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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
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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
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IBRD
IDB
IFS
IICA
IMP INDEC
IHPE
INTA
IVA JNC JNG LIBOR M< 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
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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.
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Contents
Page No.
I. Export Marketing eo. e
II. Trade and the Trade Policy Environment 150
III. Special Purpose Export Finance Facility eo. 46
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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.
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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.
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- 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
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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.
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-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.
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- 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.
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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
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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%.
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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.
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- 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.
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- 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,
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- 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
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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
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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%.
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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.
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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.
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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.
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- 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.
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- 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
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- 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
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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