEW GROWTH HORIZON FOR ARGENTINA e-commerce. The low level of participation of air costs. Microeconomic reforms, trade integration, transport in Argentina’s trade may be because it is and the associated changes in relative prices would already meeting current demand (considering the trigger a reallocation of production factors that entail competition from other modes). However, there are efficiency gains but also adjustment costs. While some high value-added products, largely produced overall productivity is expected to increase, thereby outside the Pampas regions, for which the lack of contributing to economic growth, some sectors and direct air connections with destinations, together with segment of the population may be affected due to seasonality, prevent them from being transported by import competition. Protecting workers instead of air. The lack of competition in air cargo terminal and jobs is good practice to ensure that people negatively handling services may also be a factor constraining affected by the trade shock can be reallocated. the expansion of air transportation. Both active labor-market policies (such as job search assistance and training) and passive policies The current legal framework does not support (including income support and social insurance logistics as an integral concept, undermining programs) can prove effective. Complementary competitiveness. Certain logistics activities are policies and reforms in other markets (such as either not explicitly defined by law, or only in passing, housing, credit, and infrastructure) play a crucial role leaving legal voids and grey areas. In general, sector in facilitating geographic mobility, thereby reducing regulations are dispersed, fragmented, and subject adjustment frictions. to constant revision—sometimes in opposition to other standards. Observance and implementation Key opportunities to start this process include: can differ substantially from written norms. More importantly, subsidiary norms derived from binding 2.3.1 Moving ahead on the EU- labor agreements have filled the above-mentioned MERCOSUR FTA would bring many regulatory void, going further to define functions, benefits scope, and limitations associated to specific logistics activities and for the personnel engaged in them. The recent FTA with the EU is the first deep, While social regulation should protect the public modern, and comprehensive trade agreement interest from negative externalities, the latter also ever negotiated by MERCOSUR and could be a weigh on labor costs and productivity. The issue of game changer.36 It represents a deep agreement vertical integration will also require attention, as that breaks new ground in several policy areas stakeholders indicate that access to shipping and beyond tariffs, including technical barriers to trade, port services on an equal footing is not a given for regulations on services, government procurement, independent logistics operators. and intellectual property. Implementing the EU- MERCOSUR FTA will thus create a unique window 2.3. Towards a gradual process of of opportunity to push an agenda of institutional trade integration upgrading in Argentina in several critical areas, such as transparency, anti-corruption, accountability, The process to deepen Argentina’s integration efficiency and efficacy of government policymaking, to the global economy should be gradual, well- regulatory quality and enforcement, and sustainable coordinated with macroeconomic reforms, and development. The agreement incorporates reforms include mitigation measures to offset transition that the country could implement unilaterally – 36  After twenty years of negotiations, the EU and Mercosur countries announced on June 28, 2019 an agreement for an EU-MERCOSUR FTA. This FTA still needs to be ratified by all parties before it can enter into force. A NEW GROWTH HORIZON FOR ARGENTINA 61 such as rationalizing NTMs and export restraints compared to other Mercosur countries (particularly – and anchors them in a treaty. At the same time Uruguay and Paraguay, while somewhat closer to the agreement allows for reforms in Argentina that Brazil) and other neighbors in the region. Under the require coordinated actions at the MERCOSUR level. agreement, commitments on technical measures Of other potential agreements with other countries, aim to identify, prevent, and eliminate unnecessary this is one that has been seen as potentially resulting SPS and TBT impediments to trade and to enhance in larger reforms. cooperation on such aspects. Argentina would also have to address issues related to its import The agreement covers a wide range of tariff and licensing, export duties, and capital control regimes non-tariff measures that would increase market to secure full compliance with the agreement. Box access and contestability. For example, it aims to 2.2 summarizes some specific reforms that involve eliminate many bilateral duties immediately, and strengthening various dimensions of Argentina’s most remaining tariffs gradually. Argentina has a high institutional quality and the progressive elimination number of NTMs, both in absolute terms and when of NTMs. 37 BOX 2.2. THE EU-MERCOSUR FTA WOULD ENTAIL REGULATORY AND INSTITUTIONAL REFORMS IN ARGENTINA Rationalizing import, export, and capital controls. The agreement aims at simplifying import licensing regimes, bringing transparency, and avoiding opaque import and export licensing procedures from imposing unnecessary costs and significant barriers on exporters. The agreement also aims to dismantle non-automatic import and export licenses. Notably, Argentina currently has a non-automatic licensing regime in place which covers over 1,500 tariff positions, representing slightly over a quarter of imports. The agreement would also eliminate export duties or establish upper limits for certain products (e.g., export taxes for soybean products would be limited at a maximum rate of 14 percent37). However, eliminating export duties for some key goods that make up the largest share of Argentine exports – mainly soybeans, wheat and other cereals – could significantly reduce tax revenue. This might be challenging to implement in the country’s current economic context. The agreement also contemplates a progressive reduction of capital controls. Strengthening regulatory quality and enforcement. The agreement requires Argentina to implement (and generalize or enhance, where they already exist) core elements of good regulatory practice (GRP). These would include publishing regulations in advance, conducting public consultations on draft regulations and allowing for a transitional period between publication and entry into force. The agreement also contemplates the creation of a centralized body to regulate, implement and monitor the application of GRPs across all regulatory agencies. It also aims to introduce regulatory impact assessments (RIAs) and periodic retrospective evaluations of policy measures of general interest. While these are not binding commitments, implementing RIAs for key regulatory proposals would dramatically improve regulatory quality in the country. The agreement also seeks to strengthen the parties’ legal and institutional capacity to secure enforcement of critical areas, notably geographic Indications. 37  As of March 2023, soybeans and main soy-related products are taxed at 33 and 31%, respectively. See https://www.argentina.gob. ar/sites/default/files/tributos_vigentes_al_31-12-2022.doc.pdf. 62 A NEW GROWTH HORIZON FOR ARGENTINA BOX 2.2. THE EU-MERCOSUR FTA WOULD ENTAIL REGULATORY AND INSTITUTIONAL REFORMS IN ARGENTINA (CONT.) Streamlining trade compliance processes. Under the agreement, Argentina would adopt a self- certification approach for rules of origin. After entry into force, the country would have to start accepting certifications issued by EU exporters (“self-certification”). It will have three additional years (possibly extended to five), to introduce the issuing of statements of origin by Argentine exporters for goods that will be exported to the EU. In some sectors, Argentina would also implement certificate recognition and/or recognize test results issued by EU conformity assessment bodies. Specific areas in which this practice will have to be implemented include electrical and electronic equipment safety; electromagnetic compatibility of equipment; energy efficiency; and hazardous substances in electrical and electronic equipment. Additionally, provisions seek to progressively introduce self-certification of compliance with technical regulations (suppliers’ declarations of conformity). Even though there is no binding commitment upon MERCOSUR countries to implement this approach, doing so would dramatically reduce the bureaucratic and monetary costs that EU firms must incur when introducing a product on the Argentine market, and conversely, the costs of Argentine exports to the EU. Enhancing transparency and accountability. The agreement would seek to revise the domestic legal and institutional framework that regulates public procurement. Public procurement reforms would aim to (i) strengthen overall transparency, efficiency, competition, and equal opportunities; and (ii) guarantee substantive principles for the treatment of EU bidders (i.e., national treatment; prohibition of applying certain preferences and “offsets”). The agreement also creates notification or consultation mechanisms that guarantee that the parties will be notified or participate in the process of issuing a new law or regulation. Additionally, the agreement establishes focal points and other mechanisms to answer stakeholders’ enquiries on trade issues. The impact of the EU-Mercosur FTA on the economy constructed, examining the impact of a progressive has been modelled for this report. The economic addition of reforms. 38 However, the likely economic impacts of implementing the EU-MERCOSUR FTA effects of the agreement should be assessed based in Argentina are estimated using a Computable on the third or fourth scenarios (where tariffs, NTMs, General Equilibrium (CGE) model. The main features and export taxes are considered together), as they of the modeling framework are described in Annex better reflect the trade provisions of the FTA.39 2A. The emphasis of the analysis is on economy-wide Liberalization in certain areas could be gradual, for and main sectoral effects. The analysis incorporates example market access in sensitive sectors (Figure many of the market access commitments made by 2.19). To capture full implementation, the modeled the parties, including reductions in tariffs, non-tariff scenarios are thus compared to a baseline projection barriers, and export taxes. Four distinct scenarios are extended up to 2035.40 38  The scenarios are: 1) Tariffs scenario: on top of Baseline scenario, it incorporates the tariff schedule of the agreement; 2) Tariffs + NTM scenario: complements scenario 1 with reduced ad-valorem equivalent values for NTMs. It assumes that EU reduces their NTMs (on imports from Mercosur) by 10 percent, while Mercosur countries reduce theirs by 20 percent (on imports from either the EU or other Mercosur countries); 3) Tariffs + NTMS + Export Taxes scenario: Complements scenario 2 with a reduction in export taxes for soy in Argentina by 30 percent; 4) Tariffs + NTMS + Export Taxes All: extends scenario 3 to include an elimination of all exports taxes in Argentina. See Annex 2A for more detail. 39  The difference between the third and fourth scenarios relates to the degree of reduction of export taxes. The agreement includes an annex stipulating that export taxes are allowed to increase up to maximum for a determined number of products (mainly on soybeans), but Argentina could lower its export taxes even below this maximum, in compliance with the agreement. 40  The impact is assessed by comparing the deviations in the economic variables relative to a baseline projection of the Argentinean and world economies to a notional 2035, given no changes in current policies as of 2020. A NEW GROWTH HORIZON FOR ARGENTINA 63 Figure 2.19 Figure 2.20 Liberalization Figura 2.19. of trade could be gradual The EU-Mercosur Figura 2.20. FTA would improve output, for certain areas real income and trade Average bilateral tari in Argentina for EU imports under E ects of four scenarios as % change from baseline the EU-Mercosur FTA 16 3.5 3.1 14 3.0 Percent change from baseline 12 2.4 2.5 2.3 2.3 10 2.0 Percent 1.7 8 1.6 1.5 6 0.9 1.0 4 0.5 2 0.5 0.3 0.3 0.2 0.2 0.2 0.1 0.1 0 0.0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Output Income Imports Exports Year of FTA Tari s Tari s + NTMs Tari s + NTMs + Export Taxes Tari s + NTMs + Export Taxes All Source: World Bank estimates based on tariff offers schedules. Source: World Bank estimates from CGE framework. Aggregate impacts are positive, albeit modest, for and free up resources currently held by less efficient the entire economy in all the scenarios. However, ones. This is particularly relevant for Argentina, as it should be noted that the estimated effects on shown in Chapter 1, as intra-sector reallocation output and real income from the CGE framework explains higher rates of economic growth among are likely to be conservative. The ability to assess Argentina’s peers but not in Argentina. Taking these comprehensively the impact of policy changes points together, the overall benefits to be expected depends on the extent to which all changed conditions from a comprehensive trade liberalization agenda can be measured. While the CGE model employed is are likely to exceed significantly those estimated by dynamic and allows investment and capital stock the model. As such, it is more relevant to focus on to change over time because of the agreement, the the direction of the change in key economic variables model does not incorporate other dynamic factors that result from trade liberalization rather than on proposed in the literature on endogenous growth, the quantification of the impact. such as productivity increases via for example, knowledge spillovers or scale economies. These are The EU-MERCOSUR agreement would improve difficult to model and to incorporate in this type of Argentina’s trade balance, increase income, total analysis.41 Besides the additional opportunities for trade, and output. The model results show an trade among existing firms, trade and tax reforms increase in real output stemming from the elimination would also strengthen competition within sectors, of all export taxes, relative to the baseline projection reallocate resources towards more productive firms, through 2035 (Figure 2.20). Overall welfare would 41  The effects that are relative to the baseline scenario are deviations per year (see the annex for a graphical depiction to interpret the estimated deviation). As such the gains accumulate over time (area between the two curves). 64 A NEW GROWTH HORIZON FOR ARGENTINA Figure 2.21 Figura 2.21. The effects of the trade liberalization would vary across sectors Change in sectoral output as % of baseline total output 0.4 Tari s Tari s + NTMs + Export Taxes Tari s + NTMs Tari s + NTMs + Export Taxes Removal 0.35 Change in sector's output divided by baseline 0.3 total output of all sectors combined (%) 0.2 0.13 0.1 0.07 0.07 0.0 -0.1 -0.2 Rice Wheat Other grains (maize) Oilseeds (soya) Sugar Animal products Dairy Other Agriculture Forestry Petroleum and coal Other mining Bovine meat Other meat Vegetable oils Food and beverages Light manufacturing Chemicals and plastics Pharmaceuticals Mineral and metal products Other manufacturing Motor vehicles and parts Transport equipment Utilities distribution Other services Public services Gran total Source: World Bank estimates from CGE framework. be at least 0.5 percent higher than the baseline While the economy expands overall, the (scenario 4), reflecting higher real income from effect varies across sectors, with the largest consumers’ greater purchasing power. Total imports expansion occurring in food and agriculture. would increase by about 2 percent and exports Trade liberalization among the parties allows them would increase by about 3 percent, leading to an to exploit their comparative advantages, presenting improvement in Argentina’s trade balance (see tables opportunities to some sectors and challenges to in Annex 2A). Taking all the trade and tax reforms others. Food and agriculture in Argentina is the together, NTM liberalization and the reduction of all sector that would expand the most under the export taxes are responsible for most of the trade agreement, accounting for about half of the overall gains. The bilateral trade effects of the agreement expansion in output across all sectors (Figure 2.21).43 are significant for both parties, as Argentine exports The largest expansions in dollar terms occur for to the EU would expand by about 40 percent, while food and beverages (where soybean meal, wine, bilateral imports into Argentina from the EU would and juices are significant exports), vegetable oils increase by about 27 percent.42 (where soybean oil is a key product), and services 42  Bilateral exports to the rest of Mercosur would expand by almost 1 percent, mostly driven by higher exports to Brazil. 43  Note that the deviations are presented as share of total output in the baseline, so that the sectoral percentages sum to the percent change in output across all sectors. A NEW GROWTH HORIZON FOR ARGENTINA 65 for which demand expands from the liberalization slight increases. For metal products and machinery/ of services barriers (see tables in Annex 2A). Output electronics the increase is mostly driven by lower in certain manufacturing industries, however, would NTMs, while the increase in light manufacturing be marginally lower relative to the baseline. This is exports (apparel/footwear) reflects export gains the case for mineral and metal products and other from lower tariffs in the EU. Exports of vehicle and manufactured products (including machinery and parts could fall in most scenarios. The incremental electronics). For the automotive sector, output could effect on exports of rationalizing export taxes either contract or remain neutral, depending on the manifest primarily in the vegetable oil sector (which specific scenario, with output falling mostly from the includes soybean oil). liberalization of tariff protection. While the contraction in manufacturing activity The expansion of exports is driven particularly by is not large, policies to facilitate labor transitions increased exports of food and agriculture, while should be considered. The agreement would manufacturing exports would be slightly lower. increase import competition in manufacturing where The muted drop in manufacturing exports reflects a high trade barriers currently exist. Industries in this heterogenous effect across industries (Figure 2.22). sector would also likely release labor as other sectors Exports of light manufacturing (which includes benefiting under the agreement, such as services apparel and footwear products), mineral and metal and food and agriculture, draw resources into their products, and other manufacturing would experience expanding activities. Industries in this situation Figure 2.22 Figura 2.22. Food and agriculture would drive export expansion Change in sectoral exports as % of baseline total exports 4 Tari s Tari s + NTMs + Export Taxes Tari s + NTMs Tari s + NTMs + Export Taxes All by baseline total exports of all sectors combined 3.17 3 Change in sector's exports divided 2.4 2 1.55 1 0.9 0.5 0.3 0.4 0.3 0.3 0.3 0.3 0.1 0.1 0.0 0 -1 -1.0 -2 Rice Wheat Other grains (maize) Oilseeds (soya) Sugar Animal products Dairy Other Agriculture Forestry Petroleum and coal Other mining Bovine meat Other meat Vegetable oils Food and beverages Light manufacturing Chemicals and plastics Pharmaceuticals Mineral and metal products Other manufacturing Motor vehicles and parts Transport equipment Utilities distribution Other services Public services Gran total Source: World Bank estimates from CGE framework. 66 A NEW GROWTH HORIZON FOR ARGENTINA Figure 2.23 Figure 2.24 The EU-Mercosur FTA would increase wages of both The agreement is likely to be pro-poor… Figura skilled2.23. and unskilled workers Figura 2.24. E ects of EU-Mercosur FTA on wages in Argentina, in percent People lifted from poverty by 2035 compared to baseline scenario, in thousands 0.90 30 28.2 People lifted from poverty, thousands 0.85 20 18.3 0.80 Percent 14.4 0.75 11.1 10 0.70 0.65 0 Skilled Unskilled Total Tari s Tari s Tari s + NTMs Tari s + NTMs + + NTMs + Export Taxes Export Taxes All Source: World Bank based on CGE framework. Source: World Bank based on CGE framework and the ARG-IDD. would likely include metal products and segments of both skilled and unskilled workers. As the of the automotive sector. The overall contraction economy-wide effects are (conservatively) small, of manufacturing activity in these sectors, if it so are the positive effect on wages. For total labor materialized, would not be large (less than 1 percent), the EU-MERCOSUR FTA would increase wages, on and would represent a small fraction of labor turnover average, by about 0.82 percent (Figure 2.23). The in the sector and for the overall economy.44 Yet, while effect is positive for the two categories of labor the model employed to estimate the effects of the introduced in the model (skilled and unskilled), but is agreement assumes that labor transitions to other somewhat larger for unskilled workers, whose wages activities without costs, this may not be true in would increase by 0.87 percent, versus an increase in many cases, and domestic policies should be put wages for skilled workers of 0.74 percent. in place to help them move to other sectors of the economy or to further specialize in niche products in Similarly, the agreement is likely to be pro-poor. their industry. The modelling suggests that the EU-MERCOSUR FTA would have positive effects on poverty– lifting The positive trade and output effects of the between 11,000 to 28,000 people out of poverty.45 agreement in the economy would benefit wages Figure 2.24 reports the number of people lifted 44  Beccaria and Maurizio (2018) estimate exit rates from a job in Argentina using household survey data over the period 2003-15. The yearly rate for the economy as a whole is 28 percent, and 27 percent for their category of “industry”. According to these estimates, those who leave a job transition within the year to either another job (55 percent of those changing labor status), unemployment (15 percent), or out of the labor force (30 percent). 45  Poverty is measured using a poverty line of US$ 6.85 per day in PPP terms, the revised international poverty line for upper-middle- income countries in 2017 prices. A NEW GROWTH HORIZON FOR ARGENTINA 67 Figura 2.25. trend (a GIC with a negative slope), meaning that the Figure 2.25 poorest households located in the lower centiles of … and have progressive distributional effects the income distribution would benefit more in terms Growth incidence curves under FTA scenarios of real income gains under the agreement than households in the higher centiles (Figure 2.25). The largest effect in play is the sectoral reallocation from 0.53 the agreement, particularly amid the expansion of certain sectors such as food and beverages, light manufacturing, bovine meat, and vegetable oils. 0.33 2.3.2 Leveraging the potential of trade in Percent services 0.13 Trade in services offers skilled employment and structural transformation opportunities. Traditionally associated with low-skilled jobs, the -0.07 0 20 40 60 80 100 services sectors are in reality very heterogenous. Percentile of per capita income/consumption The emergence of the digital economy is expanding Tari s Tari s + NTMs access to markets and allowing an increasing number Tari s + NTMs + Export Taxes Tari s + NTMs + Export Taxes Al of sectors to become tradable (Nayyar, Hallward- Driemeier and Davies, 2021). Services are also often Source: World Bank based on CGE framework and the ARG-IDD. and increasingly embedded in manufacturing goods, meaning their total contribution to foreign trade is from poverty, on average, by each scenario after higher than what the direct contribution reveals. the full implementation in year 15. The net effect on Knowledge-intensive services are increasingly poverty reduction goes from 11,100 in the export tax dynamic sources of innovation, offering the potential scenario, to 28,200 in the Tariffs + NTMs scenario. for productivity gains and the creation of high-skilled These small estimates go together with the (likely jobs (Stehrer et al, 2012; Jensen, 2013; Sorbe, Gal, conservative) estimates from the CGE model that Millot, 2018). suggests that welfare, measured as real income, increases only slightly under the simulated scenarios. Services trade makes a considerable contribution However, the microsimulation results show that the to foreign exchange in Argentina. In 2022, positive welfare effects hold not only on average for according to INDEC data, trade in services amounted all the population, but also for the segment of the to nearly US$ 35.7 billion, accounting for 17.8 population under the poverty line. percent of the country’s total foreign trade in goods and services. Knowledge-intensive services make up Furthermore, the agreement would have the main component of services exports, accounting progressive distributional impacts for the urban for 56 percent of the total in 2022. 46 Business and poor in Argentina. Growth incidence curves (GIC) personal travel expenses accounted for another 24 compared to the baseline scenario show a progressive percent of services exports, while the remaining 46  Knowledge-intensive services include legal, accounting, management consulting, and public relations services, research & development, advertising, marketing research and public opinion polling services, audiovisual and related services, architectural, engineering, scientific and other technical services, and others. 68 A NEW GROWTH HORIZON FOR ARGENTINA 2.26. Figura 2.26 Figure Service exports growth has stalled, but KIS is increasing its share Services exports by sector, in 2022 US$ and as a % of goods and services exports (2006-2022) 20.9 20 19.9 18.9 18.8 18.5 20 15.9 15.8 16.4 % of goods and services exports 15 15.2 14.9 15.1 15.3 14.7 15 14.5 14.0 14.0 In 2022 US$ bn 10.8 10 10 5 5 0 0 2011 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 KIS Transport Travel Others Total - As % of goods and services exports (sec. axis) Source: INDEC. Notes: KIS= knowledge intensive services and includes legal, accounting, management consulting, and public relations services; research & development; advertising, marketing research, and public opinion polling services; audiovisual and related services; architectural, engineering, scientific, and other technical services, and others. “Others” includes construction; financial services; charges for the use of intellectual property not included elsewhere.; leasing; trade-related services; telecommunications services, and government goods and services not included elsewhere. share was divided between transport and other 2012 to 2019) and have even fallen slightly (with services (15.5 and 5.1 percent, respectively). Exports an average annual rate of growth of -1.2 percent). of transport services consist primarily of services In 2020 they collapsed by 37 percent, hit by the provided to foreign operators in ports, airports, and COVID-19 pandemic. After showing a decline of 5 to foreign land transportation operators. In turn, the percent in 2021, they recovered vigorously in 2022 miscellaneous “others” category comprises diverse (42 percent), driven by the low base effect. Services activities such as charges for the use of intellectual exports in 2022 still stood 2.5 percent below pre- property (1.6 percent), financial services (1.5 percent), pandemic levels and 6.9 below the 2017 peak (of US$ and telecommunications (0.7 percent). 15.5 billion). Services exports grew over 2006-2011 in line with Since 2012, service exports performance has been trade in goods, but has decelerated afterwards limited by the application of foreign exchange (Figure 2.26).47 From 2006 to 2011, the average controls. This derived in the appearance of parallel annual increase stood at 11 percent, in line with markets with a higher price of the dollar than the exports of goods (13.8 percent). Since then, services official one, inducing some companies to seek to bill exports have remained relatively constant (from their services from other locations where they do not 47  The analysis is from 2006, which is when the National Institute of Statistics and Censuses (INDEC) changed Argentina’s balance of payments statistics methodology, adopting IMF Balance of Payments Manual number 6, meaning the new data is no longer comparable with previous data. A NEW GROWTH HORIZON FOR ARGENTINA 69 were exposed to foreign exchange loss (Lachman and entrepreneurial capabilities and a favorable López, 2022). The increase in local wages measured policy framework that includes tax incentives in dollars could also have had a negative impact, due and initiatives to stimulate training of human to the appreciation exchange rate, especially during resources (López and Ramos, 2018). Currently, the 2012-1015 period. Argentina’s international participation in exports of consumer services prominently consists of man Knowledge intensive services have nearly hours for relatively undifferentiated or standardized quadrupled, increasing their share in total services programming, which add limited value compared to exports from 28 percent in 2006 to 56 percent in more complex programming developments and are 2022 (Figure 2.27). KIS have emerged as one of the highly sensitive to the exchange rate due to their main sources of innovations and demand of qualified dependence on costs. The other major components workers (Desmarchelier et al., 2013). Argentina of knowledge-intensive services exports are legal, became an attractive location for the provision accounting, management consulting, and public of international services of large multinationals relations services (30 percent); research and companies. In the same line, a handful of medium- development (8 percent) – primarily clinical trials; sized and large local companies that successfully advertising, market research, and public opinion internationalized, in some cases reaching the polling services (5 percent); audiovisual and related category of “unicorns”. Argentina ranks 24th in services (4 percent); and architectural, engineering, the global ranking of computer exports (leading scientific, and other technical services (3 percent). the Latin American ranking) and 34th in business services. It also stands out in the case of personal, In value added terms, the share of domestic cultural, and recreational services (including health, services in Argentina’s exports is higher than education, audiovisual, and others), being the first in in other countries. According to the OECD TiVA Latin America and ranking 19th worldwide (López et database, domestic services accounted for 42.5 al., 2014). percent of total exports in value-added terms in 2018. This share is the highest of all Argentina’s Human capital is a key driver of the KIS success regional and structural comparators (Figure 2.29). story. A survey of large national and multinational Services’ share in trade in value added terms has companies finds that export growth of KIS services also increased over time: in 2008 services accounted has been fostered by the availability of qualified for about one third of trade in value-added exports. human capital, language skills, cultural affinity with For manufacturers, domestic services value added export markets (mainly the Americas, compared to content was 21.9 percent of gross exports, with the competitors like India), and a common time zone highest shares in ICT and electronics (25.2 percent), (López and Ramos, 2013). Reducing macroeconomic food products (24 percent) and chemicals and imbalances, lifting foreign exchange controls and pharmaceuticals (23.6 percent, Figure 2.30). In this reducing the frequency of changes in the rules of the sense, it is worth noticing that although most of the game would allow Argentina to benefit even more services are non-tradable, KIS represents a highly from the comparative advantage it enjoys in KIS. qualified and tradable segment. Computer services are the largest component of Even though global services trade has more than KIS exports (Figure 2.28). These consist primarily tripled in the last two decades, barriers to trade of exports of software services, which have been in services are much higher than those for trade fostered by the local availability of domestic in manufactured goods. At the same time, there is a 70 A NEW GROWTH HORIZON FOR ARGENTINA Figure 2.27 Figure 2.28 KIS represents Figura 2.27. more than half of Argentina’s service …mainly led by computer services Figura 2.28. exports... Service exports, in million US$ and as a % of the total, 2022 KIS exports, in million US$ and as a % of the total, 2022 3.461 (24%) 1.435 (18%) 2.609 (32%) 733 (5%) 215 (3%) 326 (4%) 368 (5%) 621 (8%) 8.006 (56%) 2.231 (15%) 2.433 (30%) KIS Computer services Transport Legal, accounting, management consulting, and public relations services Travel Research and Development Others Advertising, marketing research, and public opinion polling services Audiovisual and related services Architectural, engineering, scientific, and other technical services Other Source: INDEC. Source: INDEC. Note: “Other” includes other business services; other cultural and recreational personal services; waste treatment and decontamination services, agricultural and mining services; and information services. growing recognition that the dismantling of barriers by 60 percent. 48 For Argentina, this calls for renewed to trade in services offers opportunities to exploit efforts to include services trade issues in its trade untapped economic potential. According to Benz and negotiation agenda. Jaax (2020), policy-induced services trade costs are relatively high among OECD countries. Expressed Looking forward, there is broad agreement that as percentages of total trade value, average KIS offer an opportunity for Argentina’s structural multilateral costs for cross-border services trade are transformation toward more robust growth. Firstly, around 57% for communication services and 54% for these activities can generate skilled jobs and foreign business services, 60% for transport services, 103% exchange from exports, while developing skills in for insurance services, and around 255% for financial various areas – from technological and organizational services. Additionally, the OECD Services Trade to commercial. In addition, productivity spillovers Restrictiveness Index (STRI) reveals that barriers to can emerge via mobility of human capital from services trade are rising: in 2019, trade restrictions these sectors to other industries. KIS can also help were 30 percent higher than in the previous year, improve the competitiveness of other productive while the pace of services trade liberalization slowed activities by providing services complexes and 48  OECD Service Trade Restrictiveness Index https://stats.oecd.org/Index.aspx?DataSetCode=STRI A NEW GROWTH HORIZON FOR ARGENTINA 71 Figure 2.29 Figure 2.30 2.29. services make up a higher share of Domestic Figura the share has increased … and2.30. Figura exports than peers... Domestic services value-added share of gross exports, Services content as a % of gross exports by industry in % (2018) (2008 and 2018) 42.5 50 40.6 40.3 38.4 40 30.4 27.1 25.1 30 Percent 20 10 0 Argentina Australia Poland Brazil Mexico Malaysia South Korea Total Total manufacturing Agriculture Mining Food products Textiles and apparel Wood, paper, printing Coke, petroleum Chemicals Rubber and plastics Non-metal minerals Basic metals Fabricated metals ICT and Electronic Electrical equipment Machinery Motor vehicles Other manufacturing 2018 Foreign services 2018 Domestic services 2008 total Source: OECD (TiVA database). Source: OECD (TiVA database). generating knowledge transfers. Furthermore, the restrictions generate, among other consequences, country’s stock of natural capital provides a basis an incentive for workers to work freelance (a pre- for generating business agglomerations – clusters existing phenomenon that gained strong momentum – of KIS providers associated with these activities, worldwide since the COVID-19 pandemic), as this such as the biotech sector, in line with experiences allows them to almost double labor compensation as such as those of Australia, Canada or Norway. they receive dollar payments at the parallel exchange Finally, older interconnections between the KIS and rate. This situation leads to a growing “brain drain” the other tradable activities (via productive linkages, which, unlike in the past, does not go through the joint technological developments, personnel mobility, physical emigration of workers, but does create etc.) will surely help promote productivity gains distortions in the labor market. This is because in the latter, and could thus also contribute to the companies installed in Argentina face increasing objectives of productive transformation (López, difficulties in hiring labor in the local market since 2017). they cannot compete with the dollarized salaries offered by the freelance market. To seize these opportunities, Argentina needs to steadily reduce its macroeconomic imbalances. In the long term, the main challenge for Argentina In particular, foreign exchange market regulations is to upgrade its services exports towards more represent the main obstacle to the growth of the complex activities, since current international sector (Lachman and López, 2022). Exchange insertion relies on standardized services 72 A NEW GROWTH HORIZON FOR ARGENTINA Figure 2.31 Figura 2.31. Barriers to digital trade are high Digital Services Trade Restrictive Index (STRI), 2022 0.34 0.30 0.28 0.24 0.22 0.20 0.16 0.13 0.12 0.08 0.06 0.04 0.04 0.04 Argentina Poland Brazil South Korea Australia Mexico Malaysia Overall Infrastructure & connectivity Source: OECD Digital Services Trade Restrictiveness Index (DSTRI). Note: The index measures cross-cutting barriers that inhibit or complete prohibit firms’ ability to supply services using electronic networks, regarding of the sector of where they operate. The index is a composite index that includes five measures: 1) infrastructure and connectivity, 2) electronic transactions, 3) e-payment systems, 4) intellectual property rights and 5) other barriers to trade in digitally enabled services. The index varies between 0 and 1, where 0 indicates an open regulatory environment for digitally enabled trade and 1 indicates a completely closed regime.49 highly sensitive to costs. To that end, continued and makes recommendations for how to strengthen investment in human capital and highly skilled public policies to raise skills and increase their use in workers is indispensable. Sectoral level analysis labor markets. 49 in this Country Economic Memorandum on the biotechnology and the car sectors (Chapter 4) also Easing restrictions on trade in digital services highlights the strategic relevance of expanding and integrating services in trade negotiations human capital and upgrading skills so that Argentina would also benefit trade in services. Argentina boosts exports in these sectors. In particular, the imposes more restrictions on digital services trade car sector is experiencing a process of technological than both its aspirational and regional peers, transformation towards increasing digitalization according to the digital services trade restrictiveness while adapting to a less carbon intensive economy. index (DGSTRI) developed by the OECD (Figure Human capital is a key determinant for the sector 2.31). Most restrictions on digital services trade are to successfully navigate these challenges. Raising related to infrastructure and electronic transactions. skills to maintain current comparative advantages In fact, in terms of infrastructure and connectivity and expand into more complex and higher value- restrictions, Argentina is the eighth most restrictive added activities is also a priority objective for country among all 82 countries included in the external competitiveness. Chapter 3 of this Country DGSTRI in 2022. Beyond investments to improve Economic Memorandum focus on human capital digital infrastructure, Argentina should step up 49  See Ferencz, J. (2019). A NEW GROWTH HORIZON FOR ARGENTINA 73 efforts to reduce regulatory barriers in digital Improving public policies to prepare the services trade. It has several restrictions on foreign private sector to compete and benefit from entry, competition, and regulatory transparency. the opportunities of a greater trade openness For instance, the cross-border supply of services, is fundamental to the success of the opening including computer services, requires a local presence; process. Public policies could be enacted to support most board directors in Argentinean entities must Argentinean firms at three levels. First, on solving have their residence in Argentina, and firms can informational asymmetries regarding export and only sell computer engineering services from Buenos investment opportunities in international markets. Aires if they are part of the Buenos Aires Engineers Second, by easing access to finance to the private professional association (Loria Obando, Mulder & sector, which is a binding constraint to improve their Ferencz, 2022). competitiveness. Third, by implementing targeted programs to improve the productivity of firms with 2.4. Policy recommendations potential to compete in international markets. Such programs could include interventions to support Argentina has significant untapped potential innovation at the firm, improve firms’ capabilities, for integration into the world economy, but good development supplier development programs, macroeconomic fundamentals should underpin among others. any reform to open the economy. While economic fundamentals such as geography, institutions, Recommendation 2: Reduce trade costs both market size, and factor endowments are all for exporters and importers important determinants of trade performance, national policies also matter for preparing the local Reforming barriers to trade to expand input sector to compete and benefit from trade integration. sources, GVC integration, and integration into Addressing lingering macroeconomic imbalances is a global markets can be pursued both unilaterally necessary condition to enact policies that support and via trade agreements, including jointly with a gradual reinsertion of Argentina to the global other MERCOSUR parties. This involves immediate economy. As many existing market distortions are and sustained actions to reduce the CET, rationalize the result of fiscal (export taxes) and international the use of non-automatic import licenses, streamline reserves (import licenses) considerations, returning other non-tariff measures hindering trade, reduce to a macroeconomic sustainable path is paramount export restraints, and expand the country’s for trade reforms. A predictable, stable, and credible participation in deep FTAs with principal partners. exchange rate policy along with a return to fiscal sustainability should underpin any policy reform Recommendation 3: Improve trade aimed at reconnecting Argentina to the global facilitation to reduce time and costs of economy. cross-border trade The following policy recommendations would support Measures to reduce procedural obstacles to Argentina reintegration to the global economy: trade include accelerating trade facilitating initiatives in which Argentina is lagging behind Recommendation 1: Enhance the provision of regional peers. For example, although Argentina has public goods to help local firms become more initiated a national single trade window (VUCE), a competitive customs processing program for accredited traders (Authorized Economic Operators), and simplified 74 A NEW GROWTH HORIZON FOR ARGENTINA export regime for SMEs (Exporta Simple), their in the Plata and lower Parana (including increased implementation and utilization remain limited in vessel draft and new anchorage area), implementing practice. open access for railways, developing intermodal connectivity with railway access, and expanding the Lack of investment in infrastructure has harmed digital network infrastructure along important trade Argentina’s logistic competitiveness. Priority corridors and rural areas, particularly outside the actions include improving waterway transportation Pampas region. Tabla 2.3 Policy recommendations 1. Enhance the provision of public goods to help local firms become more competitive • Make export promotion activities, including market intelligence, more visible to the private sector • Evaluate the impact of ongoing export promotion efforts and relate them to the survival of firms in export markets to prioritize actions and selection criteria • Expand skills, including digital, to harness services trade • Facilitate access to credit • Strengthen the national productive development plan • Strengthen the investment promotion agency 2. Reduce trade costs • Implement the revision of the MERCOSUR Common External Tariff (2022) • Expand the scope of products subject to a 10 percent cut for Argentina; • Reduce tariffs through Mercosur flexibilities for ICT and capital goods • Further reduce the CET in coordination with rest of Mercosur to levels more in line with regional averages • Eliminate the minimum tariff lines subject to non-automatic licenses (currently over 25 percent of imports) • Evaluate regulations that can affect trade, including registration, authorization, and technical requirements, to streamline possible trade-distorting measures • Continue to streamline regulations and administrative barriers to trade as part of the trade facilitation agenda in Argentina (single window) and the efforts to harmonize technical barriers within Mercosur • Ratify and enter into force the FTAs with the EU and EFTA • Conclude deep FTAs with other trading partners (Korea, Canada, and Singapore) • As macro imbalances are brought down, progressively reduce export taxes to boost export competitiveness A NEW GROWTH HORIZON FOR ARGENTINA 75 Tabla 2.3 Policy recommendations (cont.) 3. Improve trade facilitation • Enhance the number of accredited AEO • Accelerate the implementation of VUCE and Exporta Simple • Implement in practice regimes for temporary entry (ATA Carnet, TRI) • Mobilize high-level political support for the NTFC and advance on its work plan • Expand digital networks along corridor and rural areas • Prioritize the implementation of the open access mechanism for railways • Improve infrastructure and operating conditions in the Plata and lower Parana waterways • Develop a vision for container ports in Buenos Aires beyond “Puerto Nuevo terminal” to deal with projected capacity bottlenecks • Develop intermodal facilities with railway access Source: World Bank. 76 A NEW GROWTH HORIZON FOR ARGENTINA References Arvis, Jean-François, Lauri Ojala, Christina Wiederer, Ben Disdier, Anne Célia, Charlotte Emlinger and Jean Fouré. Shepherd, Anasuya Raj, Karlygash Dairabayeva and 2016. “Interdependencies between Atlantic and Tuomas Kiiski. 2018. 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Park, Hyunju, Roberto Urmeneta and Nanno Mulder. 2019. “El desempeño de empresas exportadoras según su tamaño: una guía de indicadores y resultados”. CEPAL, Documentos de Proyectos 44664. Pavcnik, Nina. 2002. “Trade liberalization, exit, and productivity improvement: evidence from Chilean plants.” Review of Economic Studies 69: 245–76. Sorbe, Stéphane, Peter Gal and Valentine Millot. 2018. “Can productivity still grow in service-based economies?: Literature overview and preliminary evidence from OECD countries,” OECD Economics Department Working Papers 1531, OECD Publishing. 78 A NEW GROWTH HORIZON FOR ARGENTINA Annex 2A. CGE modeling framework FTA simulations the trade restrictiveness of NTMs. Carrico et al. (2020) recommend following Disdier et al. (2016) The effects of the EU-Mercosur Free Trade Agreement and using 10 percent. The current analysis assumes (FTA) are evaluated in a set of incremental policy that EU countries reduce their NTM barriers by 10 scenarios. The net effect of each policy scenario is percent, while Mercosur countries, which would compared against a baseline scenario that projects have to implement larger changes in face of their a continuation of current trends. Four scenarios are deepest agreement to date, would reduce theirs by considered: 20 percent. Following Walmsley and Strutt (2021), NTM reductions are allocated between a reduction of NTM ad valorem equivalents are taken from Licetti “iceberg” trade costs (that result in pure deadweight et al. (2018), which estimates tariff equivalents for losses) and of an NTM tariff equivalent (which hinder different regions and sectors (including goods and trade while generating rents). The NTM liberalization services) for modeling of FTAs involving Argentina is split 50-50 between these two modalities. and Mercosur, including a preliminary assessment of a potential EU-Mercosur FTA. Model structures The empirical literature on FTAs has typically Production in the model is implemented as a series used NTM cuts in the range of 5 to 30 percent, of nested constant-elasticity-of-substitution recognizing that not all NTMs are actionable. (CES) functions to capture the substitutability However, there is some variation in the assumptions and complementarity across all inputs. Crops and made about how much various FTAs would reduce livestock have a different production structure to the Table 2.A.1 Description of policy scenarios Scenario Description (S.0) Baseline Contemplates a continuation of stable economic conditions, considering existing trade agreements but no implementation of EU-Mercosur. It incorporates ad-valorem equivalent of NTMs. (S.1) Tariffs On top of Baseline scenario, it incorporates the tariff schedule of the EU-Mercosur agreement (S.2) Tariffs + NTMs On top of Tariffs scenario, it reduces ad-valorem equivalent values for NTMs. It assumes that EU reduces their NTMs (on imports from Mercosur) by 10 percent, while Mercosur countries reduce theirs by 20 percent (on imports from either the EU or other Mercosur countries). (S.3) Tariffs + NTMS + Export Taxes On top of NTMs scenario, Argentina reduces its export taxes, which are predominantly in the soybean complex, by 30 percent. (S.4) Tariffs + NTMS + Export Taxes All On top of NTMs scenario, Argentina eliminates all exports taxes. In addition, a 2 percent increase in TFP for output generated with new capital in light manufacturing and motor vehicles and parts Source: World Bank. A NEW GROWTH HORIZON FOR ARGENTINA 79 rest of the production goods. The model incorporates Trade is modeled using the so-called Armington five types of production factors: labor (differentiated specification that assumes that demand for goods by skill and by gender); capital; land; a sector specific is differentiated by region of origin. The model allows natural resource (such as fossil fuel energy reserves); for domestic/import sourcing at the aggregate level and water. (after aggregating domestic absorption across all agents), as well as at the agent level. Thus, a second Domestic production is allocated to the domestic Armington nest allocates aggregate import demand market or exported, following a constant elasticity across all exporting regions using a representative of transformation (CET) function. There are three agent specification. Exports are modeled in an domestic final demand agents: households (h), analogous fashion using a nested constant-elasticity a government sector (gov) and an aggregate of-transformation (CET) specification. The domestic investment sector (inv). Income comes from supply of each commodity is supplied to the payments to factors of production and is allocated domestic market and to an aggregate export bundle to households (after taxes). The government sector using a top-level CET function. The latter is allocated accrues all net tax payments and purchases goods across regions of destination using a second-level and services. Investment income is equated to the CET function. sum of domestic and foreign savings. A portion of capital income flows to a ‘global’ holder of equity Microsimulations that then portions out profits from the global fund. Remittances are also incorporated and are fully The Argentina Income Distribution Dynamics model bilateral. (ARG-IDD) is a single-country version of the World Bank Global Income Distribution Dynamics (GIDD) The model incorporates multiple utility functions for model. ARG-IDD is implemented as a top-down determining household demand. In this specification, macro-microsimulation framework (Bourguignon a constant difference of elasticities (CDE) utility and Bussolo 2013; Bussolo, de Hoyos, and Medvedev function is assumed. This function allows for more 2010; Maliszewska, Osorio-Rodarte, and Gupta flexibility in terms of substitution effects across 2020). On top of this, the recursive dynamic goods and for non-homotheticity. Environmental Impact and Sustainability Applied General Equilibrium (ENVISAGE) model (van der The capital market assumes vintage capital. New Mensbrugghe 2020) provides a set of linkage capital is allocated across sectors to equalize rates of aggregate variables that are used for the estimation returns. Installed capital is imperfectly mobile across of distributional analysis – namely changes in sectors. If all sectors are expanding, old (installed) the structure of population, labor, wages, and capital is assumed to receive the economy-wide rate consumption prices. Based on changes observed of return. In contracting sectors, old capital is sold on in the macroeconomic model, a microsimulation secondary markets using an upward sloping supply operates on Argentina’s 2020 Permanent Household curve. This implies that capital is only partially Survey (EPH, Encuesta Permanente de Hogares). mobile across sectors. Land and water are allocated across activities using a nested CET specification. The ARG-IDD is a dynamic multi-sector macro- Natural resources are supplied to each sector using micro model. With respect to the workhorse GIDD an iso-elastic supply function with the possibility model, the ARG-IDD incorporates a multi-sectoral of differentiated elasticities depending on market reallocation of labor. With respect to sectoral split, in conditions. both the CGE and EPH household survey, the linkage 80 A NEW GROWTH HORIZON FOR ARGENTINA aggregate variable on volume of workers (paid the case of Argentina, it is assumed that the share of employment in the working age population) was urban population stays fixed. divided into 4 sectors: i) agriculture, ii) manufacturing, iii) public services and public sector, and iv) rest of The microsimulations’ second step adjusts individual services. A worker’s skilled level is based on years factor returns by skill and sector in accordance of schooling, with a threshold of 10 or more years with the results of the CGE model. The ARG-GIDD of schooling for skilled workers. In this setting, the imposes an entirely new vector of earnings on each microeconomic wages are differentiated for skilled worker, conditional on each worker’s individual and unskilled workers. One important aspect related characteristics. Macro and micro models are linked to population growth is that the CGE model (above) with four sectors (agriculture, manufacturing, public, follows national UN population projections. To and other services) and two types of workers (skilled maintain consistency between the CGE and the micro and unskilled). By type of worker, the ARG-IDD model, we assume that during the simulation period, reallocates workers moving them out of shrinking the urban and rural population in Argentina would into expanding sectors. The sectoral reallocation grow at the same rate as the national population. process can either estimate the probability of each This would allow us to transmit the national shocks worker to be reallocated into new sectors, based into the urban EPH. This assumption implies that the on individual characteristics, or they can be chosen share of urban population in Argentina remains at randomly. Once workers are reallocated, a new 63% over the entire period. The results shown in this vector of earnings is generated using estimates from paper are representative for the urban population in a set of Mincer equations. To account for unobserved Argentina. characteristics, each individual residual is brought into the new sectors and scaled accordingly. The first step in the microsimulation exercise is to implement a set of changes in the household surveys’ The third step adjusts average wages between demographic structure. The population growth groups of workers and sectors. While the second adjustment is particularly important in countries step operates at the individual level, the third step with rapid demographic changes. In practical terms, operates at the group level scaling the average wages the adjustment for population growth allows the for each type of worker and sector. In practical terms, analysis to explicitly consider the changes in the one group is selected as numeraire, i.e. unskilled size of the working-age population. We perform agricultural, and average wages for each group are population and education projections during the first scaled relative to the numeraire. Within a group, all stage of the microsimulation model and in creating earnings are scaled with respect to the numeraire the baseline scenario for the CGE model. For each group. Operating through changes in relative wages country, we construct the demographic profile in guarantees internal consistency between macro and two steps. First, the age and gender composition micro results. It is important to highlight that until are exogenously determined following medium this point the microsimulation has operated only in variant estimates from the World Population relative terms. Prospects (UN DESA 2019). In the second step, following (Bourguignon and Bussolo 2013), country- Lastly, GIDD adjusts the average income/ specific educational profiles are constructed using consumption per capita to guarantee that it changes initial educational achievement levels observed in exactly in line with the CGE results. After creating the household surveys with some conservative yet new earnings for workers, a vector of per capita simple assumptions about educational progress. For household income is constructed considering new A NEW GROWTH HORIZON FOR ARGENTINA 81 earnings and household size when information about the relationship between incomes and savings exists. If not, a one-to-one passthrough from per capita household income to consumption is assumed. In this regard, ARG-IDD constructs a household- specific deflator to adjust for changes in relative prices. The price deflator is constructed using initial and final price indexes of food versus non-food expenditure from the macro model and household- specific budget consumption shares for food and non-food expenditure observed in the micro data. Individual food shares were estimated following a global Lorenz’s curve using standardized household surveys present in Deaton and Dupriez (2011). 82 A NEW GROWTH HORIZON FOR ARGENTINA 3 CHAPTER Upgrading and Using Human Capital for Inclusive Growth 3.1. The labor market is characterized by increasing levels of precariousness, low productivity, and modest skill levels Argentina’s labor productivity stagnated for the past 20 years. This weak performance reflects the limited productivity growth of relatively high- performing sectors, while the sectors with the lowest labor productivity – services, commerce, and construction – have experienced larger employment gains (Figure 3.1 and Figure 3.2). Decompositions of per capita income growth in Argentina for the period 2006 to 2019 show negative within-sector labor productivity growth in contrast to benchmark countries where within-sector labor productivity growth has been the largest contributor to growth (Figure 3.3). The lackluster performance of labor productivity in services is particularly worrisome given that this sector has steadily increased its employment share, representing nearly 80 percent of total employment in 2021, a trend that is expected to persist in the future (Beylis et al., 2020). 16 83 UN NUEVO HORIZONTE DE CRECIMIENTO PARA ARGENTINA A NEW GROWTH HORIZON FOR ARGENTINA 83 Figure 3.1 Figura 3.1. Labor productivity in Argentina has remained stagnant Employment and value added per worker, by sector (2006 and 2021) 3.5 a. 2006 5.0 b. 2021 Government Government 4.5 3.0 4.0 2.5 3.5 Millions of people Millions of people 3.0 2.0 2.5 1.5 Transport Other non-tradable services and comunic. 2.0 Transport Other non-tradable services and comunic. Industry 1.5 1.0 Professional services Commerce Professional services Commerce Industry 1.0 0.5 Construction Agro 0.5 Mining + EGW Construction Agro Mining + EGW 0.0 0.0 0 50 100 150 200 250 300 350 0 50 100 150 200 250 Output per employee in thousand 2004 pesos Output per employee in thousand 2004 pesos Source: World Bank based on INDEC and Ministry of Labor Ministry of Labor, Employment, and Social Security. Note: Private employment is estimated by combining formal private sector employment (data from Ministry of Labor, Employment, and Social Security) with the informality rate (from the permanent household survey – EPH). Public sector employment was taken directly from the EPH. Value added is measured as output per employee. EGW: Electricity, gas & water. Other non-tradable services: real estate, financial intermediation, education, social and health services. Other: community, social and personal service activities. A methodological break in INDEC employment series does not allow for comparisons with earlier dates. Figure 3.2 Figura 3.2. Sectoral productivity growth is trailing peers Labor productivity in Argentina and comparator countries by sector (1997-2019) Annual percent change in output per worker, 1997=1 3.0 a. Agriculture b. Industry 1.7 c. Services 2.1 1.6 1.9 1.5 2.5 1.7 1.4 2.0 1.5 1.3 1.3 1.2 1.5 1.1 1.1 1.0 0.9 1.0 0.9 0.7 0.8 0.5 0.5 0.7 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Brazil Mexico Malaysia Brazil Mexico Malaysia Brazil Mexico Malaysia Poland Chile United States Poland Chile United States Poland Chile United States Peru Colombia Argentina Peru Colombia Argentina Peru Colombia Argentina Source: WDI and EPH for Argentina. Note: Employment refers to total (both formal and informal) employment. 84 A NEW GROWTH HORIZON FOR ARGENTINA Figure 3.3 Figura 3.3. Within-sector reallocation has contributed negatively to growth Decomposition of growth in per capita value added in Argentina and comparator countries, annual percentage point change (2006 to 2019) Poland Total=3.9% Malaysia Total=3.3% Brazil Total=1.0% Australia Total=1.1% LatAm and Caribe Total=1.2% Argentina Total=0.2% -1 0 1 2 3 4 5 Annual change (percentage points) Within-sector productivity Static reallocation Dynamic reallocation Employment rate Participation rate Demographic change Source: World Bank Job Structure Tool. Note: A methodological break in the INDEC employment series prevents comparison with earlier dates. Argentina’s labor market stagnated in the recovering to 46 percent in 2021. Young people were late 2000s and has deteriorated since 2016. particularly badly affected. The unemployment rate As the economy recovered from the 2001 of people between the ages of 15 and 24 spiked economic crisis in the first half of the 2000s, the by 4 percentage points between 2019 and 2020, employment rate increased while unemployment compared to an increase of only 1 percentage point and underemployment fell (Figure 3.4 and Figure for 25-to-59-year-olds. Still, unemployment among 3.5). However, this progress stalled in the late young people returned to pre-pandemic levels in 2000s before deteriorating from the mid-2010s as 2021. economic growth weakened (Moreno and Arakaki, 2020; World Bank, 2021a). Informality is high, particularly among the poor. Sustained economic growth during the 2000s made COVID-19 had a significant impact on Argentina’s formalization more attractive by favoring long-term labor market, though many of the impacts have contracts and by reducing the probability of layoffs dissipated. Unemployment increased slightly from (and so making the higher costs of firing associated 10 percent in 2019 to 11 percent in 2020 – reaching with formality less likely) (Maurizio, 2014). As a high of 13 percent in the second quarter – but economic growth waned in the 2010s, the decline returned to pre-pandemic levels in 2021. Labor force in informality also waned. Informal employment participation deteriorated substantially, falling from currently makes up around a third of salaried work 47 percent in 2019 to 43 percent in 2020 before (Figure 3.6).50 This is much higher than in Brazil, 50  Informal workers are salaried workers who do not make contributions to social security. A NEW GROWTH HORIZON FOR ARGENTINA 85 Figure 3.4 Figure 3.5 Labor market improvements have stalled since …and underemployment rates Figura 3.4. 2010, reflected in unemployment rates… Figura 3.5. Unemployment rate in Argentina, as % of labor force, Underemployment rate in Argentina, as % of employment, 2003-2021 2003-2021 20% 18% Men Women Total 18% 16% 16% 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Source: INDEC via MTEySS. Source: INDEC via MTEySS. Note: Underemployed workers work less than 35 hours a week and are willing to work more. Chile, Australia, and Uruguay (Figure 3.7). Informality Public employment has become increasingly rates are particularly high in domestic services (75 important in the last decade as private job percent) and construction (73 percent), with a high creation has stagnated. Private sector job growth incidence among low educated workers and the poor. was strong during the commodity boom in the 2000s, but slowed during the 2010s due to macroeconomic The growth of own-account workers in recent distortions, a distortive tax system, underinvestment years could be an indication of growing labor in infrastructure, and credit constraints, among market precariousness. The share of non-salaried other factors (World Bank, 2022; World Bank, 2018). own-account workers grew from 19 percent of the Instead, employment growth has been concentrated workforce in 2015 to 23 percent in 2021. At the same in the public sector. Between 2012 and 2019, the time, the share of salaried workers declined from 77 public sector was responsible for 95 percent of the percent of employment to 72 percent. Whether this 591,000 salaried jobs created (Figure 3.8). This role represents a further deterioration in the quality of became stronger during the COVID-19 pandemic, jobs (with own-account workers replacing the role of when public employment increased even as private informality, which has remained constant in recent hiring declined. Public sector jobs represented 17 years), or is evidence of a shift in the organization of percent of jobs in Argentina in 2019, higher than in work – is not yet clear (Moreno and Arakaki, 2020; all comparator countries except for Australia, the World Bank, 2021a). Slovak Republic, and Poland (Figure 3.9). 86 A NEW GROWTH HORIZON FOR ARGENTINA Figure 3.6 Figure 3.7 Figura 3.6. Figura 3.7. Informality has stopped declining… …ranking Argentina mid-table among comparators Informality rate in Argentina, as % of salaried employment, Informality rates, as % of employment, 2019 2003-2021 60% 90% 80% 50% 70% 40% 60% 50% 30% 40% 20% 30% 20% 10% 10% 0% 0% 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Indonesia Thailand Mexico Argentina Brazil Chile Australia Uruguay Source: INDEC via MTEySS. Source: ILO STAT. Note: Year is 2018 for Thailand. Figure 3.8 Figure 3.9 Employment Figura 3.8. growth has been concentrated in the …which Figura 3.8.is among the highest of comparator public sector… countries Private and public salaried employment in Argentina 2012-2021, Public sector employment, as % of employment, 2019 in thousands (2012=1) 800 35% 600 30% 25% 400 20% 200 15% 0 10% -200 5% -400 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Australia Slovakia Poland Argentina Uruguay Malaysia Chile Brazil Mexico Thailand Philippines Indonesia Singapore Private Public Total Source: AFIP via MTEySS. Source: ILO STAT. Note: The year for Singapore is 2021. A NEW GROWTH HORIZON FOR ARGENTINA 87 Figure 3.10 Figure 3.11 The education Figura 3.10. levels of Argentina’s workforce have …but tertiary Figura 3.10. rates are declining among younger increased... people Education level, as % of employment (2003-2021) Tertiary education attainment, as % of total age cohort population (2021 or latest available) 100% 70 KOR Percent of total age group with tertiary education 60 80% AUS 50 ESP 60% POL 40 CHI TUR 30 CRI 40% MEX BRA 20 ARG IDN 20% 10 0% 0 55-64 Age cohort 25-34 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Primary or less Secondary Tertiary Source: INDEC vía MTEySS. Source: INDEC vía MTEySS. Real wage growth has been negative for formal attainment rate among younger cohorts is declining salaried workers since 2018 (World Bank 2022). in contrast to the increases observed in comparison Labor earnings measured as a multiple of the countries (Figure 3.11). Argentina also trails all of number of poverty baskets that can be purchased its aspirational comparators on the share of the have declined across occupational types, with own- workforce with tertiary education (Figure 3.12) and account workers and private informal workers the share of high-skilled workers (Figure 3.14). earning just around the poverty line. Recent increases in poverty have been a result of the decline in labor 3.2. The future of work is changing income. In the two years prior to the pandemic, the demand for skills declines in both formal and informal incomes explain about 60 percent of the increase in the poverty rate The nature of work is changing. The services (World Bank 2022). sector, as well as services jobs across all sectors, are becoming more important (Beylis et al., 2020). Though the skills level of Argentina’s workforce Technological progress and the rise of the knowledge has increased, it continues to lag peers. Between economy are increasing demand for both cognitive 2003 and 2021, the share of workers with primary and socioemotional skills, while the need for workers education or less fell 18 percentage points, while to perform routine tasks is declining. At the same the share with secondary and tertiary education time, digital skills are increasingly a prerequisite increased 10 and 8 percentage points, respectively for jobs across skill levels. How people work is also (Figure 3.10). However, the tertiary education changing. Digitization is creating opportunities 88 A NEW GROWTH HORIZON FOR ARGENTINA Figure 3.12 Figure 3.13 Figura 3.12. workforce is less educated than its Argentina’s 3.13. is also behind most of its aspirational Argentina Figura aspirational peers peers for workforce skills Percent of employees with tertiary education (2020) Percent of highly-skilled employees (2019) 70% 100% 60% 80% 50% 60% 40% 30% 40% 20% 20% 10% 0% 0% Singapore South Korea Australia Poland Malaysia Slovakia Philippines Brazil Argentina Chile Mexico Thailand Uruguay Indonesia 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Professional Technical Operational Unqualified Source: ILOSTAT. Source: INDEC vía MTEySS. for employment via platforms that typically have emerging roles identified by the senior executives lower barriers to entry and allow for more flexibility. surveyed are related to digital technologies and IT, But these jobs often have a murky place in labor while the most redundant roles relate primarily to regulations and lack benefits and access to social occupations involving manual and repetitive tasks protection. (Figure 3.18). These changes are apparent in Argentina’s Jobs in Argentina increasingly involve analytical labor market. At the sectoral level, private sector and interpersonal skills. Between 1998 and 2015, employment has shifted away from industry and non-routine cognitive analytical skills, non-routine towards services. Occupations are also evolving cognitive interpersonal skills, and routine cognitive significantly, particularly in the direction of digitally skills all increased in importance in Argentina (Apella intensive jobs. The top emerging occupations and Zunino, 2017). At the same time, routine and non- identified by LinkedIn from its users between 2015 routine manual skills have declined in importance. and 2019 are strongly linked to technologies, digital The transition to cognitive tasks and away from skills, and IT industries (LinkedIn, 2021). These include manual ones has been stronger in other countries, data engineers, data scientists, and JavaScript though Argentina does appear to have fewer routine- developers. This is consistent with qualitative intensive jobs (Apella and Zunino, 2022; Gasparini et evidence collected from the World Economic Forum’s al., 2021). Future of Jobs survey. Nearly all of the top 10 A NEW GROWTH HORIZON FOR ARGENTINA 89 Figure 3.14 Emerging jobs are in digital technologies while manual tasks are becoming redundant Principales empleos emergentes y redundantes citados por los altos ejecutivos en orden descendente de importancia Emerging Redundant AI & Machine Learning Specialists Data Entry Clerks Robotics Engineers Accounting, Bookkeeping and Payroll Clerks Digital Transformation Specialists Electronics and Telecomm Installers & Repairers Software and Applications Developers Assembly & Factory Workers Internet of Things Specialists Administrative & Executive Secretaries FinTech Engineers Shop Salespersons Data Analysts and Scientists Sales & Marketing Professionals Business Services & Administration Managers Relationship Managers Renewable Energy Engineers Material-Recording & Stock-Keeping Clerks Digital Marketing & Strategy Specialists Bank Tellers & Related Clerks Source: WEF (2020). Automation, and its potential displacement Automation’s positive productivity effects may effects, are a concern for policymakers but large- help generate new employment and mitigate scale automation-linked employment losses are the potential negative effects of population unlikely. The development of new technologies like aging. The introduction of new technologies can artificial intelligence and mobile robotics has raised increase productivity, which not only leads to concerns that even jobs that involve non-routine the replacement or alteration of certain types of tasks may be automated out of existence. Recent tasks or jobs, but also to the creation of new jobs World Bank research evaluated the two primary and tasks (Beylis et al., 2020). Higher productivity approaches for estimating the technical potential can raise the demand for goods in the industry for automation in Latin America and the Caribbean in which a technology is introduced by lowering (Beylis et al., 2020). Under both approaches, marginal costs and resulting in lower prices. It can and various robustness tests, Argentina has one also generate additional demand in interconnected of the lowest estimated shares of jobs at risk industries, and even create entirely new industries. from automation in the region (Figure 3.19). This Automation-linked productivity gains could also in part reflects the relative scarcity of routine play a role in mitigating the potential negative work in Argentina, in turn partly explained by the effects of population aging as Argentina’s working predominance of service sector jobs that generally age population shrinks in the near future. Indeed, involve harder-to-automate interpersonal tasks.51 robots may be an important part of the explanation 51  These methodologies also do not take into account important factors beyond technical potential that could affect the pace of automation. These include the economic costs and benefits for firms, particularly smaller ones, of adopting automation technologies and the stage they are at in adopting digital technologies; the fact that many workers in the LAC region work in subsistence jobs; and the legal, ethical, and cultural factors that may shape how quickly automation technologies are adopted (Arntz, Gregory, and Zierahn, 2016; Weller, Gontero, and Campbell, 2019; Dini and Rueda, 2020). 90 A NEW GROWTH HORIZON FOR ARGENTINA Figure 3.15 Figure 3.16 Argentina has lower shares of jobs at risk from Argentina has fewer digital skills than comparators Figura 3.15. Figura 3.16. automation in the region Percent of jobs at high risk of automation in Latin America Su ciency of digital skills as % of the best performer and the Caribbean 60 70% Porcentaje de empleos en alto riesgo (>70%) 50 60% 50% 40 40% 30 30% 20 20% 10 10% 0 0% Argentina Bolivia Brazil Chile Colombia Costa Rica Dominican Rep. Ecuador Honduras Mexico Nicaragua Panama Peru Paraguay El Salvador Uruguay Singapore Australia Poland South Korea Slovakia Chile Malaysia Argentina Brazil Uruguay Philippines Mexico Thailand Indonesia Arntz et al. Chile, imputed STEP, Colombia, imputed STEP, Bolivia, imputed Frey and Osborne, imputed Source: Beylis et al. (2020). Note: numbers indicate the percentage of jobs at Source: WEF (2020). high risk of being automated. Estimates based on the methodology of Frey and Osborne (2017) and Arntz, Gregory, and Zierahn (2016). for why a negative relationship between population The expansion of digital technologies and aging and economic growth has not been observed automation is affecting the skill types sought (Acemoglu and Restrepo, 2017). by employers in Argentina. Demand is evolving towards digital, critical thinking, and socioemotional However, automation is likely to affect certain skills (Herrera et al., 2019; Cunningham, Acosta, types of workers more. World Bank research on and Muller, 2016; Busso et al., 2012). In Argentina, automation in Latin America and the Caribbean for example, the socioemotional skill self-efficacy – finds that less education and lower earnings are being inclined to perceive oneself as a good student associated with work in occupations with the types or worker – is positively associated with employment of manual and routine tasks that are likely to be and higher wages (Bassi et al., 2012). Qualitative automated (Beylis et al., 2020). More education and evidence collected by the World Economic Forum higher earnings, in contrast, are linked to occupations from senior executives in Argentina shows that requiring the use of cognitive, analytical, and social a combination of technical (digital) skills and skills. socioemotional skills is increasingly important for organizations (WEF 2020). A NEW GROWTH HORIZON FOR ARGENTINA 91 92 0% 5% 10% 15% 20% 0% 5% 10% 15% 20% South Korea Indonesia Figure 3.17 Figura 3.17. Poland Malaysia Source: LinkedIn. Singapore Brazil Malaysia South Korea Thailand Philippines Philippines Argentina Mexico Poland Brazil Mexico Manufacturing Manufacturing Indonesia Australia A NEW GROWTH HORIZON FOR ARGENTINA Australia Singapore Argentina Thailand Chile Chile Uruguay Uruguay South Korea Poland Poland Brazil Chile Argentina Brazil Philippines Uruguay Chile Argentina Indonesia Australia Percent of industry’s top 50 skills in each skill group by country, 2021 Thailand a. Technology skills Australia Malaysia b. Disruptive technology skills Professional Services Professional Services Singapore Mexico Mexico Thailand Indonesia Uruguay Philippines Singapore Malaysia South Korea Uruguay Thailand Poland Uruguay Thailand Poland South Korea Brazil Singapore Argentina Chile Indonesia Brazil Mexico Argentina Chile Technology skills are strong in Argentina, but adoption of disruptive technology skills is behind Mexico South Korea Malaysia Malaysia Australia Philippines Technology, Information, and Media Technology, Information, and Media Indonesia Singapore Philippines Australia Argentina lags peers in the disruptive technology can allow women, young people, and people with skills most closely associated with the future of restricted mobility improved access to employment. work. Evidence from the WEF survey cited above Barriers to entry tend to be lower – an internet shows that Argentina is lagging comparators connection and smartphone may be all that is on (basic) digital skills (Figure 3.22). Relative to required – allowing individuals with lower skills comparators, data from LinkedIn shows that and less access to capital to obtain employment. technology skills such as the use of digital devices, However, platform work has downsides. Competition communications applications, and networks are is strong and global in the case of online-based fairly common in Argentina’s manufacturing, platform work, platform jobs can involve long periods professional services, and ICT sectors (Figure 3.23 looking for tasks and performing other unpaid Panel A). However, Argentina underperforms on the administrative tasks, and most platform workers disruptive technology skills most closely associated lack access to the benefits of standard employment with the future of work, such as artificial intelligence like social protection, workplace protections, and (Figure 3.23 Panel B). In the manufacturing and ICT training (Brinatti et al., 2021; ILO, 2021; Oyer, 2020; sectors in particular disruptive technology skills are Wood, 2019). In Argentina, for example, around 45 much less common than in peer countries. percent of platform workers do not make pension contributions, implying a slightly higher informality As in many countries, platform work has rate than in the country at large (Madariaga et al., emerged as a new type of working arrangement 2019). in Argentina. Platform work is on-demand work typically paid on a piece-rate basis and performed The COVID-19 pandemic has led more firms either online and remotely (such as Upwork and and workers to consider remote forms of work. Clickworker) or at a physical location (such as Uber In Argentina, the incidence of working from home and PedidosYa) (ILO 2021). Platform work has become increased from around 6 percent of jobs just before more common in Argentina, particularly in recent the pandemic, to above 20 percent in the final three- years as the COVID-19 pandemic increased demand quarters of 2020, similar to the average of 25 percent for services provided through apps (e.g. delivery) and in high-income countries (Maurizio, 2021). While for jobs that could be done remotely (Beccaria et al. it seems plausible that levels of remote work will 2020). Still, only about 1 percent of the workforce remain higher than they were prior to the pandemic, has generated income from platform work in the there are likely to be limits to how many jobs can be last year, about the same as Colombia’s 0.9 percent done remotely. One estimate for Argentina suggests (Madariaga et al., 2019; Fernandez and Benavides, that 40 percent of jobs require some kind of physical 2020). In general, platform workers in Argentina interaction (Albrieu, 2020). Access to the internet tend to be young, male, and more highly educated, and computers is another constraint, particularly for which seems to be the case in other countries in disadvantaged workers. Latin America and the Caribbean (Madariaga et al., 2019; Mourelo, 2020). A substantial portion (around 3.3. Argentina’s human capital needs 20 percent) are migrants. to adapt to the changing world of work Platform work offers significant potential for workers and firms, but also has downsides. Firms in Argentina are struggling to find workers Platform workers typically seek out this type of with the right skills. Approximately 40 percent of work for the flexibility it offers and to earn additional firms surveyed in the World Bank’s 2017 Enterprise income. Flexibility in the time and location of work Survey reported an inadequately educated workforce A NEW GROWTH HORIZON FOR ARGENTINA 93 as a major constraint. This compares to a LAC learning the foundational cognitive skills that are average of 29 percent. Indeed, firms seem unable necessary to acquire intellectual, methodological, to find workers with the skills they need. A 2016 or specialized knowledge in later stages in life (for survey found that 59 percent of firms had difficulty instance, reading and early mathematical skills, finding workers with the right skills (OECD, 2017). memory, attention, and solving increasingly complex Argentina’s unmet labor demand survey (Encuesta de problems). Dropout rates among secondary and Demanda Laboral Insatisfecha) shows persistent skills tertiary school students are high, and are in part a gaps, especially for operational and professional consequence of cumulative basic skills deficits that workers (World Bank, 2018). Challenges include both start early in students’ trajectories. Students do not under- and over-qualified workers. Argentina has the access science and technology degrees and technical third-highest rate of “qualification mismatch” among schools to the extent demanded by the country’s G-20 countries (OECD and ILO, 2018; OECD, 2021b). changing skill needs. Further, as the demands of While skills shortages are modest compared to the labor market shift with evolving technologies, other G-20 members, Argentina is still experiencing educational institutions will need to be flexible and these shortages for many high-level cognitive and adapt to constantly shifting needs that increasingly social skills, such as reasoning abilities and complex include not just specific technical skills but also problem solving, and for digital economy skills such higher-order cognitive and socioemotional skills. as computers and electronics. While access to education has expanded over the Argentina will need to invest in its human capital last decades, the quality of education, measured to meet the evolving demands of a technology- by acquired learning, lags in Argentina. Pre- driven, knowledge-based global economy. pandemic results of the Human Capital Index (HCI), Strengthening the skills development systems which measures the potential productivity of the available to young people prior to their entry into the next generation of workers, revealed that a child born labor market would improve Argentina’s ability to in Argentina would be only 60 percent as productive take advantage of ongoing changes in the nature of when she grows up as she could be if she enjoyed work. Challenges are particularly severe for several complete education and full health. These results are groups whose human capital is underutilized in driven largely by the education outcomes: despite an the labor market. These include women and young expected schooling attainment of 12.9 years, children people – both groups have relatively low labor force in Argentina attained only 8.4 learning-adjusted participation rates and high unemployment rates, years of schooling—a learning gap of 4.5 years. as well as often lower quality jobs. Incorporating The low quality of education remains a challenge if underutilized human capital into the labor market students are to acquire the skills they need to benefit has the potential to boost growth as an aging from education. population, and the ensuing shrinkage of the working age population, begins to take hold in the coming Students in Argentina are not learning years. foundational cognitive skills. Data from regional learning assessments show that in 2019, around 3.3.1 Challenges in developing human 46 percent of third grade students in Argentina did capital not reach minimum levels of proficiency in reading and 68 percent of them underachieved in math Argentina will need to strengthen the pathways (UNESCO, 2021). This means that a large share of that lead to the accumulation of human capital. primary school students are not able to read and Most students in the education system are not understand a simple text or solve a basic math 94 A NEW GROWTH HORIZON FOR ARGENTINA Figure 3.18 Figura 3.18. Argentina’s 15-year-olds score below most comparators for all subjects PISA scores for 15-year-olds, as % of students (2018) A. Mathematics B. Science C. Reading 100% 100% 100% 75% 75% 75% 50% 50% 50% 25% 25% 25% 0% 0% 0% Singapore Poland South Korea Australia Slovak Republic Malaysia Uruguay Chile Thailand Mexico Brazil Argentina Indonesia Philippines Singapore Poland Korea, Rep. Australia Slovak Republic Chile Malaysia Uruguay Thailand Mexico Argentina Brazil Indonesia Philippines Singapore Korea, Rep. Poland Australia Slovak Republic Chile Uruguay Mexico Malaysia Brazil Argentina Thailand Indonesia Philippines Level 1 and below Level 2 and above Level 1 and below Level 2 and above Level 1 and below Level 2 and above Source: OECD (2019). PISA 2018 Results (Volume I): What Students Know and Can Do. Note: Level 1 is the lowest PISA proficiency level. problem. Moreover, Argentina was the only country performers that drive knowledge creation (OECD, in the region that saw learning losses between 2013 2016c). and 2019 for all grades and subjects assessed. The COVID-19 pandemic has deepened these Secondary students in Argentina also perform challenges. In Argentina, attendance rates dropped poorly on standardized tests. More than two-thirds 2.3 percent between February 2020 and May/July lack basic proficiency in mathematics and more than 2021 for students aged between 6 and 14, and by half in science and reading (Figure 3.26). This means 14 percent for those aged between 15 and 17 (World that these students are likely to face significant Bank, 2022). Losses in learning-adjusted years of challenges transitioning to the labor market (OECD, schooling were 1.7 years in Argentina. This is above 2016c). Additionally, very few students in Argentina the regional average of 1.5 years, but below losses perform at the highest levels of achievement. Close in Brazil (1.8 years), Mexico (2 years) and Chile (2 to zero percent of students score at the highest years) (World Bank, UNICEF and UNESCO, 2022). or second-highest PISA levels across all subjects The effects of the pandemic are expected to be long- (Figure 3.27). This combination of a surfeit of lasting. Many students, especially from the most students lacking basic proficiency and a deficit of vulnerable backgrounds, will likely see a decline in high-performing students bodes poorly for a world their level of content knowledge and socioemotional of work that increasingly requires a workforce with a well-being due to the prolonged school closures and combination of baseline skills along with exceptional adverse economic impacts. A NEW GROWTH HORIZON FOR ARGENTINA 95 Figura 3.19. Figure 3.19 Argentina’s 15-year-olds are rarely high-scoring Percent of students scoring at Level 5 or Level 6 (2018) 40% 35% 30% 25% 20% 15% 10% 5% 0% Singapore South Poland Australia Slovak Chile Brazil Malaysia Thailand Uruguay Argentina Mexico Indonesia Philippines Korea Republic Mathematics Science Reading Source: OECD (2019). PISA 2018 Results (Volume I): What Students Know and Can Do. Note: Level 5 and Level 6 are the highest PISA proficiency levels. Learning outcomes for basic skills have finish on time . This rate drops to one third for those significantly worsened, especially for the poorest. from the poorest families. This means that many The results of the national learning assessment students enter the world of work without developing (APRENDER) in 2021 shows that between 2018 and key skills. Indeed, learning deficits relative to OECD 2021, the share of students in the last year of primary countries have already developed by secondary school who did not reach minimum proficiency levels school, implying that skills gaps are even greater. in reading tripled (Figure 3.28). Moreover, students with the lowest socioeconomic status (SES) Dropout has a range of different causes, though experienced the highest losses, widening the gap economic factors are at the root of school with the richest from 91 points in 2016 to 109 points dropout in many cases. Dropout is more common in 2021 (Figure 3.29) among students from disadvantaged households and those who have already entered the labor Even before the pandemic, Argentina was market (Bertranou, Jiménez, and Jiménez, 2017). struggling with high dropout rates, meaning that But a multitude of additional factors can play a many students enter the labor market lacking key role. These include pregnancy, the top reason cited skills. Net enrollment in secondary school is nearly in the 2014 National Youth Survey (INDEC 2015) for universal in Argentina, at 92 percent in the second girls dropping out; care responsibilities, which are quarter of 2019 prior to the pandemic (CEDLAS more often undertaken by young women than young and World Bank, 2022). Rates were slightly higher men; and a lack of or poor information about school for women (93 percent) than for men (90 percent). and the effort required and outcomes that can be However, school dropout is common: about half of expected (Bertranou, Jiménez, and Jiménez, 2017; students that begin secondary education do not Lopez, 2022). 96 A NEW GROWTH HORIZON FOR ARGENTINA Figure 3.20 Figure 3.21 Figura 3.20. levels of Grade 6 students in reading, % Proficiency …mostly Figura affecting students of lowest 3.21. of total socioeconomic status Proficiency levels of Grade 6 students in reading, % of total Average score for Grade 6 reading by socioeconomic status 100% 650 22.4 80% 32.3 35.4 600 Score in APRENDER 550 60% 33.6 34.5 500 39.9 40% 21.7 450 20% 18.7 17.6 400 22.3 14.5 7.1 0% 350 2016 2018 2021 2016 2018 2021 Below basic Basic Satisfactory Advanced Low SES High SES Source: APRENDER 2021. Source: APRENDER 2021. Similar to secondary school, enrolment in tertiary the World Economic Forum’s qualitative measure of education is high but completion is low. Net the business-relevance of tertiary education (Figure enrollment in tertiary education has increased in 3.31). recent years, rising about 5 percentage points since 2010 to 39.2 percent in the second quarter of 2019 Tertiary students’ educational choices raise (CEDLAS and World Bank, 2022). This is higher concerns about their preparation for the future than Brazil’s 24 percent, Uruguay’s 28 percent, and of work. Technical and vocational education and Mexico’s 34 percent, but below Chile’s 47 percent. training (TVET) will likely be a key component in As for secondary education, however, enrolment responding to the new types of skills demanded by does not translate into quality outcomes, in part jobs of the future, given TVET’s objective of providing because of low graduation rates and high time- technical skills and its potentially closer links to labor to-degree ratios (Figure 3.30). Low graduation market demand. However, a bias towards university rates are a particular issue for students from more degrees means that only around 20 percent of disadvantaged socioeconomic backgrounds. High tertiary students are enrolled in TVET in Argentina, a opportunity costs, lack of information to make lower share than for comparators (Figure 3.32). This career decisions, and weaknesses in socioemotional is despite the fact that non-university degrees tend skills all contribute to low graduation rates. The low to have higher economic returns than university graduation rates contrast with qualitative evidence degrees. Fields of study are also skewed towards the that tertiary education provides business-relevant humanities at the expense of the science, technology, skills. Argentina ranks third among comparator engineering, and mathematics (STEM) and digital countries (with a score quite similar to Australia) on skills that are growing in demand and likely to A NEW GROWTH HORIZON FOR ARGENTINA 97 Figure 3.22 Figure 3.23 Completion of tertiary education is lower than Argentina’s tertiary education performs well for Figura 3.22. Figura 3.23. peers’ business-relevant skills Gross graduation ratio from tertiary education, percent of Business relevance of tertiary education, as % of the population at theoretical graduate age, 2019 best-performing country, 2020 70% 90% 80% 60% 70% 50% 60% 40% 50% 30% 40% 30% 20% 20% 10% 10% 0% 0% Australia Singapore South Korea Poland Slovak Rep. Mexico Thailand Indonesia Argentina Chile Malaysia Singapore Australia Argentina Malaysia Indonesia Thailand Mexico Poland Brazil Source: UNESCO Institute for Statistics. Note: Data is from 2017 for Mexico, Source: WEF (2020). 2015 for Thailand, 2018 for Indonesia, and 2020 for Malaysia. have higher returns (Bustelo, Flabbi, and Viollaz, written text, and undertaking core pedagogical 2019). Argentina comes last among comparator practices like planning a lesson and evaluating countries for the proportion of students studying student learning. Challenges with teacher quality are in STEM programs (Figure 3.33). The bias against related to the low selectivity of teaching education STEM programs is more severe for women: despite programs, low-quality teacher training institutes, making up 59 percent of the university population, little to no practical training on teaching in a women make up just 33 percent of STEM students classroom, and poor quality assurance and teacher (Cortelezzi, 2021). This is ultimately translated into evaluation mechanisms (Aguerrondo and Vezub, the world of work, for example, in the lack of women 2011; Elacqua et al., 2018; Narodowski et al., 2018). in IT professions (Aramburu and Goiicoechea, 2021). The ability of teachers to provide skills of the future – like digital skills – is also in question. Only 41 percent Finally, Argentina faces challenges in assuring of school principals agreed with the statement quality teaching. Evidence for teacher quality is that “Teachers have the necessary technical and scarce in Argentina as no teacher evaluations exist. pedagogical skills to integrate digital devices in However, the Enseñar evaluation52 of prospective instruction.” This is the lowest in Latin America and teachers found that over 40 percent struggled with the Caribbean and far below the 65 percent OECD extracting and interpreting information, producing average (World Bank, 2022). 52  https://www.argentina.gob.ar/educacion/evaluacion-informacion-educativa/ensenar 98 A NEW GROWTH HORIZON FOR ARGENTINA Figure 3.24 Figure 3.25 3.24. has lower TVET enrolment than some Argentina Figura comes last for the share of STEM and ICT …and3.25. Figura peers… graduates Enrolment in TVET programs, as % of students enrolled Field of study of graduates of tertiary education, as % of tertiary in tertiary education, 2019 graduates, 2019 40% 45% 35% 40% STEM ICT 30% 35% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% Singapore Malaysia Chile Australia South Korea Argentina Thailand Indonesia Philippines Mexico Slovak Rep. Poland Brazil Malaysia Singapore South Korea Thailand Mexico Philippines Slovak Rep. Poland Chile Indonesia Australia Brazil Uruguay Argentina Source: UNESCO Institute for Statistics. Note: Data is from 2016 for Thailand, Source: UNESCO Institute for Statistics. Note: Data is from 2016 for Thailand 2018 for Indonesia, and 2017 for the Philippines. and 2018 for Indonesia. 3.3.2 Challenges in the utilization of the HCI (Figure 3.34). This is the greatest gap among human capital comparator countries. While the female HCI is higher than the male HCI in Argentina, the female UHCI is On top of the challenges facing human capital lower than the male UHCI, indicating that women accumulation, human capital is also significantly face more significant barriers than men in deploying underutilized in Argentina. The World Bank’s their human capital. Human Capital Index (HCI) measures the human capital that a child born today could expect Women’s labor force participation is much lower to acquire at age 18 based on their health and than in other countries. The female labor force education. The utilization-adjusted HCI (UHCI) participation rate prior to the COVID-19 outbreak incorporates information about (non-agricultural) was 40 percent, 15 percentage points lower than employment to assess how inefficiencies disrupt the male rate of 55 percent (Figure 3.35). This gap the deployment of human capital in labor markets puts Argentina below most comparator countries (Pennings, 2020).53 While the UHCI reduces the HCI (Figure 3.36). Household and care responsibilities across countries, it is particularly stark in Argentina are a common reason for women, particularly young where the total UHCI is nearly 40 percent lower than women, remaining out of the labor market. In 2019, 53  The utilization-adjusted human capital index (UHCI) deploys the share of the working age population that is employed as a proxy to measure how well accumulated human capital (as expressed in the Human Capital Index) is used. An alternative measure uses the share of workers who are non-agricultural employees or employers to incorporate job quality into the measure. The indicators show the long-run income gains of moving to full human capital and full utilization of human capital. Thus, a UHCI score of 0.3 means that a child born today will only be 30 percent as productive as they would be with full education and health and with full utilization of their labor. A NEW GROWTH HORIZON FOR ARGENTINA 99 Figure 3.26 Figura 3.26. Human capital is also significantly underutilized Percent gap between HCI and Utilization-adjusted Human Capital Index (UHCI) overall, and by gender, in Argentina and comparator countries 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Australia Poland Malaysia South Korea Argentina Mexico Chile Australia Poland Malaysia South Korea Argentina Chile Mexico Australia Malaysia Poland South Korea Mexico Chile Argentina Total Female Male HIC UHCI Source: World Bank, updating Pennings (2020). the labor force participation rate was just 33 percent digits today. Education is an important determinant for women with children younger than 10 in their of women’s labor market outcomes. In 2019, the households, and there were substantial differences labor force participation rate for women between the in participation rates for women from around age ages of 25 and 64 without secondary education was 25 into older age (Figure 3.37). Indeed, most inactive 57 percent, compared to 71 percent for women with young women in Argentina report not working secondary education and 89 percent for women with because of household duties (Golman, 2020). Female tertiary education. The gender gap in labor force unemployment is also slightly higher than male participation has a similar educational component. unemployment. The participation gap between women and men is substantially larger among the less educated (29 Women’s employment tends to be more precarious. percentage points) than among those who acquire Fourteen percent of women employed in 2021 were university degrees (10 percentage points).54 underemployed, meaning that they are able and willing to take on more work. This is 4 percentage Women work fewer hours of paid work than points more than men. Women are also somewhat men and undertake substantially more unpaid more likely than men to be informally employed, with work. Between 2016 and 2019, women worked for an informality rate of 34 percent in 2021 compared pay an average of 30 hours per week compared to to 30 percent for men. This gap has narrowed, 40 hours per week for men (Trombetta and Cruz, however, from double digits in the 2000s to single 2020). This in large part reflects women’s dominant 54  Data from EPH-INDEC. 100 A NEW GROWTH HORIZON FOR ARGENTINA Figure 3.27 Figure 3.28 Female labor participation is lower The female/male labor participation gap is Figura 3.27. Figura 3.28. than male larger than many comparators Labor force participation rate in Argentina by gender, Ratio of female to male labor force participation rate, 2021 % of population, 2004-2021 60% 100% 50% 80% 40% 60% 30% 40% 20% 20% 10% 0% 0% 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Australia Slovak Rep. Uruguay Thailand Singapore Poland South Korea Brazil Argentina Chile Malaysia Indonesia Philippines Mexico Men Women Source: INDEC vía MTEySS. Source: ILOSTAT. Note: The ratio is the ILO modeled estimate. role in unpaid care work at home, particularly among in better-paid jobs. Data from LinkedIn shows younger women. Women take on a larger share of that the share of women declines as seniority unpaid domestic and care work: they represent two- increases until only 21 percent of C-Suite roles (top thirds of all people with unpaid work and spend 50 senior executives) are occupied by women (Figure percent more time – or 7 hours a week more – than 3.39). Men make up 96 percent of employment men on unpaid work (Micha, Trombetta and Pereyra, in construction, 89 percent in transport, and 71 2021). This is particularly true in households with percent in manufacturing (Figure 3.40). Women small children and with lower incomes. make up just 22 percent of professionals in the high- paying information technology (IT) sector (Aramburu Women are underrepresented in high-level jobs. and Goiicoechea, 2021). Data from LinkedIn also Women workers tend to be more educated, but this shows that women who work in the ICT sector have is not reflected in the jobs they obtain in the labor different skills from men, perhaps indicating that market (Figure 3.38). Women are overrepresented they work in different roles. (Table 3.2). As the world in low-skilled jobs like domestic work where they of work becomes more digitized, this educational represent 99 percent of employment (Trombetta and occupational segregation could create further and Cruz, 2020). Women are also underrepresented disadvantages for women. A NEW GROWTH HORIZON FOR ARGENTINA 101 Figure 3.29 Figura 3.29. Women with young children are less likely to participate in the labor market than those without Labor force participation rate of women with and without children younger than 10 in their households, as % of population (2019) 100% 80% 60% 40% 20% 0% 15 20 25 30 35 40 45 50 55 60 Age Without under 10 With under 10 Source: EPH, INDEC. Figure 3.30 Figure 3.31 Women workers tend to be more educated… Figura 3.30. Figura they …but 3.31. are underrepresented in high level jobs Education levels in Argentina by gender, as % of employed Share of women by job seniority in Argentina, as % of population, 2021 employment, 2021 40% 60% 35% 50% 30% 40% 25% 20% 30% 15% 20% 10% 10% 5% 0% 0% Incomplete Less than Complete Complete Entry Senior Manager Director VP C-Suite secondary secondary tertiary Male Female Source: EPH, INDEC. Source: LinkedIn. Note: C-Suite designates titles of top senior executives, such as CEOs. 102 A NEW GROWTH HORIZON FOR ARGENTINA Figure 3.32 Table 3.1 Women in the ICT sector have more non- Women Figura dominate in domestic service, education 3.32. technology skills than men and health jobs Top 10 most characteristic skills in Argentina’s ICT sector, Di erence between male and female share of employment 2021 in Argentina by sector, in percentage points, 2021 100 Women Men 80 Spanish Scrum* 60 40 Scrum* SQL* 20 Agile Methodologies* Git* 0 Jira* JavaScript* -20 -40 SQL* MySQL* -60 Can-do approach Microsoft SQL Server* -80 Interpersonal relationships Node.js* -100 Domestic service Education Health Real Estate Other Services Professional Public admin Accommodation Financial Trade Arts Administrative Manufacturing Communications Agriculture Electricity Mining Transport Construction Portuguese Agile Methodologies* Liability React.js* Microsoft SQL Server* Spanish Source: LinkedIn. Note: The “*” indicates a technology skill. Source: EPH, INDEC. Note: A positive difference means more women in the sector while a negative one means fewer women. Women in Argentina earn less than men, linked of discrimination or other unobservable factors that to working hours and a potential motherhood are difficult to analyze. Recent research has also penalty, among other factors. Men and women in found a pay gap between mothers and non-mothers, Argentina earn similar hourly wages (around 250 a so-called motherhood penalty (Casal and Barham, pesos an hour in 2021). However, this measure hides 2013). several important factors. First, as described above, women tend to work fewer paid hours. Indeed, the Young people, especially the more educated, face gender wage gap in 2021 was 0 percent when using challenges in accessing jobs. The unemployment hourly wages – that is, women and men made the rate for young people was increasing steadily in the same amount – but widened substantially to 33 years leading up to the COVID-19 outbreak (Figure percent when looking at monthly wages.55 Second, 3.43). As the pandemic waned in 2021, young people this overall measure does not consider individual (those aged up to 24) had an unemployment rate characteristics, notably education level, which is of 23 percent, more than three times the 7 percent higher on average for women in Argentina. Once rate for people between the ages of 25 and 64. Youth these characteristics are controlled for, women’s unemployment is substantially higher in Argentina hourly wages were around 14 percent less than men than in comparator countries (Figure 3.44). High between 2016 and 2019 (Trombetta and Cruz, 2020). youth unemployment – and the spike in youth The remaining “unexplained” gap could be the result unemployment during the COVID-19 outbreak – is 55  ILO (2018a) found similar results in cross-country research on the gender wage gap. A NEW GROWTH HORIZON FOR ARGENTINA 103 Figure 3.33 Figure 3.34 Young people find it harder to access the labor Figura 3.33. unemployment is higher than in most Youth3.34. Figura market comparator countries Unemployment rate in Argentina by age group, as % of labor Unemployment rate for 15-24 age group, as % of labor force force (2003-2021) of same age (2021) 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Uruguay Brazil Argentina Slovak Rep. Chile Indonesia Malaysia Poland Australia Singapore Mexico South Korea Philippines Thailand 15-24 25-59 Source: INDEC vía MTEySS. Source: ILOSTAT. Note: The unemployment rate is the ILO modeled estimate. particularly concerning because of the possibility for hours a week to child care, while those who work or longer-term scarring caused by lower employment study dedicate just over 50 (Bertranou, Jiménez, and rates and wages (Filomena, Picchio, and Giorgetti, Jiménez, 2017). 2022; Schmillen and Umkehrer, 2017; Eliason and Storrie, 2006). When they do find employment, lack of education and insufficient skills can mean that young A relatively large proportion of young people people typically end up in more precarious jobs. are not employed or in school. Nineteen percent Nearly two-thirds of young people were employed of young Argentineans (between 15 and 24 years informally in 2021, compared to 38 percent of old) were not in employment, education or training workers between the ages of 25 and 34 (Figure 3.46). (NEET) in 2019. Argentina’s NEET rate is the third Informality rates decline substantially among higher highest of comparator countries, behind only Brazil education levels. Because many young people drop and Indonesia (Figure 3.45). Care responsibilities out of school before finishing upper secondary levels, are a factor in disengaging from school and work, they lack the necessary skills to secure a formal, and gender differences in the NEET rate (which is 5 stable job and settle instead for informal or part- percentage points higher for women than for men) time employment (de Hoyos, Rogers, and Székely, are also related in part to care responsibilities. For 2016). Indeed, for young people who were previously instance, women between the ages of 20 and 24 who NEET, the informality rate is more than 80 percent do not work and do not study dedicate more than 90 (Golman, 2020). Young people are also more likely 104 A NEW GROWTH HORIZON FOR ARGENTINA Figure 3.35 Figure 3.36 A large Figura share of young people are not in 3.35. are more likely to be Youth3.36. Figura employment, education or training in precarious jobs NEET rate, as % of youth population (2019) Informality rate by age group, as % of salaried employment (2003-2021) 35% 80% 30% 60% 25% 20% 40% 15% 10% 20% 5% 0% 0% Brazil Indonesia Argentina Philippines Mexico Uruguay Chile Thailand Malaysia Slovak Rep. Australia Poland Singapore 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Total Female Male Up to 24 25-34 35-49 50-60 60+ Source: ILOSTAT. Source: INDEC vía MTEySS. to be underemployed and to work on fixed-term section makes 5 recommendations for reforms in contracts than older people. This explains in part these areas, also summarized in Table 3.3. the worse labor market outcomes that young people experience during economic downturns, as their jobs Recommendation 1: Foster human capital are more easily terminated (Bertranou, Jiménez, and development Jiménez, 2017). Quality education is a key part of keeping students 3.4. Policy recommendations in school. Section 3.3.1 identified dropout as a key challenge facing human capital development in Stronger policies to build and use human capital Argentina. The decision to drop out of school is often could unlock growth opportunities. Argentina’s labor the outcome of a cumulative process of frustration market faces significant challenges in generating and disengagement that begins in the initial grades of quality jobs. These challenges are exacerbated by basic schooling. When children experience difficulties the changing skills and tasks required at work, and in learning foundational cognitive skills during their the way in which work is arranged. To respond to and early years, these difficulties can become more take advantage of these changes, Argentina needs pronounced and more challenging to overcome as reforms that promote skills development from early they progress through education levels, particularly education onwards, while also helping workers to for more disadvantaged children. use newly acquired skills in the labor market. This A NEW GROWTH HORIZON FOR ARGENTINA 105 Improvements in instruction can help improve Recommendation 2: Refocus active labor education quality. International evidence shows that market programs (ALMPs) to help the teachers and their professional skills are the most workforce meet evolving skills needs important input for education quality and that the most effective interventions to improve learning are Active labor market programs could help the delivered by teachers. Moving from a low-performing existing workforce meet Argentina’s evolving teacher to a high-performing teacher increases skills needs while also addressing the labor student learning dramatically (by between 0.5 and 2 market challenges of vulnerable groups like young years of schooling). Importantly, good teachers and people and women. Active labor market programs quality teaching can make a difference in schools (ALMPs) seek to engage and reengage workers in with a disproportionate share of students from low the labor market through a variety of strategies socio-economic backgrounds (OECD, 2005; OECD, including employment services like job matching and 2012). Several reforms can help improve instruction career and skills guidance; training like upskilling and in Argentina: reskilling; self-employment and entrepreneurship support; and employment subsidies. Recent • Focus pre-service and in-service teacher successful ALMPs globally have targeted sectors in training on the knowledge, pedagogical, and demand and combined training with complementary socioemotional skills that teachers need to services like labor market intermediation, financial be effective and provide children with the support, and program design that takes into account adequate skills and environment to learn. challenges faced by specific groups (Katz et al. 2022; Shift teacher training emphasis from theoretical Kluve et al. 2019; Stöterau 2019; Ferreyra et al. content to the practical pedagogical skills that 2021). teachers need most in the classroom – for example, how to motivate children and how to check their understanding. The Ministerio de Trabajo, Empleo, y Seguridad • Formative assessment tools can be made Social (MTEySS) has worked to reform its ALMPs available to teachers so they can diagnose in recent years to align them more closely to students in real time and implement remedial employer demand. This includes a shift from measures where needed. For teachers to be able direct provision of employment to an emphasis to implement remedial measures, a supportive on labor market intermediation and training and working environment with good working a competency-based training and certification conditions is important. This goes beyond system. MTEySS has created several programs compensation packages to institutionalizing targeting disadvantaged jobseekers. This includes meritocratic recruitment and providing incentives most recently Fomentar Empleo and Jóvenes con Más for better and learning-aligned performance. y Mejor Trabajo (JMyMT), which take an integrated • Intensify the use of education evaluation and approach to address multiple barriers facing information systems by school staff to identify jobseekers. Earlier programs including Seguro de early deficits, and design programs and interventions to take corrective actions. Track Capacitación y Empleo and Jóvenes also took a more students through their education trajectories integrated approach. Evaluations show that these both at the general system level and at the school latter programs have achieved successful outcomes level. (Mourelo and Escudero 2017; Salvador and Vezza 2020). 106 A NEW GROWTH HORIZON FOR ARGENTINA However, Argentina’s ALMPs have faced ALMPs, and institutional capacity and financing challenges in recent years. Demand for ALMPs (Asenjo, Escudero, and Liepmann 2022). has been weak in recent years because of changes in administration, the creation of different Recommendation 3: Improve labor market programs targeting the same groups, and the opportunities for women COVID-19 pandemic. Despite a promising start, the development of occupational standards has stalled Improvements in care could help improve women’s and the competency-based system is not used labor market outcomes. Women’s lower labor force extensively. In part as a result, there are insufficient participation and lower quality of work are related to links between training and employers resulting in many, often interlinked, factors including educational overly academic curricula. Underinvestment and an and occupational segregation, lower wages, gender insufficient focus on employability also affect ALMPs. norms, and access to care. Lack of access to child Public expenditures on training-based ALMPs are low and elder care and relatively short maternity and relative to the OECD average (OECD 2019). A recent paternity leave help explain why household and evaluation of ALMPs in Argentina finds that they are care responsibilities have such a substantial impact biased towards crisis response and income support on women’s labor market outcomes (Gasparini and and insufficiently focused on facilitating transitions Marchionni, 2015; Bustelo et al., 2019; Berlinski and of disadvantaged groups to employment (Salvador Galiani, 2007; Beccaria, Maurizio, and Vázquez, 2017). and Vezza 2020). Finally, ALMPs face problems with Expanding access to care services can therefore delivery. Overlapping target groups, a coverage- improve women’s labor market participation. Large- focused implementation culture, and heterogeneity in scale construction of pre-primary school facilities in capacity and quality across the more than 600 local Argentina in the 1990s, which constituted an implicit employment offices make program implementation childcare subsidy, increased maternal employment difficult. (Berlinski and Galiani, 2007). Research into the motherhood penalty in Argentina finds that it is only Several institutional improvements could present in the informal sector which lacks maternity enhance the effectiveness of Argentina’s ALMPs. leave and dismissal protection (Casal and Barham, Argentina’s ALMPs could be strengthened by 2013). improving coordination, including by relying more on profiling of beneficiaries to determine needed Recommendation 4: Build workforce benefits; shifting ALMPs to focus more on skills development pathways that support lifelong development; professionalizing staff; and improving learning monitoring and evaluation (World Bank 2021). Overall, much of the reform needed is institutional Lifelong learning programs can help ensure that rather than programmatic in nature and has more reskilling and upskilling opportunities are available to do with improving delivery than adding new throughout working lives as skills needs evolve. The programs. This is consistent with recent research changing world of work will require workers to shift on the effectiveness of integrated approaches to their career paths during their lifetimes, implying employment support in developing countries, which the need for ongoing education. Training that takes highlights the importance of identification and a lifelong approach may require new financing and participation of target groups, the quality of services delivery mechanisms such as individual learning and linkages between income support programs and accounts and more reliance on digital delivery. Given A NEW GROWTH HORIZON FOR ARGENTINA 107 that increases in the demand for lifelong learning will In order to expand support for displaced workers, likely be driven by changing skills demand, training severance reform can be complemented with programs will need to reflect these demands with stronger unemployment insurance, monitoring, regular skills assessments, up-to-date labor market and enforcement. This could increase labor market information, and strong connections with employers efficiency, and enhance workers’ protections. (OECD, 2021b). Rationalizing the severance system has the potential to increase labor market efficiency somewhat, while Ensuring that older workers are equipped also offering better protection to unemployed workers to participate in the labor market could be if complemented by a strengthened unemployment particularly important as Argentina’s population insurance system. Unemployment insurance is a more ages, leaving fewer prime age workers to generate desirable form of protection against unemployment growth. Evidence suggests that automation and because of its wider risk pool, its ability to provide digitalization affect workers of different ages support even – or especially – in times of economic differently in Argentina, with older workers facing crisis, and its ability to protect workers rather greater challenges transitioning to the new types than jobs. Simulations find that replacing the of jobs that are increasingly in demand (Apella and severance system with an unemployment insurance Zunino, 2017). Training programs for older adults will system combining individual savings accounts and need to be adjusted to older peoples’ learning styles. insurance for long-term unemployment, which would lower employer contributions overall, would lead to Recommendation 5: Increase protection for less unemployment and more formal dependent workers who lose their jobs employment (World Bank, 2021a). Argentina struggles to support displaced workers through severance and unemployment insurance. Lack of a reliable safety net for unemployed workers is a key concern as changes in the nature of work create labor market disruptions that may involve people spending periods out the labor market looking for and upskilling and reskilling themselves for new jobs. Argentina offers both severance pay and unemployment insurance to protect unemployed workers. However, both suffer from weaknesses. In 2018 only a third of workers eligible for severance payments reported receiving them (World Bank 2021). Low maximum benefits have limited the support that unemployment insurance provides (Asenjo and Pignatti 2019). The benefit’s replacement rate between 2007 and 2014 was 3 percent of the median salary of formal workers and 7 percent of the minimum wage (Bonari, Dborkin, and Starkman 2015). Overall, the share of the unemployed receiving benefits from any type of unemployment protection, including severance and unemployment insurance, is just 11 percent. 108 A NEW GROWTH HORIZON FOR ARGENTINA Tabla 3.2 Policy recommendations 1. Foster human capital development • Improve instruction, shifting teacher training from theoretical content to practical pedagogical skills. • Provide a supportive working environment to allow teachers to be able to adjust to implement remedial measures. • Intensify the use of evaluation and information systems to identify early deficits and design programs and interventions, at both general system level and school level. 2. Refocus active labor market programs to help the workforce meet evolving skills needs • Refocus active labor market programs on employability and skills development. • Invest more in efficient and effective delivery. • Improve coordination, professionalize staff and improve monitoring and evaluation. • Rely more on beneficiary profiling to determine needs. 3. Improve labor market opportunities for women • Expand access to quality care services 4. Build workforce development pathways that support lifelong learning • Offer lifelong learning programs to ensure reskilling and upskilling throughout working lives as skills needs evolve. • Ensure that older workers are equipped to participate in the labor market. 5. Increase protection of workers • Complement severance reform with stronger unemployment insurance, monitoring and enforcement. 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Washington, D.C.: World Bank Group. 114 A NEW GROWTH HORIZON FOR ARGENTINA 4 CHAPTER Biotechnology and Automobiles: Two sectors with potential to contribute to growth T his CEM has outlined the major hurdles which Argentina must overcome if it is to regain its high-income status. It makes the case for diversifying its economy away from commodities, open up trade much more widely and deliver high-quality education and on-going training to ensure a highly skilled and relevant workforce that can keep up with the demands of a dynamic, technology-driven, knowledge- intensive global economy. This chapter showcases two sectors where these issues dovetail – biotechnology and automobiles. With the right policies, both have the capacity to flourish. The ability to train human resources is essential for the development of a knowledge-intensive activity such as biotechnology, and proved crucial for the first advances in biotechnology in the 1980s and its subsequent growth. Maintaining the sector’s comparative advantage will require a bold human resources policy to ensure the sustainability of the innovative ecosystem built to date. Meanwhile, Argentina’s important automotive industry has seen a contraction over the last decade, both in consumption and production, and is highly challenged by the eruption of a global process of technological change. Increasing productive specialization and external competitiveness, and upgrading skills, will be crucial at this pivotal point in its history. A NEW GROWTH HORIZON FOR ARGENTINA 115 4.1. Biotechnology: Driven by largely focused on reorienting previously publicly scientific excellence but constrained funded and disparate research strengths in related by an emerging skill mismatch fields toward productive applications with high socioeconomic returns, and developing critical Biotechnology’s underpinning sciences have a long partnerships with the private sector.56 tradition in Argentina. The sector’s origins date back to the 1950s when the first molecular biology Biotech activities concentrate policy interest laboratories were founded, virtually in lockstep with in the country. Biotechnology was considered a the emergence of this disciplinary field worldwide priority in the last two Science, Technology and (Kriemer, 2010). The early ascent of biotechnology in Innovation (STI) plans (Plan Estratégico Bicentenario the country is explained by two factors: first, the long 2006-2010 and Plan Argentina Innovadora 2020). The tradition and scientific excellence in fields related context and conditions for the creation and survival to biotechnology, such as chemistry, medicine, of this type of industry, as well as its growth, have biology, and agronomy. Second, the accumulation changed significantly since the emergence of the first of productive and entrepreneurial capabilities in biotechnology company in Argentina. The vertiginous activities related to biotech’s main applications, such expansion of the biotechnology knowledge base as seeds, vaccines, pharmaceuticals, animal health, in recent decades has been accompanied by and products based on fermentation techniques. institutional, economic, financial, and production changes that are affecting business development and The sector took off as an industry in the 1980s, in company strategies. Understanding and developing line with global trends. The emergence of the sector the capabilities to face these changes is central was the result of deliberate public policies that aimed both to the survival and growth of Argentinean to take advantage of Argentina’s strengths – in biotechnology firms. human capital, research excellence, and institutional research capabilities. Private sector capabilities 4.1.1 The biotech sector comprises and assets in foundational fields such as agronomy vertically integrated and innovative and medicine were also key. Since the 1980s, the firms, with R&D start-ups emerging government has promoted a variety of programs focused on biotechnology, including the National Argentina’s biotechnology sector consists of about Biotechnology Program (1982-1991), the National 300 companies and 54 scientific institutions Priority Biotechnology Program (1992-1996), the with research capacity.57 The country ranks 12th in Biotechnology Program of the Multi-year Science the world for its number of biotech companies. and and Technology Plan (1998-2000) and the National is one of the leading biotech countries in the region, Strategic Plan for Science, Technology and Innovation together with Mexico and Brazil.58 The number of “Bicentennial” (2006-2010). These programs were firms has grown eightfold in the last three decades.59 56  1981 saw the first local private initiative in the field of biotechnology take place with the development of the protein “interferon” by the local pharmaceutical company Sidus. This came a year after Genentech, the first US biotech company, announced that they had succeeded in cloning and expressing human interferon in bacteria. 57  According to the latest official survey, carried out in 2019, there are 139 biotechnology companies in Argentina (Ministry of Science, Technology and Innovation, 2021). This figure, however, significantly underestimates the number of biotech companies in Argentina since it does not include recently created biotech start-ups. According to the Argentinean Chamber of Biotech Start-ups (CB Start- up), in June 2022 there were 65 biotech start-ups in the country. Besides, due to a change in the methodology, it does not include biotech companies that use biotechnology techniques to provide services based on assisted reproductive techniques for human beings and animals. It also excludes most firms that produce microbial inoculants for agriculture (mainly for soybean production) and those that apply micropropagation techniques in plants. According to the last biotech survey these firms altogether accounted for 93 firms (Ministry of Science, Technology and Innovation, 2014). 58  According to the OECD’s Key Biotechnology Indicators: https://www.oecd.org/innovation/inno/keybiotechnologyindicators.htm 59  In 1986, the first study on the biotech sector in Argentina found 32 local companies (Bercovich and Katz, 1990). 116 A NEW GROWTH HORIZON FOR ARGENTINA Figure 4.1 Figura 4.1. Most biotech companies in Argentina are innovative and vertically integrated, with a good number of start- ups High SMEs DBFs SMEs DBFs Start-ups Own technological developments Start-ups SMEs no-DBFs Large no-DBFs SMEs DBFs Low Low High Productive and marketing capabilities Source: World Bank. Note: DBF= Dedicated Biotechnology Firms; No-DBFs= no-Dedicated Biotechnology Firms; SMEs=Small and Medium Enterprises. Firms located righter in the x-axis show a higher degree of vertical integration (own productive and marketing capabilities). Those situated upwards on y-axis show a higher degree of technological capabilities. The activity – though small compared with world This compares to 1.35 percent for the average industry leaders such as the US, Germany and Japan Argentinean manufacturing firm.61 – has expanded significantly. Argentine companies’ sales increased from AR$ 548 million in 2013 to AR$ Most biotech companies are vertically 1,103 million in 2019. Biotech products and services integrated (i.e., covering all stages, from R&D to exports soared from AR$ 29 million to AR$ 329 manufacturing and product commercialization). million in the same period. According to official public Nonetheless, some start-ups and small or medium data, Argentina’s biotech sector has an estimated (SME) dedicated biotechnology firms (DBFs) focus turnover of US$2.1 billion (0.5 percent of GDP) and on developing technologies only (R&D companies).62 employs around 50,000 workers.60 This knowledge- Regarding the degree of technological capabilities intensive activity entails R&D efforts well above the of biotech companies, most can be classified as average for the Argentinean manufacturing sector: innovative. Only some large non-DBFs and some R&D activities carried out by biotech enterprises SMEs DBFs have little of their own technological represented 3.2 percent of biotech sales in 2019. development (Figure 4.1). These are firms that apply 60  Based on a presentation by the Undersecretary of Knowledge Economy in the first meeting of the Cluster of Biotechnology in Cordoba Province (May 11th, 2022). 61  Source: National Employment and Innovation Dynamics Survey. 62  According to OECD definitions, biotechnology firms can be classified into i) dedicated biotechnology firms (DBFs), whose predominant activity involves the application of biotechnology techniques in the production of goods or services and/or in the execution of biotechnology R&D; ii) biotechnology R&D firms (R&D DBFs), which perform R&D activities in the biotechnology area but neither develop nor sell biotechnology products; and iii) companies that carry out R&D or production activities involving biotechnology technologies, but not as their main activity (non-DBFs): typically companies of chemical or biological origin which devote part of their resources to the development or application of biotechnology, either as a separate business unit or as part of the firm’s activities. A NEW GROWTH HORIZON FOR ARGENTINA 117 Table 4.1 Most biotech companies are pharmaceuticals and providers of R&D services Companies by sector (2019) Sector Number of firms, 2019 Share of total firms (%) Pharmaceuticals 31 22.3 R&D services 25 18 Other business services 15 10.8 Other agricultural activities 14 10.1 Agricultural services 11 7.9 Chemical products 10 7.2 Food and beverages 9 6.5 Seed production 9 6.5 Electrical, radio and television equipment and medical instruments 15 11 Total 139 100 Source: Ministry of Science, Technology and Innovation (2021). R&D survey of the business sector. Biotechnology activities in Argentina. Years 2013-2019. Buenos Aires. well-known biotechnology techniques (such as those 4.1.1 Pharmaceuticals and R&D services used in animal or human assisted reproduction, or are the leading sectors micropropagation of plants), but do not invest in their own innovative efforts to develop new technology One of the core attributes of biotechnology is its or apply biotechnology techniques to create new cross-sectoral nature, given the wide range of products. potential applications for biotech technologies. In Argentina, the pharmaceutical sector accounts for A distinctive feature of biotechnology activity the largest share of biotech firms, at 22 percent (Table globally is the predominance of small- and medium- 4.1). Next is the R&D services sector (at 18 percent) sized companies63 - a characteristic which also and the agricultural sector, whose producers and prevails in Argentina. Of the 139 biotechnology service companies, together with seed producers, companies identified in the last official survey, 75 together account for 25 percent. “Other services” percent are small- and medium-sized companies also stand out, at 11 percent of all companies. (Ministry of Science, Technology and Innovation, 2021). When considering the growing number of Most biotech-related projects carried out by start-ups and most of the biotech companies that Argentinean biotech firms are in the traditional were not included in the last survey, the share of areas of health and agriculture. Human health small companies becomes even higher. It should be applications make up the largest share (38 percent), noted that most small companies are DBFs. followed by agriculture (22 percent), animal health 63  OECD Key biotechnology indicators, http://www.oecd.org/sti/inno/keybiotechnologyindicators.htmOECD (2018). 118 A NEW GROWTH HORIZON FOR ARGENTINA Table 4.2 Biotech projects are dominated by the health sector Projects by area of application (2019) Area of application Number of projects* Share of total projects (%) Human health 90 38.6 Agriculture 52 22.3 Animal health 30 12.9 Industrial production 19 8.1 Animal reproduction 16 6.9 Other 12 5.2 Environmental treatment 7 3 Aquaculture 4 1.7 Bioinformatics 2 0.9 Bioenergy 1 0.4 Total 233 100 Source: Ministry of Science, Technology and Innovation (2021). R&D survey of the business sector. Biotechnology activities in Argentina. Years 2013-2019. Buenos Aires. Note: *A single company may report one or more projects. (12 percent), industrial production (8.1 percent) and 18,210 are dedicated to R&D activities (3.65 percent). animal reproduction (6.9 percent). However, there The total number of employees in R&D rose from are also biotech projects in some emerging sectors 525 to 665 in the period 2019-2021 (27 percent). In or topics, such as environmental treatment (3 terms of innovation outputs, data for 2019 indicate percent), aquaculture (1.7 percent), bioinformatics that 47 percent of Argentine biotech companies (0.9 percent) and bioenergy (0.4 percent) (Table 4.2). reported having significantly improved an existing biotechnology product. In turn, 24 percent indicated 4.1.2 The sector is innovation-led having launched a new technological product on the domestic market, and 11 percent on the international The biotech sector can be characterized as an market. innovation-led ecosystem. The pharmaceutical sector accounted for 62 percent of total R&D Patent statistics show that there are around investment in 2019, followed by the R&D services 600 biotech patents applied in Argentina, sector (10 percent) and the chemicals sector (9 though a smaller proportion of these are filed by percent). While large companies account for 61 residents.64 Over 2005-2017, there were 112 patents percent of total R&D investment in biotech, small filed by residents in biotechnology. This placed biotech companies make the greatest R&D effort, Argentina ahead of South American countries such representing 45.4 percent of their total sales (Table as Chile (19) and Colombia (13), although well below 4.3). Data based on a survey of 30 companies carried Brazil (223). In the leading biotech countries – Japan, out by the Cámara Argentina de Biotecnología (CAB) the United States and Germany – patents applied reveals that in 2021, 665 employees out of a total of for by residents were far higher (49,965; 31,014 64  Ministry of Science, Technology and Innovation (2014). A NEW GROWTH HORIZON FOR ARGENTINA 119 Table 4.3 Small biotech companies make the greatest R&D effort R&D investment in biotechnology and sales of biotech goods and services, by firm size (2019) R&D investment in biotech R&D investment in biotech Company size (millions of current pesos) as a % of sales Total % Total % Small 77 55.4 164 14 45.4 Medium 31 22.3 296 25.2 7.4 Large 31 22.3 713 60.8 2.2 Total 139 100 1,173 100 3.2 Source: Ministry of Science, Technology and Innovation (2021). R&D survey of the business sector. Biotechnology activities in Argentina. Years 2013-2019. Buenos Aires. and 16,655; respectively). 65 Biosidus, Inis Biotech 4.1.3 The innovation system involves and Bioceres stand out among the resident firms interactions between biotech firms, that applied for biotechnology patents in 1990- public bodies, and foreign organizations 2020 in Argentina. Amongst the public institutions, CONICET, Universidad Nacional del Litoral and INTA Argentine biotech firms are considered the hold more than 15 patents over the period analyzed. central actors in the innovation biotech ecosystem, in terms of relating to other actors. Articles published by Argentine researchers in These interactions have a range of purposes, such as international journals date back to the 1960s; creating new biotech developments (R&D alliances), since then, the number of publications has transferring or receiving knowledge (knowledge- increased every decade. Over the period 2010- licensing), receiving funding to develop technologies 2019, there were 947 publications by Argentine and innovate (funding flows), applying for support researchers in international journals — 0.47 percent for firm creation (physical space to incubate the of the global total and 197 percent more than in firm, creation of a business plan, etc.) and bringing the previous decade (with 369 publications in the a development to the market (product regulation) period 2000-2009). However, from an international (Figure 4.2). perspective, Argentina is far behind the leading countries. Looking at the indicator of publications Biotech firms’ R&D collaborations and licensing per million inhabitants for 2000-2020, Argentina – agreements mostly involve science, technology with 32 publications per million inhabitants – is well and innovation (STI) institutions. These institutions below the United States (388 per million inhabitants), are mostly universities, institutions that belong to the United Kingdom (96 per million inhabitants) the Argentinean Science and Technology Council and Germany (73 per million inhabitants). However, (CONICET), or the National Institute of Agricultural Argentina is the regional leader, with lower rates for Technology (INTA). These organizations collaborate other Latin American countries such as Brazil (23), with the private sector over transferring technology, Colombia (10) and Peru (3).66 providing science and technology (S&T) services, and 65  Authors’ calculations based on OECD Stat. 66  Source: Scopus 120 A NEW GROWTH HORIZON FOR ARGENTINA Figura 4.2. Figure 4.2 Mapa del ecosistema biotecnológico argentino Map of the Argentinean biotech ecosystem Organizations abroad High SMEs SMEs DBFs DBFs Start-ups Argentina Own technological developments SMEs Start-ups no-DBFs STI Institutons Large STI / Productive policies no-DBFs Incubators Business accelerators SMEs Regulatory agencies DBFs Low Low High Productive and marketing capabilities Licensing technology transfer Funding R&D cooperations Firm creation and product to the market support Source: Stubrin (2022). engaging in R&D collaborations. Estimates indicate (representing 40 percent of all R&D collaborations that Argentina has about 3,000 researchers, 185 that firms engaged during the period 2003-2008; research groups and 1,050 biotechnology research Stubrin, 2013). Linkages to foreign organizations projects carried out in universities, CONICET have also increased in recent years. Biotech start- institutes and INTA experimental stations, mostly ups are born as network-organizations setting up located in the provinces of Buenos Aires, Santa Fe alliances both locally and abroad. and Córdoba (Ministry of Science, Technology and Innovation, 2016). Knowledge cooperation between Public policies have been central for providing Argentinean biotech firms and STI institutions has funding to biotech firms’ R&D activities and intensified in recent decades, largely explained for the creation of science-based companies. by a process of institutional learning within Horizontal policy instruments for the promotion of STI institutions. This has seen them create and scientific activity and innovation, as well as others of strengthen their own transfer-of-technology offices, a vertical nature – specifically oriented towards the accompanied by changes in the culture of public promotion of innovation in the sector – have helped science and technology organizations toward a to build local capabilities. The projects financed by vision and practice more favorable for linkages with the Argentine Sectoral Fund (FONARSEC), whose the private sector. objective was to promote associative projects between the scientific-technological sector and the Biotech firms also engage in licensing agreements productive sector to help solve social and economic and R&D collaborations with organizations problems, was a catalyst for the emergence of abroad. Between 2003 and 2008, biotech firms new technological and productive platforms in carried out 90 R&D agreements with organizations biotechnology. Another important policy tool was the in other countries: 50 with foreign companies and EMPRETECNO Program, which helped to give birth to 40 with science and technology organizations new DBFs in the country. Since 2007, two new policies A NEW GROWTH HORIZON FOR ARGENTINA 121 have had significant impacts on the promotion of the activity such as biotechnology, and has proved biotech sector: (i) the Biotechnology Law (enacted crucial for the first advances in biotechnology in in 2007), which provided fiscal benefits to biotech the 1980s and its subsequent growth. In recent firms; and (ii) the enactment of the Entrepreneurial decades, the academic offering of undergraduate Capital Law 27,349, which created the National and graduate courses with biotechnology as their Fund for Entrepreneurial Capital (FONDCE). This epicenter has expanded notably, complementing fund works as a co-investment system for financing courses in the areas of medical and health sciences, new ventures in which the Argentine State commits natural and exact sciences, agricultural sciences and to invest twice the amount invested by the private engineering. Currently, across its public and private sector (see Section 4.1.4). universities, Argentina can offer 15 undergraduate degrees and 12 postgraduate specializations in Scientific accelerators, incubators and regulatory biotechnology and related disciplines. A new biotech agencies are also key elements of the ecosystem degree at the National University Córdoba has for converting scientific developments into firms attracted over 700 new undergraduate students, that deliver products to the market. Scientific becoming the second-most elected degree in the accelerators do not only provide seed funding – Chemistry Sciences Faculty just two years after its they describe themselves as “company builders”. creation.68 They assist start-ups to develop a business plan or give advice on intellectual property rights (IPR) Productive and entrepreneurial capabilities are regulations. Incubators are key for providing spaces strong to set up the newly created companies.67 There are four incubators for biotech start-ups in the country. Argentina has entrepreneurial and productive However, infrastructure is lacking to provide enough capabilities in sectors where biotechnology space to meet the demands of the growing number technologies are widely applied, such as of biotech start-ups in the country. Regulatory agriculture, health and the food industry. The agencies are also crucial for creating biosafety country is among the world’s leading agricultural standards for new products. SENASA and ANMAT producers and food exporters, and has an important (National Administration of Medicines, Food and local seed industry and a pharmaceutical industry Medical Technology) are the two main regulatory with a high participation of national companies. In the agencies in the country. 1980s, some companies established in these sectors began to acquire R&D capabilities in biotechnology 4.1.4 Comparative advantages have to develop vaccines, drugs, new varieties of seeds, contributed to sector growth and etc. In other words, companies that used biological brought strategic opportunities or chemical technologies began to diversify into the adoption of biotechnology. Dedicated biotechnology Education and training in biotech related areas firms have also emerged, many of them start-up have expanded companies that develop technologies that can be applied in the agricultural, food, energy or health The ability to train human resources is essential sectors. For these companies, Argentina acts as for the development of a knowledge-intensive an “immense pilot plant” – a huge testing ground 67  In 1999, the National Association of Incubators, Parks and Technology Poles (AIPYPT) was created. Two years later, the Secretary of Science and Technology (SECyT) financed a program for the planning and implementation of incubators and technology parks in the country. 68  Speech by Marcelo Mariscal, Chemistry Sciences Faculty Dean at Córdoba National University, at 1st Córdoba Biotech Cluster Meeting, May 12th 2022. 122 A NEW GROWTH HORIZON FOR ARGENTINA for their new worldwide developments. The growth Business accelerators are a driving force for of DBF start-up companies in the country has industry dynamism turned Argentina into the main provider of projects for IndieBio, the world’s first accelerator of biotech The emergence of scientific accelerators start-ups (Engler, 2023). DBFs in biotechnology offers further opportunities for development (mostly start-ups) set up alliances locally with in the biotech sector. It is estimated that established firms in various fields of application around 65 biotech start-ups have been created (human health, animal health, seeds, food, etc.) since 2017, supported by the country’s business that have the productive knowledge, specific assets accelerators. The creation of FONDCE by Law (greenhouses, for example), marketing capacity and 27,349 on Entrepreneurial Capital in March 2017 other complementary knowledge and resources offers a public-private arrangement to stimulate (Box 4.1) investment in innovative start-ups. The law BOX 4.1. LOCAL PRODUCTIVE CAPABILITIES HAVE HELPED TO DEVELOP NEW BIOTECHNOLOGY BUSINESSES In the field of agricultural biotechnology, the start-up Bioheuris is a case to highlight. Bioheuris, a domestic firm created in 2016, is considered one of the five most important agricultural biotechnology companies in the world. Bioheuris developed a patented gene editing technology based on CRISPR (three provisional patents in the United States) which would help to use fewer herbicides to eliminate weeds in soybean, sorghum and alfalfa. Alliances with local seed companies have been key to its growth and business strategy, providing the genetic material for testing the technology, as well as for its financing and potential subsequent commercialization. The first tests of this technology at the Argentinean seed company Santa Rosa were crucial for gaining access to the first investment funds. Bioheuris has molecular biology laboratories and plant handling facilities at the Scientific and Technological Center in Rosario and at the Helix Center in Saint Louis (USA). The Argentine biotechnology company Keclon, created in 2011, develops industrial enzymes of internationally competitive quality for the edible oil, food, biodiesel and animal nutrition industries. The enzymes are innovative biotechnological solutions that improve industrial performance without harming the environment. The company originated from the demands of the biodiesel production sector in Argentina which – being one of the world’s largest producers and exporters of soy-based biodiesel – faced the problem of biodiesel impurity, which reduced its quality. A team of CONICET researchers led by Dr. Hugo Menzella developed enzymes to optimize the quality, efficiency and cost of oil and biodiesel production. This patented development gave rise to Keclon, which currently develops enzymes for several industries in Argentina and in the international market. Although Keclon receives public support through CONICET and funding through the R&D&I Agency (through the FONARSEC and Empretecno programs), which was key in its early stages (Kantis and Federico, 2016), more than 90 percent of the company’s financing is provided by private investors, particularly from the local oil industry. Molinos Agro, one of the main oil companies in the country, was the first customer and investor, using Keclon’s enzymes to treat one million tons of oil per year. Other local oil companies linked to Keclon are Santa Fe Aceites and Ganagrin. Through the investment of private and public capital, the company was able to set up a production plant in the Province of Santa Fe with a capacity of 65,000 liters of fermentation (expandable to 200,000) with large-scale fermentation technologies. It employs around 100 people. A NEW GROWTH HORIZON FOR ARGENTINA 123 stipulated a co-investment system: for every company is successful. In Argentina there are four Argentine peso invested by the private party, science-based business accelerators, two of which the state would invest two pesos, with a cap of are only focused on biotech companies (GridX and US$ 300,000 per venture. These funds act as SF500). In 2022, Córdoba Province also launched Conditional Liquidation Financial Assistance, Coinversión Biotech, an initiative that replicates the which implies that they are only reimbursed if the FONDCE model at a provincial scale (Box 4.2).69 BOX 4.2. SCIENCE ACCELERATORS IN ARGENTINA CITES (Center for Technological, Business and Social Innovation). CITES is Argentina’s first scientific accelerator and defines itself as a venture builder, translating local capabilities into investment opportunities for global investors. CITES has management support from the corporate areas of the Sancor Seguros Group, its main investor. It provides space for incubating and establishing startups with offices, co-working facilities and laboratories in three Argentine cities: Sunchales (where the headquarters are located), Buenos Aires and Bariloche. The business model is inspired by Israel’s incubators. It invests up to US$ 750,000 in seed capital and up to US$ 600,000 in follow-on. CITES has a portfolio of 15 companies with more than 25 patents and more than 100 scientists involved. Its sectors include pharma, medical implants, drug discovery, food tech, medical equipment, agtech and drones, medical diagnosis, and robots. It is the first venture capital fund with public placement in Argentina. Litoral Accelerator. This was born in the city of Santa Fe in 2017 as a consortium founded by the Litoral National University, the Litoral Centro Technology Park, and the Santa Fe Stock Exchange, with the Industrial Union of Santa Fe as a consultative body. It differs from other scientific accelerators in its trajectory, being closely linked to the scientific-technological system, which provides it with very deep project evaluation expertise and knowledge of the scientific environment and its organizational culture. It invests in a range of sectors: biotechnology, life sciences, human health, animal health, environment, agribusiness, medical devices and equipment, fine chemistry, digital health, nanotechnology and engineering. The average initial investment by companies is US$ 500,000 and around US$ 1.5 million in follow-up investment in successive rounds of financing. Since its inception, it has attracted 233 ventures, pre-selected 58, and invested in 5 biotech companies: Inbioar, Bioheuris, Infira, and BioSynamptica S.A. GRID Exponential (GridX). GridX is an accelerator focused on biotechnology. Set up in 2017, it defines itself as a company builder, bringing scientists and entrepreneurs together to create biotechnology companies that solve global problems. Its areas of interest are agriculture, food, diagnostics, health and biotech tools. GridX’s rationale is based on generating teams that complement and balance scientific and business capabilities to promote market success. It brings the scientific and business worlds closer together for the creation of new companies. It invests a maximum initial capital of US$ 500,000 per start-up. Its portfolio includes 39 biotech companies, and it expects to select around 10 start-ups a year for financing. Examples include: Microgenesis, Stamm, Beeflow, Caspr, Michroma, Feedvax, Tomorrow Food, Bitgenia, and OncoPrecision. 69  See https://innovaryemprendercba.com.ar/coinversion-biotech 124 A NEW GROWTH HORIZON FOR ARGENTINA BOX 4.2. SCIENCE ACCELERATORS IN ARGENTINA (CONT.) SF500. Located in the city of Rosario (Santa Fe province), SF500 is an investment fund and accelerator for biotech companies, aiming to create 500 new biotech startups in the next 10 years. SF 500 was established in March 2022 by the Bioceres group and private investors (90 percent of total capital) and the province of Santa Fe (10 percent of total capital). It will invest US$ 250,000 in early-stage ventures. SF500 is also a company builder, offering legal, financial, management, and intellectual property advice to the ventures. It also provides infrastructure and laboratories through its alliance with the National Agrobiotechnology Institute (INDEAR) in Rosario, a research and development organization created by the Bioceres group and the Conicet in 2004. SF500 has invested in four companies: Wonder, Oncoliq, Biota Life, and Dharma Biosciences. Coinversión Biotech. Born in March 2022, Conversión Biotech focuses on scientific-technological enterprises in Córdoba Province that have an investment agreement or commitment with an angel investor, an accelerator or an investment fund. The program has a total budget of US$ 400,000. Conversión Biotech can co-invest with angel investors with a public ticket of between US$ 30,000 to 50,000, or co- invest with accelerators or investment funds with a public ticket of US$ 50,000. Source: World Bank, based on interviews with key sector stakeholders. Growing capabilities for linkages and capabilities for technology transfer and setting collaboration are vital up linkages. This is driven by the less negative view of scientists collaborating with industry and a Developing the capabilities that allow firms to greater need for companies to collaborate to bring collaborate and exchange resources and knowledge innovative technologies to the market. This has seen with third parties is crucial in the world of a rise in collaboration in the local system, which biotechnology. There are two main reasons for this. can be either unidirectional – through the purchase First, the knowledge base on which biotechnology of technological services, access to specific assets is based is increasingly broad and complex, which (equipment, physical space) or licensing – or joint, for makes it very difficult for all knowledge to be example working with R&D projects. concentrated under “one roof”. Second, technological change is occurring at a dizzying pace. This means A milestone for private-public collaboration in that the competitiveness of companies depends to the biotechnology arena occurred in response a large extent on the capacity and speed with which to the COVID-19 pandemic. The Research and they can incorporate new knowledge. It also means Development and Innovation (R&D&I) Agency that carrying out learning processes and developing (formerly known as ANPCYT) created the COVID-19 new technologies in isolation is highly risky and Coronavirus Unit together with MINCyT and costly. The best strategy is therefore to become CONICET. The unit launched a special call for project networked companies. proposals (the “COVID-19 Project Ideas”) to finance the development of projects carried out by national Over the last 15 years, the public scientific- researchers and technology-based companies (EBT) technological system has acquired institutional for the study, diagnosis, control, prevention and A NEW GROWTH HORIZON FOR ARGENTINA 125 treatment of the disease, with total funding of up to accustomed to applied science; (ii) the accelerated US$ 5 million. This initiative fostered significant intra- timeframe in the transfer and regulatory processes public sector collaboration (involving the Ministry of of public sector agencies shortened timeframes and Health, CONICET, INTA, ANLIS and universities, and encouraged more research;70 and (iii) the creation of the Ministry of Science, Technology and Productive new public-public and public-private collaborations Innovation) as well as with the private sector. It did led to the development of a COVID-19 vaccine, so through: (i) the participation of scientists not treatments for COVID-19, and diagnostic kits (Box 4.3). BOX 4.3. COLLABORATION AND TECHNOLOGICAL DEVELOPMENTS HELPED RESPOND TO COVID-19 ARVAC Cecilia Grierson: a vaccine against COVID-19 A team of researchers from the Biotechnological Research Institute of the National University of San Martín (UNSAM) and CONICET, led by Dr. Juliana Cassataro, applied to the COVID-19 Project Ideas call for the development of a COVID vaccine based on recombinant proteins, a technology already applied in vaccines against Hepatitis B or HPV. The working group had experience in developing adjuvants for vaccines against infectious diseases, as evidenced by publications and patents. Through the R&D Agency, the UNSAM research team was partnered with Laboratorio Cassará, an Argentine pharmaceutical company with significant R&D capabilities in biotechnology, scale-up and production capacity under good manufacturing practice standards, as well as regulatory knowledge. This public-private collaboration allowed the scientific team of UNSAM and the Pablo Cassará Laboratory, through a research and development agreement, to combine capabilities to develop the vaccine for COVID-19 ARVAC Cecilia Grierson. They was authorized in March 2022 by ANMAT to perform Phase 1 clinical studies in humans. Previously, two vaccine prototypes had been obtained which demonstrated in studies in animal models the potential to induce very good levels of virus-neutralizing antibodies and T-cell immune response, in line with current requirements for vaccines that prevent COVID-19. The preclinical studies were funded by the R&D&I Agency under the call for “In vivo trials of Argentine COVID-19 vaccines” through FONARSEC, and the industrial development, scale-up and Phase I clinical trial are funded by the Pablo Cassará Laboratory. Treatment for COVID-19: Hyperimmune serum anti-SARS-CoV-2 The anti-SARS-CoV-2 hyperimmune serum project was another one selected by the COVID-19 Project Ideas. It is a biological drug developed for the treatment of people infected with SARS-CoV-2, with the aim of reducing its impact and lethality. It was approved by ANMAT after obtaining positive results in the Phase 2/3 clinical trial: it reduced mortality by almost half (45 percent) in patients with severe COVID-19, and treated patients showed a 24 percent reduction in hospitalization in intensive care and 36 percent reduction in the need for mechanical respiratory assistance. This technological development is the result of joint work by a public-private network headed by the company Inmunova together with the Argentine Biological Institute (BIOL) and the National Administration of Laboratories and Health Institutes Dr. Carlos G. Malbrán (ANLIS). It also involves collaboration with CONICET, the Leloir Institute Foundation (FIL), Mabxience – a company specialized in biosimilars and biopharmaceuticals – and the National University of San Martín (UNSAM). 70  For example, the National Administration of Medicines, Food and Medical Technology (ANMAT) implemented an ultra-fast approval mechanism for clinical research protocols and a common model was established for hospital ethics committees. 126 A NEW GROWTH HORIZON FOR ARGENTINA BOX 4.3. COLLABORATION AND TECHNOLOGICAL DEVELOPMENTS HELPED RESPOND TO COVID-19 (CONT.) Inmunova is in charge of the serum development process. It is a national public-private biotechnology company founded in 2009 by Argentine scientists as a spin-off of the research center Fundación Instituto Leloir. The company is incubated at the Argentine Nanotechnology Foundation (FAN) and specializes in research, design and development of innovative drugs for rare diseases. The Argentine Biological Institute (BIOL), in charge of the development of serum engineering batches for preclinical and clinical trials, is a long-standing national company founded in 1908, which specializes in the production of injectables, semisolids and biological products. The joint venture between Inmunova and BIOL was based on their complementary technological capabilities: Inmunova specializes in immunology, while BIOL focuses on the production of hyperimmune serums. Both companies had previous experience working together for a joint process of co-development of a heterologous serum for hemolytic uremic syndrome. It is on the basis of this previous collaboration that they decided to join forces again in this new project. The National Institute of Infectious Diseases (INEI-ANLIS) performed tests in their laboratories and measured the serum’s ability to neutralize the COVID-19 virus. Diagnostic reagents In less than 90 days, 4 tests for COVID-19 were developed and approved by the regulatory authorities (Table 4.4), and a potential capacity to produce 240,000 kits per week was achieved. In addition, another 53 research projects – specifically for diagnostic kits – were submitted and admitted to the ANCyPT call for proposals, revealing the capabilities of the entire system to deal with this type of device. Table 4.4 Diagnostic kits for COVID-19 developed through public-private partnerships Tiempo de Producción Nombre del Kit Tipo de Kit Desarrolladores Estado del Kit Desarrollo semanal Instituto Leloir y COVIDAR IgG Serológico Aprobado por ANMAT 45 días 10.000 Laboratorio SRL CONICET, ICT C. Milstein y NEOKIT TECNOAMI RT-PCR Aprobado por ANMAT <60 días 50.000 Laboratorio Pablo Cassará Diagnóstico UNIQUI, UNSAM, ELA-CHEMSTRIP molecular - Easy Chemtest y Productos Aprobado por ANMAT <90 días 100.000 Loop Amplification Biológicos SA Argenomics y ZEV COVIDAR-DX RT-PCR Aprobado por ANMAT <90 días 100.000 Diagnostics RT-PCR No disponible UNQUI y Hospital Italiano En desarrollo En desarrollo En desarrollo Tecnología Crisper Source: Economic Commission for Latin America and the Caribbean (ECLAC), “La salud como desafío productivo y tecnológico: capacidades locales y autonomía sanitaria en la Argentina pospandemia”, (“Health as productive and technological challenge: local capacities and health autonomy in post-pandemic Argentina”), Documentos de Proyectos (LC/TS.2020/172- LC/BUE/TS.2020/2), Santiago, 2020. A NEW GROWTH HORIZON FOR ARGENTINA 127 4.1.5 Key bottlenecks to strengthen the Equipment and R&D financing competitiveness of the sector Step-up investment in R&D activities. The biotech Education, training and skills sector would benefit from greater commitment to invest in R&D in the public and private sector. Funding Address an emerging shortage of human capital. available for researchers in the public research Argentina has skilled human resources in basic system is generally low and in Argentine pesos, sciences and engineering who conduct research in a with a drop in value due to the delayed allocation broad spectrum of biosciences and biotechnologies. of funds. Financing for developing technology and However, the growth of the sector demands innovation is scarce and not always accessible to different skills to what the market is providing. certain types of companies. For example, start- There are growing signs of tight availability of ups find it difficult to access programs designed for human resources in certain areas or disciplines well-established companies. It is important to have (bioinformatics, for example). The flow of researchers different financing instruments for start-ups and moving from the scientific-technological system to for small, medium, and large established companies. industry – fueled by good job opportunities in the The timing, sums and requirements of financing are private sector, low salaries in academic careers and often not well matched to the needs of the sector, a researcher evaluation system that does not reward which involves high-risk technology development the development of technology in the same way as processes and a long maturity period. Specific the development of science – risks hollowing out policies are needed to foster the consolidation the scientific system. It has been pointed out that of specialized venture capital funds. This implies researchers’ low salaries and low funds for doctoral distinguishing between policies aimed at fostering and post-doctoral fellowships are undermining talent biotech start-ups and those aimed at developing the attraction and retention, as well as the training of start-up ecosystem, which views fund managers as new human resources in the scientific system. This one of the key players. poses hurdles to the sector’s sustainability in the medium to long term. Rekindle investment to address increasing obsolescence of biotech equipment. The public Implement a bold human resources policy to ensure sector is obsolete and lacks biotechnology equipment, the sustainability of the innovative eco-system in which is an increasingly important obstacle not only biotechnology. This needs to simultaneously feed to the growth of biotechnology companies, but also to the country’s science base and the development of local scientific excellence in this field. Even the ability the industry. Some ways to do this are to identify to publish scientific articles is at risk, according to the areas and specialties in which people need to local stakeholders. The lack of adequate equipment be trained in basic and applied science to generate and facilities lengthens the time of scientific and technical training programs for the industry, and technological development, and even hinders to identify the specialties that are required for the collaboration between scientific institutions and the growth and development of the biotechnology private sector. Public sector scientific institutions industry (e.g., people with expertise in fermentation, are unable to meet the demands of local companies regulation, etc.). In particular, a gap was identified in (e.g., provision of certain technological services). the training of human resources in regulatory issues The imported nature of the equipment and its costs that can cut both ways, in regulatory agencies and make it difficult for public science and technology in research. institutes to renew it through ordinary or local 128 A NEW GROWTH HORIZON FOR ARGENTINA research project funds. Specific lines of financing are Remove infrastructure bottlenecks at the required to meet this need. incubation stage to bolster the number of new biotech start-ups and their growth. This raises Macroeconomic stability is key for the development questions about where the new start-ups will of the industry and retaining emerging start- settle in the future as they need to scale up their ups in Argentina. Macroeconomic uncertainty and developments. Although there are a few incubators instability, import restrictions and underdeveloped for biotechnology companies in the country, capital markets make doing business complicated incubator space is still insufficient. in Argentina, particularly for those ventures that are inherently risky and that depend on key strategic Streamline bureaucracy and long regulatory import inputs (like imported reagents, for example) processes. Local regulatory processes can be as in the case of biotech-related business. The long and uncertain, which significantly affects macroeconomic context is particularly unfavorable innovation opportunities in sectors such as animal for new-born biotech start-ups. Time is precious for or health biotech where time-to-market is crucial. these ventures, thus, start-ups are severely affected For example, ANMAT, the regulatory agency for in the innovation process by long import timespans, human health medicines, has very bureaucratic and which, in turn, delay potential access to new funds. excessively long regulatory processes according Adverse macroeconomic conditions also affect to most stakeholders interviewed. Companies biotech science, as researchers are unable to obtain point out that this issue should be improved by the the inputs they need in a timely manner. regulatory agency. During COVID, the processes have been shortened due to the health emergency. Innovation from the laboratory to the market These fast-track processes need to be implemented permanently. Also, given the rapid progress in Create the conditions for transitioning from the knowledge development, staff of regulatory agencies scientific process to industry. This is a key challenge need to be trained and strengthened on a continuous for many businesses. In particular, the scale-up basis. stage of scientific-technological developments in biotechnology faces difficulties in terms of lack of 4.2. Automobiles: Long equipment and resources. Developing incentives for industrial tradition weakened by researchers in the scientific system to participate macroeconomic instability and in business development activities or even start distortive trade policy a new company is another key objective, as these types of activities are not appreciated in academic The automotive industry is one of the most careers in Argentina. Some stakeholders interviewed important manufacturing activities in the world even identified the latter as a major bottleneck and due to its contribution to production, employment pointed out the need to update CONICET’s Research and trade, the production chains it generates, and Scientific-Career Framework (dated from 1973). its contribution to technological development. Its A key finding that emerges from interviews with production is concentrated in only 30 countries, CONICET it that the institution is aware of this including Argentina. Globally, the sector contributes situation and recognizes the need to develop new 3 percent of world GDP, although in some countries it rules and a new set of incentives to ease and trigger ranges between 5 percent and 10 percent of national the participation of scientists in technological and GDP (Germany, Brazil, China, Korea and India, among science-based business ventures. others). It is the fourth largest exporting sector, A NEW GROWTH HORIZON FOR ARGENTINA 129 Table 4.5 Terminals produce all types of vehicles, with recent specialization in pick-ups Automotive terminals with production in Argentina Productive capacity Company Location (province) Production (thousands of units per year) Agrale Buenos Aires Trucks and buses 10 Stellantis (PSA+FCA) Buenos Aires/ Córdoba Cars and utilities 300 Ford Buenos Aires Pick-ups 100 General Motors Santa Fe Cars 100 Iveco Córdoba Trucks 20 Mercedes Benz Buenos Aires SUVs and trucks and 50 buses Nissan Córdoba Pick-ups 70 Renault Córdoba Cars and utilities 90 Toyota Buenos Aires Pick-ups 160 VW Buenos Aires Pick-ups and cars 100 Source: ABECEB. accounting for 8.9 percent of world trade, behind 4.2.1 Argentina’s automotive industry is electronic equipment, fuels and nuclear reactors. It mature and has recently specialized in generates around 10 million direct jobs globally and medium-size pickups is a strong stimulator of technological change (The World Factbook, 2022). Argentina has a mature automotive industry, with a long industrial tradition. There are 10 terminals, The sector is immersed in a global process of located in three provinces (Buenos Aires, Córdoba change, with effects on production and markets. and Santa Fe), which produce all types of vehicles: The emergence of new businesses and new companies cars, utility vehicles, pick-ups, trucks and buses is redefining the productive space. New “production (Table 4.6). They jointly have an installed capacity of ecosystems” are being shaped, under the influence of approximately one million units and generate around several factors: the centrality of the new consumer; 28,000 direct jobs (ADEFA and Ministry of Labor, technological acceleration; and the influence of Employment and Social Security-MTEySS). governments through sustainability initiatives, new regulatory frameworks, and government incentives. It is estimated that the auto parts sector is made The electrification of mobility is also advancing up of 400 companies. Around 100 companies are exponentially, based on the role of governments part of the first tier of suppliers (system and auto promoting its production, consumer demand, and parts manufacturers that supply directly to the the price catch-up between electric and combustion terminals), with the remaining 300 making up the vehicles, mainly due to the decrease in the price of second tier. These companies are geographically electric batteries. located close to the automotive terminals and 130 A NEW GROWTH HORIZON FOR ARGENTINA account for 37,000 jobs (MTEySS). Among the gave the necessary signals for complementarity in products manufactured, metallurgical activity production. Brazil specialized in the manufacture stands out (manufacturing of molds and dyes, of small low-end and heavy commercial vehicles, stamping of metal parts, forging, steel and aluminum while Argentina first developed the mid-range car casting), followed by the plastic industry (injection industry, and then that of light commercial vehicles, and manufacturing of plastic parts), armed sets dominated by pick-ups. (boxes, gear, steering boxes), structural elements (PU chassis and trucks), tires and glass. As in other The Argentine automotive industry has been countries, the auto parts companies in the first ring experiencing a contraction over the last decade, are highly technical and maintain high production both in consumption and production. The production standards, following the guidelines of the terminals. peak recorded in the last ten years occurred in 2013, Technology and standards are lower in the second at 791,000 units, after which production began to ring, and sometimes they have a diversified offer fall, reaching a low of 276,000 units in 2020 (Figure serving industries other than automotives. 4.3a). During 2021 and 2022, activity recovered strongly, resuming the growth path towards values Although Argentina produces all types of closer to the decade’s average (450-500,000 units vehicles, it has specialized in recent years in the per year). Having reached domestic sales of 900,000 manufacturing of medium size pick-ups with a load units per year in 2017, sales have now levelled off at capacity of up to 1 ton. The share of this segment around 400,000 units (Figure 4.3b). in total production has almost doubled in the last 10 years, from 36 percent in 2011 to 60 percent in 2021. The limited performance of production and sales Additionally, pick-up exports represent 63 percent is mainly explained by macroeconomic instability of foreign vehicle sales. Currently, the country is and distortive policies. Unlike other economies positioned on the world stage as the fifth largest in the region, the country has not yet managed producer of medium pick-ups, behind Thailand, the to create the conditions required to stabilize its US, China, and Mexico. There are four manufacturers: macroeconomic indicators. Recurring changes in Toyota, Ford, VW and Nissan/Renault. The segment the regulatory framework, imports, capital flows has high engineering capacities, production plants and price controls, exchange restrictions and a at the technological frontier, a highly developed high tax burden, together with other fluctuating and competitive supplier network and high external and inconsistent macroeconomic policies – largely insertion. For these reasons, it stands out as the determined by political-electoral cycles – have led specialization segment that could lead the Argentine to decades of chronic macroeconomic imbalances, automotive industry’s growth (Civetta et al., 2020). recurring crises and market distortions. These have negatively affected investment and economic Bilateral integration of the automotive sector growth in the medium term (Chapter 1). with Brazil was crucial for the development of the sector, including modernization of the productive The period 2017-2021 saw an important structures. The Acuerdo de Complementación investment cycle in the automotive industry Económica N14(ACE, Complementary Economic (Table 4.6). This process included the launch of new Agreement)N 14, signed in December 1990, exclusive platforms, the restyling of existing products provided the framework for the development of the and the modernization of facilities. According to automotive industry, and set out the expansion path SMATA (the automobile transport mechanics and for bilateral integration with Brazil. Managed trade related union), investments accounted for US$ 5 A NEW GROWTH HORIZON FOR ARGENTINA 131 Figure 4.3 Figura 4.3. The automotive industry has seen a 10-year contraction a) Production by destination market (thousands of units) b) Sales to the domestic market (local + imported, thousands of units) Domestic market Exports Production 791 764 617 413 433 545 513 493 494 492 359 422 248 201 219 283 341 313 957 836 901 277 803 276 687 644 710 240 351 358 148 297 292 275 460 400 259 343 386 209 200 128 165 101 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 p 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 p Source: ABECEB based on ADEFA. billion71 (SMATA et al., 2021). Since 2021, investment expansion. Even though it is not the strongest has barely exceeded US$ 1 billion, among which the segment in the country, the regional strategy of new Ford Ranger model and the expected launch of some companies could allow the expansion of some the region’s first hybrid pick-up by Toyota stand out. models with an exclusive platform in Argentina. However, Argentina is far from obtaining enough new For this purpose, it would be key to improve investments or assignments of new models for the competitiveness through larger-scale production. established terminals. Finally, the production of heavy vehicles (trucks and buses) could be sustained in the short term from 4.2.2 Key bottlenecks to strengthen the the manufacture of CNG/LNG (compressed and competitiveness of the sector liquefied natural gas) vehicles if Argentina manages The medium-sized pick-up segment will continue to increase gas production. This development would to be driven by demand from productive activities be domestic market-oriented. linked to natural resources: mining, oil and gas, agribusiness and construction. All these activities The potential international expansion of generate sustained demand based on international Argentine production depends on specialization prices. Argentina has an important insertion in the in exports and the country’s existing competitive South and Central American markets, but it could advantages. Argentina maintains relative continue to expand, even into Mexico. Additionally, advantages over Brazil in the manufacture of pick- although to a lesser extent, the production of mid- ups, while the latter is more competitive in the car range cars could grow hand in hand with international and truck segments. However, there are specific 71  Including investments of the entire chain: terminals, auto parts and distributors. 132 A NEW GROWTH HORIZON FOR ARGENTINA Table 4.6 Automotives experienced an important investment cycle between 2017 and 2021 Investments in automotive projects (2017-2025) Terminal Segment Project/Model Start of production Amount Million US$ Pick-ups New Hilux 2017 817 VW Pick-ups Amarok Restyling 2017 44 Ford Pick-ups Ranger Restyling 2017 73 Nissan Pick-ups Frontier 2018 600 Fiat Cars Cronos 2018 456 Renault Utilities Kangoo II 2018 80 PSA Cars New 208 2020 138 Iveco Trucks New CNG engines 2020 20 VW SUV Taos 2021 650 Nissan Pick-ups Frontier restyling 2022 130 GM SUV Tracker 2022 300 MB Utilities Sprinter restyling 2022 150 Ford Pick-ups New Ranger 2023 580 VW PU/SUV/motorcycles Amarok, Taos, Ducatti 2023 250 Iveco Trucks New models 2025 200 Toyota Pick-ups Hybrid version 2025 NA Total 4.488 Source: ABECEB. Note: Restyling means the redesign of the model. niches in all segments (commercial vehicles, compact 6 million vehicles per year. Such capacity implies cars, medium trucks) where Argentine production is billions of dollars in specific assets that cannot be still competitive. quickly converted to the manufacture of vehicles with new powertrain technologies. It seems that The Argentine automotive sector is highly the current installed capacity -which exceeds 100 challenged by the eruption of a global process million units globally- will be underutilized, as global of technological change. The car of the future will production has stabilized around 85 million units. be electric, connected, shared and autonomous. Globally, automotive companies are immersed in The sector needs to balance its productive major transformation processes, both of products capacities with the restrictions imposed by the and production. This process confronts the country macroeconomic environment, and structural with the need to revamp its systems in an unfavorable difficulties. Industrial projects need macro stability, context for investment in the region. There are 11 long-term policies, and predictable and stable industrial establishments in Argentina and 25 in regulatory frameworks. However, Argentina has Brazil, with a combined capacity of approximately gone through decades of chronic macroeconomic A NEW GROWTH HORIZON FOR ARGENTINA 133 imbalances and changing rules of the game. At a 2021. This situation is also observed in the auto parts structural level, the main constraints include a high trade, where 40 percent of imports come from Brazil tax burden on vehicles, logistics problems and certain and transport by road is used with great frequency. difficulties of the state bureaucracy. The tax cost of acquiring a vehicle is usually very high in Argentina, The digitalization of production process and estimated between 40 percent and 50 percent of upgrading on human capital is a pressing need the sale price of locally manufactured vehicles. The to continue competing in the medium term. The tax burden is usually a distorting element of market digital transformation would allow national providers prices, since it makes the final price of products more (especially tier 2 and 3) to capture the opportunities expensive, making it more difficult for consumers to derived from accompanying the development of purchase the vehicles. leaders (terminals and tier 1). In turn, the training of human resources is a require if Argentina wants to Logistics considerably affect the competitiveness remain in the group of countries that produce cars. of a sector whose expansion will necessarily be Existing knowledge and institutions are not enough. linked to the external market. While Argentina It is necessary to consider future challenges, where increases its vehicle exports to Latin America and knowledge will undoubtedly be the most important diversifies markets, the share of maritime transport specific asset. In this sense, the country has an is reduced in favor of alternative, less-efficient, outstanding software and computer services sector means. Exports to neighboring regions have begun to (Grosso, 2019), which could add value to automotive involve road transport. This saw the share of exports production, both in vehicle and components software, by ship fall from 84 percent in 2014 to 70 percent in and in industrial services such as logistics. 134 A NEW GROWTH HORIZON FOR ARGENTINA References Bercovich, N. and J. Katz (1990). Biotechnology and Political Ministry of Science, Technology and Innovation. 2016. Economy: Studies of the Argentinean Case. University “Biotecnologia Argentina al año 2030: llave estratégica Libraries. 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