Department Discussion Paper

All.GENTIRA: ECONOMIC RECOVEllY AND CllOwm

'l'IADE

(Background Paper 3)

December 1987

Latin .America and the Caribbean Country Operations Department IV

Discussion Papers are not formal publications of the World Bank. They present preltminary and unpolished results of country analysis or research that is circulated to encourage discussion and comment; citation and the use of such a paper should take account of its provisional character. The findings. interpretations. and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank. to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent.

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wb406484Typewritten Text

wb406484Typewritten Text 66409

MCRE

ADMIRA

ANA

BAHADE BCRA

BONAVI

BONEX

CEM CEN

CEPAL

CD CGIAR/CGR

CGT

CKD CONADE

CPI CRM

DGI DIF DJAT

DmI

DNPC

FIEL

FONAVI FUNDECO GATT

GDP GDFI

GLOSSARY OF ACRONYMS

Asociacion Argentina de Consorcios Nacionales de Experimentacion Agricola

Asociacion Metalurgica Argentina

Administracion Nacional de Aduanas

Banco Nacional de Desarrollo Banco Central de la Republica

Argentina Bonos Nacionales de Intereses

Variables Bonos Externos

Corporacion de Empresas Nacionales

Comision Economica para Latinoamerica

Certificado de Deposito

Confederacion General de Trabajo

Consejo Nacional de Desarrollo

Cuenta de Regulacion Monetaria

Direccion General Impositiva

Declaracion Jurada de Admision Temporaria

Declaracion Jurada de Necesidades de Importacion

Direccion Nacional de Promocion Comercial

Fundacion de Investigaciones Economicas Latinoamericanas

Fondo Nacional de Vivienda Fundacion Economica

Argentine Association of Regional Experimental Consortia

Argentine Metallurgy Association

National Customs Administration

National Development Bank Central Bank of Argentina

variable interest rate bonds

foreign bonds (US dollardenominated Government bonds)

Country Economic Memorandum Corporation of National

Enterprises Economic Commission for

Latin America (ECLA) certificate of deposit Consultative Group on Inter

national Agricultural Research

General Confederation of Workers

completely knocked down National Development

Council consumer price index Monetary Regulation Account

(Interest Equalization Fund)

General Tax Directorate Deposit Insurance Fund temporary admission import

request import permit

National Directorate of Commercial Promotion

Latin American Foundation for Economic Research

National Housing Fund Economic Foundation General Agreement on Tariffs

and Trade gross domestic product gross domestic fixed

investment

IBRD

IDB

IFS

IICA

IMP INDEC

IHPE

INTA

IVA JNC JNG LIBOR M&LT MCBA

NADE

NFS PAN PEA

PRESEX (PEX)

RER BEER

SIC

SICE

SIGEP

SITC

SKD SKI

SNESR

TAR VA VAT VNA WI YPF

Instituto Interamericano de Cooperacion Agricola

Instituto Nacional de Estadistica y Censo

Institute Nacional de Planeamiento Economico

Instituto Nacional de Tecnologia Agropecuaria

Impuesto de Valor Agregado Junta Nacional de Carnes Junta Nacional de Granos

Kunicipalidad de la Ciudad de Buenos Aires

Nomenclatura Arancelaria de Exportacion

Programa Alimentario Nacional Poblacion Economicamente Activa

Programas Especiales de Exportacion

Secretaria de Industria y Comercio Exterior

Sindicatura General de

Eapresas Publicas

Servicio Nacional de Economia y Sociologia Rural

Temporary Admission Regime

Valores Nacionales Ajustables

Yacimientos Petroliferos Fiscales

International Bank for Reconstruction and Development

Inter-American Development Bank

International Financial Statistics

Inter-American Institute tor Agricultural Cooperation

International Monetary Fund National Institute for Stat

istics and Census National Economic Planning

Institute National Institute for Agri

cultural Technology value-added tax National Keat Board National Grain Board London Interbank Offer Rate medium and long term Municipality of the City

of Buenos Aires Customs Classification for

Exports nonfactor services National Food Program economically active

population Special Export Program

real exchange rate real effective exchange

rate Standard Industrial

Classification Secretariat of Industry

and Foreign Trade General Comptroller of

Public Enterprises Standard Industrial . Trade Classification

semi-knocked down small and medium-size

industry National lural Economic

and Sociological Service trade policy value added value-added tax indexed national bonds wholesale price index state oil company

PREFACE

This is Background Paper 3 of a series of working notes proposed in conjunction with the Economic Recovery and Growth exercise. There were many contributors. These include the following members of the mission that visited Argentina in April 1986:

F. Desmond McCarthy (Mission Chief)

Constantino Lluch (Labor/Em~loyment)

Claudio Frischtak (Industry)

William Tyler (Trade)

Alberto Verme (Consultant - Private Investment)

Thomas Boyatt (Consultant - Export Marketing)

Javier Gonzalez-Fraga (Consultant - Monetary)

Maria Claudia Franco (Research Assistant)

Harutaka Hamaguchi (Young Professional)

Papers were also contributed by Professors M. Connelly, R. Dornbusch, and L. Taylor. The principal counterpart in Argentina was Mr. A. Canitrot, Secretary of Economic Coordination. Since these are working notes they often reflect intermediate stages of thinking before the final report was published. As such they were not subject to rigorous review procedures of the World Bank or the Government of Argentina.

I would like to thank Ms. Milagros A. Divino for preparing the draft and processing the report through to publication.

Contents

Page No.

I. Export Marketing eo. e

II. Trade and the Trade Policy Environment 150

III. Special Purpose Export Finance Facility eo. 46

I. EXPORT MARKETING

1.1 This section considers the viability of an export-led growth

strategy for Argentina. Can Argentina improve its growth prospects by

selling significantly more products in the world market? If so, what

products, how can they be marketed, and what can the Government do to

facilitate this process?

1.2 It will take more than fiscal incentives and a favorable exchange

rate to significantly boost Argentine exports. Many products will need an

improvement in overall marketing strategy. This section identifies some

approaches that may be helpful.

Argentina's Current Export System

1.3 "Outward-Looking vs. Inward-Looking." The major obstacle to an

export-led growth strategy in Argentina is the nation's closed economy and

desire for economic self-sufficiency. For the last few decades, the

Government has taxed exports such as beef and grain in order to generate

revenue for infrastructure, military hardware, and state industrial

enterprises. Economic policy-makers have built an import-substitutj

around Argentina that keeps imports out to protect Argentine

manufacturers. For generations, the essence of Argentine trad~

been that if a product is made or can be made in Argentina, J

import equivalent out.

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1.4 These protectionist policies have led to the creation of large

and powerful groups with a vested interest in the inward-looking status

quoo These groups include industrialists, trade unions, the militar,y, and

large government bureaucracies involved in state enterprises. The entire

complex is infused with an emotional nationalism that militates againat

change.

1.5 The above factors will enormously complicate the Argentine

decision-making process as the nation tries to open the economy and move

toward an export-led growth strategy. Not only does it seem desirable to

open the economy to a freer trade regime, but the whole Argentine way of

doing business needs an infusion of fresh ideas.

1.6 The Import System. Argentina's import system is extremely

rigid. The policy of prohibiting imports of products that can be made in

Argentina dooms export industries to using high-cost, often low-quality

inputs manufactured in Argentina. One example will suffice. Argentina's

fishing industr,y currently exports about US$150 million annually. These

exports could be quadrupled if the fishing industr,y were allowed to import

state-of-the-art nets and machinery. Because fish nets and associated

machiner,y are made in Argentina, the Argentine fishing industr,y is using

out-of-date, high-cost 6quipment, and the countr,y is paying an obvious

price.

1.7 Exchange Rates. Argentina's exchange rate has long been erratic

and overvalued. In his study, Argentina y Brasil: Dos Estrategias Para La

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Exportacion, Elvio Baldinelli of the Fundacion de Investigaciones

Economicas Latinoamericanas demonstrated the relative stability of Brazil's

exchange rates compared to the wild gyrations of Argentina's. He

identified this difference as one of the main reasons for the poor

pe~formance of Argentine exporters compared to their Brazilian

counterparts.

1.8 Gove~ent Export Regimes. The Argentine Government has long

provided a variety of fiscal, financial and institutional incentives to

stimulate exports. These measures have changed frequently, and have often

been flawed in implementation. The Government's recently announced PEX

program provides special benefits equal to 15% (plus 5% for new markets) of

the f.o.b. value of exports for firms committing themselves to expand

exports by a minimum of US$2 million per year. Many other incentives have

accumulated over the years, but their implementation has been uneven.

1.9 Marketing Structure and Approach. Typically, the Argentine

industrial manufacturer produces goods for a protected local market. When

domestic demand declines and producers have excess capacity, they try to

sell products manufactured for the Argentine market in external markets

about which they often have little or no knowledge. In general, potential

Argentine exporters are product-driven rather than market-driven.

Problems and Bottlenecks in Argentina's Export System

1.10 Major Problem Areas. Among more than 50 Argentine businessmen

with whom the export system was discussed for this analysiS, there was

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virtual unanimity on three major problem areas:

(a) The rules of the game for exports must be stabilized. Exchange

rate fluctuations have already been noted. In addition, fiscal

and financial punishments (export taxes) and rewards (rebates,

drawbacks, subsidized financing, etc.) of the export system have

changed significantly with every government and almost with every

Minister of Economy. For instance, the marketing director of an

important home products company said that from 1982 to 1986,

governmental regulations for his product varied between a 15%

export tax and an 11% rebate. This erratic regulatory policy

made pricing his product grotesquely complicated, and the

resulting wild pricing swings meant the loss of export customers

for his company and a bad reputation for Argentina.

Recommendation. Argentine creditors are considering major

policy-based lending operations. President Alfonsin has already

publicly stressed the need for stabilit,y in the trade system.

The lending operations under consideration could provide a

vehicle to allow Government officials to put in place a sound and

stable export system.

(b) The Government's role in the export system must be reduced. B.y

Presidential Decree of Dec. 6, 1985, the Government decided to

facilitate the paperwork required for exports by concentrating

all export license approvals in a single office, the ventanilla

unica. Approximately 25 separate bureaucracies were affected,

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and each resisted the decree. At the end of 1986, the issue was

still in doubt. Two examples illustrate the problems caused by

Argentina's excess bureaucracy.

(i) Bureaucracy in the Export Field (Paperwork).

The second stage of Plan Austral employs export credits

and subsidies to promote Argentina's export performance.

But for an exporter to obtain these benefits, his

application must go through the following 29 steps:

1. Submit application to the National Directorate for Commercial Promotion;

2. Possible requests for further information by Directorate;

3. Opening of a case file, analysis and evaluation;

4. Preliminary report by Directorate;

5. Report is submitted to the weekly meeting of the subcommittee of the National Fund for Export Promotion of the Advisory Council on Foreign Trade for its op~n~on. Report is considered in the first or second weekly meeting;

6. For loans, information must be provided to the Banco de la Nacion, which then has 25 days to analyze the net worth and financial situation of the applicant;

7. With steps (4), (5), and (6) completed, the Commission of the National Fund for Export Promotion meets and examines the application, which is then approved and signed by the National Directors for Trade Promotion and Exports and by the Undersecretary for Foreign Trade;

8. A draft resolution is prepared;

9. Funds are allotted and registered;

10. Formal processing and submission of draft resolution;

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11. National Director for Trade Promotion initials the draft resolution;

12. Draft resolution is sent to the Undersecretary for Foreign Trade under cover of memorandum;

13. Review and initialing by Undersecretary;

14. Resolution is signed by the Secretary for Foreign Trade;

15. A new case file is opened with the resolution, and applicant is notified;

16. Resolution is processed, registered and distributed;

17. Resolution is passed to official accounting office;

18. Treasury receives the resolution and may ask for further information;

19. Preparation of Loan/Subsidy Agreement, signature by applicant;

20. Signature of agreement by the Secretary of Foreign Trade;

21. Signed agreement is added to the new (i.e., second) case file;

22. File passes through accounting and allotment procedures;

23. File returns to official accounting office for final control;

24. File is passed to Treasury, where in the case of subsidies, a check is registered and issued. In the case of a loan, the authorization is passed to the Banco de la Nacion for disbursement;

25. In the case of loans, if the amount exceeds the maximum authorized for issuance based solely on the applicant's signature, mortgages or the pledging of other collateral must be prepared, processed and signed;

26. Disbursement of funds;

27. Preparation of accounts by recipient;

28. Presentation of accounts to the Directorate;

29. Final approval of the case file.

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(ii) The New Export Promotion Scheme. The 15%

benefit enacted for exports requires the candidate

exporter to file an application composed of 11 forms, plus

various annexes and supporting documents amounting to 25

pages. The application (see Attachment 1) is complicated s

and was strongly and unanimously criticized by the

businessmen interviewed for this analysis. In fact, the

complexities of the application have intimidated small

firms that lack the expertise to complete the forms,

effectively preventing them from applying. Large

companies that do have the necessary expertise are furious

at the time and expense required to complete the

application.

Recommendation. The Government should obtain consulting

assistance to help streamline the implementation of its export

promotion policies and programs. Clearly, the emphasis should be

on a minimized and simplified role for the Government.

Government should aim for a one-page application that requires

only a list of the new products (along with volumes and values),

plus a coherent plan of how the company intends to proceed.

(c) The Port of Buenos Aires should be rationalized. Since much of

Argentina's exports flow through the Port of Buenos Aires,

facilities there must be improved. The Port is now one of the

more expensive in the world. Port costs at Montevideo--just

across the river--are estimated to be one-fifth of those at

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Buenos Aires. Yokohama, Bremen, and New York are all

significant~ cheaper, as well. . Modern trade patterns strongly

suggest that an integrated roll-on/roll-off facility is

essential.

Recommendation. An assessment is needed to determine how to make

the Port of Buenos Aires cheaper and more efficient.

Roll-on/roll-off container facilities should be expanded.

Consideration should be given to financing alternative ports and

fully containerized operations to meet medium- and longer-term

needs.

Specific Problems and Bottlenecks

1.11 In addition to the problem areas discussed above, Argentine

businessmen also mentioned the following obstacles to improved exports:

(a) The Exchange Rate. A number of studies have emphasized the

importance of a realistic exchange rate for exporters. A

realistic rate could be established through a wide variety of

trade and foreign exchange regimes.~/

Recommendation. The Government should be encouraged to

articulate its exchange rate policy as clearly as possible to

1/ See Rhee, Y.W., "A Framework for Export Policies and Administration: Lessons from the East Asian Experience". Series on Industry and Finance, Vol. 10, World Bank, 1984.

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reduce uncertainty. This would be a positive step towards

stabilizing the rules of the game.

(b) The Import System. Argentina's import system is one of the most

restrictive in the world and needs to be substantially

liberalized. If Argentina is to have a successful

export-led economic policy, exporters must have access to

imported raw materials, intermediate inputs such as machinery,

technical advice, and capital goods that generate value-added

exports.

Recommendation. The Government should establish automatic import

licenses to allow exporters to bring in the raw materials,

intermediate materials and machinery they need to manufacture

products for export (the fishing industry is a case in point).

Ideally, these imported goods should have a duty exemption, but

in any case, they should be obtainable competitively with a

drawback system. Import regimes of this nature were critical in

the establishment of successful export-led growth in East Asia.

(c) Governmental Export Promotion Policies. Government export

promotion programs often fail because they are inefficient and

corrupt, or because they are so obviously a disguised subsidy

that they are attacked by the importing country. In the East

Asian experience, a system of pre-export financing based on the

wb406484Typewritten Text

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export letter of credit with an automatic rediscounting mechanism

was most effectiveo This system avoids the problem of checking

quantities. In any case, any export promotion system should be

automatic (the benefits are automatic and not dependent upon the

benevolence of a bureaucrat), universal (all exporters have

access), and administratively straightforward (procedures are

simple ).

Recommendation. The Government should gradually eliminate export

taxes, rebate indirect taxes on exports (GATT-acceptable), and

establish a pre-export financing system that meets the criteria

discussed above.

(d) Marketing Orientation and Activity. Given the monopolistic/

oligopolistic nature of many Argentine manufacturers, the typical

Argentine industrialist has concentrated on production rather

than marketing. As in all such market-protected situations, the

result is products that are often below world quality standards

and above world price levels.

This production orientation should be changed. If Argentina is

to compete in international markets, and iLdeed depend upon

exports to advance economic growth, the nation must develop

products that meet or exceed international quality standards at

or below international price levels. The beginning of this

process is to understand that product development must be driven

by what the international consumer desires and expects. This

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will be a dramatic change in orientation for most Argentine

manufacturers and processors, and it will require a knowledge of

consumer preferences in major international markets--at least

those in North America and Europe. Obtaining such knowledge is

expensive and difficult, and this is an area where the Government

could contribute significantly.

As an illustrative example of the need to understand foreign

markets, there is the case of an Argentine manufacturer of

ceramic tile. "Company Xtt decided to sell its products in the

US market, beginning with the New York metropolitan area. Having

made this decision, Company X did not simply try to market

products already being produced for the Argentine market.

Instead, the company spent several hundred thousand dollars

analyzing the needs and quality expectations of the North

American market. Company X learned a series of very important

facts about the market, the ignorance of anyone of which would

have doomed the exporter to failure. First, Company X learned

that North American consumers wanted a totally different color

range than those in Argentina. By testing the market, the

company learned which colors to use and changed its ink coloring

capability. Second, the company learned that to sell basic tile

in the US, a manufacturer had to supply an ancillary range of

accessories (flat facings, curved facings, etc.). And third,

Company X discovered that the moisture content of tiles for the

US market would have to be significantly lower than for the

Argentine market due to the greater extremes in temperature in

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the US. These details graphically illustrate the fundamental

point that export success requires an intimate knowledge of the

markets the candidate exporter wants to penetrate. This is an

area of weakness in Argentina that could be strengthened by

consultant 8dsistance.

1.12 Many of the foregoing recommendations require the Government to

change current policies, alter current programs, and/or dramatically change

the bureaucratic status quo. No one should underestimate the political

sensitivity and difficulty of such tasks. The highest degree of tact and

diplomacy will be necessary to effect some of these changes. The changes

are, however, critical to the success of an export-driven growth strategy.

An Export Action Program

1.13 In addition to recommendations involving existing policies,

several new programs could facilitate an export-led growth strategy for

Argentina. These include the following:

(a) Fund and organize a basic export survey. In a number of

countries, lenders provide loan packages that include a small

component to lund surveys of local economies and local companies

to determine export potential. But undertaking such surveys

after loans are approved is putting the cart before the horse. A

consulting group composed of active exporters should be sent to

Argentina to survey the country's productive capacity and

recommend which sectors have significant export potential.

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(b) Fund and organize sectoral export analyses. Once an initial

review has established the broad outlines of export potential,

individual companies in established export sectors should be

surveyed to determine which have export potential, and what they

need to do to realize this potential. This technical assistance,

which again should be provided by experienced exporters, is

critical to the overall success of the program, and it is an area

where an agency such as the World Bank can make a direct and

immediate contribution.

(c) Establish and administer a revolving fund for loans to Argentine

exporters for market information and developmental activity in

targeted export markets. To avoid adding yet another government

bureaucracy to Argentina's export system, this fund should be

administered by an independent agency, preferably under the aegis

of an external, non-Governmental entity. As the case of Company

X demonstrates, market studies and other developmental activity

will be the crucial first step in increasing exports.

(d) Rationalized countertrade regulations. Argentina's current

countertrade system is confused. It is not clear whether the

Ministr,r of Commerce or the Central Bank is in charge. Argentina

needs a functioning countertrade system to compete with neighbors

like Brazil. It would be useful for a consultant to analyze the

situation and recommend how to improve it.

(e) Prevent the establishment of a Government trading company.

Currently, YFF, the state oil company, has an affiliated trading

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company for goods and services connected to the petroleum

industry. Any proposal that the Government organize a

government-owned and operated trading company should be examined

closely. An official Argentine trading company would inject

politics and bureaucracy further into the export system, and

would compete unfairly with private sector trading companies. It

would also cost taxpayers money, and would generally complicate a

scene that is already complicated enough. At a time when

international financial institutions are recommending the

privatization of government commercial enterprises to reduce

Argentina's fiscal deficit, it is not prudent to establish yet

another governmental commercial enterprise.

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II. TRADE AND THE TRADE POLICY ENVIRONMENT

Export Performance

2.1 Argentina's export performance was poor during the early to

mid-1980s. During the 1970s, exports rose from US$1.8 billion (1970) to

US$7.8 billion (1979), while imports climbed from US$1.7 billion (1970) to

US$6.7 billion (1979). During the import splurge of 1980 and 1981, import

levels were US$10.5 and US$9.4 billion, respectively. By 1985, imports had

been compressed to US$3.8 billion, while exports totaled US$8.4 billion.

The trade surplus necessary to help service the external debt under the

deteriorated international commercial bank lending environment has been

generated not through export expansion, but instead through import

reduction which was produced mainly by income contraction and import

restrictions. In fact, as indicated in Table 1, exports have stagnated.

When adjustment is made for US dollar inflation, the deterioration in

exports is even more dramatic. Industrial exports have paralleled the

overall poor export performance. Despite significant growth until the late

1970s, in the early 1980s industrial exports began a period of decline.

Exports continue to be marginal for virtually all manufacturing firms;

at the end of 1986, exports accounted for less than 10% of industrial

output.

2.2 There are several reasons for the stagnation of Argentine

exports, among them a precipitous drop in world market prices for

Argentina's major export commodities. Between 1981 and 1985 the real

declines in international prices for soybeans, sorghum, wheat, and corn

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were 25%, 32%, 46%, and 24%, respectively. These four commodities account

for over one-third of Argentina's exports.

Table 1: EXPORTS BY COMMODITY GROUPS, SELECTED YEARS, 1970-85 (US$ milli ons )

Primary Agro-based Industrial Total Year Products Products Products Exports

1970 1975 1980 1981 1982 1983 1984 1985 /a

683 1 ,436 3,194 4,162 3,033 3,810 3,771 3,684

877 878

2,951 2.886 2,487 2,639 2,868 2,492

205 628

1,788 2,091 2,106 1 ,386 1,468 2,220

1,773 2,961 8,021 9,143 7,624 7,836 8,107 8,396

/a Preliminary estimates.

Source: INDEC, Secretaria de Comercio, and BCRA.

2.3 On the domestic front there are a number of problems.~ First,

the highly unstable macroeconomic policy environment has imposed additional

risks on exporters. For example, the erratic nature of Argentine exchange

31 An exploratory econometric analysis was undertaken using quarterly data for the period 1970-85 to examine the determinants of Argentine industrial exports. Ordinary least squares were used to estimate an export supply function for industrial products. The analysis provided evidence suggesting that: (a) the temporary admissions scheme for export production was significant in expanding exports; and (b) poor domestic demand conditions have encouraged producers to seek out export markets. The exchange rate variable was not statistically significant. There are several possible explanations for this, including an inappropriate implicit specification of the lag structure, unevenness of exchange rate expectations, and the failure of the analysis to incorporate export subsidy information into the effective exchange rate variable.

- 17

rate policy has convinced producers that export activity and investment for

export production are highly and inherently risky.3/ Overall, there seem

to be no clearly defined rules of the game regarding economic policies in

general, and export policies in particular. This lack of policy definition

has resulted in very high uncertainty for economic actors, and has in turn

impeded export growth. 4/

2.4 Second, the economic policies pursued by the Government

discriminate against export activity. Problems for exporters include the

exchange rate policy, the trade policy regime, and even the special export

incentive programs intended to offset the discrimination against other

economic policies. Without policy changes to reduce such discrimination,

sustained export growth, particularly of manufactured products, is unlikely

to occur. Many producers see current government policies as evidence of a

lack of serious commitment on the part of the Government to expand exports.

Exchange Rate Policy

2.5 The exchange rate constitutes one of the most important prices

in an economy such as Argentina's. It represents the relative price of

tradeable goods versus non-tradeables, and a real currency depreciation

For a discussion of this policy instability, see Julio J. Nogues, "The Nature of Argentina's Policy Reforms during 1976-81 If, World Bank Staff Working Paper No. 765, January 1986.

A common sentiment expressed by the managers of industrial firms is the negative impact of policy instability on their firms' exports. One manager of a large manufactured product exporting firm stressed that the most important thing the government could do would be to establish stable and uniformly applied rules of the game.

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signifies an increase in the relative prices of tradables, including both

exportable and import-competing products. Structural adjustment of an

economy to less attractive international economic circumstances, along with

their concomitant balance of payments difficulties, generallY involves such

an increase in the relative price of tradables.

2.6 The exchange rate ranks high in importance as a policy

instrument for the promotion of exports. The level of the exchange rate

not only determines the competitiveness of exports, but also gives

producers the simplest and clearest signal of the gains to be made through

exporting. Other policy measures, such as export subsidies, are less

immediate in their appeal. Experiences in a number of countries suggest

that exporters respond more vigorously and more promptly to exchange rate

changes than to other equally remunerative combinations of policy

incentives. Furthermore, export subsidies, even if designed to offset any

exchange rate overvaluation or fiscal discrimination, invite retaliation by

trading partners.~ Third, nominal and real exchange rates are a fairly

flexible policy instrument. In the context of macroeconomic policies, the

real value of the exchange rate can be adjusted, through frequent nominal

changes if necessary, to provide the desired real remuneration to

exporters. During the pre-Plan Austral period of high inflation, however,

changes of more than 1000% in nominal levels were needed to achieve 100%

shifts in real levels.

21 Since Argentina is now a signatory of the GATT Subsidies Code, such retaliation is more likely to occur, and more likelY to be detrimental should it occur.

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2.7 One way to evaluate the conduct of exchange rate policy is to

examine the behavior of the real effective exchange rate (REER) over time.

This rate is in essence a purchasing power parity rate (for a discussion of

the methodology and data and a presentation of the estimates, see

Attachment 2). It is a measure of how the purchasing power of Argentina's

currency has changed over time in relation to the purchasing power of the

currencies of Argentina's trading partners. For instance, when Argentina

inflates more rapidly than the rest of the world, Argentina's exporters

will find their costs rising more rapidly than the prices they can charge

customers; their margins become squeezed. If the exporters raise their

product prices in line with their costs they lose competitiveness. Either

way there is a disincentive to exporting. Changing the exchange rate can

restore exporter's margins. The REER also indicates, therefore, the degree

to which Argentina's devaluations against the dollar (and, at the same

time, the currency fluctuations of Argentina's trading partners against the

dollar) have compensated for the difference between Argentina's inflation

rate andthose of its trading partners. The REER index employs export

weights based on Argentina's export markets. In essence, the index shows

the relative movement over time of the value of the Argentina's currency

against the country's major trading partners' currencies weighted by their

shares in Argentina's exports after the effects of differential inflation

rates are taken into account. An increase in the index indicates a real

currency appreciation, while a fall indicates a real depreciation.

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2.8 The REER index, as estimated quarterly, is presented in

Figure and Attachment 3.~./ The index shows that one of the major

characteristics of Argentina exchange rate policy has been its volatility.

The REER has fluctuated enormously, perhaps more than in any other country

during the same period. The nominal exchange rate, pegged against the US

dollar, remained fixed from mid-1971 until 1975. During this period,

because of higher inflation in Argentina than in its trading partners,

Argentina's export competitiveness eroded gradually but substantially.

This erosion was followed by a major exchange rate adjustment in early

1976. In the late 1970s, exchange rate policy was a major part of the

effort to contain inflation and reduce inflationary expectations. The

effect of this policy was to bring about a dramatic real currency

appreciation and to undermine Argentina's export competitiveness. Between

the end of 1977 and the end of 1980, the REER appreciated by close to 55%.

This approach was unsustainable, and eventually the exchange rate regime

collapsed. A subsequent and substantial adjustment had to be made in the

real rate.

2.9 The REER level at the end of 1985 did not appear to be wildly out

of line relative to the level prevailing in the early 1970s. Whether the

level at the end of 1986 was appropriate is another question. Given

Argentina's debt service problem and the need to adj~st the economy to the

changed international economic circumstances, it would appear that a higher

~ Although the REER is computed with a trade-weighted basket of currencies, a simpler procedure, involving only the US dollar and US inflation in comparison with Argentine inflation, was also employed. This estimate is the US dollar inflation adjusted real exchange rate (RER). Its movements closely approximate those of the REER. See Attachment 3.

--

-21

Figure 1

.A, R: C~ E r-., JTIr'J./J..

1 :;;!O

110

1CO

9(,)

dO -

I

R:EA.L EFF F" "'TE.:./-.J"

4()

:;:;~1=: 1

11:1 -1 I

,~.t -t-rr"t-rr~ ,-,..T'I,-r-r'r-r"\---r'...,...."f"'-r......T-.....r~ I ' ,-r-r.,.....,.,...~~ i f ' iii .-. i , t , ~

70 71 72 7~ 74 75 7e 77 76 79 80 81 82 83 84 85

1']'7'::'-- 1 ~'Joe.5 F!!EEF'!: Ef'( QUu.~S o f'~J::J~ ..-Fif.. ~ F'EER-C:,;;rnlTl.

- 22

REER (i.e., a more appreciated currency) would not be economically

desirable.21 If the Government were to promote exports more aggressively

and dismantle some existing restrictive trade policies, a lower REER would

be warranted. The trade policy reforms necessary for more effective and

sustained export expansion would impl~( a real depreciation.

Trade Policy Regime

2.10 Argentina's trade policy regime effectively restricts trade

flows, creates distortions for resource allocation across tradeable goods

sectors, discriminates for domestic sales against exports, and further

contributes to economic waste by rewarding rent-seeking behavior.

2.11 Greatly simplified, Argentina's trade policy regime consists of

import restrictions, and export taxes and subsidies. Import restrictions

are elaborate and nontransparent, and are applied with a strong

discretionary component. Restrictions include tariffs, tariff exemptions,

and, most importantly, highly restrictive quantitative limits on imports.

2.12 Tariff protection is relatively moderate. Prior to Plan Austral,

which increased de facto tariff rates by an additional 10%, ad valoreum

II Between the June 1985 announcement of Plan Austral and April 1986, the nominal exchange rate was fixed despite domestic inflation of over 40%. Fortunately, the REER did not undergo a concomitant appreciation, in great part due to the weakening of the US dollar against third country currencies.

http:desirable.21

- 23

tariff rates ranged up to 48%.8/ Yet, virtually all tariff items (99%)

carried a top rate of 38%, and nearly half of the items charged had tariffs

of 25% or less. An import weighted average of tariffs for the first six

months of 1985 covering those products not receiving tariff exemptions was

19.6% (see Table 2)~' A disproportionate share of total tariff revenue is

collected on high tariff items. For the first six months of 1985, only

14.4% of imports paid tariffs of 38% or more but these imports generated

43.4% of all tariff revenues (for a frequency distribution of imports and

tariff collections according to tariff rates, see Attachment 4). Despite

Argentina's relatively moderate tariff levels, many imported products are

exempted from tariffs altogether by industrial promotion schemes adminis

tered by the Government. In the first half of 1985, 34% of all imports

were exempted. As a result, the average realized tariff rate computed for

all imports was only 12.9% (see Table 2). The tariff exemptions created an

estimated US$130 million tax revenue loss for the first six months of

1985. Despite that revenue loss, tariff exemptions have grown, reflecting

in part the arbitrary nature of the system. In 1981 the average realized

tariff rate (tariff collections divided by total imports) was 19%. In

creasing tariff exemptions, coupled with the decline of overall imports,

have further exacerbated the fiscal situation of the Government, which is

heavily dependent upon indirect taxes levied on trade flows.

2.13 In mid-1982, import limits were intensified in an attempt to cope

with the balance of payments crisis. These direct controls have since been

8/ For an analysis of the tariff system, see World Bank, "Argentina: Strategies toward Industrial and Export Development", Report No. 58416-AR, September 30, 1985.

-24

;

. Table 2: REALIZED TRADE TAXES AND SUBSIDIES AND AN',n-EXPORT BIASES. BY PRODUCT CATEGORY (Jan.-June] 985)

,"

Sec. Oescri&:)tion

Ave. Export

Tax Rate ( y,,)

Ave. Ex&:)ort Subsidy

Rate ( '1. )

Net Ex&:)ort Subsidy

Rate (%)

Ave. Realized

Tari-F-F Ratell

( 7..)

Ave. Nominal TariH Rate/2

(7. )

Nominal Anti-Ex&:)or

Bias Rate/3

( %)

o Mu,e. &c Samp les 0.0 0.0 0.0 0.2 3.0 3.0 1 Animal Products 4.5 2.7 -1.8 7.4 9.4 11.2, 2 Vegetable Products 20.1 0.3 -19.8 4.3 10.4 30.2 '3 Misc. Animal &c Veg. 14.2 0.0 -14.2 10.9 13.9 28.0 4 Food Ind. Products S.e 0.7 -7.9 4.6 5.2 13. 1 5 Mineral Products ~8.1 0.1 -SS.O 10.8 17.2 75.3 e Chemical Products 1.9 1.8 0.0 7.4 12.9 13.0 7 PlastiC Goods 1.0 3.3 2.3 20.9 22.e 20.3 9 Leather Products 12.2 0.4 -11.9 10.8 22.3 34.2 9 Wood Products 2.1 2.8 O.e 16.2 le.e 16.0

10 Pul&:) &c Pa&:)er Prod. 1.0 2.9 1.9 le.6 20.8 19.0 11 Textiles &c Apparel 12.5 5.2 -7.2 20.1 2e.4 33.e 12 Shoes &c Other App. 4.4 O. 1 -4.3 13.7 26.4 30.7 13 Nonmet. Min. Prod. 0.8 3.5 2.7 18.4 27.0 24.3 14 Jewelry 20.3 0.0 -20.3 11.9 22.2 42.6 15 Metallurgical PrOd. O.e e.9 e.3 14.e 20.e 1.4.3 le Machinery &c Engines 0.7 3.4 2.7 12.S 22.0 19.2 17 Trans&:)ort Machinery 0.3 . 5.2 5.0 20.7 27.9 22.8 1S Precision Equi&:)ment 1.2 3.1 1.9 13.e 14.7 12.8 1.9 Wea&:)ons 0.0 4. 1 4. 1 33.e 38.2 34. 1 20 Misc. Manu~acturing 0.3 2.9 2.5 20.7 23.2 20.7 21 Art Objects 3.9 0.0 -3.9 0.0 51.7 55.6

SUMMARY:

Ag. &c Agr. Indus. 0.4 -1.6.5 4.9 8.e 25.1 Industry (ex. Agro) 3.4 -9.6 13.2 19.4 28.9

of which: Capital Goods 0.5 4.3 3.8 16.S 24.4 20.6

Total 16.0 1.1 -14.9 12.9 19.6 34.4

. Notes: 11 The average reallzed tari~f rate is defLned and estimated as import

tax collections divided by the value of imports. 21 The averageno;inal tarif~ rate is calculated as the average realized

tariff rate~ except that tari~f exempted imports are excluded. 31 The nomlnal anti-export bias rate, expressed as a percentage of FOB

value, is equal to the average nominal tariff minus the net export subsidy rate.

Source: Computed from INDEC information. See tables in attachment for a greater disaggregation.

- 25

consolidated, and they now constitute the core of the the Argentine import

restriction and protection system.9/ All imports are now subject to prior

permit. Importers must obtain an import authorization called a"Declaracion

Jurada de Necesidades de Importacion" (DJNI). For goods not produced in

the country (about 5,500 tariff positions out of 11,000), the DJNI is

issued automatically 48 hours after an application is submitted. Issuing

the DJNI takes four steps in two different locations: (i) the application

is received at the Secretariat of Industry and Foreign Trade (SICE); (ii)

the data is entered into a computer data base; (iii) the data is processed

in a computer located in another location (the Ministry of Social Welfare)

where both inputs and outputs must be entered manually; and (iv) the DJNI

is handed over to the importer, back at the SICE.

2.14 Once imports are authorized under DJNI, tariff protection for

these goods is moderate because the ad valorem rates currently applicable

are still the ones set at the time of the 1979 reforms: tariff rates

ranging from 0% to 38%, with only about 1% of imports paying higher

duties. In mid-1985, these rates were augmented 10% by a temporary surtax

imposed as part of Plan Austral. Import data for the first six months of

1985 (before the surtax was imposed) show that 34% of Argentina's imports

entered the country duty free; another 31% of imports paid duty at a rate

of 10% or lower; 12% of imports paid between 10% and 20%; and the remainder

paid higher rates (including 14.4% of imports which paid 38% or higher).

Overall, the ratio between tax collections and imports for that period

indicates an average collected rate of 12.9%, excluding the surtax.

21 The nature of the import regime is specified in Decree 4030 of December 1984. A detailed analysis is provided in World Bank, "Argentina: Strategies toward Industrial and Export Development", Ope cit., pp. 81-86.

- 26

2.15 The remaining 5,500 tariff positions--covering mostly imports

in competition with local production--are subject to discretionary

authorizations that result in further protection of imports. For about

4,500 tariff positions, the import permit applications are referred to

producers' associations to determine whether there is local production

available that could satisfY the needs of the potential buyer. As a rule,

the producers' associations approve the issuance of import permits only if

domestic production is not available; price competitiveness is not a

dominant consideration. As a consequence of this cumbersome, costly system

of prior consultations, actual protection for local producers is

indeterminate. Although the formal decision to authorize competitive

imports is made by the SleE, this agency seldom if ever rejects the

producers associations' recommendations. Finally, about 1,000 tariff

positions are subject to prior approval on the basis of public health

considerations or compliance with international agreements.

2.16 Although the elimination of the system of prior consultations

with the producers' associations was part of the lMF stand-by agreement,

the Government could not implement the elimination, and the lMF Board

waived this condition when it released the last tranche of the stand-by. A

gradual transition to automatic DJNl probably would have allowed the

Government to advance in the trade regime area, reducing at least part of

the distortion built into the system.

2.17 The import licensing system in effect disallows competitive

imports for a wide range of products, and protection for domestic

production and sales is considerable. Domestic prices for such products

- 27

are not constrained by international prices; they are determined by the

interplay of domestic market forces as tempered by price controls. Since

markets in Argentina are relatively small and commonly highly concentrated

among a few producers, product prices and production costs are

frequently high, and product quality poor.~/

2.18 On the other side of the trade equation, Argentina's exports are

also restricted by an elaborate system of licenses, permissions and taxes.

The export licensing system uses selective export prohibitions, along with

taxes, to keep down the domestic prices for agricultural goods. The export

procedures are in themselves complex and involved for all products,

frequently requiring export authorizations from a number of different

government institutions.

2.19 Exports are also impeded by fiscal measures. Export taxes are

levied on a wide range of products, and are highly concentrated on

agricultural products. Table 2 presents data on realized export taxes and

subsidies. In the first half of 1985, the average realized tax rate on the

exports of agricultural and agro-industrial products was 16.9%. Under Plan

Austral, export tax rates were raised by another 8%. Since then, however,

steps have been taken to reduce such taxes, particularly for agricultural

products.

2.20 Export taxes are only partially offset by a system of tax

incentives and subsidies. Manufactured exports are exempt from the final

production stage of indirect taxes. Moreover, an explicit fiscal subsidy

lQ/ An analysis of an unrepresentative sample of manufactured products revealed implicit tariffs, based upon domestic and international price comparisons, ranging from 25% to 200%.

- 28

has been provided to compensate producers for the payment of indirect taxes

on previous stages of production. These subsidy rates have varied over

time and by product. At the end of 1986, owing to governmental budgetary

constraints, they were practically nonexistent. When the subsidies were in

effect during the first half of 1985, the realized export subsidy rate for

industrial exports was 3.4%. Because of the magnitude of export taxation

(13%), these subsidies were not sufficient to offset export taxes (see

Table 2). In the aggregate, net export taxes for all exported products

amounted to 14.8% of the FOB value of those exports.

Reform of the Temporary Admission Regime

2.21 Temporary admission regimes (TAR) allow export industries to

obtain imported inputs at international prices. Thus, they reduce the

anti-export bias introduced by protectionist policies and increase the

international competitiveness of exports. If the TAR is automatic and

covers all types of inputs, exporters will operate in a simulated free

trade regime. Argentina's TAR is deficient on several counts, and its

value as an export promotion instrument is quite limited. Several reforms

would make it more valuable while moving exporters towards free trade

status. The major deficiencies of Argentina's TAR are: (i) inadequate

administrative procedures; (ii) lack of automaticity; (iii) limited

coverage of inputs; (iv) lack of provisions for indirect exporters; (v)

lack of provisions for the replacement of stocks of non-duty-free imported

inputs used to produce exports; and (Vi) lack of applicability to capital

goods.

- 29

2.22 Coverage and Automaticity. Argentina's TAR is highly

restrictive. It applies only to inputs that cannot be supplied

domestically, or where the price of domestic supplies exceeds by roughJY

30% or more the c.i.f. price of the imported good. These restrictions have

injected a strong protectionist element into the temporary admission

system, neutralizing a good portion of its export promotion value.

Furthermore, the restrictions generate a case-by-case review of DJAT

(Declaracion Jurada de Admision Temporaria--a TAR import request)

applications, which causes delays. The applications are reviewed by a

Government committee that publicizes them, and may be obliged to review the

complaints of affected domestic producers. Protectionist considerations

often prevail; standards for admission or rejection are not explicit. For

example, the 30% preference margin mentioned above has not been written in

any law or statute. In practice, DJAT applications are hotly contested by

producers who try to force exporters to use domestically produced inputs

(even if uncompetitive or of inadequate quality) in an attempt to

piggyback on the exporter's profits. Contentious, lengthy meetings are the

rule rather than the exception when these matters are discussed, and the

public officials are often put in the position of being judges, all of

which contributes significantly to the above-mentioned delays.

2.23 The TAR should be automatic, and its coverage should be broader.

Eut this should be done gradually, since it would open up the economy to

foreign competition. Although this opening would be limited, it would

still likely generate widespread resistance among local producers who

currently face low and declining sales levels. Also, still fresh in

prOducers' memories is a fully automatic TAR that was included in the

1979-81 experiment and became a source of legal contraband.

- 30

2.24 Indirect Exporters. Argentina's TAR cannot be used by indirect

exporters, since regulations explicitly forbid the transfer of goods

imported temporarily. Some exporters circumvent this prohibition by

importing via the TAR and passing on the inputs to a supplier. Customs

considers this illegal. Extending the TAR to indirect exporters would make

exports more competitive internationally, in turn fostering backward

linkages in production, raising the quality of inputs, and inducing the

development of a more export-oriented manufacturing sector. Those

producers already using the system would. avoid the legal risks they

currently face.

2.25 Replacement of Stocks of Imported Inputs. Generally, a TAR can

be used only by a producer who at the time of importing inputs knows that

he will be exporting. Thus, the exporter must have a firm export order or,

alternatively, he must have a steady, predictable, flow of exports. Such a

feature builds a bias into the system, discriminating against small and

medium-scale enterprises and first-time exporters.

2.26 Capital Goods. Argentine customs laws do not permit the tempor

ar,y admission of capital goods unless they are re-exported. The re-export

of capital goods embodied in goods produced for export is not allowed.

Including capital goods in the TAR is not likely to have any significant

impact. Many imported capital goods enter the countr,y duty free,

irrespective of whether they are to be sold domestically or used to produce

for export. This duty-free entry occurs via the industrial promotion

regime, which grants exemptions of import taxes on capital goods,

income tax holidays, and exemptions from the value added tax. Furthermore,

- 31

the Government's limited supervision capacity, coupled with the virtual

impossibility of insuring that capital goods are used only to produce for

export, could convert the temporary admission of capital goods into a

virtual free-for-all, eroding the public image of the broader TAR and

jeopardizing its survival. Further, the subsector that produces capital

goods needs special restructuring measures, and the Government intends to

design an action program to do this. It is recommended that the TAR not

include capital goods for the time being. After the Government launches

its restructuring program for capital goods and reforms its various systems

of investment incentives, the merits of including capital goods in the TAR

should be reviewed.

Simplification of Import and Export Procedures

2.27 The World Bank's 1985 report, "Argentina: Strategies Towards

Export and Industrial Development," identified the complexity of export

procedures as an important factor affecting the country's export

performance. The Government concurs with this judgment and intend~ to

initiate a program of reforms with strong private sector support. However,

the actual course of events indicates that bureaucratic resistance to

change is stronger than initially anticipated.

2.28 Automatic TAR Import Requests. Automatic TAR import requests

(DJNIs) take 48 hours to issue. This is not a significant bottleneck,

but reducing it could be a signal to the private sector of the Government's

determination to make the TAR system automatic. For importers in good

standing, Customs has established a simplified import procedure to clear

- 32

goods from Customs within 48 hours after their arrival. Except for the

identification of the goods, all of Customs' verifications are made after

the goods enter the country legally. Should Customs find any error or

inconsistencies in the documentation submitted, the importer would be

subject to stiff penalties, one of whjch is to be denied the possibility of

utilizing the simplified import procedure.

2.29 Prior Authorization of Export Shipments. The large number of

public agencies involved in issuing prior authorizations of export ship

ments is a deterrent to export activity, causing delays, introducing

uncertainty about shipment dates, and increasing private sector costs.

Towards the end of 1985, the Government decided to consolidate all such

prior authorizations in a single procedure managed by Customs. A

presidential decree instructed the 30 public agencies involved to appoint

officials to work in a special area provided by Customs, the ventanilla

unica (single window), where exporters could obtain approval from all

agencies. Unfortunately, the same decree gave Customs the authority to

exempt public agencies from compliance with this rule in special cases. A

few days later, Customs issued a regulation exempting all but two of the

public agencies involved. Predictably, the private sector complained. The

Government reacted strongly, and Customs reversed itself and decreed that a

public agency's prior authorization would be automatically granted unless

that agency sent a representative promptly.

Intervention by a Commercial Bank. Commercial banks must

intervene in the documentation of every export shipment, a requirement

originally made by the Central Bank to certi~ that exporters made suitable

- 33

arrangements to get paid. Through their intervention, the commercial banks

do not guarantee the inflow of foreign exchange. Rather, they are supposed

to monitor foreign exchange inflows, and report back to the Central Bank if

they detect that an exporter is not surrendering foreign exchange on time

and in the established amounts. Until recently, Customs authorized the

shipment of exports when the exporter produced the export documentation

with a commercial bank certification. This procedure was not an obstacle

for exporters. Some cases of fraud were detected, however, when the

certificaion was falsified by exporters to avoid surrendering foreign

exchange at the official rate. 11/ To guard against those actions, the

Central Bank and Customs established an additional control. Commercial

banks are now required to confirm their certifications daily by sending a

special form to Customs headquarters. Shipment of the goods is authorized

only after the exporter displays the certification, which Customs checks

against the confirmation sent by the commercial bank.

Elimination of Export Taxes

2.31 Export taxes have traditionally been levied as an easy, expedi

tious way of generating revenues, largely concentrated on agricultural

products. Most export taxes on industrial commodities were eliminated in

August 1985. The remaining taxes range from 5-10% of the f.o.b. value of

exports, while those on petrochemicals range from 30-60% of f.o.b. value.

Non-agricultural commodities currently covered by export taxes include

11/ Exporters who cashed in their foreign exchange in the parallel market could get 30-40% more than the official rate before Plan Austral was adopted. Since then, however, the parallel rate has averaged only 10% above the official rate, and towards the beginning of July 1986, the spread had been reduced to 2%.

- 34

fuels, chemicals, leather manufactures, jewelry, and some minerals. A

program for reducing export taxes on agricultural commodities has been

agreed on with the World Bank. Reduction of export taxes on fuels and

chemicals is part of the ongoing discussions related to the Bank's

proposed lending in oil and gas. Elimination of export taxes on

manufactures is a key element in industrial export growth, and would

constitute a clear signal of the direction of the Government's policies.

2.32 The net effects of the Government's trade policies regime are

considerable anti-export biases. These biases make the domestic market

more attractive and profitable than export production and sales. Evidence

of such anti-export biases is presented in Table 2. Lower-range estimates

of the anti-export biases for major product groups range from 11% (animal

products) to 75% (mineral products).~/ For all traded goods in the

~/ Some qualifications to these estimates are in order. First, the rates are computed on a nominal rather than an effective basis. It would be preferable to have them done on an effective basis, i.e., estimated as a percentage of value added in productive activity. Second, the effects of Argentina's extensive system of nontariff barriers are omitted. To include these effects would require a comprehensive analysis based upon domestic and international price comparisons. Instead, the average nominal tariff has been used as a proxy for protection afforded in the domestic market. Since the nominal tariffs constitute underestimates of protection, the anti-export bias rates presented in Table 2, and Attachment, Table 2, are low estimates. Third, the tax, tariff, and subsidy rates in Table 2 are computed on the basis of collected taxes and tariffs and disbursed subsidies; they are realized rates. In addition to presenting some anomalies in the aggregates, a further downward bias in the anti-export biases exists. For example, to the extent that taxes on either exports or imports are prohibitive for those trade flows, they are omitted from the estimations. Finally, the data presented in Table 2, and Attachment 4, Table 1, are provided according to the trade classification; it would be preferable to have the information organized according to the industrial classification, thereby permitting a more thorough examination of the structure of incentives. For a competent and insightful analysis conducted for 1977, the reader is referred to Julio Berlinsky, Proteccion Arancelaria de Actividades Seleccionadas de la Industria Manufacturera Argentina, Buenos Aires, Ministerio de Economia, 1977.

- 35

aggregate, the nominal, lower-range anti-export bias rate has been

estimated at 34%.

2.33 Export taxes are one of the main reasons that Argentine

anti-export biases are so high. If Argentina had the ability to affect

international price levels for its exported products, the optimal export

tax argument would justify such export taxation. But with the possible

exception of wheat, this is not the case, and there is no welfare-

maximizing economic rationale for Argentine export taxes. Instead,

Argentine income and welfare are reduced by these taxes. The rationale for

export taxation is primarily fiscal (although historically there may have

been a confiscatory element). The Government is heavily dependent on

export tax revenues. In the first half of 1985, export tax receipts

amounted to approximately US$700 million (see Attachment 5).~ While the

reduction of export taxes is highly desirable on economic grounds,

alternative sources of fiscal revenues will have to be found if such

reductions are to be viable. For 1986 it is estimated that these

reductions in trade taxes will result in a fall in revenue of about A 300

million which is equivalent to about US$318 million (at 1986 period average

exchange rate).

Special Export Incentives Program

2.34 In order to offset anti-export policy biases, successive

Argentine governments have intermittently pursued a number of export

promotion schemes. In general, these programs are administered in a

11/ By way of comparison, import taxes for the same period totaled US$246 million, and fiscal export subsidy expenditures were US$50 million.

- 36

discretiona~ and frequently discriminatory fashion. Moreover, as a whole

they do not overcome the policy bias against exports. There are currently

two principal export promotion schemes--the tempora~ admissions regime

(TAR) and the recently announced special export incentives system.

2.35 Ideally, the TAR should be able to substantially reduce the

anti-export bias for individual producers. The scheme is designed to

provide exporters with access to inputs at international prices, i.e-,

unrestricted duty free imports of products to be incorporated into the

final exported product. Many countries (e.g., Korea, Taiwan, Brazil) have

used such a aystem to considerable advantage in expanding exports. An

effectively-run TAR can short-circuit the detrimental effects of the

protection system on inputs for export manufacturing. But because of the

way in which the TAR currently operates in Argentina, the country is denied

the full benefits of such a system.~1

2.36 A second major governmental program for export promotion is the

Special Export Program (Programas Especiales de Exportacion, or PRESEX or

PEX) to be administered by the Minist~ of Industry and Commerce. PEX

incentives are negotiated individually with applying firms, based upon a

firm's incremental exports over a period of up to five years. The scheme

is aimed primarily at larger firms, but also allows participation by

cooperatives and trading companies. To qualify, a firm's exports must have

increased at least US$2 million per year, or US$10 million over a five-year

period. The benefit to participating firms is a fiscal reimbursement

111 Between 1978 and 1983 Argentina employed an automatic and unrestricted TAR for export production. Although it evidently functioned reasonably well, it was terminated primarily to protect domestic producers.

- 37

of up to 15% of the f.o.b. value of the increase in the firm's exports. To

fund these payments, an amount roughly equivalent to US$60 million was set

aside in the 1986 central government budget.

2.37 While it is still too early to assess the results of the PEX

program, several effects are likely. First, as with any system based upon

incremental exports, substantial distortions are probable. Under PEX,

two firms producing and exporting the same product, in the same amount, to

the same market, could receive entirely different effective domestic

currency remuneration, with the pioneer exporting firm receiving less.

Existing exports are not benefitted. The formation of phantom new

exporting firms is not inconceivable, and arrangements between previously

exporting and nonexporting enterprises to take advantage of the incremental

export incentive would not be surprising. There is a risk that existing

exports will be supplanted by "new" exports, leaving overall export levels

little increased, if any. The natural government response to these sorts

of problems may be a counterproductive further tightening of inspection,

administrative controls, and bureaucratic requirements.

2.38 A second probable characteristic of the PEX incentives is that

they are bound to be highly discretionar.y and nonautomatic. Moreover, the

process appears to be a ver.y paper-intensive and bureaucratic one. 15/

12/ To apply for the program, a firm must complete 14 lengthy forms and 4 annexes.

- 38

Because the program has a limited budget, PEX incentives are to be awarded

on a case-by-case basis. Just what the criteria are for inclusion in the

program is not yet known. For this reason, many firms, especially

established exporters, view the program with skepticism. For prospective

exporters outside Buenos Aires, the cost of chaperoning their paperwork

through the various officials is often prohibitive.

2.39 Third, the PEX program invites retaliation by Argentina's trading

partners. Once the program is in place, exports that receive PEX benefits

are likely to be subject to countervailing duties in the importing

countries. The PEX benefits, while intended to offset discriminatory

policy treatment of exports, will be viewed formally and legally as an

export subsidy. Since Argentina is not a signatory of the GATT Subsidies

Code, it is not necessary for importing countries to show injury in order

to apply countervailing duties. Therefore, a response by Argentina's

trading partners may be quick and detrimental to all Argentine exporters of

the products in question.

2.40 A likely fourth effect of the PEX program is that it may

contribute to the uncertainty that prevails regarding overall export

- 39

policy.~/ The program requires governmental fiscal resources at a time

when fiscal constraints are particularly acute, and there is no budgetary

provision for such resources beyond 1986. The expected difficulties in

administering a program based upon incremental exports, and the likelihood

of retaliation from Argentina's trading partners further contribute to

export policy uncertainty in general, and doubts about the PEX program in

particular.

2.41 In addition to the TAR and the PEX program, there exist a host of

other, less significant government programs designed to promote exports.

While once important, a number of official export financing and credit

incentive schemes have been severely curtailed. Obtaining credit for

export production and/or sales does not appear to be an insurmountable

problem for exporting firms, but such credit is only available at the very

high real market interest rates currently prevailing in Argentina. The

Export Finance Unit described in Section III could help address this

problem. The Government also has an export marketing and information

~/ In discussing the PEX program in Argentina, reference is frequently made to the reasonably successful BEFIEX program instituted in 1972 in Brazil. There are a number of critical differences between the two programs, however. First, the major benefit enjoyed by firms participating in the BEFIEX program is duty free importation of capital goods and some intermediate inputs. (Imports for export production are unrestricted and duty free as a matter of course under Brazil's equivalent of the TAR.) Second, to the extent that a fiscal export subsidy may still exist under BEFIEX contracts, that subsidy was in place for all exporters across the board at the time the multi-year contract was signed. Furthermore, any remaining subsidization is not based upon incremental exports, as is the case with the PEX program. Third, while there have been conflicts between Brazil and its trading partners concerning the BEFIEX incentives, those conflicts have been attenuated by the fact that Brazil is a signatory of the GATT Subsidies Code.

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service operating through its overseas embassies. While this service is

potentially valuable, few firms have reported export sales generated

through it.

Recommendations and Policy Suggestions

2.42 Expanding exports is absolutely essential if Argentina is to

emerge from its economic crisis and resume economic growth and

development. A strategy for aggressively expanding exports, as reflected

in general terms in the Government's "Guidelines of an Economic Growth

Strategy 1985-89," merits further specification and implementation. The

overall emphasis of such a strategy should be on increasing export

competitiveness and productive efficiency. Doing this will require a major

commitment on the part of the Government, and substantial and politically

difficult changes in the overall economic policy environment. Without such

changes, however, exports are unlikely to undergo any sustained growth, and

economic recovery will remain elusive. It might be possible to facilitate

such policy changes, and perhaps even build some support for them, if the

Government were to announce its commitment to export expansion and indicate

a target expansion of, say, 15% annually. In doing so, attention could

then be focused on those policy changes necessary to bring about the

achievement of the export target.

2.43 The cornerstones of a strategy of export expansion and

economic recovery should be: (i) the provision of a stable economic policy

environment; (ii) relative price changes to improve Argentina's competitive

position in international markets and to provide greater incentives for

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exportables; (iii) reduction of the anti-export biases in present economic

policies; and (iv) increased automaticity and transparency in the

administration of incentive policies, coupled with procedural

simplification and the reduction of governmental red tape. While the

policy changes necessary to support export-led economic growth ,are numerous

and interrelated, two individual policies stand out as central--an

aggressive exchange rate policy, and a viable and smoothly functioning

system of temporary admissions for export production.

(a) Exchange Rate Policy. In order to spur exports and growth, an

aggressive exchange rate policy should be pursued to assure both

the relative price relationship necessary to foster tradeable

goods production in Argentina, and the competitiveness of

Argentine products in world markets. In addition, a stable and

competitive real exchange rate is crucial for sustained export

growth, and should be a policy objective. In the present

context, the Government, at a very minimum, should not permit any

further appreciation of the austral.

(b) Export Incentive System. There should be several improvements to

the current export incentive system, primarily to reduce the

existing anti-export biases in economic policies. They are:

(i) Reform of the Temporary Admissions Regime (TAR) for

Export Production. All restrictions imposed on imported

inputs for export production should be removed, perhaps

gradually. Such imports should be duty free and unimpeded;

the only administrative requirement, subject to subsequent

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verification, should be that the inputs actually be

incorporated in the exported production. The system should

possess well defined and universal rules and procedures.

Thus, it should be fully automatic and in no way subject to

discretionary approval on the part of f,Overnment officials.

In implementing such a reformed TAR, it may be desirable to

proceed on a piecemeal basis, gradually expanding a positive

list of permissible imports to include the universe of all

tariff positions. At some later stage, the reformed system

should be extended to indirect exporters, perhaps linked with

an export financing system based upon a letter of credit, as

is done in Korea. The final policy objective should be a

completely free trade regime for export production.

(ii) Reduction and Removal of Export Taxes. All export taxes,

with the possible exception of the tax on wheat, should

eventually be removed. The fiscal impact of these tax

reductions could be minimized by initiating a revenue neutral

export tax reduction and tariff reform. Also, since domestic

food prices would rise as a result of these actions, some

targeted food subsidies to low income groups may be desirable

from the viewpoint of equity.

(iii) Reimbursement of Indirect Taxes for Exports. The

remaining indirect taxes embodied in exports should be

rebated. To do this, the Government will require a

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better understanding of the magnitude of such remaining

taxes paid in previous stages of production, and a

convenient, and non-countervailable, mechanism to effect the

reimbursement, probably in the form of a tax credit.

(iv) Acceleration and Extension of the Ongoing Simplification of

Export Procedures. The "sole window" for export

authorizations should be fully implemented and the remaining

paperwork simplified.

(v) Elimination of Export Licensing for Most Products. While

procedural simplifications such as the "sole window" approach

constitute a considerable improvement, export licensing for

nearly all products should eventually be eliminated. A

simple export declaration, employed in many countries, could

be instituted for statistical purposes, subject to subsequent

verification and control.

(vi) No expansion of the PEX Export Incentives. The PEX program

is likely to encounter numerous economic and administrative

difficulties and should not be expanded.

(vii) GATT Participation. The Government should weigh the pros and

cons of adhering to GATT as a means of more effectively

advancing Argentina's international trading interests.

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(c) Reform of System of Import Restriction. Policy changes in the

import restriction system could also help reduce the existing

anti-export biases in economic policies. In addition, these

changes would increase competition and productive efficiency.

Four new policies would help bring about a significant and

lasting reform of the import restriction system. They are:

(i) Reduction of Quantitative Import Restrictions. The list of

products requiring prior permit should be dramatically

reduced. If this cannot be done in one step, it might be

possible first to eliminate the necessar,r consultation

procedure with local producers associations. The number of

products requiring prior permit should then be continually

reduced, in concert with a tariff reform and the passing of

those products into the category of automatic import license

approval. Eventually it might be possible to eliminate

import licensing altogether, except for some very special

products.

(ii) Reduction of Tariff Exemptions. All tariff exemptions,

except those related to the TAR or other export programs,

should be e~iminated as part of a more generalized tariff

reform. Not only would this make the tariff system more

efficient, but tariff revenues would also increase.

(iii) Tariff System Reform. The tariff system should be reformed

in such a way as to make tariffs the major policy instrument

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for providing domestic market protection. As the use of

Annexos I and II are reduced, tariffs for many products

should be increased. In doing so, tariff dispersion and

tariff averages will increase, at least initially. A

suitable tariff range in the initial phase of such a reform

might be 10-90%. If properly designed, the revenue impact of

this tariff reform could be substantial. Over time, the

upper limits of the tariff schedule should be reduced. As

experience and confidence with the reform grow, more

elaborate timetables and schedules could be formulated and

announced.

(iv) Modernization of Adversely Affected Sectors. To accompany

the suggested trade policy reforms, a comprehensive program

of adjustment assistance should be instituted for those firms

and workers adversely affected. The adjustment assistance

should help firms modernize their plant, re-equip if they can

ultimately compete, restructure their assets, and improve

their efficiency.

2.44 The policy changes suggested here imply a fundamental change in

economic direction and strategy. Not only does this require a major

commitment on the part of the Government; it implies substantial technical

work as well. To this end it may be desirable to establish a small

inter-ministerial working group within the Government, probably under the

auspices of the Ministry of Economy, to do the necessary analytical and

preparatory work for implementing the desired policy reforms.

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III. SPECIAL PURPOSE EXPORT FINANCE FACILITY

A. Objective

3.1 One of the major obstacles to the growth of the Argentine export

sector is the lack of adequate financing. A useful scheme for alleviating

this problem is the pre-financing export program the Government is

currently sponsoring. Consideration, however, needs to be given to the

potential impact that additional financing could have on the money supply

and, consequently, on inflationary expectations. One possible way of

advancing monies to exporters, while at the same time avoiding pressures on

monetary policy, would be the creation of a Special Purpose Export Finance

Facility (SPEFF). This agency would reside outside Argentina and raise

funds in the international capital markets. The principal objectives of

the SPEFF are as follows:

(a) To assist the Government of Argentina in financing export

promotion programs, and to attract the foreign investment and

foreign exchange revenue necessary to repay existing

indebtedness;

(b) To make existing and future export promotion programs

more efficient and expedient for the Argentine exporter; and

(c) To create-a link between the domestic and international capital

markets and the export financing function, so as to increase

private sector participation and create the framework for an

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eventual transfer of this responsibility away from the

Government.

B. Structure

3.2 The central element of the proposed SPEFF would be an

independent, special purpose company that raises funds in both the domestic

and international capital markets and onlends those funds to Argentine

exporters of goods, services and equipment.22!

3.3 These loans will be funded by the issuance of debt securities by

the SPEFF in the international capital markets. The type of security will

be determined by the term of the underlying loan, as defined by the World

Bank and the Argentine exporter's requirements. Since there are likely to

be various sources of funds that satisfy particular term requirements, the

type of security will also be the one that offers the lowest rate at that

time.

3.4 It is conceivable that the securities issued by the SPEFF could

be sold on terms approximating those of international credit. The World

Bank could choose to back the asset side of the balance sheet. Such a

pass-through effect could essentially prove to be true in the markets for

the securities because the only effective guarantor of the securities would

be the World Bank. While the SPEFF could function as a stand-alone credit,

the interposing of the credit of a AAA-rated private financial institution

11/ A similar structure has been employed by the UK for the refinancing of a portion of its rescheduled credit to Brazil.

http:equipment.22

- -~

between the SPEFF and the investor would add marketability to the

security. Specifically, the securities issued in the international capital

markets would be supported by a surety bond to be issued by a AAA-rated

private financial institution such as an insurance company.

3.5 To account for the possibility of late payments by exporters on

the SPEFF credits, and the delay before disbursement under the World Bank

guarantee, the SPEFF structure would include a backstop revolving credit

facility. The beneficiary of this facility would be the SPEFF itself, with

drawings allowed solely for the purpose of making timely payments on the

SPEFF's market obligations, pending receipt of funds from the exporter or

receipt of disbursements under the World Bank guarantee.

3.6 The revolving credit facility could also be used to fund initial

disbursements of credits granted by the SPEFF pending the issue of

securities. Such an alternative would give the SPEFF greater flexibility

in both the size of its disbursements and the timing of its security

issues.

c. Mechanism of the SPEFF Structure

3.7 The following outline assumes, for the sake of illustration, the

issuance of floating rate notes by the SPEFF. In practice, any capital

market instrument could serve as the underlying security. In this example,

the World Bank acts as an export credit agency guaranteeing the Argen