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ARGENTINA: Escaping crises, sustaining growth, sharing prosperity 2 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY LIST OF ABBREVIATIONS AND ACRONYMS ALMP Active Labor Market Policies AMBA Metropolitan Area of Buenos Aires (Área Metropolitana de Buenos Aires) ANSES National Social Security Administration (Administración Nacional de la Seguridad Social) AUH Universal Child Allowance (Asignación Universal por Hijo) BCRA Central Bank of the Republic of Argentina (Banco Central de la República Argentina) CABA Autonomous Federal Capital of Buenos Aires (Ciudad Autónoma de Buenos Aires) CEDLAS Centro de Estudios Distributivos, Laborales y Sociales ECD Early Childhood Development EPH Permanent Survey of Households (Encuesta Permanente de Hogares) EPHC Continuous Survey of Households (Encuesta Permanente de Hogares-Continua) EU European Union FAO Food and Agriculture Organization FTA Free Trade Agreement GCI Global Competitiveness Index GDP Gross Domestic Product GHG Greenhouse Gases GFS Government Finance Statistics GMO Genetically Modified GP Global Practice, World Bank GSURR Global Practice for Social, Urban and Rural Development GVCs Global Value Chains IDB Inter-American Development Bank IFC International Finance Corporation ILO International Labour Organization IMF International Monetary Fund IPs Indigenous Populations INDEC National Statistical and Census Institute (Instituto Nacional de Estadística y Censos) LAC Latin America and the Caribbean MERCOSUR El Mercado Común del Sur MSMEs Micro, Small, and Medium-Sized Enterprises NAFTA North American Free Trade Agreement New HICs New High-Income Countries NGO Nongovernmental Organization NREL National Renewable Energy Laboratory NTMs Nontariff Measures O*Net Occupational Information Network Database Information Network database ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 3 OECD Organization for Economic Co-operation and Development PISA Program for International Student Assessment, OECD PIT Personal Income Tax PPP Purchasing Power Parity PPPs Public–Private Partnerships PUAM Universal Pension for the Elderly (Pensión Universal para el Adulto Mayor) R&D Research And Development RAP Political Action Network (Red de Acción Política) RC Routine Cognitive RER Real Exchange Rate SEDLAC Socio-Economic Database for Latin America and the Caribbean SCD Systematic Country Diagnostic SITC Standard International Trade Classification SMEs Small And Medium Enterprises STI Science, Technology and Innovation TFP Total Factor Productivity Trapped MICs Middle-Income Trapped Countries UK United Kingdom U.S. United States of America WBG World Bank Group WDI World Bank’s World Development Indicators WDR World Development Report WEF World Economic Forum WHO World Health Organization WTO World Trade Organization WWF World Wildlife Fund 4 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY ACKNOWLEDGMENTS “Argentina: Escaping crisis, sustaining growth, sharing prosperity”, a systematic country diagnosis (SCD), was produced by the World Bank Group Argentina Country Team. Members from all Global Practices and the International Finance Corporation (IFC) contributed to the preparation of the document in a collaborative process, through the provision of a large number of substantive inputs, participation in consultations, advice, and feedback. In addition, the team benefitted greatly from conversations with authorities, partners, and stakeholders throughout the preparation of the document. The report was completed at the beginning of August 2018 amid the continued economic turmoil that has hit Argentina. The focus of the report is on medium- to longer-term development challenges in Argentina, rather than contemporaneous macroeconomic developments. The report has been written by Fernando Giuliano, Economist; María Ana Lugo, Senior Economist; Giovanni Ruta, Senior Environment Economist; and Emily Sinnott, Lead Economist and Program Leader based on inputs from a wide team of sector and country experts, and under the guidance of Jesko Hentschel, Country Director. The core team included Ignacio Apella, Social Protection Economist; Agustin Arakaki, Consultant; Laura Calderón, Consultant; Julián Folgar, Research Analyst; and Marco Larizza, Senior Public Sector Specialist. On the IFC side, the team consists of Luciana Harrington, Strategy Officer; Zeinab Partow, Principal Country Economist; and Valeria di Fiori, Operations Officer. The team relied on the contributions and support of many colleagues, country office staff, and consultants, including but not limited to the list below. The team gratefully acknowledges the overall guidance of Oscar Calvo-Gonzalez, Practice Manager Poverty and Equity; Valerie Hickey, Practice Manager Environment, Pablo Saavedra, Country Director for Mexico; Argentina program leaders Carole Megevand and Rafael Rofman, and Latin American and the Caribbean Chief Economist Carlos Vegh (LCRCE). The team also benefitted from insightful comments and suggestions of the peer reviewers: Marianne Fay, Chief Economist of the Sustainable Development Vice-Presidency; Luis-Felipe López-Calva, UN Development Programme (UNDP) Assistant Administrator and Regional Director for Latin America and the Caribbean; and David Rosenblatt, Manager of Strategy and Operations, Development Economics unit. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 5 “ARGENTINA: ESCAPING CRISIS, SUSTAINING GROWTH, SHARING PROSPERITY” EXTENDED TEAM Global Practice (GP) GP Input Provider Agriculture Tomas Ricardo Rosada Villamar, Michael Morris Education Francisco Haimovich, Helena Rovner Energy & Extractives Lucia Spinelli Environment & Natural Resources Giovanni Ruta (co-Task Team Leader), Laura Calderon, Pablo Herrera Finance, Competitiveness and Innovation John Pollner, Steen Byskov, Daniel Gomez Gaviria Governance Marco Larizza, Silvana Kostenbaum Health, Nutrition, Population Maria Eugenia Bonilla, Daniela Romero, Vanina Camporeale Macroeconomics, Trade and Investment Emily Sinnott (co-Task Team Leader), Fernando Giuliano, Stefano (Macro-Fiscal) Curto, Julian Folgar, Mariano Villafane, Daniela Dborkin Macroeconomics, Trade and Investment Tanja Goodwin, Martha Licetti, Mariana Iootty De Paiva Dias (Trade, competition, and investment) Poverty Maria Ana Lugo (co-Task Team Leader), Agustín Arakaki, Lourdes Rodríguez-Chamussy, Jonna Lundvall Social Protection, Labor & Jobs Ignacio Apella, Marcela Salvador, Juan Martin Moreno Transport & ICT Santiago Arias, Camila Rodriguez, Verónica Raffo Social Development German Freire, Santiago Scialabba Urban/DRM Nancy Lozano, Beatriz Eraso, Cathy Lynch Water Gustavo Saltiel, Maria Catalina Ramirez, Victor Vazquez, Javier Zuleta Climate Ana Bucher Gender Jonna Lundvall, Maria Emilia Sparks IFC Luciana Harrington, Zeinab Partow, Valeria Di Fiori Overall team Support Geraldine Garcia, Maria Emilia Sparks Communications Kelly Alderson, Carolina Crerar, Yanina Budkin 6 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY TABLE OF CONTENTS Acknowledgments 4 Executive Summary 9 Setting the Stage 9 What sets Argentina apart? 12 A history of economic and policy volatility 14 Recent growth and shared prosperity trends 16 Pathway to shared prosperity 19 Chapter 1. Setting the Stage 31 Introduction 31 Falling behind 32 Argentina’s defining characteristics 36 Convergence postponed 39 The Challenge going forward 46 Pathway to shared prosperity 48 Chapter 2. Growth 53 Drivers of economic growth 53 Pathway 1: Putting in place the institutional and macroeconomic fundamentals for growth 57 Macroeconomic stability: moving beyond boom-bust cycles 57 Expenditure and revenue policies to support growth 60 Institutions for growth 65 Pathway 2: Open, outward-oriented development model 69 Creating financial capital 69 Creating the infrastructure to support growth 71 Creating an economy open to trade, competition and investment 75 Enhancing the capacity of firms to benefit from expanded markets 80 Chapter 3. Toward a more inclusive society 87 Recent trends in poverty and shared prosperity and challenges ahead 87 Pathway 3: Releasing constraints to productive inclusion 94 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 7 Chapter 4. Sustainability and investing in natural capital 110 Overview of challenges and institutional context 111 The role of natural capital in Argentina’s economy 112 Pathway 4: Investing in natural capital and ensuring environmental sustainability 117 Chapter 5. Priorities for a sustained and inclusive growth 131 Prioritizing reforms for shared prosperity 131 Prioritization process 132 Priorities 132 Knowledge and analytical gaps 140 References 142 Annexes 152 Annex I: Poverty measurement in Argentina 152 Annex II: Profile of the Poor and Bottom 40 153 Annex III: Selected WBG Analytical Work 155 Annex IV: Data diagnostics for WBG client countries 157 Annex V: Consultations 159 8 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 9 EXECUTIVE SUMMARY markets, to significantly improving education outcomes are necessary to ensure that the population benefits from a resurging private sector and renewed connection with the global economy. Learning from other countries’ experience in implementing structural reforms and gradually opening up their economies (like Australian reforms from the early 1980s and Sweden’s in the 1990s) Setting the Stage is a long-term agenda, and a strong societal consensus will need to develop to support the changes for reforms “Argentina: Escaping crisis, sustaining growth, sharing to endure. Not to be underestimated is the importance of prosperity” is an analysis on the medium-term agenda ensuring a strong safety net to support those who may be to ensure growth and shared prosperity in Argentina hit by structural changes in the economy. and comes at a time when the country is embarking on deepening structural reforms while dealing with recent Argentina is rich in natural capital assets and has a sudden financial market pressures that emerged in April historically strong middle class. Along with its 2.8 million 2018. The current government came into office at the end square kilometers, its extraordinary fertile land makes of 2015 facing a difficult legacy of macroeconomic and Argentina one of the largest agricultural producers in the structural imbalances. It has made significant progress world. The beef and soy sectors apply some of the most since then on important reforms. However, continued modern practices in the world and are leaders in breeding, macroeconomic imbalances—with a primary deficit of agricultural machinery, and innovation. Argentina has 4.2 percent of gross domestic product (GDP) in 2017 and vast natural resources in energy, with world-class wind inflation of 24.8 percent at the end of 2017—combined with and solar potential and the second-highest shale gas high external financing needs made Argentina vulnerable and fourth highest shale oil reserves in the world. In to increased emerging market turmoil at the end of April addition, Argentina has significant opportunities in some 2018, when the country experienced a large depreciation manufacturing subsectors and high-tech, innovative of the peso and a rise in country risk. In response, the services. Argentina has a historically large and strong government requested an emergency credit line with the middle class. Social indicators are mostly good, and International Monetary Fund in early May and accelerated society deeply values education and knowledge as a some key reforms. This report was completed at the means for potential mobility and improving status. Noted beginning of August 2018 amid Argentina’s continuing successes in research and innovation (four of the six most economic turmoil. The focus of the report is on medium- to successful Latin American tech unicorn companies, with longer-term development challenges in Argentina, rather a value of over US$1 billion, are Argentine [see Mander than contemporaneous macroeconomic developments. 2016]) makes the country a potential destination for high- The report looks at the policies needed to Argentina to end value-added industries. its vicious circle of 14 economic crisis since 1950, that the country experienced. This includes a substantial focus on Nonetheless, compared to that of its peers, Argentina’s macroeconomic policies to set in place the foundations for long-run economic performance has been disappointing, medium-term growth and shared prosperity by boosting affecting the country’s ability to reduce poverty and jobs and productivity.1 Achieving macroeconomic increase incomes of its citizens. Average long-run stabilization is a precondition for creating a healthy and economic growth in Argentina has been only 2.7 percent— vibrant economy. But deep reforms in areas varying from about half that of high-performing countries in the region enhancing domestic competition, to developing capital and less than a third the level of emerging countries in 1  Shared prosperity requires that economic growth results in a sustainable increase in the living standards of the less well-off. The World Bank Group monitors progress in shared prosperity using the income growth of the population in the bottom 40 percent of the income distribution. 10 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Asia. As a result, the country has consistently lost ground Congo (figure ES.2), ranking with fragile states like Iraq relative to rich economies; GDP per capita, which was and Syria and highly hydrocarbon-dependent countries. similar to the average of a group of rich economies at the Uruguay, a neighboring country affected by Argentina’s beginning of the 20th century, fell to only 38 percent of cycles, and arguably subject to similar external shocks, these rich countries’ economic output per person today spent less than one-fifth of the time in recession. (see figure ES.1). Given its secular decline from relatively Recessions in Argentina not only occur often but also high levels of income per capita, Argentina can be referred are deep. In an average recession cycle, Argentina’s GDP as a unique country that did not grow, but rather fell, into contracts 3.5 percent per year. The result is a relatively middle-income status, and remained there. Furthermore, weak growth performance: Average long-run economic 40 percent of its population is today still vulnerable to growth in Argentina has been only 2.7 percent, below falling into poverty, and growth has come at the expense that of its regional peers (3.7 percent), new high-income of environmental sustainability (with 12 percent of forest countries (3.9 percent, see box 1.1 in the main report for loss between 2001 and 2014—double the world average). a definition of this group), and Organisation for Economic The lack of job creation in Argentina in recent years Co-operation and Development countries (3.2 percent). limited the significant progress made on poverty and shared prosperity in the previous decade, as the labor Institutions have played a central role in shaping the market deteriorated significantly since 2012. policy-making process in Argentina and—consequently— the volatility in economic policy making that has emerged. The main explanation for this poor performance This report argues that economic policies are only one of is Argentina’s unusually volatile macroeconomic many reasons for Argentina’s decline in income relative environment, reflected in large swings in economic to advanced economies. Economic policies are influenced activity. During the period 1950–2016, Argentina went as much by the quality of the institutions as by the “rules through 14 recessions (one or more consecutive years of of the game” under which political and social actors negative growth), with an average duration of 1.6 years. interact. The way institutions function in Argentina has As a result, the country spent roughly one-third of the historically undermined the incentives to establish, time since 1950 in recession. This is the most time of any enforce, and sustain intertemporal agreements on the country in the world except the Democratic Republic of the content and direction of economic policies. Specifically, Figure ES.1: Argentina’s long decline from the top Argentina’s GDP per capita as a percentage of the average of rich economies, 1950–2016 120 100 80 60 40 20 0 1900 1904 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Source: Data from Maddison Project Database, version 2018. Bolt, Jutta, Robert Inklaar, Herman de Jong and Jan Luiten van Zanden (2018). Note: Rich economies are Australia, Canada, Denmark, Germany, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 11 Figure ES.2: Since 1950, Argentina spent one-third of the time in recession DR Congo, Argentina Iraq Syria Zambia Zimbabwe Bulgaria Venezuela Niger Sudan Côte d’Ivoire Nigeria Romania Jamaica Trinidad & Tobago Kuwait Angola Madagascar Uruguay Iran Russia Federation Argelia Mali Senegal Hungary Iceland Ghana Poland Barbados Bolivia Qatar New Zealand Cyprus Greece Burkina Faso Mozambique Tunesia Uganda Cambodia Czech Republic Chile Peru Saudi Arabia Ireland Portugal Sweden United Kingdom Cameroon Ethiopia Suoth Africa Bangladesh Brazil St. Lucia United Arab Emirates Belgium Finland Switzerland Malawi Marocco Myanmar Turkey United States Netherlands Spain Kenya China (Alternative) Indonesia Malaysia Singapore Dominican Republic Mexico Jordan Denmark Germany Italy Luxembourg Tanzania China (Official) Sri Lanka Vietnam Oman Yemen Malta India Japan Philippines Thailand Costa Rica Ecuador Canada Austria Hong Kong South Korea Albania Guatemala Bahrain France Taiwan Israel Australia Norway Egypt Pakistan Colombia 0 5 10 15 20 25 30 35 Source: Calculations based on data from the Conference Board’s Total Economy Database. Note: The graph shows the number of years in recession as a percentage of total years, 1950–2016. 12 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY there is historically a lack of success of major political an institutionalized arena to discuss and define public institutions—including the executive, the legislature, policies, and created incentives for short-term policies the judiciary, and the state bureaucracy—in enforcing that are often fiscally unsustainable and associated credible commitment and fostering cooperative behavior with long-term economic costs. Recent developments among actors. This lack leads to policies that are either are encouraging: they point to the emergence of a more too volatile (reflecting political opportunism and short- fruitful dynamic. The Fiscal Pact agreed on between the term calculations among actors—cortoplacismo) or too national government and 23 of 24 provinces in November rigid (reflecting noncooperative behavior and distrust 2017 is an important step in coordinating fiscal policy at among actors, forcing them to ex ante rigid solutions the national and provincial levels. The pledge to contain to mitigate opportunistic behavior). These institutional recurrent spending and public employment growth at features, which can be traced back to constitutional the provincial level is core to avoiding a worsening of and electoral rules, as well as to a history of political fiscal imbalances of the provinces in a time of high fiscal instability, have limited the time horizon of policy makers, consolidation pressures. making longer-term structural reform programs difficult to get off the ground and sustain. Over the past years, What sets Argentina apart? important institutional reforms have commenced and an open dialogue about the need to foster and strengthen Natural resource abundance. Argentina is rich in natural core institutions is taking place. The urgency to reform capital, but underinvestment is holding back the country’s core institutions; foster functioning checks and balances potential. With 6.24 hectares per person, the country has between the legislative, executive, and judiciary; and one of the largest land endowments per capita in the world. ensure accountability of those holding office has recently Water is also abundant at the national level, though with been laid open by the widening notebook (cuadernos) wide regional variations. A favorable temperate climate scandal, involving fraud and corruption charges of public makes Argentina’s land fertile for rainfed crop production officials and a large number of private sector businessmen and cattle. Argentina has one of the largest continental or representatives. shelves and is rich in marine and coastal resources. It is also rich in renewable energy resources, including hydro, Distributive conflicts between the federal and the wind, solar, and biofuels, which are largely untapped. provincial governments have been at the heart of Mineral and renewable resources are likely to play a Argentina’s political history, underlying the country’s growing role in the country’s economic future. Finally, structural challenges. The stark economic inequalities natural diversity and landscapes attract international among provinces and the structural features of visitors, building a strong tourism sector that importantly Argentina’s federal system imply that most provinces are contributes to GDP and job creation. highly dependent on the national government to finance their expenditures. In turn, presidents need to secure A historically large middle class with unmet high- votes in Congress to implement economic policies. As a income country aspirations. Between 1880 and 1915, result, the policy-making process can be characterized as the country benefitted from an abundance of fertile land one of “deals” or “exchanges” between the Executive and and the expansion of world trade. Land owners became provinces whereby governors grant political support in increasingly wealthy, benefiting also from land policy exchange for fiscal transfers. Historically, these political that facilitated land concentration. The massive influx economy dynamics have translated into a fiscal transfer of immigrants, especially from Europe, dramatically system that tends to favor resource-poor but vote-rich changed the social structure of the country. By 1914, a regions to strengthen the national ruling coalitions, third of Argentines were foreign immigrants, a large share undermining efficiency in resource allocations. They of whom had nonmanual work experience. Favorable have also weakened the functional role of Congress as international trade conditions after the Second World ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 13 Figure ES.3: Argentina’s regions have very heterogeneous income levels Standard deviation of regional per capita (log) GDP, in percent 70 Country Data Average 64 60 Standard Deviation, in percent 49.0 50 40 35.3 30 27.3 20 10 0 Argentina Venezuela Brazil Chile Mexico Peru Colombia Uruguay Slovak Republic Slovak Republic United States Mexico Malaysia Uruguay Estonia Germany United Kingdom Greece France Australia Netherlands Chile Turkey Czech Republic Poland Korea Chile Latvia Turkey Hungary Ireland Switzerland Czech Republic Italy Poland Norway Portugal Korea Slovenia Austria Finland Spain Japan Sweden Canada Denmark Belgium Regional Countries New High Income Countries OECD Countries Source: Data from Gennaioli et al. 2014. Note: OECD = Organisation for Economic Co-operation and Development. War, combined with industrialization and redistributive deviation of (log) GDP per capita across subnational policies, led to a real income increase and a rapid decline governments. Argentina is a clear outlier among comparator in inequality (the income share of the top 1 percent). countries. Many important expenditure responsibilities By the mid-20th century, Argentina had a strong and lie at the provincial level, such as basic health care and educated middle class, full employment, and many could education, whereas revenues are mostly collected at enjoy a certain standard of living previously unseen. In a the national level. To help fund expenditures, a portion context of full employment, the construction of a social of revenues is redistributed back to provinces through welfare state in which most contributed, ensured health an automatic revenue-sharing scheme (coparticipación), care and generous pensions for an increasing proportion and by discretionary transfers by the executive branch. of the population. These benign economic conditions for Although some degree of mismatch between expenditure workers and the establishment of a welfare state, led to a and collection responsibilities is inevitable to guarantee working class that aspired to become middle-class. the provision of relatively homogeneous services, in Argentina this is very large, with a sizable discretional Marked by significant vertical fiscal imbalance, component. The need to provide homogeneous services Argentina is a very unequal federation, with areas as rich across heterogeneous provinces generates perverse as developed nations and provinces as poor as lower- expenditure and revenue collection incentives, resulting middle-income countries. Argentina is a federal country in substantial fiscal challenges. comprising 23 provinces and the autonomous federal capital of Buenos Aires (Ciudad Autónoma de Buenos Aires, CABA). Heterogeneity across provinces in terms of income is very large.2 Figure ES.3 compares the standard 2  CABA, the richest district of the country, has a GDP per capita of US$28,358, whereas Formosa, the poorest province, has a GDP per capita of US$3,704. 14 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY A history of economic and policy procyclical policies that result in consumption and volatility investment (both public and private) growing faster than income. On the external sector this is reflected in increased Taken together, these three features of Argentina have imports through two channels. First, imports rise because combined in deleterious ways to result in a long-term of increased demand for imported consumption goods disappointing economic performance. The high-income and production inputs. Second, a growing aggregate aspirations of a country with middle-class ambitions demand puts pressure on the market for non-tradable and the short-term considerations (cortoplacismo) goods, increasing their relative price—a real appreciation of the political system combine to create enormous that further increases imports. Because exports—mainly pressures to spend during booms. Often it is the booming based on natural resources and held back by an extractive agricultural sector that provides the high rents to fuel fiscal regime—usually fail to keep up with the rapid these fiscal expansions. The large vertical imbalances growth of imports, the current account deteriorates. of the federal system and the tendency of political and This process usually comes to an end when the rest of economic actors to reach agreements through short-term the world refuses to continue to finance Argentina’s “deals” has undermined the ability of public institutions current account deficit, and it usually results in a sharp to enforce long-term commitment to reforms and to depreciation of the currency, a spike of inflation, a large sustainable policies that use the country’s rich natural drop in real wages, and a deep recession that reverts the assets to harness growth. This has frequently led to current account wiping out a large portion of the welfare highly procyclical economic policies that amplify booms gains in the expansion period. and busts. Successive crises have deepened this dynamic: growing impoverishment during downturns leads to high These boom-and-bust episodes in turn result in both pressures to spend when economic conditions improve, underinvestment in natural capital (which takes time to and actors have over time lost their trust in the ability reap rewards) and in extractive policies to generate short- of the economy to deliver long-term stable growth, term liquidity (generating the liquidation of assets and reducing their incentive to look beyond short-term gains. even illegal extraction). These cycles, sometimes referred As a result, Argentina has failed to keep up with rich to as “stop-and-go cycles” are illustrated in figure ES.4 economies and has experienced an unusually volatile showing the correlation between current account balance macroeconomic environment, reflected in large swings in and GDP growth.3 As the economy grows and the current economic activity and 14 crises since 1950. account deteriorates, the external restriction starts to bind, and usually results in a sharp depreciation of the One of the main explanations behind Argentina’s real exchange rate (RER). After a period of appreciation, disappointing macroeconomic performance lies its the RER usually sharply depreciates, as shown by the tendency to “live beyond its means,” a practice that is spikes in figure ES.5. These large depreciation episodes an endogenous driver of its boom-and-bust cycles. The triggered large contractions in economic activity. Defining country’s social demands and political pressures yield large depreciation episodes as those where the exchange an equilibrium characterized by excessive aggregate rate depreciates in one year by more than one standard spending (that is, aggregate dissaving). The dissaving of deviation, there were five such episodes since 1950 that the country as a whole is financed with savings from the resulted in contractions in economic activity, usually rest of the world, reflected in a current account deficit. large, with a decline on average of 5 percent per episode.4 The tendency to overspend grows wider in booms, with 3  For an historical account of stop-and-go cycles, see for example, Diaz Alejandro (1970), or the more recent Gerchunoff and Llach (2007), Hey- mann (2007), Albrieu and Fanelli (2008), and Gerchunoff and Rapetti (2016). 4  This does not include the most recent exchange rate depreciation episode in 2018. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 15 Figure ES.4: Correlation between current account Figure ES.5: Real exchange rate index as a percentage of GDP and GDP growth 7 4 6 Current account, Mean Change per Cycle 3 2 5 1 4 0 -10 -5 0 5 10 15 3 -1 2 -2 1 -3 0 -4 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 GDP Average Annual Growth Rate per Cycle Sources: Data from Ferreres 2005, Instituto Nacional de Estadística y Censos, and Banco Source: Ferreres, 2005. Central de la República Argentina. Notes: A real depreciation of the peso is an increase in the index. Notes: Each dot is a period of consecutive growth or contraction of economic activity, in percentage (x axis), and the corresponding change in the current account (CA) balance, in percentage points of GDP (y axis), all expressed in annual averages. Institutionally, these cycles are reflected in the large and 2008 (Bonvecchi 2010). Historically, policy volatility swings in economic policy throughout the country’s has typified Argentina for longer than the last quarter of history. Among some of the most significant in the last a century. Using a measure of policy stability based on quarter century: The country moved from a very rigid presidential speeches during 1940–2016, Argentina and exchange rate regime (currency board established in República Bolivariana de Venezuela come out with the 1991) to a managed float, to a dual exchange rate regime, lowest policy stability using this measure, and were the and to the current flexible exchange rate. Trade was to be countries that most diverged in economic output from the gradually opened when Mercado Común del Sur (Mercosur) United States over 1940–2010 (Calvo-González, Eizmendi was created in 1991, but the strategy was abandoned and and Reyes 2017). Given this history, commentators today reversed to the extent that in the 2000s an increased focus on the expectation of a strong possibility that the number of goods came to be subject to import controls. current direction of economic policy may be reversed in The privatization of public utilities in the 1990s turned Argentina if political power shifts. to nationalizations from the mid-2000s onward and to the current focus on public–private partnerships. Recurrent crises and successive policy swings resulted Argentina has moved from a “mostly free” economy in in worsening welfare conditions from the mid-1970s 1995 to a “mostly unfree” one in 2017 (Index of Economic to the early 2000s. Slow and unstable growth, deep Freedom)—a situation that the aforementioned economic political conflict, sweeping trade liberalization, and labor reforms aim to rectify by reducing the constraints to repression in the mid- to late 1970s were associated with economic activity.5 Tax legislation has been enacted or increasing poverty and inequality (figure ES.6) (Altimir modified over 80 times since 1988. Fiscal federal rules 2001; Gasparini and Cruces 2009). The hyperinflation, have been changed 14 times in the same period, and real depreciation, and economic contraction of the 1980s budgetary rules have been altered 16 times between 1992 resulted in greater declines in real wages and rising labor 5  The Index of Economic Freedom covers 12 freedoms, ranging from property rights to financial freedom, in 186 countries. According to the 2017 Index, Argentina ranks 156 out of 186 countries (see https://www.heritage.org/index/). 16 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure ES.6: Recurrent crises worsened welfare conditions since the 1970s Poverty and inequality in Greater Buenos Aires, 1974-2016 40 0.70 35 0.65 30 0.60 25 0.55 Poverty rate (%) Gini Coefficient 20 0.50 15 0.45 10 0.40 5 0.35 0 0.30 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Gini (IPCF) Poor ($5.5 a day) Source: Data from SEDLAC (CEDLAS and World Bank), based on Encuesta Permanente de Hogares-Continua, http://www.worldbank.org/en/topic/poverty/lac-equity-lab1 and for older data http://www.cedlas.econo.unlp.edu.ar/wp/en/estadisticas/sedlac/. informality (Beccaria 2007), leading to rising levels of for Economic Co-operation and Development (OECD) poverty. The following decade, although the economy countries and, after thirty years, instead came closer was growing and inflation was under control, the to the performance of regional peers. The quality of sudden liberalization of trade along with an appreciated Argentina’s education system, once seen as the top RER led to a rise in unemployment and informality, performer in Latin America and the Caribbean (LAC), especially among unskilled workers. In the absence of has eroded and converged to the median in the region. wide compensatory social protection programs and with For example, Argentina placed second in reading scores weak labor institutions, this rise led to a more unequal among thirdgraders in LAC at the end of the 1990s (in distribution of incomes, and an increasingly segmented the United Nations Educational, Scientific, and Cultural society between the haves and have-nots (Cicowicz Organization’s first regionally comparable measurement), 2002; Galiani and Sanguinetti 2003; Gasparini and but fell to the LAC average in the latest round (Cassasus Lustig 2011). This situation worsened toward the end of et al. 1998, 2014). the decade, when a recession finally led to the end of the convertibility regime in 2001/02, accelerated inflation, Recent growth and shared prosperity and saw poverty reach its highest level in Argentine trends history. After this deep crisis, employment conditions ameliorated, particularly for the less qualified. However, The aftermath of the 2001/2002 crisis provided as macroeconomic unbalances accumulated, labor market an opportunity to address the country’s recurrent improvements slowed and poverty stagnated. macroeconomic imbalances and set the basis for long- term growth. The collapse of the Convertibility Regime The successive economic crises were also reflected in and default on foreign obligations resulted in a massive noneconomic aspects of well-being. Life expectancy real depreciation of the peso, a sizeable output gap, low improvements slowed, diverging from those of new wages, and a large fiscal surplus. In a context of expanding high-income countries (new HICs) and Organisation world demand and increasing commodity prices, the ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 17 Figure ES.7: Growth decomposition by demand Figure ES.8: Growth contributions by factor component, period year averages, in percent of production, period year averages, in percent 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 1998-2002 2003-2011 2012-2017 1998-2002 2003-2011 2012-2017 Imports Exports Public Consumption Investment Capital Labor TFP Private Consumption GDP growth (yoy) Sources: Data from Ministry of Treasury, Argentina, and the World Bank’s World Source: Data from The Conference Board. Development Indicators dataset. Argentine economy recovered vigorously, growing 5.9 turned to increasingly protectionist policies such as percent, on average, between 2003 and 2011.6 But this quantitative restrictions on foreign trade and foreign was further fueled by expansionary fiscal and monetary exchange markets, hurting productivity. policies to support high levels of private consumption (figure ES.7). The continued expansion of aggregate Macroeconomic imbalances grew wider in the years demand was met by increased intensity in the use of after 2011, following the deepening of the policies that labor and capital, and by some productivity gains, mostly generated them in the first place. In 2011–15, private explained by a recovery from the large fall in 1998–2002 job creation almost stalled. Government expenditure (figure ES.8). continued to grow far beyond historical records, productivity collapsed, and the current account deficit By 2011, the demand-driven growth strategy showed widened. The lack of access to international credit signs of exhaustion, with macroeconomic imbalances markets translated into a growing monetization of fiscal becoming self-evident. General government expenditures deficits, which further fueled inflation. The economy thus had increased at an unprecedented pace, growing by over entered an annual cycle of recessions and expansions, 11 percentage points of GDP between 2004 and 2011 to with real GDP a mere 2.5 percent higher in 2017 than in fuel mostly current expenditures on subsidies, pensions, 2011, a fall if measured in per capita terms. and wages. Increased tax pressure failed to keep up with expenditures, leading to a rapid deterioration in the fiscal With increasingly protectionist policies and a continuous position that turned a 3.3 percent surplus in 2004 to a real appreciation of the peso, the tradable sectors’ 7.8 percent deficit in 2016. Growing fiscal imbalances put share of GDP fell. Export taxes, high import tariffs, low pressure on the RER and current account, which moved competition, discretional import licenses, and quotas to deficit for the first time in almost a decade. Especially in currency markets combined to reduce the share of after 2011, to tackle external imbalances, the government tradable sectors in output, despite favorable commodity 6  Geometric average, including the 2009 recession due to the international financial crisis. 18 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY prices and external conditions. Industries that produce in employment and shrinking of the skill–wage gap is goods, such as agriculture or manufacturing, grew by less associated with the commodity boom that increased than half the rate of the service sectors in the 2004–16 demand for low-skilled workers (Fernandez and Messina period (25 versus 57 percent). As a result, the share of 2017; Messina and da Silva 2017). Also helpful was goods-producing sectors in GDP (at producer prices) the recovery of idle capacity right after the crisis and decreased by 12 percentage points from 44 to 32 percent. a consumption growth model with a macroeconomic The share of services grew from 56 to 68 percent in the scheme that favored national firms (Beccaria et al. 2005). same period.7 Government transfers became especially important for families in the lower deciles and contributed to the The expansion of nontradable sectors resulted in a reduction of extreme poverty (Bustos and Villafañe 2011; misallocation of employment to low- productivity Salvia et al. 2015.). Pensions were an essential source activities. High-growth sectors since 2004 are mostly of additional family income—in particular, among the nontradable, such as construction, health services, vulnerable—because of a pension fund moratorium, or public administration. This is due not only to the which led to a doubling of the coverage rate (from 40 to continuous RER appreciation but also to deliberate 80 percent) among elderly in the bottom quintile (Rofman policies to protect some sectors perceived as being major and Olivieri 2012; Rofman et al. 2015). In addition, the contributors to job creation, especially for low-skilled phasing out of the Jefas y Jefes de Hogar Desocupados workers. These high-growth sectors have also experienced program (launched to address the 2001/02 crisis) low productivity growth, a sign that productivity in the was reversed with the creation of the universal family high-employment growth sectors has failed to catch allowance program (Asignación Universal por Hijo, AUH) up with the influx of workers. Unless those sectors had in 2010, reaching 15 percent of households by 2016. relatively high productivity to begin with, which they did not,8 this points to a misallocation of employment to low Over 2011–16, family incomes across the whole productive uses. The misallocation is both a source and a distribution remained stagnant, primarily because result of low aggregate growth. Low growth results in low of a contraction in labor incomes, compensated only job creation, which in a context of a growing labor force partially by pensions and public transfers (figure ES.9). (demographic bonus) leads to the need for some sectors, The meagre 1.1 annual employment creation was driven typically public administration and public education, mainly by public employment and self-employment, to absorb the growing labor force. This vicious cycle whereas wage employment in large firms remains almost generated a trap of low productivity, low job creation, and at the same level. This slowdown in job creation reflects growing labor misallocation. the limitations of a demand-driven development strategy, in a context of less favorable terms of trade than in the The shared prosperity process in 2004–11 was mainly previous years, which resulted in the decline in labor driven by the recovery in labor incomes (figure ES.9). productivity. Manufacturing contracted by 6 percent Family incomes grew largely because of the positive between 2011 and 2016, and the main employment gains performance of labor income, particularly among the came from the expansion of services (including the public poorest households, recovering from the crisis as well sector) and commerce. Rising inflation also reduced as continued job creation after 2007. During this period, the real value of wages (8.7 percent in the five years employment grew at a rate of 2.2 percent per year, driven over 2011–16), with the largest losses seen among self- by wage earners primarily in large firms. This increase employed and small-firm wage employees. 7  Shares in current prices. In constant 2004 prices, the share of the service sector increased 5 percentage points. 8  The sectors with highest value added per worker in 2004 were mining and oil, fisheries, and financial intermediation, in that order. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 19 Figure ES.9: Shared prosperity over 2004–11 was mainly driven by the recovery in labor incomes, which stagnated over 2011-16, and were only partially compensated by pensions and public transfers Panel A. Decomposition of per capita income growth per decile, Panel B. Decomposition of per capita income growth per decile, by source of income, 2004-11 by source of income, 2011-16 18 18 16 16 14 14 12 12 Percentage Points Percentage Points 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Labor income (male) Private transfer Capital income Other incomes Total income Labor income (female) Public transfers Pensions Implicit rent Source: Data from SEDLAC (CEDLAS) and World Bank, based on Encuesta Permanente de Hogares-Continua, http://www.worldbank.org/en/topic/poverty/lac-equity-lab1. Despite improvements in the past 15 years, Argentina Pathway to shared prosperity faces significant challenges in terms of poverty and shared prosperity. According to official estimations, The development model that Argentina needs to move 30.3 percent of Argentines living in urban areas are poor to centers on achieving sustained growth by opening and 6.1 percent are unable to meet basic food needs up the economy and putting in place the conditions for (2016, second semester). Measured at US$5.50 per private sector–led growth. The transition to new sources capita per day in 2011 purchasing power parity (PPP) of growth for development in Argentina involves a large dollars (typical of upper-middle-income countries), the and wide-ranging set of policy reforms (see figure ES.10 poverty rate in Argentina is about a third of the average for an illustration of the transition needed). Advancing level in LAC; however, it is still higher than in the new through this path will help the country avoid the boom- HICs and OECD countries (50 percent and almost two and-bust economic cycles predominant since 1950. The and a half times, respectively). Today, 2 million people government is committed to advance a reform agenda, live in informal settlements lacking property rights and and has already made progress along several of the basic services, which contrasts with the emergence areas identified (see box ES.1 for further details). These of enclosed neighborhoods catering to upper-middle- policy reforms can be grouped along four pathways income individuals and the rich. The country has reached where progress is critical for sustainable growth and high levels in access to improved water and educational an expansion of shared prosperity. Without sound attainment, but is still far from OECD standards in terms macroeconomic management that brings price stability of infant mortality, the under-five mortality rate, and life and a fiscally sustainable path, the transition to a new expectancy. In addition, access to basic services such as development model will flounder. Pathway 1 concerns education, health, and piped water or sewerage networks putting in place these fundamentals for growth. Economic varies largely across provinces and across economic growth in Argentina has come to rely on domestic demand background. With a third of jobs being informal, economic and largely on the expansion of government spending. opportunities for youth are limited—particularly among The country has begun the move to a more open, outward- young women with low levels of education. oriented development model. Pathway 2 looks at the 20 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY policies that are necessary to support this model. Low For the change to a new economic model to endure, investment, very undeveloped capital markets, and large growth will have to translate into better quality jobs, physical investment needs have to be tackled. Reducing and the progress made on reducing poverty will need to barriers to trade is only part of the story: the economy has continue. Pathway 3 (presented in chapter 3) outlines the to open up to domestic and international competition, and constraints that will have to be overcome if people are the highly concentrated market power some firms enjoy to realize the dividends from a changed economic model. has to be reduced. For success, a larger group of firms Success will entail bringing in more people to the labor will have to build the capacity to export and compete in market and increasing their productivity. Of concern, then, a more competitive domestic market. Chapter 2 of the is the evidence that the population is falling behind in report describes Pathways 1 and 2. relative terms on educational outcomes—not a good sign for a country that needs to reverse its lagging economic Argentina has begun to implement this reform agenda to performance and expand its middle class. Additionally, transform its economy, while dealing with the unwinding sustained and inclusive growth will require that everyone, of macroeconomic imbalances and working to prevent a irrespective of socioeconomic background or location, rise in poverty due to the transition. In December 2015, the has access to quality services needed to accumulate government faced the challenge of large macroeconomic assets. In the shorter term, it will also be important to imbalances, substantial distortions to economic activity, enhance the extent to which social safety nets and active and a weakened institutional framework: large fiscal labor market policies can mitigate the negative social deficits, monetization of the fiscal deficit, and high impacts of reducing market distortions and opening up to inflation were accompanied by price controls, large and domestic and international competition in the transition regressive subsidies, trade restrictions, and the rationing period. Furthermore, integrating all of Argentina (and of foreign currency. Credit and capital markets were not just the richer areas) into the world economy will extremely thin, and investment low. Reforms were put in be important to expand the gains from opening up and place to eliminate foreign exchange controls and move to making the economy more productive. Finally, Pathway 4 a flexible exchange rate regime, to establish an inflation- (chapter 4) outlines how protecting the environment and targeting framework for monetary policy, to gradually harnessing the value of nature for development will be reduce energy and transport subsidies, to regularize essential to ensure the sustainability of economic growth. relations with creditors, and to improve official statistics. Structural reforms have also been put in place to From the long list of constraints identified in this strengthen productivity and competitiveness by removing systematic country diagnostic (SCD), it was necessary to distortions holding back private sector–led growth, distinguish those that are the most critical to achieving including reducing export taxes and easing import controls, sustainable and inclusive growth (chapter 5). To prioritize improving the institutional framework for competition and among the constraints to growth and shared prosperity, capital markets, launching an ambitious infrastructure the report uses the following criteria: (i) impact on the investment program to be financed by public–private twin goals—this filter looks at the potential impact partnerships, and reducing the costs of doing business. of removing a constraint on reducing poverty and At the same time, there has been a focus on strengthening increasing the welfare of the bottom 40 percent; (ii) the legal framework to fight corruption and increase complementarities—this filter assesses the degree to public sector transparency—which will now need to be which an opportunity identified in one area might have tackled with higher urgency given the “notebook scandal” positive impacts on other priority areas given the strong revelations about widespread fraud and corruption in the connections across a number of the challenges and that adjudication of public works programs (see box ES.1 for addressing one set of constraints might also trigger further details on the reforms put in place over 2016–18). or be a condition for progress in other areas; and (iii) ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 21 Box ES.1: Summary of key policy shifts and structural reforms in 2016–18 Normalization of international relations • The International Monetary Fund conducted its first Article IV consultation in a decade in November 2016. Argentina will hold the World Trade Organization Ministerial Conference in 2017 and the G20 Presidency in 2018. • After 15 years, Argentina returned to international capital markets with the largest single bond issuance in history for an emerging country (April 2016). Main reforms • Monetary policy: The Central Bank formally adopted an inflation-targeting regime with a floating ex- change rate. In addition, it committed to gradually decrease financial assistance to the central govern- ment. • Statistics: Since January 2016, the credibility of the National Statistical System was restored; as a result the International Monetary Fund lifted its Declaration of Censure on Argentine official statistics (Novem- ber 2016). • Export and imports: Export taxes were eliminated, with the exception of taxes on soybeans, which were reduced and for which the government announced a scheduled further reduction. An imports adminis- tration system replaced the mostly discretional licensing regime in place until 2015. Foreign exchange controls were lifted after four years. • Subsidies: Energy, water, and transport subsidies were reduced while keeping a social tariff for low-in- come users in water and transport and creating a social tariff for residential electricity and natural gas consumers. Energy subsidies will continue to decrease gradually until they are eliminated by 2021, with the exception of social tariffs. • Taxes: The personal income tax floor was raised and family allowances expanded to reach 4.1 million children, up from 2.9 million. A successful tax amnesty program was implemented to encourage repatria- tion of undeclared funds held abroad, resulting in additional revenues of 1.6 percent of GDP. Recently, a capital gains tax was implemented for the first time. • Pension system: Argentina’s pension system accounts for 40 percent of the national budget. In De- cember 2017, Congress approved a change in the pension indexation formula in line with international practice, and put in place the Universal Pension for the Elderly. • Competition: A new Competition Law was passed by Congress on May 9, 2018. This law modernizes the regulatory framework for antitrust policy, including setting up a new authority with greater independen- ce, introducing a leniency program for cartel agreements (such as price-fixing), improved sanctioning rules for anti-competitive practices, and a more efficient merger control system. • Capital markets: A new Capital Markets Law—which modernizes the regulatory framework for capital markets, including by enhancing corporate governance, expanding the supply of financial assets, and targeting the widening of the domestic investor base—was passed by Congress on May 9, 2018. • Public–private partnerships framework: Congress approved a new public-private partnerships fra- mework to help address the country’s existing infrastructure deficit and to stimulate private investment in key sectors of the economy such as infrastructure, housing, services, production, applied research, and technological innovation (November 2016). 22 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Box ES.1: cont. • Transparency: President Macri declared his target of placing Argentina among the top countries in the world in terms of transparency. These efforts include the Access to Information Law that became effec- tive in September 2017, the passing of the Corporate Criminal Responsibility Law to fight corruption in November 2017, ongoing reforms in procurement for public infrastructure and public procurement, and a renewed commitment for open government with the open data portal and the implementation of the second open government action plan. • Fiscal pact: Long-standing disputes over transfers between the national government and the provinces were settled in a fiscal pact of November 2017. Provinces agreed to freeze current public expenditures in real terms and to decrease the burden of the highly distortive provincial turnover taxes. • Public employment: The government enacted a voluntary separation scheme at the federal level to rationalize the public wage bill (April 2018). The program targets older employees from the national administration and government agencies. Reforms under discussion on structural agenda • Labor market reform: Informal labor accounts for one-third of salaried employed workers. The govern- ment is discussing a labor market reform with the aim of providing incentives for formalization. • Trade: Argentina is one of the most closed economies in the world. Trade reform needs to be carefully designed because a significant portion of labor is employed in protected sectors. Trade discussions be- tween Mercosur and the European Union have resumed. The Pacific Alliance accepted Argentina as an observer member. • Education: Argentina has high school dropout rates, especially in secondary school, and low learning outcomes. The government made important strides in moving evaluation to the center of debate, but further reforms are needed. preconditions—this filter identified those constraints institutional challenges and governance constraints. The that need to be tackled as a precondition for achieving design and successful implementation of policies—in any sustainable and inclusive growth. sector or at any level of government—is, to a large extent, determined by the strength of the institutions and the Priorities are organized in two categories: cross-cutting coordination across levels. This section introduces the institutional factors needed to enable growth and thematic set of cross-cutting institutional factors to enable growth, priorities. Cross-cutting enablers are “drivers of success” which have emerged from the analysis and consultation for the more traditional thematic priorities. Enablers can process across most of the areas, and the sector-specific magnify the effects of other reforms and their impacts on list of priorities identified.   growth, inclusion, and sustainability over the long-term. They tend to be institutional in nature. The architecture Cross-cutting institutional factors to of Argentina’s political and economic institutions plays enable growth a fundamental role as the underlying determinant of policy outcomes. Moving toward a sustainable and Strengthening the independence and efficiency of inclusive development model can therefore be proven accountability institutions is needed to ensure law difficult without addressing some of the more pressing enforcement and reduce corruption. Transitioning toward Figure ES.10: Argentina’s economic transition OLD DEVELOPMENT MODEL TRANSITION NEW DEVELOPMENT MODEL Growing macro Sound macro and fiscal framework and fiscal imbalances Open economy Closed economy Deepended capital Limited financial and physical capital markets and logistics Low competition, innovation Enabling factors High competition, innovation and productivity and productivity Growth Open Social and Environmental Public sector as fundamentals development productive Private sector sustainability driver of jobs model inclusion as driver of jobs ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Low quality services and High and equal quality services inefficient social spending and efficient social spending Expanded social safety net Strengthened social policy spending Extractive and unsustainable Inclusive and climate use of natural capital resilient green growth Source: SCD team. 23 24 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY a sustainable and inclusive development model will policy making can help bridge the ideological divide prove difficult without addressing some of the pressing and support a rational debate about policy goals and and fundamental institutional challenges and governance strategic priorities. By centering on expected outcomes constraints, including the need to ensure an impersonal and rigorous assessment of the impact of public policies, application of rules (from the “rule by law” to the “rule an evidence-based approach can help government focus of law”). The experience of many countries shows that policy making on effectiveness of social interventions constitutional constraints become self-reinforcing and efficiency in use of resources. This approach can when power in the system is distributed evenly and contribute to mitigate polarization among political and powerful elites and the political “system” accept the economic actors, and increase the chances of bipartisan law’s limitations (Fukuyama 2010, 2014; North, Wallis, agreement. and Weingast 2009). For this transition to happen in Argentina, further efforts are needed to ensure better Making federalism work by promoting cooperative contract enforcement, an independent judiciary, and behavior across governmental levels will be central to stronger accountability of institutions across all levels ensure successful implementation of policies. As indicated of government to be able to prosecute and sanction above, the need to provide homogeneous services across corrupt behavior.   Over the past years, Argentina has heterogeneous provinces generates perverse expenditure made important strides in strengthening accountability and revenue collection incentives, resulting in substantial and anti-corruption efforts: new or overhauled laws fiscal challenges. Historically, the policy instruments and have been passed or are being discussed in the areas of processes used to negotiate these distributional tensions corporate criminal liability, access to information, ethics between the national and provincial governments and integrity, plea bargaining, and asset recovery; and (including participaciones to provinces, public transfers, accountability mechanisms have been strengthened pensions, subsidies, and taxation) have proven harmful significantly, such as those of the Anti-Corruption Office. In to Argentina’s achievement of its long-term development part, the revelations surrounding the cuadernos scandal— objectives. Moreover, in many cases, the decision which are gaining in number and scale on a daily basis making and implementation are decentralized to various as this report is finalized—are fruits of such strengthened regulatory agencies, without appropriate coordination institutions. But this can only be a beginning of the mechanisms, and thus leads to increased fragmentation necessary deep-rooted changes. and undermines the capacity of the federal government to guide implementation. There is therefore an urgent Supporting evidence-based decision making using high- need to make federalism work in Argentina by promoting quality data and information systems could contribute a more cooperative behavior in which national, state, and to reaching consensus and advancing reforms. Good, local governments interact cooperatively and collectively comprehensive quality data and information systems to solve common problems. To this end, stronger central are necessary for the diagnosis, design, implementation, coordination would assist in making government actions and monitoring and evaluation of key policy areas. Yet, more coherent and aligned with the overall strategic the challenges in information across sectors are large, priorities and orientation of the country’s development and the current sharing practices can undermine policy agenda. Coordination of policies can be improved also by making. But in addition, transparency reforms and open promoting reforms (such as those needed in education) data initiatives can also promote rational decision that create incentives for subnational governments to making based on best available evidence. Further efforts improve public spending efficiency and comply with are needed to promote the reuse of these data and the national policy guidelines and regulations, similar to the dissemination of information to increase public scrutiny. existing ones used in the health sector (Plan Sumar). In a context of often politicized debates on where and how to allocate scarce public resources, evidence-based ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 25 Thematic priorities a sustainable level in relation to economic output. Given the size of current fiscal imbalances, a fiscal consolidation Inclusive and sustainable growth will require progress on is essential to stabilize public debt. Cuts to subsidies and both equity and productivity fronts, as well as ensuring other inefficient government programs need to continue, macroeconomic stability and enhancing environmental while the long-term aim should be to increase the share of sustainability. The analysis done as part of the Systematic spending going on growth-enhancing measures, such as Country Diagnostic process identified a large set of priority public investment projects. The tax system needs economic priorities: of these priorities, 12 are considered to be redesigned to reduce the weight of distortionary taxes to be core. The priorities have also been assessed in terms and to broaden the tax base. This should include a clear of their impact on the twin goals, their complementarity definition of expenditure responsibilities across different with the rest of the priorities, and their role as essential levels of government and a sound intergovernmental preconditions to the successful achievement of the fiscal transfer system to ensure the efficient and equitable remaining priorities. These have been largely confirmed provision of public services, and improved subnational through the systematic consultation with national and revenue-collection incentives. international experts. Enhancing infrastructure is also seen as an objective The prioritization exercise suggests two tiers of of first-order importance. The quality of Argentina's priorities. Reforms included in the first tier are of first- infrastructure stock is deteriorating and this poses a order relevance, very important across the three filters. challenge to competitiveness. Infrastructure investment These include a sound macroeconomic management, is historically low, with very low participation of private better infrastructure, improved quality and relevance sector financing, and unlikely to grow much owing to of education, and increased efficiency of spending. limited fiscal space. Moreover, logistics performance Improved fiscal policy for growth and equity can be indicators are generally lagging. Good infrastructure and pooled in the first-tier group, though with slightly lesser lower logistic costs are key to Argentina’s ambitions in impact on twin goals. A second tier is headed by closing terms of growth. Although financing is a key bottleneck, the gap in the provision of basic infrastructure services, more focused national and territorial goals, and efficient important across the three dimensions, and the other strategies can substantially reduce financing needs. priorities that have varying degrees of importance across In addition, upstream reforms will enable Argentina the three filters. to improve spending efficiency and attract private financing on better terms—whether through public– First-tier reforms private partnerships or commercial borrowing by public enterprises. Efforts to improve public investment These reforms are led by sound macroeconomic institutions and frameworks—notably budgeting and management, which is also key in the short run, given procurement systems—should enable the country to current financial distress. This reform builds from the substantially stretch the resources it already allocates to diagnosis that macroeconomic mismanagement and infrastructure. An improved framework for infrastructure frequent economic policy reversals have been a source planning, financing, and investing will be a key driver of and outcome of successive boom-and-bust cycles and competitiveness. welfare swings. This is tightly linked to an improved fiscal policy for growth and equity because a sound Improving the quality and relevance of education is macroeconomic management also entails a rebalancing identified as a first-tier reform related to fostering an of fiscal policy to reduce economic distortions and inclusive economy. School readiness and early literacy have an expenditure and tax policy that better supports skills are low, despite relatively high coverage. A focus on growth and equity. Public expenditure needs to move to quality will also call for strengthening teachers’ careers by 26 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY improving training curriculum, consolidating the network Second-tier reforms of training institutes, and creating the conditions to attract teachers and motivate them to perform. Recent reforms This group of very relevant reforms with a slightly lower establishing annual standardized testing of students’ level of priority is led by closing the gap in the provision learning outcomes, enforcing the communication of of basic infrastructure services. Broad disparities results to schools, and pre-service teachers’ evaluations persist in basic services, informal settlements, and should contribute toward focusing the system on quality, connective infrastructure across regions and within large although teacher evaluations are still pending. In fact, agglomerations. Access to safely managed water and resistance by teachers’ unions to education reforms are sanitation services varies significantly across regions and generally focused on changes in teachers’ professional between the core and the peripheries of large cities. There development. In addition, it will be essential to revamp are 4,000 informal settlements in the country. Closing secondary education focusing on developing critical basic infrastructure service gaps, investing in connective basic cognitive and (21st century) soft skills, in line with infrastructure, and strengthening local capacity will be Secundaria 2030. key for the convergence of living standards and for linking populations to economic opportunities. This will require Increased efficiency in the provision of health and enhancing integrated planning across different sectors, education while ensuring equal quality for all will also as well as widening the financial options and developing contribute to an inclusive economy. With respect to clear mechanisms to set up transparent systems of fiscal increased efficiency in health and education, completion transfers across different levels of government. rates are low, learning outcomes are poor, and health outcomes high and unequal across provinces. Unequal A closely related priority refers to the development access to quality services and inefficiencies reflect and deepening of financial and capital markets and highly fragmented systems that lack coordination household access to credit, which could be thought of mechanisms across systems and subnational entities. as access to basic financial services. Argentina’s very Increasing efficiency will require making policies that shallow financial markets reflect a gap in mechanisms are increasingly guided by evidence to help identify cost- that could better support growth, infrastructure, housing, savings initiatives, and a solid system of monitoring and and enterprise development for the private sector. evaluation. In health, efficiency could be substantially Households, particularly those that are more vulnerable, improved by establishing an appropriate model of care, have limited access to credit for productive investment where (i) several providers including a main primary care and asset accumulation. Poorer people rely on personal provider work together in an integrated, coordinated loans or credit cards, with high interest rates. Expanding manner to provide care for an individual (with integrated credit and mortgage markets will be essential. The information systems), and (ii) there is an emphasis on new legal frameworks are encouraging, but substantial actively expanding effective coverage at the primary care regulatory and institutional rollout measures are needed level. As a result of these efforts, the health system would to ensure that financial and capital market products can indeed be better placed to strengthen the prevention operate in an enabling environment. These measures will and control of the burden of noncommunicable diseases, also ensure that the government works with the private especially in the context of an aging population. This also sector in developing new and innovative instruments to calls for the reduction of common risk factors associated promote long-term finance for productive purposes and to with these diseases, such as unhealthy diets (particularly generate new asset classes of financial instruments that among children, where obesity is high), physical inactivity, can be more transparently priced and traded. tobacco use, and alcohol abuse ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 27 Two reforms directly linked to the open economy important social, economic, and environmental impacts development strategy stand out for their impact on the that will require strong policy shifts. Priorities to adapt to twin goals and complementarities: increasing integration climate change involve proper costing of climate action, into the global economy and reducing barriers to contingency planning, and a closer integration between competition and lower logistic costs. Key trade policy the mitigation and adaptation agendas. actions include lowering tariffs and nontariff measures in priority sectors, unilaterally reducing nontariff measures On the other hand, harnessing natural capital endowments in input products, removing nonautomatic licenses to through policies and investments stresses the need to increase predictability, and boosting regional integration leverage natural resources for growth in a sustainable agreements to increase market access. Competition and way. Natural capital in Argentina includes agricultural trade authorities can further coordinate to harmonize soils and pastures, water, forests, fisheries, strong wind technical standards with trade partners. To improve and solar potential, and subsoil assets (oil, gas, coal, and investment policy, Argentina can revise the incentives minerals). Some assets, particularly forest ecosystems framework, introduce effective policies to promote and fisheries, are under significant pressures. Argentina links with local suppliers, and set up comprehensive has lost 21 percent of its forest cover in less than 25 regulatory improvement and simplification mechanisms. years. At the same time, fish stocks have suffered from Jointly among competition and investment promotion overexploitation because the country lacks a national authorities, the government can open up key sectors management plan for sustainable and responsible fishing to investment. On the competition and logistics side, with a long-term vision. Yet these resources, along with Argentina can continue strengthening its anticartel the strong renewable energy potential, can be important enforcement, implement the recently overhauled merger sources of economic rents, jobs, and sustainable control framework, strengthen pro-competition sector livelihoods. Unleashing the potential of natural capital regulation in key sectors such as telecommunications requires breaking with the extractive policies of the and transport, and implement competitive neutrality past and consolidating a policy framework that attracts principles to ensure that public and private operators private sector investments. Policies, incentives, and compete on a level playing field. The competition authority enforcement are also required to ensure that the open will need to be well-resourced, prioritize its engagements access that characterizes many natural assets, such and actions, and achieve technical independence. as forests, land, and fisheries, does not give way to illegality and degradation. Finally, a more sophisticated Two priorities on natural capital and environmental demand for greener attributes in global value chains sustainability stand out. On the one hand, fostering is already emerging, and Argentina has much to gain climate-smart growth for the short and the long term from developing information mechanisms in support of relates to the climate impacts that are rapidly coming labels and practices that encourage the thriving green to the fore of Argentines’ lives and economic activities. businesses throughout the country. Whereas appropriate adaptation policies in key sectors including agriculture, water, energy, and health can Finally, an additional item will become increasingly help deal with impact in the present, a more systemic important as Argentina’s population ages: the need for approach can offer more robust outcomes. By the end a social consensus to ensure pensions are sustainable. of this century, under an extreme emissions scenario, Pensions are fundamental for protecting the income of the the projected warming could reach an average change elderly population: poverty rates would be substantially of about 3.5 degrees Celsius in the north of the country, higher in the absence of the recent reforms that expanded relative to present-day conditions. This will produce coverage. Two-thirds of the moratorium goes to the three 28 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY poorest deciles. But with 11 percent of GDP already other dimensions. Improving the quality of social spending accounted for by pensions, the mid-term sustainability is and investing in human capital are priorities that will not currently guaranteed given the demographic transition see their fruits in the medium and long run, but today’s and the current rules. There is a need to consider options inaction will prove costly. Within some of the priorities, that balance the high levels of generosity (which has sequencing of specific measures is also fundamental, recently increased with the Reparación Histórica that as is the case of prioritizing the deepening of domestic recalculated and adjusted benefits retroactively and competition prior to successfully integrating the country going forward) with the broad coverage while ensuring into the global economy. International experience of future sustainability. This is particularly important as the implementing large structural reforms reveals substantial government starts discussions on a future pension system potential gains; however, prior experience has also shown reform. In this sense, the December 2017 parametric that proper sequencing and monitoring are essential to reform will help make the system more sustainable by success. Comprehensive reform programs to deepen changing the pension indexation mechanism to one that competition and open up the economies to trade and ties benefit changes more closely to changes in prices (and investment in Australia, Mexico, and Sweden took a up to a minor extent to changes in wages). Nonetheless, decade or more to put in place. In addition, appropriate in addition it would be desirable to broaden the agenda to interinstitutional coordination, at the federal level and revise all the parameters and components of the system, between the national and subnational governments, both contributory and noncontributory. as well as public–private dialogue are required to achieve early wins and consolidate the reform process. Moving along the reform path will not be easy. The Finally, improving infrastructure spending appears as forces that caused political and economic volatility in not only to be a precondition of but also to have strong the past still linger and are likely to influence the future. complementarities with other policies identified. Just as this Systematic Country Diagnostic was about to be completed, high devaluation pressures forced Some of these reforms are already underway, but there Argentina’s government to increase its focus on short- is a risk that the present context will mask the sense term macroeconomic stabilization priorities. Without of urgency of key structural reforms whose outcomes broad-based support and appropriate safeguards for the are seen in the longer term. Continuing with the reform vulnerable, the reform process might stall. The proposed process is crucial before inequalities and vulnerabilities reforms can, however, face a different fate than previous increase under the pressing fiscal challenges, and before reform efforts because they seek to put a comprehensive the opportunity to embed the results of a decade of package of policies in place that simultaneously tackle successful growth fades away. Sustaining a long-term growth challenges, inclusion concerns, and the potentially commitment to policy reform on behalf of politicians, the large scope for productivity improvements and natural private sector, and the population at large is challenging capital–based growth. given the complexity and extensiveness of the reform agenda. Clearly communicating the gains and potential A key element for government actions will be sequencing. longer-term impact can help, as will political dialogue Although all the priorities are identified as fundamental around interventions to minimize social conflict and for sustainable and inclusive growth, the sequencing generate the political capital needed. Over time, results of reforms is essential for success. For example, it is achieved in these areas may serve to build political undeniable not only that ensuring macroeconomic support and shift incentives. stability is a precondition for other priorities but also that its failure can undermine most of the progress achieved in ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 29 30 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY CHAPTER 1 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 31 SETTING THE STAGE up their economies, like the Australian reforms from the early 1980s and Sweden’s from 1990, is a long-term agenda; and a strong societal consensus will need to develop to support the changes for reforms that endure. Not to be underestimated is the importance of ensuring Introduction a strong safety net to support those who may be hit by structural changes in the economy, This report on the medium-term agenda to ensure growth and shared prosperity in Argentina comes at a time Argentina is rich in natural capital assets and has a when the country is embarking on deepening structural historically strong middle class. Along with its 2.8 million reforms, while dealing with recent sudden financial square kilometers, its extraordinary fertile land makes market pressures that emerged in April 2018. The current Argentina one of the largest agricultural producers in the government came into office at end-2015 facing a difficult world. The beef and soy sectors apply some of the world’s legacy of macroeconomic and structural imbalances. most modern practices and are leaders in breeding, Progress has made since then by the administration on agricultural machinery, and innovation. Argentina has also important reforms. However, continued macroeconomic vast natural resources in energy, with the world’s second- imbalances—with a primary deficit of 4.2 percent of highest shale gas and fourth-highest shale oil reserves. In gross domestic product (GDP) in 2017 and inflation of addition, Argentina has significant opportunities in some 24.8 percent at end-2017—combined with high external manufacturing subsectors and high-tech, innovative financing needs made Argentina vulnerable to increased services. Argentina has a historically large and strong emerging market turmoil at end-April of April 2018, middle class. Social indicators are mostly good, and when the country experienced a large depreciation in society deeply values education and knowledge as a the peso and a rise in country risk. In response to this, means for potential mobility and status. Noted successes the government requested an emergency credit line with in research and innovation (four of the six most successful the International Monetary Fund (IMF) in early May and Latin American tech unicorn companies—those with a accelerated some key reforms. value of over US$1 billion—are Argentine [see Mander 2016]) makes the country a potential destination for high- This report was completed at the beginning of August value-added industries. 2018 amid the continued economic turmoil that has hit Argentina. The focus of the report is on medium- to Nonetheless, compared to that of its peers, Argentina’s longer-term development challenges in Argentina, rather long-run economic performance has been disappointing. than on contemporaneous macroeconomic developments. Average long-run economic growth in Argentina has been This includes a substantial focus on macroeconomic only 2.7 percent—about half that of high-performing policies to set in place the foundations for medium- countries in the region and less than a third of the growth term growth and shared prosperity by boosting jobs and of emerging countries in Asia. As a result, the country’s productivity. Achieving macroeconomic stabilization is a income per capita fell from being 70 percent of that precondition for creating a healthy and vibrant economy. of the United States in 1914 to only 33 percent today. But deep reforms in areas varying from deepening Furthermore, 25 percent of the population lives in poverty domestic competition to developing capital markets to and another 20 percent is still vulnerable to falling into achieving greater education outcomes are necessary poverty, and growth has come at the expense of the to ensure that the population benefits from a resurging environment (with 12 percent of forest loss between private sector and renewed connection with the global 2001 and 2014—double the world average). The lack of economy. Learning from other countries’ experience in creation of good quality jobs in Argentina in recent years implementing structural reforms and gradually opening limited the significant progress made on equity in the 32 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY previous decade. Although inequality as measured by the capita, Argentina can be referred to as a unique country Gini index decreased by over 20 percent between 2004 that did not grow into, but fell into, middle-income status and 2013, outpacing the reduction in the Latin America and remained there. and Caribbean (LAC) region (5 percent), progress has since stalled. Poor GDP growth has reinforced itself through slow capital accumulation. Sustained long-term economic growth requires investment and maintenance of assets, measured comprehensively to include produced capital, Falling behind natural capital, human capital, and net foreign assets. Recent estimates of comprehensive wealth show that Argentina fell into middle-income status, failing to keep Argentina’s poor GDP performance has been on par with up with its high-income peers of the early 20th century. the country’s total wealth evolution. Between 1995 and Since the mid-20th century, Argentina has consistently 2014, the average annual growth rate of wealth per capita lost ground relative to rich economies, and has now joined was about 1 percent, that is, slower than for most of a group of middle-income countries failing to catch up Argentina’s peers, except Mexico (0.2 percent) and Turkey with more developed peers, usually referred to as middle- (nil; figure 1.2). It has been much lower than in Chile (4.3 income trapped countries (see box 1.1). Argentina’s GDP percent), Peru (4.2 percent) and Uruguay (4 percent). per capita was similar to the average of a group of rich This means that slow growth reinforced itself via slow economies by the beginning of the 20th century, but accumulation of total wealth. has now dropped to 38 percent of these rich countries’ economic output per person (see figure 1.1). 1 Given its The main explanation for this poor performance secular decline from relatively high levels of income per is Argentina’s unusually volatile macroeconomic Figure 1.1: Argentina’s GDP per capita as a Figure 1.2: Change in GDP vs. total wealth per percentage of the average of rich economies, capita, 1995-2014 1900-2016 120 5.0 4.5 CHL PER 100 4.0 MYS POL SVK Total wealth per capita (%) 3.5 URY KOR 80 3.0 STR Peer 2.5 60 COL 2.0 1.5 VEN REG Peer 40 BRA 1.0 OECD 0.5 ARG 20 MEX TUR 0.0 0 1 2 3 4 5 0 -0.5 1900 1920 1940 1960 1980 2000 2020 GDP per capita Source: Data from Maddison Project Database, version 2018; Bolt, Jutta, Inklaar, de Jong, and van Zanden (2018). Note: Rich economies are Australia, Canada, Denmark, Germany, the Netherlands, Norway, Source: Data from Lange, Wodon, and Carey 2018. Sweden, Switzerland, the United Kingdom, and the United States. 1  The 10 economies were chosen using the following methodology: from the 15 richest economies in 1950, 1985, and 2015, we selected the 10 richest economies repeated on the three sample years (excluding small island states and countries of the Organization of the Petroleum Exporting Countries). These are Australia, Canada, Denmark, Germany, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 33 Figure 1.3: Argentina’s GDP growth rate, in percent, 1950-2016 15 10 +/- 1 Standard deviation 5 0 -5 -10 -15 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Source: Data from Ferreres 2005 and Instituto Nacional de Estadística y Censos. TABLE 1.1. ARGENTINA’S ECONOMIC CYCLES, 1950–2016 Expansions Recessions Number of events 14 14 Average duration (years) 3.4 1.5 Average annual GDP change (in 5.8 3.7 percentage) Source: Calculations based on The Conference Board. environment, reflected in large swings in economic activity percent, below that of its regional peers (3.7 percent), (figure 1.3). During the period 1950-2016, Argentina went new high-income countries (3.9 percent, see box 1.1 for through 14 recessions (one or more consecutive years of a definition of this group), and Organisation for Economic negative growth), with an average duration of 1.6 years. Co-operation and Development (OECD) countries (3.2 As a result, the country spent roughly one-third of the percent). time since 1950 in recession. This is the most time of any country in the world except the Democratic Republic of What lies behind Argentina’s volatile behavior? In the Congo (figure 1.4), ranking with fragile states like Iraq order to answer this question, the next subsection will and Syria and highly hydrocarbon-dependent countries. introduce the three aspects at the root of this dynamic: Uruguay, a neighboring country affected by Argentina’s natural resources abundance, historically large middle cycles and arguably subject to similar external shocks, class with unmet high-income country aspirations, and spent less than one-fifth of the time in recession. an unequal federation marked by a significant vertical Recessions not only occur often in Argentina but are also imbalance. The following subsection will show, with a deep. In an average recession cycle, Argentina’s GDP long-term perspective, how these three characteristics contracts 3.5 percent per year (table 1.1). The result is have interacted, resulting in Argentina’s high volatility. a relatively weak growth performance: average long- Finally, the last subsection will emphasize the recent run economic growth in Argentina has been only 2.7 history, mainly over the last decade and a half. 34 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 1.4: Years in recession as a percentage of total years, 1950–2016 DR Congo, Argentina Iraq Syria Zambia Zimbabwe Bulgaria Venezuela Niger Sudan Côte d’Ivoire Nigeria Romania Jamaica Trinidad & Tobago Kuwait Angola Madagascar Uruguay Iran Russia Federation Argelia Mali Senegal Hungary Iceland Ghana Poland Barbados Bolivia Qatar New Zealand Cyprus Greece Burkina Faso Mozambique Tunesia Uganda Cambodia Czech Republic Chile Peru Saudi Arabia Ireland Portugal Sweden United Kingdom Cameroon Ethiopia Suoth Africa Bangladesh Brazil St. Lucia United Arab Emirates Belgium Finland Switzerland Malawi Marocco Myanmar Turkey United States Netherlands Spain Kenya China (Alternative) Indonesia Malaysia Singapore Dominican Republic Mexico Jordan Denmark Germany Italy Luxembourg Tanzania China (Official) Sri Lanka Vietnam Oman Yemen Malta India Japan Philippines Thailand Costa Rica Ecuador Canada Austria Hong Kong South Korea Albania Guatemala Bahrain France Taiwan Israel Australia Norway Egypt Pakistan Colombia 0 5 10 15 20 25 30 35 Source: Calculations based on data from the Conference Board’s Total Economy Database. Note: Argentina in red, South American countries and Mexico in green. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 35 Box 1.1: Middle income trap from above? Argentina and comparator countries Given its secular decline from relatively high levels of income per capita, Argentina can be referred as a unique countrya that did not grow but fell into into middle-income status, and remained there. Following Felipe, Abdon, and Kumar (2012),b trapped middle-income countries (Trapped MICs) are defined as those that remain in the middle-income range for more than 20 years.c The countries other than Argentina that fall into this definition are Algeria, Brazil, Mexico, Romania, South Africa and Bulgaria. Among Trapped MICs, Argentina has been the richest by far in the past (see figure B1.1.1) but has also spent the most time as a mi- ddle-income country, 53 years, over 1960–2016, compared to an average of 36 years among Trapped MICs. Although Argentina’s relative decline in GDP per capita is shared with Latin American peers, some coun- tries have managed to diverge from this trend. Chile, in particular, has managed to grow rapidly in recent decades, and Uruguay also now is classified as a new high-income country (new HIC). Argentina remained the richest economy in the southern cone until the late 1990s, when first Chile and later Uruguay overtook it. Both Chile and Uruguay are now classified as new HICs following Felipe, Abdon, and Kumar (2012): countries taking less than 20 years to move from the upper-middle-income range to the high-income range and registering a 3 percent GDP per capita growth on average since passing the middle-income threshold. By contrast, Argentina’s GDP per capita average growth rate is 1.3 percent since the country last entered the upper-middle-income range (1964–2016) (see figure B1.1.2). Lower average growth in Argentina is due partly to higher economic volatility characterized by longer time periods spent in recession compared to other countries (for further discussion see the first section of chapter 2). Figure B1.1.1: Argentina's and Trapped MIC's Figure B1.1.2: GDP per capita in Argentina and GDPper capita as percentage of the average new HICs, in 2016 PPP US$ of rich economies, 1960-2016 in percent 80 50 70 40 60 50 30 Thousands 40 30 20 20 10 10 0 0 T T+3 T+6 T+9 T+12 T+15 T+18 T+21 T+24 T+27 T+30 T+33 T+36 T+39 T+42 T+45 T+48 T+51 T+54 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 Argentina Mexico Algeria Korea Czech Republic Chile Slovak Republic Argentina Brazil Romania Bugaria South Africa Hungary Poland Malaysia Uruguay Turkey Sources: Data from the de Hoyos’ Total Economy Database, November 2017; World Bank Sources: Data from the de Hoyos’ Total Economy Database, November 2017; World Bank 2017a; and Felipe 2012. 2017a; and Felipe 2012. Note: HIC = high-income country; PPP = purchasing power parity. Note: HIC = high-income country; PPP = purchasing power parity. Three comparator groups are used in the Systematic Country Diagnostic: (i) new HICs will be used as the set of structural peer countries for comparison purposes (Chile, Czech Republic, Republic of Korea, Malaysia, Poland, Slovak Republic, Turkey, and Uruguay); (ii) Argentina will also be benchmarked against the largest LAC economies (Brazil, Chile, Colombia, Mexico, Peru, and República Bolivariana de Venezuela) plus Uru- guay; and (iii) OECD economies—a group of countries that Argentina aspires to join in the near future. a. More recently, República Bolivariana de Venezuela also fell from high-income country status. b. GDP per capita in purchasing power parity (PPP) (constant 2016 US$) was used to create the income measure to rank countries. Income thresholds are the same as in World Bank (2017a). c. There is an extensive literature on the middle-income trap concept, first introduced by Gill and Kharas in 2007 (see World Bank [2017a] for a survey). World Bank (2012a), for example, showed that only 13 of 101 middle-income economies in 1960 had graduated to high income by 2008. 36 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Argentina’s defining characteristics the expansion of industrial-scale agriculture,2 Argentina lost 21 percent of its forests, a loss considerably higher Natural resource abundance than the one experienced by peers (figure 1.6). This has resulted into a private gain at often high public costs (in Argentina is rich in natural capital, but neglect and the form of increased flooding and reduced environmental underinvestment hold back its potential. With 6.24 services). Moreover, soils are highly compromised: it is hectares per person, the country has one of the largest land estimated that 37.5 percent are affected by hydraulic endowments per capita in the world (figure 1.5). Water and wind erosion (Casas and Albarracín 2015). Also, the is also abundant at the national level, though with wide most productive areas (Pampa Argentina) are vulnerable regional variations. A favorable temperate climate makes to increasing trends of hydrological extremes, mainly Argentina’s land fertile for rainfed crop production and floods. The Province of Buenos Aires alone, source of 25 cattle. Argentina has one of the largest continental shelves percent of grain and meat production in the country, had and is rich in marine and coastal resources. It is also rich more than 1 million hectares flooded in 2001 and again in renewable energy resources, including hydro, wind, in 2015, with hundreds of millions of dollars in losses. solar and biofuels, which are largely untapped. Finally, On the marine side, naturally rich fish resources have natural diversity and landscapes attract international declined through overfishing. visitors, building a strong tourism sector that importantly contributes to GDP and job creation. Renewable natural A historically large middle class with assets are not the only resource: mineral and renewable unmet high-income country aspirations resources are likely to play a growing role in the country’s economic future. The country has world class gas and shale By the mid-20th century, Argentina had a strong and oil potential. Yet Argentina’s development model has been educated middle class, full employment, and many could depleting large portions of its natural capital base. For enjoy a standard of living not seen before. Between 1880 example, between 1990 and 2014, driven in large part by and 1915, the country benefitted from an abundance of Figure 1.5: Land per capita, 2014 Figure 1.6: Forest cover change 1990-2014, percent 7 20 7 6.24 15 6 6 10 5 5 5 3.99 4 0 4 Hectares 3.46 3.41 3 -5 3 1.73 -10 2 1.40 2 1.17 -15 0.91 0.88 1 -20 1 0.24 0.23 0.30 0 -25 0 Argentina Structural Regional OECD ARG VEN BRA COL MEX PER OECD Structural CHL peers peers peers Total land Agricultural land Arable land Forest cover change Forest cover percent 2014 Source: Data from FAOSTAT, http://www.fao.org/faostat/en/#home. Source: Data from FAOSTAT, http://www.fao.org/faostat/en/#home. 2  Of course, agriculture is not just a source of negative externalities. Positive externalities and benefits arise from the fact that Argentina is a key player in global food security, and innovation in agriculture and food systems provide important global public goods. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 37 fertile land and the expansion of world trade, and land But the successive policy and economic shifts that led owners became increasingly wealthy because of a land to declining real wages and the de-formalization of policy that facilitated land concentration (Alvaredo wage employment since the mid-1970s hit workers and 2010). The massive influx of immigrants, especially from deepened the segmentation of the society. The periods Europe, dramatically changed the social structure of of negative economic growth, combined with high rates the country. By 1914, a third of Argentines were foreign of inflation and increasing unemployment, severely immigrants, a large share of whom performed nonmanual impacted the once aspiring middle classes (the “new work.3 Favorable international trade conditions after the urban poor”) and the already poor, leading to a surge in Second World War, combined with industrialization and inequality. The share of incomes received by the top 1 redistributive policies, led to a real income increase and percent grew from 7.4 in 1973 to 12.4 in 1997 to 16.7 in a rapid decline in inequality (the income share of the top 2004 (Alvaredo 2010). Between 1980 and 1990, workers 1 percent) (figure 1.7). These benign economic conditions lost 38.8 percent of their income, and the fall was even for workers and the setting up of a welfare state led to the higher for those in middle class occupations (Kessler and expansion of middle class aspirations among this newly Di Virgilio 2008). The new poor had education levels and enriched working class. In a context of full employment, family structures closer to those of the middle class, but the construction of a social welfare state in which most low income and a lack of social security akin to those of contributed ensured health care (through the trade union’s the structurally poor. As unemployment and informality obras sociales) and generous pensions for an increasing increased, a higher proportion of families lost their health proportion of the population. Social security revenues as and old-age insurance, increasing the duality of society a share of GDP rose from 1.3 percent in 1943 to 6 percent between the formal/protected and informal/unprotected in 1955 (Alvaredo 2010), real wages almost doubled groups. After the 2001/02 crisis, economic growth and from early 1940 to early 1970s (figure 1.8), and old-age job creation were accompanied by an expansion in health coverage increased threefold (from 12.6 percent in 1950 and old-age insurance to the wider population, as well to 44.5 percent in 1970) (Isuani and San Martino 1993).4 as in social safety nets. However, labor markets remain Figure 1.7: The top 1 percent income shares in Figure 1.8: Average real wages, 1940-2006 Argentina, and other new world countries Year 1970 = 1 30 1.4 1.3 25 1.2 Top 1% income share (%) 1.1 20 1.0 15 0.9 0.8 10 0.7 0.6 5 0.5 0 0.4 1940 1950 1960 1970 1980 1990 2000 2010 1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 Argentina U.S. Australia New Zealand Canada (October each year) Source: Reprinted from Alvaredo 2010. Source: Reprinted from Beccaria, Esquivel, and Maurizio 2005, which was based on Llach and Sanchez 1974 and authors’ calculations. 3  Estimates per occupation put the size of the middle class at 30 percent by 1914 (Adamovsky 2016). 4  The first estimate, using the definition of the middle class from Ferreira et al. (2013) as those with per capita income between US$10 and US$50 per day, puts the size of this group in Greater Buenos Aires in 1974 at almost 80 percent of the population. 38 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 1.9: Subnational inequality: Standard deviation of regional per capita (log) GDP, circa 2010, percent 70 Country data Average 64 60 49.0 50 Standar deviation 40 35.3 30 27.3 20 10 0 Slovak Republic Slovak Republic Malaysia Venezuela Estonia Argentina Brazil Australia Netherlands United States Chile Mexico Peru Colombia Uruguay Chile Turkey Czech Republic Uruguay Poland Korea Chile Mexico Denmark Latvia Turkey Hungary Ireland Switzerland Czech Republic Italy Poland Canada Norway Portugal Germany Korea Slovenia Finland Greece Spain Reino Unido France Japan Sweden Belgium Austria Regional countries New high income countries OECD countries Source: Data from Gennaioli et al. 2014. Note: Last available data between 2001 and 2010. Argentina data for 2005. highly segmented, with a third of workers not contributing peers, 81 percent higher than new high-income countries,7 to the social security system. and 134 percent higher than the average OECD country. An unequal federation marked by a The need to provide homogeneous services across significant vertical imbalance heterogeneous provinces generates perverse expenditure and revenue collection incentives, resulting in unique fiscal Argentina is a very unequal federation, with areas as rich challenges. Many important expenditure responsibilities as developed nations, and provinces as poor as lower- lie at the provincial level, such as basic health care and middle-income countries. Argentina is a federal country education, whereas revenues are mostly collected at the comprising 23 provinces5 and the autonomous federal national level. To help fund those expenditures, a portion capital of Buenos Aires (Ciudad Autonoma de Buenos of revenues is redistributed back to provinces through Aires, CABA). Heterogeneity across provinces in terms an automatic revenue-sharing scheme (coparticipación), of income is very large. CABA, the richest district of the and by discretionary transfers by the executive branch. country, has a GDP per capita of US$28,358 (higher than Although some degree of mismatch between expenditure that of Spain), whereas Formosa, the poorest province, has and collection responsibilities is inevitable to guarantee a GDP per capita of US$3,704 (below that of Guatemala).6 the provision of relatively homogeneous services, in To visualize such internal discrepancies in development Argentina this mismatch is very large, with a sizable levels, figure 1.9 compares the standard deviation of discretional component. In 2016, the average province (log) GDP per capita across subnational governments. collected only 37 percent of its revenues, and in only Argentina is a clear outlier among comparator countries, six provinces own tax collection represented more than with a standard deviation 30 percent higher than regional 50 percent of revenues. Although, on average, transfers 5  According to the 1853 Constitution, each province has its own constitution, generating different institutional designs and administrative struc- tures. 6  Values for 2005 (the latest year for which provincial GDP is available) in PPP constant 2014 US$ (Gennaioli et al. 2014). 7  For an explanation on the choice of comparator countries, please refer to box 1.1. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 39 Figure 1.10: Provincial revenues as percentage and the short-term considerations (cortoplacismo) of the of total revenues, 2015 political system combine to create enormous pressures to spend during booms. Often it is the booming agricultural 90 sector that provides the high rents to the state to fuel 80 70 these fiscal expansions. The large vertical imbalances 60 of the federal system and the tendency of political and 50 economic actors to reach agreements through short-term 40 “deals” have undermined the ability of public institutions 30 20 to enforce long-term commitment to reforms and to 10 sustainable policies to use the country’s rich natural 0 assets to harness growth. This has frequently led to Catamarca Mendoza Santa Cruz Neuquén Salta T. del Fuego Chubut Santa Fe La Pampa San Luis Córdoba Buenos Aires Río Negro Entre Ríos Sgo. Del Estero Jujuy Chaco Corrientes Misiones Formosa Tucumán CABA La Rioja San Juan highly procyclical economic policies that amplify booms and busts. Successive crises have deepened this dynamic: growing impoverishment during downturns leads to high Rich GDP per capita Poor pressures to spend when economic conditions improve, Provincial data Trendline Average and actors have over time lost their trust in the ability Source: Data from Ministry of the Treasury, Argentina. Note: CABA = Ciudad Autónoma de Buenos Aires. of the economy to deliver long-term stable growth, reducing their incentive to look beyond short-term gains. As a result, Argentina has failed to keep up with rich do serve redistributive purposes, with poorer provinces economies and has experienced an unusually volatile receiving a larger share of their revenues from the federal macroeconomic environment, reflected in large swings in government, there are also large deviations (see figure economic activity. 1.10). The revenue-sharing arrangement is the source and outcome of a very unique political economy, where One of the main explanations behind Argentina’s governors continuously lobby for transfers from the disappointing macroeconomic performance lies in its federal government, and the federal government needs tendency to “live beyond its means,” an endogenous the support of governors to pass laws in the senate. As driver of its boom-and-bust cycles. The country’s social a result, many important decisions are negotiated on a demands and political pressures yield an equilibrium short-term basis, resulting in a proexpenditure, antitax characterized by excessive aggregate spending (that is, collection bias at the subnational level. Although other aggregate dissaving). The dissaving of the country as a federal countries like Brazil, Colombia, and Mexico whole is financed with savings from the rest of the world, also show high levels of expenditure decentralization, reflected in a current account deficit. The tendency to Argentina’s larger heterogeneity and high degree of overspend grows wider in booms, with procyclical policies vertical fiscal imbalances make it an outlier (Tommasi, that result in consumption and investment (both public Saiegh, and Sanguinetti 2001). and private) growing faster than income. On the external sector this is reflected in an increase in imports through two channels. First, imports rise because of an increase in the demand for imported consumption goods and Convergence postponed production inputs. Second, a growing aggregate demand puts pressure on the market for nontradable goods, Taken together, these three features of Argentina have increasing their relative price, a real appreciation that combined in deleterious ways to result in a long-term further increases imports. Because exports—mainly based disappointing economic performance. The high-income on natural resources and held back by an extractive fiscal aspirations of a country with middle-class ambitions regime—usually fail to keep up with the rapid growth of 40 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 1.11: Correlation between current account Figure 1.12: Real exchange rate index, as a percentage of GDP and GDP growth, 1950-2016 1950-2016 4 7 3 Current account, Mean Change per Cycle 6 2 5 1 4 0 -10 -5 0 5 10 15 3 -1 -2 2 -3 1 -4 0 GDP average annual growth rate per cycle 1950 1960 1970 1980 1990 2000 2010 2020 Sources: Data from Ferreres 2005, Instituto Nacional de Estadística y Censos, and Banco Source: Banco Central de la República Argentina. Central de la República Argentina. Note: A real depreciation of the peso is an increase in the index. Note: Each dot is a period of consecutive growth or contraction of economic activity, in percentage (x axis), and the corresponding change in the current account balance, in percentage points of GDP (y axis), all expressed in annual averages. imports, the current account deteriorates. This process depreciates in one year by more than one standard deviation, usually comes to an end when the rest of the world refuses there were five such episodes since 1950 that resulted in to continue to finance Argentina’s current account deficit, contractions in economic activity, usually large, with a and usually results in a sharp depreciation of the currency, decline on average of 5 percent per episode (table 1.2).9 a spike of inflation, a large drop in real wages, and a deep recession that reverts the current account and wipes out a Fiscal policy is a key factor behind Argentina’s tendency large portion of the welfare gains in the expansion period. to overspend. The equilibrium is usually driven by—or These boom-and-bust episodes in turn result in both channeled through—its public sector, which runs chronic underinvestment in natural capital (which takes time to fiscal deficits and conducts procyclical policies. On reap rewards) and in extractive policies to generate short- average, the consolidated (federal plus provincial) fiscal term liquidity (generating the liquidation of assets and deficit since 1960 was 4.2 percent of GDP, with only five even illegal extraction). These cycles, sometimes referred years (from 2003 to 2007) of fiscal surplus (see figure 1.13). to as “stop-and-go cycles” are illustrated in figure 1.11 The surplus years were not the result of countercyclical showing the correlation between current account balance policies, but an anomaly as the consequence of a massive and GDP growth.8 As the economy grows and the current crisis, a decade-long default, and extraordinarily high account deteriorates, the external restriction starts to commodity prices. In fact, Argentina failed to join a group bind, and usually results in a sharp depreciation of the real of LAC countries that, despite a history of procyclical fiscal exchange rate (RER). After a period of appreciation, the policies, were able to conduct countercyclical policies in RER usually sharply depreciates, as shown by the spikes the 21st century (see figure 1.14). One of the main sources in figure 1.12. These large depreciation episodes triggered of procyclicality is the inability of the political system to large contractions in economic activity. Defining large manage the country’s so-called distributional conflict, a depreciation episodes as those where the exchange rate situation where the demands by different interest groups 8  For an historical account of stop-and-go cycles, see for example, Diaz Alejandro (1970), xviii and 549, or the more recent Gerchunoff and Llach (2007), Heymann (2007), Albrieu and Fanelli (2008), and Gerchunoff and Rapetti (2016). 9  This does not include the most recent exchange rate depreciation episode in 2018. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 41 TABLE 1.2. LARGE DEPRECIATION EPISODES, 1950–2016, PERCENT Year RER Depreciation GDP Growth Rate 1975 81 -0.6 1981 78 -0.4 1982 137 -3.2 1989 61 -6.9 2002 153 -10.9 Average 102 -5.4 Source: Calculations based on data from Ferreres 2005 and Banco Central de la República Argentina. Notes: A large depreciation is defined as a depreciation above one standard deviation. RER = real exchange rate. (unions, businesses, professional councils, and soon) regime, and now has a flexible exchange rate. Trade was exceed the available resources, with the corresponding to be gradually opened up when Mercosur was created pressures over fiscal policy (see Heymann and Navajas in 1991, but the strategy was left behind and reversed to 1989 for a classic exposition). The unequal federalism the extent that by 2012 import controls were put in place. contributes to this distributional conflict—this time The privatization of public utilities in the 1990s turned between provinces and the national government. The to nationalizations from the mid-2000s onward and is macroeconomic consequences of procyclical fiscal now replaced by a focus on public–private partnerships. policies and the resulting fiscal imbalances are varied, Argentina has moved from a “mostly free” economy in but three mechanisms are of first-order importance. 1995 to a “mostly unfree” one in 2017, according to the First, procyclical fiscal policies contribute to the real Index of Economic Freedom.10 Tax legislation has been appreciation process described above, both on the real enacted or modified more than 80 times since 1988. side (increased public expenditure puts pressure on the Fiscal federal rules have been changed 14 times in the markets for nontradable goods, raising their relative price) same period, and budgetary rules have been altered 16 and on the financial side (the inflow of borrowed dollars times between 1992 and 2008 (Bonvecchi 2010). Table appreciates the nominal exchange rate). Second, the 1.3 gives an overview of policy reversals across varied need to finance increasing fiscal deficits fuels Argentina’s areas between the 1990s and the 2000s. Historically, recurrent debt problems. Third, fiscal deficits are the main policy volatility has typified Argentina for longer than the cause of Argentina’s chronic inflation problems because last quarter century. Using a measure of policy stability the monetary authority continuously acts as a lender of based on presidential speeches during 1940–2016 last resort to the federal government.  (Calvo-González, Eizmendi, and Reyes 2018), Argentina and República Bolivariana de Venezuela come out with Institutionally, these cycles are reflected in the large the lowest policy stability and were the countries that swings in economic policy throughout the country’s most diverged in economic output from the United history. Among some of the most significant in the last States over 1940–2010 (figure 1.15). Given this history, quarter century: The country moved from a very rigid commentators today focus on the expectation of a strong exchange rate regime (currency board established in possibility that the current direction of economic policy 1991) to a managed float, then a dual exchange rate may be reversed in Argentina if political power shifts. 10  The Index of Economic Freedom covers 12 freedoms, ranging from property rights to financial freedom, in 186 countries. According to the 2017 Index of Economic Freedom, Argentina ranks 156 out of 186 countries (see https://www.heritage.org/index/). 42 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 1.13: Fiscal balance, Argentina, Figure 1.14: Correlation between public 1960-2016, in percent of GDP expenditure and GDP, 1960-2016 Correlation of Government Spending and GDP, 2006-2016 4 1.0 Back to procyclicality Venezuela, RB Still procyclical 2 0.8 Greece Argentina 0 0.6 Uruguay Ecuador Haiti -2 -0.8 Bolivia PanamaPakistan 0.4 -4 0.2 Italia ColombiaIndonesia -4.4 España PortugalPhilippines Guatemala -6 -6.7 0.0 Thailand Peru -7.0 El salvador Jamaica Brazil Dom. Rep. -8 Mexico -0.2 Paraguay Syria Finland India China -10 -0.4 Japan Germany -12 -0.6 UK S. Korea Turkey Denmark Switzerland Belgium France Chile Costa Rica -14 -0.8 USA Established countercyclical New countercyclical -16 -1.0 1961 1971 1981 1991 2001 2011 2021 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 Provinces Federal government Correlation of Government Spending and GDP, 1960-1999 Source: Data from Ministry of the Treasury, Argentina. Source: Reprinted from Vegh et al. 2017. In turn, successive crises lead actors to lose their trust Recurrent crises and successive policy swings resulted in in the ability of the economy to deliver long-term stable worsening welfare conditions from the mid-1970s to early growth as noted earlier, reducing their incentive to look 2000s. Slow and unstable growth, deep political conflict, beyond short-term gains. It increases volatility as growing sweeping trade liberalization, and labor repression in the impoverishment during downturns leads to high pressures mid- to late 1970s are associated with increasing poverty to spend when economic conditions improve. This also and inequality (figure 1.16) (Altimir 2001; Gasparini and implies that growth patterns become increasingly reliant on Cruces 2009). The hyperinflation, real depreciation, changes in factor accumulation and utilization rather than and economic contraction of the 1980s resulted in even higher productivity (a shift in the production function).11 greater decline in real wages and rising labor informality Since 1960, the contribution of total factor productivity (Beccaria 2007), leading to rising levels of poverty. The (TFP) has been erratic, decreasing in three of the last six following decade, although the economy was growing, decades for an average of zero growth, compared to a 0.6 and inflation was under control, the sudden liberalization percent average annual growth rate in OECD countries of trade along with an appreciated RER led to a rise and new HICs.12 The contribution of capital, large in the in unemployment and informality, especially among 1960s and 1970s has been decreasing: the capital-to- unskilled workers. In the absence of wide compensatory GDP ratio fell by on average 15 percent since the 1980s.13 social protection programs and weak labor institutions, Stagnant TFP, coupled with a strong decline in the capital this rise led to a more unequal distribution of incomes intensity ratio, resulted in relatively low labor productivity and an increasingly segmented society between the haves growth—as low as 2 percent on average in the 1980s and have-nots (Cicowicz 2002; Galiani and Sanguinetti (see chapter 2 for a discussion of productivity trends).14 2003; Gasparini and Lustig 2011). This situation 11  As a result, real appreciation during the “stop-and-go” cycles is not offset by productivity gains, making the RER much more volatile. 12  Moreover, the positive contribution of TFP to growth for Argentina in the 2001–10 period is likely overestimated given the effect of the commo- dity price supercycle on measured TFP. 13  Because of data limitations for the whole period, capital is not adjusted by capital utilization, so its contribution could be overestimated, as shown in BCRA (2017). 14  Although data for Argentina are not available, Brandt, Schreyer, and Zipperer (2017) suggest that the poor performance of TFP may be lower than indicated. The authors show that TFP growth, after accounting for natural capital as a factor of production, is sometimes overestimated in times of natural resource booms. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 43 TABLE 1.3. ECONOMIC POLICY MAKING: A HISTORY OF POLICY REVERSAL 1990s 2000s Independent central bank (1991) New Central Bank Charter (2012) Currency Board (fixed exchange rate) (1991) Managed float with official and parallel markets (post- 2001 crisis) Fiscal Solvency Law (1999) Central Bank Financing of Deficit institutionalized (2012) Pension Reform (individual accounts/AFJPs) (1994) Pension system “unification” (public sector) (2008) Labor Reform (2000) New Labor Reform (revokes the 2000 law) (2004) Founding Member of WTO (1995) Import restrictions (“G3” complaint filed at WTO) (2012) Privatizations: e.g. Telephone, airline, road concessions Nationalizations: Airline (2008); Railway (2015); Water (1990); Railway concessions (1991); Water an sanita- services in GBA (2006); Oil company (YPF-Repsol) tion concession (1992); electricity companies (Edenor, (2012) Edesur), gas compay (1992); Oil company (YPF) (1993); Postal service (1997); Provincial banks and provincial enterprises (various) Price deregulation New Supply Law (2014) Source: Reprinted from Rosenblatt 2016. Figure 1.15: Policy volatility and convergence worsened toward the end of the decade, when a recession with the U.S. GDP per capita, 1940-2010 finally led to the end of the convertibility regime in 2001/02, accelerated inflation, and saw poverty reach 0.3 Spain its highest level in Argentine history. After the drastic crisis, employment conditions improved, particularly Catching-up 0.2 among the less qualified. However, as macro unbalances 0.1 Ecuador Costa Rica Chile accumulated, labor market improvement slowed down 0.0 Mexico and poverty stagnated. Peru Falling behind -0.1 Paraguay Despite improvements in the past 15 years (see chapter -0.2 3 for details), Argentina still faces significant challenges R2=0.40 Venezuela Argentina -0.3 in terms of poverty and shared prosperity. According to 0.4 0.5 0.6 0.7 0.8 0.9 1.0 official estimations, 30.3 percent of Argentines living in Change in speech proportion of the top three topics between 1940-2010 urban areas are poor and 6.1 percent are unable to meet Source: Calvo-González, Eizmendi, and Reyes 2018. basic food needs (2016, second semester).15 Measured Note: This figure shows the cross-country correlation between long-term growth and policy volatility during the 1940–2010 period. Long-term growth is measured as the percentage at US$5.50 per capita per day in 2011 PPP (the upper- point change of the GDP per capita of each country (as a percentage of the GDP per capita of the United States). Policy volatility is measured as the percentage point change of the middle-income country poverty line), Argentina’s poverty share of the top three topics in the presidential speech of the initial year. The topics were rate is significantly lower than that of its regional peers selected by a Latent Dirichlet Allocation model using pooled data of all the countries, and using a 10 percent minimum threshold to discard topics with low frequencies. (figure 1.17). However, it is still higher than it was 40 15  Latest official poverty estimations for 2017 (second semester) show that poverty rates for the 31 agglomerations have declined to 4.8 percent for extreme poverty and to 25.7 percent for total poverty. Although comparisons across time—beyond 2016—are challenging, experts estimate that these rates are the lowest in the past 15 years. To maintain time comparability with international statistics, we choose to report in the main text the 2016 figure. 44 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 1.16: Poverty and inequality in Greater Figure 1.17: Income poverty rate, circa 2016, Buenos Aires, 1974-2016 in percent 40 0.70 35 30.3 35 0.65 30 30 0.60 25 Poverty rate, in percent 21.7 25 0.55 Gini coefficient 20 20 0.50 15 15 0.45 10 7.8 10 0.40 6.1 5.2 5 0.35 5 3.2 0 0.30 0 Extreme Poor ARG Regional NHIC OECD 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 poor peers Gini (IPCF) Poor ($5.5 a day) Official line Upper middle income class poverty line (US$5.50PPP) Source: Calculations based on data from SEDLAC (CEDLAS and World Bank), based on Source: Data from Instituto Nacional de Estadística y Censos for official estimates, and World Encuesta Permanente de Hogares-Continua. Development Indicators and SEDLAC for internationally comparable estimates. Note: For groups of countries, simple averages are presented. NHIC = new high-income countries; OECD = Organisation for Economic Co-operation and Development. Figure 1.18: Life expectancy at birth (years), Figure 1.19: Non-monetary welfare dimensions, 1960-2015 circa 2015 Infant mortality rate (per 1,000 live births) 85 80 (negative of) Lower Mortality rate, under-5 secondary (per 1,000 live births) 75 completion rate (% of relevant age group) 70 65 (negative of) School Lack of improved 60 enrollment, secondary sanitation facilities (% net) (% of population with access) 55 50 Lack of improved water source 1960 1970 1980 1990 2000 2010 2020 (% of population with access) ARG Regional New HIC OECD ARG Regional New HIC OECD Source: Data from the World Bank’s World Development Indicators. Source: Data from the World Bank’s World Development Indicators. Note: For groups of countries, simple averages are presented. New HIC = new high-income Note: For groups of countries, simple averages are presented. New HIC = new high-income country; OECD = Organisation for Economic Co-operation and Development. country; OECD = Organisation for Economic Co-operation and Development. years ago, and is now 50 percent higher than in the new crisis affected performance in other cases. The country HICs and almost two and a half times higher than in OECD has reached similar levels in access to improved water, countries. In addition, a substantial proportion of the but is still far from the OECD standards in terms of infant population is vulnerable to poverty should they be hit by mortality, the under-five mortality rate, and life expectancy. economic shocks (see box 1.2). Life expectancy improvements deaccelerated, diverging from new HICs and OECD countries trend and, after thirty Although Argentina managed to reach OECD standards years, instead becoming similar to the performance of in some dimensions of well-being, successive economic regional peers (figure 1.18). The quality of Argentina’s ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 45 Box 1.2. Vulnerability to shocks: Potential impact on poverty rates At the end of March 2018, the Instituto Nacional de Estadística y Censos announced the new estimates for poverty and extreme poverty, showing relatively large declines, surprising some observers. Most of the complementary indicators—from both the labor market and the main public transfer—were consistent with this improvement, and thus, qualitatively, this was to be expected. Overall employment increased (faster for informal and independent workers), and wages in the formal sector grew at a higher pace than the value of poverty baskets (27 percent compared to 22 percent). Similarly, the total amount of pensions, as well as contributory and noncontributory family allowances grew faster than inflation. Still, a decline of 4.6 per- centage points in poverty rates from 30.3 percent (2016) to 25.7 percent (2017) was larger than expected. In part, this is the result of the shape of the distribution relative to the poverty threshold. By the second semester of 2016, a sizeable share of Argentines had incomes very close to the poverty line (figure B1.2.1). On average, a 10 percent increase in real household income was enough to move down the poverty rate 5 percentage points (table B1.1.1). Figure B1.2.1: Kernel distribution of household TABLE B1.1.1. SIMULATION OF EFFECTS OF income per adult equivalent (in logs), 2016 and FALLING AND INCREASING PER CAPITA REAL 2017, second semester INCOME ON OFFICIAL POVERTY AND EXTREME POVERTY RATES, 2017, SECOND SEMESTER 0.6 Extreme Poverty Poverty 20% less 7.1 35.5 0.4 15% less 6.5 32.6 Kernel density 10% less 5.7 30.1 5% less 5.1 27.6 0.2 Current rate 4.8 25.6 5% more 4.2 23.6 0.0 10% more 3.9 22.0 4 6 8 10 12 14 15% more 3.5 20.4 In (household income per adult equivalent) 2016 2017 20% more 3.2 18.6 Source: Calculations based on data from Encuesta Permanente de Hogares-Continua 2016 Source: Calculations based on data from Encuesta Permanente de Hogares–Conti- and 2017 (second semester). nua 2017 (second semester). The other side of the coin is that currently a relatively large fraction of households is vulnerable to falling back into poverty even with slight changes in economic conditions. For example, inflation usually has a higher impact on people in the lower tail of income distribution because it tends to affect the purchasing power of the poor more than that of those at the top, resulting in increased poverty and inequality (Easterly and Fischer 2001; Panigo et al. 2016). If real incomes of families living just above the value of the basic basket of goods and services (poverty threshold) were to decline, the direct impact on the poverty rate would be sizeable. Estimates suggests that, if prices grew 5 (10) percent faster than per capita household incomes, the official poverty rate would increase by 2 (4.5) percentage points relative to the last observed rates (2017, second semester). In this context, having a well-targeted cash transfer program with efficient delivery mechanism, such as the AUH, can potentially allow the government to respond quickly to mitigate the impact of a negative shock among the most vulnerable families. 46 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY education system, once seen as the top performer in Latin percent average annual growth rate in OECD countries and America, has eroded and converged to the median in the new HICs.16 The contribution of capital, large in the 1960s region. For example, Argentina placed second in reading and 1970s has been decreasing. Stagnant TFP, coupled scores among third graders in Latin America and the with a strong decline in the capital intensity ratio resulted Caribbean at the end of the 1990s (in the United Nations in relatively low labor productivity growth, as seen in Educational, Scientific, and Cultural Organization’s first figure 1.21—as low as 2 percent on average in the 1980s. regionally-comparable measurement), but fell to the regional average in the latest round (Cassasus et. al. Increases in labor and capital accumulation and utilization 1998, 2014). are a must for income convergence with advanced economies. The labor force is not projected to shrink because of aging until the 2040s. But the opportunity exists to increase the current participation rate of women, The challenge going forward youth, and those with low skills. However, there are worrying indications that skills are falling behind relative The opportunity for Argentina to develop is there: it is a to new HICs and OECD peers, and there is no time to closed economy with large parts of the nonagricultural waste in prioritizing improving educational outcomes and sector locked in low productivity and, currently, building a culture of learning in the workplace. Investment noncompetitive activities. The divide between the two is critical to support growth; however, currently it is about Argentinas—globally competitive firms and workers 16 percent of GDP, well below in the new HICs, where enjoying rich country conditions contrasted with a investment is on average close to 24 percent of GDP. The large part of the population with low skills and poorer severe underdevelopment of domestic capital markets quality of life, often in the informal sector, that is much limits the ability to invest: loans to the private sector in more vulnerable—puts at risk the country’s convergence. Argentina are only 14.4 percent of GDP versus the LAC Investing effectively in people so they can take up better- average of 42.7 percent.17 quality jobs, and ensuring access to better services and social protection, is critical to narrowing these divides. Although there is space for growth based on capital The country can piggyback on its natural capital base. accumulation and job creation, increasing productivity Rather than adopting extractive policies, however, it can will be critical for convergence to advanced country create the conditions for nature-based industries that income levels. A requisite for productivity growth is sustainably exploit the country’s fertile lands, forests, to achieve macroeconomic stability by establishing renewable energy sources, and touristic assets. a macroeconomic and institutional setting that allows for a reduction of the primacy of fiscal policy. The long-run decline in relative GDP per capita has Reducing economic distortions and increasing domestic been mirrored by a lack of gains in aggregate and labor competition is required to reallocate resources productivity. Growth patterns have become increasingly across sectors: investors rank Argentina 137th out of reliant on changes in factor accumulation and utilization 138 countries in openness to domestic and foreign rather than higher productivity (a shift in the production competition. Integration into global markets would spur function). The contribution of TFP has been erratic, productivity growth by creating conditions and incentives negative in three of the last six decades (see figure 1.20), for better functioning of markets and more efficient use for an average of zero growth since 1960, compared to a 0.6 of resources. Argentina stands out for how closed off it 16  Moreover, the positive contribution of TFP to growth for Argentina in the 2001–10 period is likely overestimated given the effect of the commo- dity price supercycle on measured TFP. 17  Competition data come from the World Economic Forum (2017). Investment data are from the World Bank (2016), and domestic capital market development data are from the IMF (2015). ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 47 Figure 1.20: Growth decomposition by decade, Figure 1.21: Labor productivity annual average annual averages, 1961-2016, percent growth rate, 1961–2016, percent 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 1961-70 1971-80 1981-90 1991-00 2001-10 2011-16 1961-70 1971-80 1981-90 1991-00 2001-10 2011-16 1961-2016 Labor quantity contribution Labor quality contribution Argentina Regional peers Capital services TFP GDP growth New HICs OECD Sources: Data from Banco Central de la República Argentina and the Conference Board’s Total Sources: Data from Banco Central de la República Argentina and the Conference Board’s Total Economy Database. Economy Database. is from the global economy: it is the fourth-most closed that can compete globally alongside low-productivity economy in the world, with total trade to GDP just ahead producers and firms. Finally, geographical areas across of Sudan, Pakistan, and Brazil and only one free trade Argentina differ greatly in their capacity to benefit from arrangement (FTA) in place. Continuous productivity exports, investment, and increased domestic competition. gains, the ultimate driver of sustained shared prosperity, cannot be achieved in such a closed setting. On the But this is not enough because sustaining shared structural side, there is also a large productivity agenda prosperity over time will require productive and in improving firm management practices and innovation sustainable use of the country’s assets. The first asset is investment and adaption. A precondition for this is to human capital. Enhancing equity of opportunities will be ensure the country has a highly skilled (and malleable) key to guarantee that nobody is left behind in the transition labor force. to the new development model. As mentioned above, this is particularly challenging given the dual nature of the The duality of the economy presents a challenge to Argentine economy and will require active policies, where ensure all households gain from opening up the economy investment in human capital needs to be center stage. But and is an obstacle to productivity growth itself. Close to the country also needs to invest in a more sustainable a third of workers are informal, meaning they are more use of traditionally underinvested natural capital, such vulnerable to income shocks because they do not qualify as forests, renewable energy, and tourism resources. for social insurance. Informality also means that workers Investment in the country’s nature-based comparative are less likely to benefit from employer-provided training. advantage can generate employment and rents. This Exclusion of workers from the formal economy also should include, but is not limited to, the acknowledgment presents a challenge to the political support for transition of the negative effects of deforestation, aquifer depletion, to an outward-looking growth model: a social contract is and the state of depletion of a large share of agricultural more likely to form if there is a growing middle class with soils, the most important source of rents for the country. clear gains from change. There is also a dual economy Effective management of the adverse consequences for agricultural producers and firms engaged in services of global warming and its heterogeneous social and and manufacturing, with highly productive enterprises geographical impact will need to play a greater role. 48 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Pathways to shared prosperity labor market policies can mitigate the negative social impacts of reducing market distortions and opening up to The development model that Argentina needs to reach domestic and international competition in the transition centers on achieving sustained growth by opening up period. Furthermore, integrating all of Argentina (and the economy and putting in place the conditions for not just the richer areas) into the world economy will private sector growth. This SCD identifies four pathways be important to expand the gains from opening up and where progress is critical for sustainable growth and making the economy more productive. Finally, pathway 4 an expansion of shared prosperity. Without sound outlines how protecting the environment and harnessing macroeconomic management that brings price stability the value of nature for development will be essential and a fiscally sustainable path, the transition to a new to ensure the sustainability of economic growth. The development model will founder. Pathway 1 concerns policy priorities are outlined in the final section. The putting in place these fundamentals for growth. Economic transition to new sources of growth for development in growth in Argentina has come to rely on domestic demand Argentina then involves a large and wide-ranging set of and largely on the expansion of government spending. policy reforms (see figure 1.22 for an illustration of the The country has begun the move to a more open, transition needed). Many reforms in these areas have outward-oriented development model. Pathway 2 looks already started (see box 1.3 for further details). at the necessary supporting policies. Low investment, very undeveloped capital markets, and large physical investment needs have to be tackled. Reducing barriers to trade is only part of the story: the economy has to open up to domestic and international competition, and the highly concentrated market power that some firms enjoy has to be reduced. For success, a larger group of firms will have to build the capacity to export and compete in a more competitive domestic market. For the change to a new economic model to endure, growth will have to translate into better quality jobs, and the progress made on reducing poverty will have to continue. Pathway 3 outlines the constraints that will have to be overcome to ensure that everyone reaps the benefits from a changed economic model. Success will entail bringing in more people to the labor market and increasing their productivity. Of concern, then, is the evidence that the population is falling behind in relative terms on educational outcomes—not a good sign for a country that needs to reverse its lagging economic performance and expand its middle class. Additionally, sustained and inclusive growth will require that everyone, irrespective of socioeconomic background or geographic location, has access to quality services needed to accumulate assets. In the shorter term, it will also be important to enhance the extent to which social safety nets and active Figure 1.22: Argentina’s economic transition OLD DEVELOPMENT MODEL TRANSITION NEW DEVELOPMENT MODEL Growing macro Sound macro and fiscal framework and fiscal imbalances Open economy Closed economy Deepended capital Limited financial and physical capital markets and logistics Low competition, innovation Enabling factors High competition, innovation and productivity and productivity Growth Open Social and Environmental Public sector as fundamentals development productive Private sector sustainability driver of jobs model inclusion as driver of jobs Low quality services and High and equal quality services inefficient social spending and efficient social spending Expanded social safety net Strengthened social policy spending ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Extractive and unsustainable Inclusive and climate use of natural capital resilient green growth Source: SCD team. 49 50 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Box 1.3. Summary of key policy shifts and structural reforms, 2016–18 Normalization of international relations • The IMF conducted its first Article IV consultation in a decade in November 2016. Argentina will hold the World Trade Organization Ministerial Conference in 2017 and the Group of 20 Presidency in 2018. • After 15 years, Argentina returned to international capital markets with the largest single bond issuance in history for an emerging country (April 2016). Main reforms • Monetary policy: The Central Bank formally adopted an inflation-targeting regime with a floating ex- change rate. In addition, it committed to gradually decrease financial assistance to the central govern- ment. • Statistics: Since January 2016, the credibility of the National Statistical System has been restored; as a result the IMF lifted its Declaration of Censure on Argentine official statistics (November 2016). • Export and imports: Export taxes were eliminated, with the exception of soybeans, which were reduced and for which the government announced a scheduled further reduction. An imports administration system replaced the mostly discretional licensing regime in place until 2015. Foreign exchange controls were lifted after four years. • Subsidies: Energy, water and transport subsidies were reduced while keeping a social tariff for low income users in water and transport and creating a social tariff for residential electricity and natural gas consumers. Energy subsidies will continue to decrease gradually until they are eliminated by 2019, with the exception of social tariffs. • Taxes: The personal income tax floor was raised, and family allowances were expanded to reach 4.1 million children, up from 2.9 million. A successful tax amnesty program was implemented to encourage repatriation of undeclared funds held abroad, resulting in additional revenues of 1.6 percent of GDP. Recently, a capital gains tax was implemented for the first time. • Pension system: Argentina’s pension system accounts for 40 percent of the national budget. In De- cember 2017, Congress approved a change in the pension indexation formula in line with international practice, and put in place the Universal Pension for the Elderly. • Competition: A new competition law, which modernizes the regulatory framework for antitrust policy, including setting up a new authority with greater independence, introducing a leniency program for cartel-agreements (such as price-fixing), improved sanctioning rules for anti-competitive practices and a more efficient merger control system, was passed by Congress on May 9, 2018. • Capital markets: A new Capital Markets Law, which modernizes the regulatory framework for capital markets, including by enhancing corporate governance, expanding the supply of financial assets, and targeting the widening of the domestic investor base, was passed by Congress on May 9, 2018. • Public–private partnership framework: Congress approved a new public–private partnership fra- mework to help address the country’s existing infrastructure deficit and to stimulate private investment in key sectors of the economy such as infrastructure, housing, services, production, applied research, and technological innovation (November 2016). • Transparency: President Macri declared his target of placing Argentina among the top countries in the world in terms of transparency. These efforts include the Access to Information Law that became effec- tive in September 2017, the passing of the Corporate Criminal Responsibility Law to fight corruption in ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 51 November 2017, ongoing reforms in procurement for public infrastructure and public procurement, and a renewed commitment for open government with the open data portal and the implementation of the second open government action plan. • Fiscal pact: Long-standing disputes over transfers between the national government and the provinces were settled in a fiscal pact of November 2017. Provinces agreed to freeze current public expenditures in real terms and to decrease the burden of the highly distortive provincial turnover taxes. • Public employment: The government enacted a voluntary separation scheme at the federal level to rationalize the public wage bill (April 2018). The program targets older employees from the national administration and government agencies. Reforms under discussion on structural agenda • Labor market reform: Informal labor accounts for one-third of salaried employed workers. The govern- ment is discussing a labor market reform with the aim of providing incentives for formalization. • Trade: Argentina is one of the most closed economies in the world. Trade reform needs to be carefully designed because a significant portion of labor is employed in protected sectors. Trade discussions between Mercosur and the European Union have resumed. The Pacific Alliance accepted Argentina as an observer member. • Education: Argentina has high school dropout rates and low learning outcomes. The government made important strides in moving evaluation to the center of debate, but further reforms are needed. 52 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY CHAPTER 2 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 53 GROWTH By 2011, the demand-driven growth strategy showed signs of exhaustion, with macroeconomic imbalances becoming self-evident. General government expenditures had increased at an unprecedented pace, growing by over 11 percentage points of gross domestic product Drivers of economic growth (GDP) between 2004 and 2011 to fuel mostly current expenditures on subsidies, pensions, and wages. Increased The aftermath of the 2001/02 crisis was an opportunity tax pressure failed to keep up with expenditures, leading to address Argentina’s recurrent macroeconomic to a rapid deterioration in the fiscal position that turned a imbalances and set the basis for long-term growth. 3.3 percent consolidated surplus in 2004 to a 7.8 percent The collapse of the Convertibility Regime and default deficit in 2016. Growing fiscal imbalances put pressure on on foreign obligations resulted in a massive real the real exchange rate and current account, which moved depreciation of the peso, a sizeable output gap, low to deficit for the first time in almost a decade. To tackle wages, and a large fiscal surplus. In a context of external imbalances the government turned to protectionist expanding world demand and increasing commodity policies such as quantitative restrictions on foreign trade prices, the Argentine economy recovered vigorously, and foreign exchange markets, hurting productivity. growing 5.9 percent, on average, between 2003 and 2011.1 But this was further fueled by expansionary fiscal Macroeconomic imbalances grew wider in the years and monetary policies to support high levels of private after 2011, following the deepening of the policies that consumption (see figure 2.1). The continued expansion generated them in the first place. In 2011–15, private of aggregate demand was met by increased intensity in job creation almost stalled. Government expenditure the use of labor and capital, and by some productivity continued to grow beyond historical records, productivity gains, mostly explained by a recovery from the large fall collapsed, and the current account deficit widened. The in 1998–2002 (see figure 2.2). lack of access to international credit markets translated Figure 2.1: Growth decomposition by demand Figure 2.2: Growth contributions by factor component, period year averages, in percent of production, period year averages, in percent 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 1998-2002 2003-2011 2012-2017 1998-2002 2003-2011 2012-2017 Imports Exports Public consumption Investment Capital Labor Total factor productivity Private consumption GDP growth (yoy) Sources: Data from Ministry of Treasury, Argentina, and the World Bank’s World Sources: Data from Ministry of Treasury, Argentina, and the World Bank’s World Development Indicators dataset. Development Indicators dataset. 1  Geometric average, including the 2009 recession due to the international financial crisis. 54 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY into a growing monetization of fiscal deficits, which force (demographic bonus) leads to some sectors needing further fueled inflation. The economy thus entered an to absorb the increase in the labor force, typically public annual cycle of recessions and expansions, with real GDP administration or public education. This vicious cycle a mere 2.5 percent higher in 2017 than in 2011, a fall if generates a trap of low productivity, low job creation, and measured in per capita terms. growing labor misallocation. With increasingly protectionist policies and a continuous Low capital depth and shallow financial markets are other real appreciation of the peso, the tradable sectors’ sources of low productivity. Since 2004, the capital-to- share of GDP fell. Export taxes, high import tariffs, low output ratio is on average 15 percent lower than in the competition, discretional import licenses, and quotas 1980–2004 period. This reflects the permanent negative in currency markets combined to reduce the share of shock of the 2001/02 crisis on credit markets, and its tradable sectors in output, despite favorable commodity impact on investment: the private credit–to-GDP ratio fell prices and external conditions. Industries that produce from an average of 22 percent in the two decades prior to goods, such as agriculture or manufacturing, grew by less the crisis to an average of 13 percent since (World Bank than half the rate of the service sectors in the 2004–16 2017g). Lack of trust in the domestic financial system is period (25 versus 57 percent). As a result, the share of also reflected in the fact that Argentine residents held a goods-producing sectors in GDP (at producer prices) large share of their wealth offshore. Wealth held abroad decreased by 12 percentage points—from 44 to 32 by Argentine residents is estimated at 35 percent of GDP, percent. The share of services grew from 56 to 68 percent the fourth-largest among large economies, after major oil- in the same period.2 exporting countries (see figure 2.4). President Macri put in place a tax amnesty for the disclosure of undeclared The expansion of nontradable sectors—such as assets that lasted from July 2016 to March 2017. Although construction, health services, or public administration— assets worth over a fifth of GDP were declared (US$116.8 resulted in a misallocation of employment to low- billion), this policy did not induce nationals to repatriate productivity activities. The high growth of these sectors these assets: about US$93 billion of the assets disclosed since 2004 is due not only to the continuous real exchange continue to be held offshore. rate appreciation but also to deliberate policies to protect some sectors perceived as being major contributors to job In a challenging macroeconomic environment, the creation, especially for low-skilled workers. These high- productivity and productive capabilities of Argentina’s growth sectors have also experienced low productivity firms barely improved over the past two decades. growth, (see figure 2.3), a sign that productivity in the According to the World Enterprise Surveys for 2010 high-employment growth sectors has failed to catch and 2017, labor productivity at the firm level fell an up with the influx of workers. Unless those sectors had average of close to 6 percent in those years. Moreover, an relatively high productivity to begin with, which is not economic fitness analysis, which measures the underlying the case,3 this points to a misallocation of employment capabilities that support a country’s productive structure, to low-productivity uses.4 This misallocation is a source, shows Argentina has experienced fitness losses in and a result, of low aggregate growth. Low growth results several mid- and high-complexity industries (such as in low job creation, which in a context of a growing labor electrical equipment, transportation, and petroleum/ 2  Shares in current prices. In constant 2004 prices, the share of the service sector increased 5 percentage points. 3  The sectors with highest value added per worker in 2004 were mining and oil, fishery, and financial intermediation, in that order. 4  A full assessment of the extent of resource misallocation in Argentina is not possible because of serious data limitations, so these findings should be taken with caution. For example, (i) value added per worker is an imperfect proxy for marginal productivity, especially for sectors such as public administration; (ii) sectors are defined rather broadly (with no disaggregation within manufacturing, for example), and (iii) 2004 is not the best baseline year. Nevertheless, figure 2.3 illustrates an important point: the reallocation of workers to more productive sectors will be key to ignite productivity growth. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 55 Figure 2.3: Change in value added per worker and change in employment by sector, 2004-2016, in percent Change in employment Utilities 70 Public administration Construction 60 Health services Financial intermediation Mining and oil 50 Education Housekeeping Hotels & restaurants 40 Transport & Real estate Other services communications 30 & business act Manufacturing 20 Commerce 10 Agriculture 0 -10 Fishery -20 -60 -40 -20 0 20 40 60 80 Change in Value added per worker Source: Calculations based on data from Instituto Nacional de Estadística y Censos. Notes: Bubble size represents employment in 2016. Includes formal and informal employees. Figure 2.4: Offshore wealth, 2007, in percent of GDP 80 70 60 50 40 30 20 World average: 9.8% 10 0 Canada Sweden Taiwan SAR, China Iran Brazil Argentina Venezuela Netherlands Korea Poland China Finland Japan India Norway Indonesia Mexico USA Austria Thailand Colombia Ireland Spain South Africa Italy Russia France Germany UK Turkey Portugal Greece Russia (NEO) UAE Saudi Arabia Australia Denmark Belgium Sources: Data from Alstadsæter, Johannesen and Zucman (2017). Note: All countries with a GDP of greater than US$200 billion in 2007. coal processing). Since 2000, Argentina’s fitness has With Argentina in need of more firms that export, innovate, increased only marginally and in very few sectors (mainly and diversify their production, recent policy measures in metal products and plastics; see figure 2.5). On the are starting to have impact. More than 80 percent of GDP-fitness plane, Argentina’s position is close to that firms in Argentina are micro and small firms. However, of Brazil and the Russian Federation (see figure 2.6). most formal employment is generated by the few large Because of the high correlation between economic fitness firms. The Argentine economy is characterized by a high and GDP, diversification and capability upgrading in concentration of production, both geographically—in the areas of strongest fitness such as chemicals, crops, Buenos Aires Province, the Autonomous City of Buenos animal products, and food/beverages provide potential Aires (Ciudad Autónoma de Buenos Aires, CABA), Santa opportunities for further GDP growth. Fe, Cordoba, and Mendoza—and in terms of production 56 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.5: Product fitness for 2000 and 2015 Figure 2.6: Correlation between product fitness Atractiveness increasing and GDP per capita, 1995-2014, in logs counter-clockwise from here Growth trajectory Foresty Oil & gas Electronics Apparel 1 Chemicals 12 Advanced economies Fishing 0,75 Machinery Misc. 11 Beverage & tobacco 0 0,50 Electrical equipment Argentina GDP per capita (log) Crops ,2 0,25 10 2014 0 Wood Metal products 9 1995 Leather Paper 8 Food Transportation 7 Textile products Minerals Animal products Metal 6 Minig Petroleum & coal Furniture Plastics Textiles -5 -4 -3 -2 -1 0 1 2 Normalized sector firness rank 2000 2015 Product fitness (log) Source: Reprinted from Roster and Cader (2018). Source: Reprinted from Roster and Cader (2018). Figure 2.7: GDP annual growth rate, by sector, 2016 and 2017, percent P. Private households with domestic services 2016 2017 O. Other services N. Social and health services M. Education L. Public admin & defense K. Real state J. Financial sector I. Transport & comunications H. Hotels and restaurants G. Retail and wholesale F. Construction E. Electricity, gas & water D. Manufacturing C. Mining B. Fishing A. Agriculture, livestock farming, and forestry -15 -10 -5 0 5 10 15 Source: Data from Instituto Nacional de Estadística y Censos. sectors, with retail businesses, agriculture, and light existing micro, small, and medium-sized firms continue to manufacturing accounting for the bulk of production. be classified in the same category—the “graduation rate” Although the total number of firms has slightly declined of firms into higher firm size categories has increased since 2013, net firm creation for all sizes of firms has been continuously over the last three years. This slow recovery positive for the last two years. Firm entry has exceeded is mirrored by the small proportion of fast-growing firms, firm exit across the firm size distribution. Although few those that generate most new private employment.5 firms manage to grow sustainably—after five years, most Since 2006, the number of exporting firms has fallen. 5  Data from the government’s dataset on business, GPS Empresas, Ministerio de Producción, Secretaría de Transformación Productiva, Subsecre- taría de Desarrollo y Planeamiento Productivo, available at http://datos.gob.ar/dataset/siep-gps-empresas. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 57 Only during the last two years has this trend stopped and These repeated boom-and-bust episodes have been started to reverse, with exports increasing on both the accompanied by big changes in the economic context and extensive margin (new firms entering) and the intensive shifts in policies, undermining confidence in the long- margin (more exports by existing exporters). Exporting term performance of the economy and the credibility of firms are the only type of firms seeing an increase policy makers. in employment according to the World Bank’s latest Enterprise Survey (2017). Fiscal policy in Argentina has been highly procyclical throughout its history, even by the standards of For a successful transition to a new development Latin America and the Caribbean (LAC), a procyclical model, Argentina needs to generate the macroeconomic region. Over the last 60 years, LAC countries and most conditions and conduct the structural transformations to developing economies have had procyclical fiscal policies allow firms to thrive. Macroeconomic conditions include (see figure 2.8). Argentina is among the most procyclical sound fiscal and monetary policies to reduce volatility, economies in LAC (fifth), above the regional average. and expenditures and revenue policies to promote Fiscal procyclicality usually results from the combination growth, which include important institutional reforms. of political pressures to spend in good times and the New sectors and firms can emerge as sources of sustained inability of emerging economies to borrow in bad times. growth—provided barriers to investment, trade, and competition are removed. Recent growth has come mainly In contrast to most of its LAC peers, Argentina’s fiscal from services, agriculture and fishery, and construction, policy has become even more procyclical in the last 15 which is growing at the fastest pace in a decade (figure years. Most LAC countries improved fiscal management 2.7). Imports of machinery and capital goods have been over that period, as they learned from experience and growing. Employment growth is coming mostly from implemented sounder fiscal policies in the context of tourism—in hotels and restaurants. favorable external conditions. Although more than 90 percent of LAC countries carried out procyclical fiscal policies during 1961–99, 60 percent continued to do so between 2000 and 2016. Furthermore, though still Pathway 1: Putting in place the positive, the average LAC correlation coefficient went institutional and macroeconomic down from 0.24 to 0.13 after the year 2000. This was fundamentals for growth not the case of Argentina, where the correlation between (the cyclical component of) GDP and government Macroeconomic stability: Moving beyond expenditure increased from 0.35 to 0.72. The increase in boom-bust cycles fiscal procyclicality is true even excluding the 2001/02 crisis and its aftermath. Overall, Argentina became the The use of fiscal and monetary policies as a buffer second most procyclical country in LAC since 2000, against rather than as an amplifier of economic shocks after República Bolivariana de Venezuela. If the analysis is of first-order importance to avoid boom-and-bust takes into account fiscal multipliers, the procyclicality of cycles. Macroeconomic mismanagement, in the form fiscal policy becomes even more worrisome. Although of procyclical fiscal and monetary policies, has been a there is no agreement about its magnitude in developing main driver of Argentina’s excessive macroeconomic and emerging economies, there is evidence that long- volatility (see, for example, Buera, Navarro, and Nicolini run fiscal multipliers are as large as 1.3 or 1.4 in closed 2011). Procyclical international capital flows and low economies like Argentina.6 This implies that procyclical domestic financial market depth exacerbate the problem. fiscal policies greatly amplify the economic cycle. 6  Long-run multiplier estimates of Ilzetzki, Mendoza, and Vegh (2011) using a Structural Vector Autoregression Approach (SVAR). 58 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.8: Correlation between cyclical component of real government expenditure and real GDP, 1961-2016 1.00 0.75 0.50 Procyclical 0.25 0.00 Countercyclical -0.25 -0.50 Avg. industrial = -0.19*** Avg. developing (non-LAC)= 0.25*** -0.75 Avg. LAC = 0.23*** -1.00 Argentina Canada Cambodia Honduras Malaysia Sweden United Kingdom Mozambique Myanmar Rwanda United States Zambia Nicaragua Brazil Iran Bolivia Swaziland Pakistan Switzerland Lebanon Finland Belgium Australia El Salvador Italy Congo Spain South Africa Norway Japan India Thailand Saudi Arabia New Zealand Mexico Ghana Jordan Tanzania Sri Lanka Ireland Jamaica Tunisia Gambia, The Ecuador Laos Dem.Rep Germany Colombia Panama Cape Verde Yemen Chile Botswana Turkey Morocco Bangladesh Korea Uruguay Portugal Paraguay Indonesia Central African Rep. Chad Angola Mauritius Greece Algeria Nigeria Haiti Nepal Philippines China,P.R.: Mainland Togo Dominican Rep. Mali Peru Uganda Cameroon Guatemala Cote d'Ivoire Venezuela, Rep. Syrian Arab Rep. Sierra Leone Niger Gabon Seychelles Madagascar France Austria Sudan Netherlands Oman Denmark Benin Kenya Senegal Costa Rica Source: Reprinted from Vegh et.al 2017. Developing (non-LAC) LAC Industrial Federal expenditure drove the increase in fiscal historically been the most procyclical subcomponents procyclicality, but it is still higher at the provincial level. of fiscal policy. At the federal level, pensions not only Although fiscal procyclicality at the provincial level is are the biggest expenditure item in the budget but also high, it has remained relatively stable before and after have contributed the most to fiscal procyclicality since the 2001/02 crisis (see figure 2.9). All provinces have 1961 (figure 2.10). However, the increase in procyclicality procyclical public expenditures except for Neuquen, which in the last decades has been driven by wages, capital is rich in hydrocarbons. There are reasons to believe that expenditure, and especially transfers (mainly energy and subnational governments should be less countercyclical transport subsidies). At the provincial level, the dynamic than the federal government, which ultimately bears was more uniform across expenditure items (figure 2.11). the burden of macroeconomic stabilization (see, for example, Musgrave and Musgrave 1989; Oates 1972, 1999). However, the high fiscal procyclicality at the Figure 2.9: Fiscal Procyclicality by level of provincial level results largely from institutional design: government, 1961-2016 significant spending decentralization processes in 1.0 the 1970s and 1990s led to large vertical imbalances, Correlation betnween cyclical component of 0.9 funded by procyclical revenue transfers from the federal 0.8 real expenditure and real GDP government. The narrow access to alternative financial 0.7 sources translates procyclical transfers at the federal 0.6 level into procyclical policies at the provincial level. The 0.5 overall increase in fiscal procyclicality has, however, 0.4 0.3 been driven by federal government expenditures, whose 0.2 correlation coefficient more than doubled from 0.24 in 0.1 1961–99 to 0.49 in 2006–16. 0.0 1961-1999 2000-2005 2006-2016 1961-2016 Recurrent transfers have been the main driver of the increase General gov Central gov Provinces in fiscal procyclicality, whereas pensions and wages have Source: Calculations based on data from the Ministry of Treasury, Argentina. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 59 Figure 2.10: Fiscal procyclicality by subcomponent, Figure 2.11: Fiscal procyclicality by subcomponents, federal government, 1961-2016 provincial government, 1961-2016 1.0 1.0 Correlation betnween cyclical component of Correlation betnween cyclical component of 0.8 0.9 0.8 real expenditure and real GDP real expenditure and real GDP 0.6 0.7 0.4 0.6 0.5 0.2 0.4 -0.0 0.3 0.2 -0.2 0.1 -0.4 0.0 Wages Social security Recurr. transf. Capital exp. Total Wages Recurr. transf. Cap. exp. Total 1961-2016 1961-1999 2000-2005 2006-2016 1961-2016 1961-1999 2000-2005 2006-2016 Source: Calculations based on data from Ministry of Treasury, Argentina. Source: Calculations based on data from Ministry of Treasury, Argentina. Nonetheless, recurrent transfers to municipalities (mainly inflation. All countries except for Argentina took the first to finance municipal wages) not only contributed most to path, which resulted in single-digit inflation (5.1 percent provincial procyclicality but also increased the most after on average). Argentina instead used monetary policy to the year 2000. prevent the peso from appreciating in nominal terms. As a result, real appreciation was met by a large increase in Monetary policy has also been an amplification mechanism prices, 14.6 percent on average (see figure 2.13). for macroeconomic shocks. Argentina has the third most procyclical monetary policy in LAC. The main source of Macroeconomic management to temper Argentina’s monetary procyclicality in Argentina has been fiscal unusually volatile cycle is thus a precondition for procyclicality, with the Treasury using the Central Bank sustainable growth. Argentina needs to build fiscal space as a regular source of financing for its continuous deficits, in good times to be able to run countercyclical fiscal as will become clear in the next subsection. However, policies in bad times. To this end, the role of automatic monetary policy has also been an independent source of stabilizers in the federal budget should be heightened, macro instability. The 2004–08 period of fiscal surplus and institutional arrangements such as the establishment is a good example of procyclical monetary management of sovereign wealth funds could be evaluated once fiscal not driven by fiscal considerations. In that period, pressures ease. At the provincial level, the procyclicality countries of South America were subject to similar real of public expenditure is tied to the nature of transfers appreciation pressures due to the commodity price boom. to provinces from the federal government. The recently Real exchange rates (RERs) appreciated to a similar order enacted Fiscal Pact, which increases provincial financial of magnitude across countries—11.6 percent on average autonomy and establishes spending rules at the provincial (see figure 2.12).7 Depending on monetary policy, real level, is an important step. Alternatives such as the appreciation can materialize either through a nominal establishment of a countercyclical fund across provinces exchange rate appreciation or an increase in domestic could help them share risks to smooth out regional shocks. 7  The RER is defined as , where E is the nominal exchange rate (local currency unit per US$), is the U.S. consumer price index, and P is the domestic consumer price index. A real appreciation is a decrease in . 60 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.12: Real exchange rate depreciation, Figure 2.13: Nominal exchange rate depreciation 2004-2008, percent and inflation, 2004-2008, annual averages, percent 0 20 Depreciation -2 18 high inflation Average real exchange rate depreciation 16 -4 ARG 14 Average inflation GDP -6 12 -8 10 -10 -8 -6 -4 -2 0 2 4 6 8 10 -10 URU 8 BRA COL 6 -12 CHL 4 -14 PER Apreciation 2 -16 low inflation 0 ARG BRA CHL COL PER URU Average nominal exchange rate depreciation Sources: Calculations based on data from the World Bank’s World Development Indicators. Sources: Calculations based on data from the World Bank’s World Development Indicators. On the monetary side, a consensus on the importance of instead concentrated on current expenditures such as an independent monetary authority is a prerequisite for pensions or energy subsidies, which do little to enhance countercyclical monetary policies. productivity and, in the case of subsidies, can disrupt the functioning of strategic sectors. On the revenue side, the Expenditure and revenue policies to large increase in the tax burden was not based on a sound support growth and progressive expansion of the tax base but relied heavily on emergency and distortionary taxes. An improved fiscal framework is needed to reduce economic distortions and better support growth. A The public sector in Argentina expanded at an significant increase in the size of the public sector, such unprecedented pace over 2006–16 because of an as the one experienced in Argentina in the last decade, expansion in public employment and wages, and spending has economic effects that go beyond fiscal sustainability on pensions and subsidies. Although Argentina’s overall concerns. First, it increases real appreciation pressures, public sector has represented historically about 26 which results in a reallocation of resources away from percent of GDP—the period average over 1961–2006— traded and into nontraded, often unproductive, sectors. public sector expenditure reached 41.2 percent of GDP Second, it crowds out the private sector, increasing the in 2016. Public spending grew 15.2 percentage points returns to rent-seeking activities and diverting effort and of GDP between 2006 and 2016 (see figure 2.14). This talent from more productive endeavors. In a resource- expansion was concentrated on current spending (rise of constrained environment, it also diverts financing from 15.4 percent of GDP), but capital expenditure (remaining the private sector, given the large returns that can be at about 3.7 percent of GDP, just 1 percent higher than made on sovereign bonds. Third, given the relatively high the 1990s average) did not benefit from this expenditure level of informality, increased fiscal pressure on the formal boom. The large rise in public spending is due to a large sector becomes substantial, which limits the amount increase in public employment and wages (increase and scope of potentially profitable projects and might of 4.1 percent of GDP), a strong increase in pensions reduce incentives toward formality. Moreover, larger (social security spending rose by 4.5 percent of GDP), public expenditure did not translate into a more efficient and a significant increase in energy and transport provision of public services or better infrastructure. It subsidies (transfers to private sector increased by 3.8 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 61 Figure 2.14: Public expenditure, general Figure 2.15: Total expenditure increase, 2007-16 government, 1961-2016, percent of GDP by component, percent of GDP 45 41.2 Others; 0.1 Salaries; Goods and services; 0.4 4.1 40 Deficit SOEs; 0.5 35 Universities; 0.2 30 Interest 26.0 payments; 1.4 25 20 Average 15 1961-2002: 26% 10 Transf. private Social sector; 3.8 security; 4.5 5 0 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 Source: Calculations based on data from the Ministry of Treasury, Argentina. Source: Calculations based on data from the Ministry of Treasury, Argentina. Figure 2.16: Public spending comparison on Figure 2.17: Pension expenditure in percent selected items, 2015, percent of GDP of GDP, and share of population older than 65 years of age, circa 2015 16 13.6 18 Italy 14 12.6 16 11.7 12 Pensions expenditutre (% GDP) 10.3 14 Argentina 10 9.6 Brazil (2015) 12 Poland 8.3 Japan 8 6.8 6.9 10 Turkey Uruguay OECD Bulgaria B 6 8 Argentina (2006) 4 6 Isra Israel Colombia C Chile h 2 4 Canada Paraguay 2 Mexico Peru 0 Wage bill Social security benefits 0 0 5 10 15 20 25 30 ARG Regional New HICs OECD % Population > 65 Sources: Data from the Ministry of Treasury, Argentina; IMF; and OECD. Source: Data from the Ministry of Treasury, Argentina; IMF; and OECD. percent of GDP) (see figure 2.15). Pension spending rose in Argentina is close to 12 percent of GDP, almost double because of an expansion in coverage—the incorporation the averages for the region and for new high-income of noncontributory pensioners to the system for an countries (new HICs), and higher than the Organisation almost universal coverage—and to the introduction of an for Economic Co-operation and Development (OECD) automatic indexation mechanism in 2009 that resulted in average. Expenditure on social security, which increased large increases in real earnings for pensioners. because of an expansion in pension coverage and a generous new indexation scheme, is higher than regional After a large expansion in the last decade, Argentina’s and new HIC averages, but still below OECD levels (see public spending on salaries and social security benefits figure 2.16). Pension spending as a share of GDP (11.3 is higher than in most of its comparators: the wage bill percent) is among the highest in the world, higher than in 62 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.18: Tax burden, 2016, percent of GDP Figure 2.19: Direct tax composition, 2016, percent 4.1 2.4 15.7 2.2 40 100 34.2 17.7 15.5 13.9 35 31.5 29.1 80 12.3 30 21.0 22.9 9.5 25 7.0 60 38.8 37.4 9.9 20 43.0 5.4 10.7 15 40 14.6 62.9 10.6 10 9.4 2.8 20 3.0 39.4 44.7 29.0 5 3.1 3.0 8.4 3.2 3.6 2.0 0 0 Argentina New HICs Regional OECD Argentina New HICs Regional OECD Others Property Social security contributions PIT CIT Property Others Goods and services CIT PIT Source: Data from the International Monetary Fund’s Government Finance Statistics (GFS) Source: Data from the International Monetary Fund’s Government Finance Statistics (GFS) database and OECD Revenue Statistics database. database and OECD Revenue Statistics database. Note: CIT = corporate income tax; PIT = personal income tax. Note: CIT = corporate income tax; PIT = personal income tax. much “older” countries like Bulgaria and Japan (see figure the average wage, the minimal taxable income level in 2.17), and has almost doubled in the past decade. Argentina is much higher than in OECD countries (see figure 2.20). Broadening the tax base and reducing The tax burden also increased substantially, though special regimes and exemptions, while shifting the relying heavily on indirect taxes. The tax burden in structure toward higher direct taxes and less indirect Argentina reached 31.5 percent of GDP in 2016, higher distortive ones, are the key tax challenges as the country than regional peers, but similar to new HIC and OECD looks forward. The recent tax reform of December 2017 peers (figure 2.18). Taxes rose by more than 10 percentage aims to reduce the weight of distortive indirect taxes points of GDP between 2001 and 2016, because of the over time and to decrease the burden of social security introduction of new “emergency” taxes (for example, contributions for lower-income workers. export duties and a financial transaction tax), the economic recovery, and higher rates (for example, A similar story took place at the subnational level. Overall social security contributions and the provincial turnover provincial expenditures increased substantially (by 40 tax). Unlike OECD countries, and to a lesser extent new percent) in the last decade, only partially matched by HIC peers, Argentina relies heavily on indirect taxes,8 own revenue growth, thus putting additional pressure including the distortive provincial transaction tax and on the transfer system to close the fiscal gap (given the financial transactions tax, and has a narrow tax base. lack of access of provinces to financial markets). Likewise, Argentina stands out for having low personal income tax provincial tax schemes shifted toward distortionary (PIT) revenues compared to the OECD average and new taxes, such as the Turnover Tax (Ingresos Brutos), which HICs (figure 2.19), due in part to generous treatment of generates internal trade barriers—because the tax rate is personal deductions and the proliferation of simplified heterogenous among provinces—and increases domestic tax regimes (see Gomez Sabaini and Morán 2012), and prices and discourages exports by being a cascade sales a very high nontaxable income threshold. Compared to tax. 8  Taxes on goods and services are higher in Argentina than in all its peers both in relative terms (that is, they represent 46 percent of overall tax revenues compared to 33 percent in OECD) and in absolute terms (14.5 percent of GDP against 10.7 percent of GDP in OECD). ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 63 Figure 2.20: Income threshold where single taxpayers start paying income tax, measured as a multiple of the average wage, 2016 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 ARG IND CRI CHL IDN BRA CHN MEX GRC SVK ISR PRT SVN AUT CZE SPA IRL ZAF LUX HUN OECD GBR CAN ITA ISL DEU USA POL KOR JPN BEL EST CHE NOR SWE AUS NZL NLD DNK FIN TUR FRA Source: Data from OECD 2017. Given the size of current fiscal imbalances, fiscal make public debt converge toward 53 percent of GDP by consolidation is still essential to stabilize public debt. 2023. There are, however, risks to debt sustainability. The The federal government’s gross public debt in 2017 is standard debt sustainability analysis stress test shows estimated to be about 57.1 percent of GDP (excluding that, under an RER shock (50 percent real depreciation intra-public-sector debt brings the share down to 29.4 with 0.25 pass-through), debt could jump to 81 percent percent of GDP). The overall fiscal deficit reached 6.5 of GDP, above the high-risk threshold. Thus, given that percent of GDP in 2017—6.0 percent corresponding to the almost 70 percent of public debt is denominated in central government deficit and 0.5 percent to subnational foreign currency, a peso depreciation is a large risk. Debt governments (see figure 2.21). In May 2018, President is also vulnerable to a growth shock (negative growth Macri announced that Argentina would start talks with in 2019 and 2020), as the parameters of the stress test the International Monetary Fund (IMF) to secure a would take it to 70 percent of GDP (see figure 2.22).9 precautionary credit line. The announcement took place following a 5 percent fall in the peso at the beginning of the A sound fiscal policy is also necessary to solve Argentina’s day, and amid growing worries of a continued run on the chronic inflation problem. In the 73 years since 1945, the currency. The timeline for reducing the fiscal deficit was year when chronic inflation started, Argentina has seen also made more ambitious, with the 2018 target reduced double-digit inflation (or more) in 61 years. This includes from 3.2 to 2.7 percent of GDP. As of the beginning of three hyperinflation episodes between 1989 and 1990 August 2018, the 2019 target was set at a primary deficit (see figure 2.23 for a cross-country comparison starting of 1.3 percent of GDP, reaching a surplus of 0.2 percent in 1960). Only between 1994 and 2001 did Argentina of GDP in 2020. The planned fiscal consolidation effort experience consistently low inflation, the cost of which should yield a declining federal public debt–to-GDP ratio was having a strict currency board regime. For the most after 2018. The peso depreciation in 2018 is expected part, inflation can be explained by the subordination of to increase the public debt–to-GDP ratio to 65 percent. monetary policy to fiscal policy. Figure 2.24 shows the Implementation of the government’s fiscal program would evolution of the fiscal balance and the inflation tax,10 9  The debt sustainability analysis is based on IMF (2018). 10  The inflation tax refers to the penalty for holding cash due to inflation. This is seen as a tax because it ultimately represents a transfer of real resources to the state, which has monopoly power over money printing, the ultimate cause of inflation. It is computed as the inflation rate times the stock of money in the economy (as measured by M1, which is cash holdings and demand deposits of the public). 64 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.21: Argentina: Fiscal balance, percent Figure 2.22: Projected debt to GDP, percent, of GDP, 2002-17 2018-23 4 90 80 2 70 -0.5 0 60 50 -2 40 -4 30 -6.0 20 -6 10 -8 0 2018 2019 2020 2021 2022 2023 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Baseline Primary balance shock Real GDP growth shock Provinces Federal government Real interest rate shock Real exchage shock Source: Calculations based on data from the Ministry of Treasury, Argentina. Source: Reprinted from IMF 2018. Figure 2.23: Average annual inflation rate Figure 2.24: Fiscal balance and inflation tax, in comparator countries since 1960, percent in percentage points of GDP, 1944-2013, percent 70 63.8 15 60 10 50 41.3 5 40 0 30 23.3 -5 20 -10 10 5.0 0 -15 Regional New HICs OECD ARG 1944 1954 1964 1974 1984 1994 2004 2014 Fiscal balance Inflation tax Sources: Data from the World Bank’s World Development Indicators; Ministry of Treasury, Sources: Instituto Nacional de Estadística y Censos; calculations based on Banco Central de la Argentina; and Instituto Nacional de Estadística y Censos; calculations based on Banco República Argentina data. Central de la República Argentina data. Note: These averages exclude hyperinflation episodes in Argentina, Brazil, and Perú. New HICs = new high-income countries; OECD = Organisation for Economic Co-operation and Development. both as a share of GDP. Both series are close mirrors of growth. Argentina needs to reduce the fiscal deficit to limit each other, except for the currency board years, where external vulnerabilities, private investment, help relative monetary policy was limited to defending the peso–dollar prices adjust in favor of tradable sectors, and allow for parity. The inflation tax is on average 3.3 percent of GDP, an independent, anti-inflationary monetary policy. At the reaching peaks of 11 percent in 1975 and 9.5 percent in same time, it is important to protect the vulnerable from 1989. the adverse impacts of fiscal consolidation. Over time, the country needs to gradually rebalance its expenditure The composition of public expenditure in Argentina and profile to increase the share of investment to support the country’s chronic fiscal deficits are detrimental to its productive and welfare needs. On the revenue side, ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 65 a reduction of overall tax pressure should include a incentives to oppose new economic conditions and thus rebalancing of the tax system to rely more on direct taxes prevent efficiency-oriented reforms from happening, such as the PIT and move away from distortionary and leading to a low-level equilibrium that undermines the regressive taxes such as the financial transactions tax and growth potentials. These political economy constraints a provincial turnover tax levied on sales. This turnover may be particularly binding in Argentina because actors tax is levied at each stage in the supply chain without who gained during an earlier or current growth phase any tax credits for tax paid at earlier stages of production may be powerful enough to block institutional changes (impuesto sobre los ingresos brutos). Reform of the tax that threaten their positions and to resist the switch to structure and a reduction in tax pressure are, however, a new growth model based on firm entry, competition, challenges that can only be faced once an elimination of and innovation. The notebook scandal, which began to the fiscal deficit has been achieved. unfold at the beginning of August 2018, offers the country an opportunity to examine past institutional failures in Institutions for growth depth and to put its governance institutions on new and more robust foundations, ensuring that a functioning, Moving toward a new growth model based on greater empowered system of checks and balances exists. economic diversification and productivity requires a different set of institutions. According to the World Historical legacies of institutional instability tend to Development Report 2017: Governance and the Law (World reproduce a low-level equilibrium where the incentives of Bank 2017b), although it is possible for economies to policy makers and interest groups are dominated by short- start growing without substantive changes in the nature term considerations (corto-placismo) and opportunistic of governance, sustaining growth over time is difficult behavior. For a large part of the 20th century, various without addressing fundamental institutional challenges. types of institutions have consistently failed to take The historical experience of countries that “escaped” root in Argentina, and the country experienced a level the middle-income trap and converged toward high- of institutional instability remarkable even by regional income economies suggests that a range of institutional standards. Between 1930 and 1983, 12 presidents were reforms (strengthening the role of check-and-balances removed by extraconstitutional means and successive institutions, promoting greater independence and military coups led to radical institutional reversals competition in the media market, curbing corruption in economic policies. Since 1928, only four elected through effective anticorruption reforms, and so on) presidents completed their full terms in office; two of them were instrumental to create a level playing field among rewrote the Constitution to prolong their presidencies, firms and enable contract enforcement and more efficient and another tried to amend it to allow the president to run resource allocations, ultimately contributing to long-term for a third term. Indeed, Argentina’s history of instability growth and productivity gains. has left an imprint on how political and economic actors interact, fostering a culture of noncompliance with formal Power asymmetries and vested interests, however, may laws and procedures and recurrent efforts to circumscribe, prevent the adoption and implementation of reforms manipulate, and change rules and policies perceived to needed to enable the transition to a new economic model. harm short-term interests of powerful actors (Levitski and In Argentina, a range of priority policy and institutional Murillo 2005; Nino 1992). reforms are instrumental to move the country on a path toward greater diversification and productivity. Such Distributive conflicts between the federal and the reforms are expected to alter the bargaining influence provincial governments have also undermined the ability and preferences of political and economic actors, creating of institutions to enforce long-term commitment to policy winners and losers. In the face of these changes, interest reforms and induce the coordination and cooperation groups that currently benefit from the status-quo have needed to carry them out. The stark economic inequalities 66 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.25: Consolidated Regulatory Figure 2.26: Congress Capabilities Index, Governance Score, 2016 Average 1994-2013 7 4 6 3 5 Regional average 4 2 3 2 LAC AVG 1 1 0.8 0.47 0 0 El Salvador Guyana Barbados Nicaragua Argentina Venezuela, RB Brazil Honduras Haiti Ecuador Paraguay Guatemala Bolivia Peru Panama Dominican Rep. Mexico Colombia Puerto Rico Trinidad & Tobago Belize Uruguay Chile Jamaica Suriname Costa Rica Slovak Republic Malaysia Argentina Brazil Turkey Peru Chile Czech Republic Poland Colombia Mexico Korea, Rep. Source: Data from Global Indicators of Regulatory Governance. Source: Data from Franco Chuaire and Scartascini 2014. Note: The score captures good regulatory management practices in three core areas: Note: LAC = Latin America and the Caribbean. publication of proposed regulations, consultation around their content, and the use of regulatory impact assessments. Each core area includes multiple subcomponents in the overall score. among provinces and the structural features of the (figure 2.25). As a result, Argentina’s rulemaking process Argentina’s federal system (vertical imbalance) imply often lacks transparency, and there is little space for that most provinces are highly dependent on the national engagement with key stakeholders and beneficiaries on government to finance their expenditures. In turn, the proposed content of laws and regulations (figure 2.26). presidents need to secure votes in Congress to implement The political economy of the budget process in Argentina economic policies. As a result, the policy-making process illustrates this point, showing how Congress plays only can be characterized as “deals” or “exchanges” between a marginal role relative to other more influential players president and governors (Scartascini, Stein, and Tommasi (Rodriguez and Bonvecchi 2006; Bonvecchi 2008; 2013; Spiller and Tommasi 2003, 2008), whereby Hallerberg, Scartascini, and Stein 2009). Moreover, governors grant political support in exchange for fiscal the historical tendency of both civilian and military transfers. The governors’ political support is provided governments to replace Supreme Court justices with through the electoral channel (by mobilizing votes during political loyalists has weakened the judiciary, including its presidential elections); and the legislative channel11 ability to enforce laws and sanction noncompliance (figure (by securing votes from provincial legislators for the 2.27 and figure 2.28). Finally, political interference in the president’s policy agenda and projects in the House and public administration has undermined the development the Senate) (De Luca 2008; Spiller and Tommasi 2008). of a professional bureaucracy, leaving Argentina with Moreover, agreements are often achieved through informal weak cooperation and coordination mechanisms channels, undermining legislative and oversight functions among government agencies as well as across levels of of Congress12—whose performance is comparatively weak government. Consequently, laws and regulatory practices 11  Due to the closed-list proportional electoral system, governors control the candidate selection process and the nominations for congressional elections, to the point that political careers of individual politicians are often structured and decided at the provincial level (Jones 2002; Jones and Hwang 2005). Consequently, “president need to negotiate not only electoral but also legislative support with governors” (Gonzales and Mamone 2015: 55). 12  In the World Development Report 2017 terminology, this refers to “deal-based” versus “rules-based” elite bargains. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 67 Figure 2.27: Judicial Independence Index, Figure 2.28: Regulatory Enforcement Index, Average 2001-2013 2016 4 0.8 0.7 3 0.6 Regional Average 0.47 0.5 2 LAC AVG 0.4 1.44 0.3 1 0.2 0.1 0 0.0 Guyana El Salvador Venezuela, RB Nicaragua Argentina Brazil Venezuela, RB Argentina Brazil Honduras Cuba Haiti Ecuador Paraguay Panama Bolivia Guatemala Peru Mexico Dominican Rep. Colombia Trinidad & Tobago Puerto Rico Jamaica Chile Uruguay Mexico Turkey Malaysia Peru Colombia Poland Chile Czech Republic Uruguay Korea, Rep. Suriname Barbados Costa Rica Source: Franco Chuaire and Scartascini 2014. Source: The Rule of Law Project, http://www.thecenterforruleoflaw.org/rule-of-law-pro- ject.html. are often enforced in a decentralized and fragmented The institutional weakness of the state apparatus has manner, with different sectors of the public administration created a social environment where perceptions of operating under different regulations and overlapping corruption continue to permeate public affairs. Argentina responsibilities (Spiller and Tommasi 2008). In turn, ranks 85th out of 175 countries on the 2017 Corruption this institutional environment allows opportunities for Perception Index. Both the World Economic Forum’s inefficiencies and rent-seeking behavior. Global Competitiveness Index (GCI 2017–18) and the World Bank’s 2017 Enterprise Survey report corruption as This opportunistic and noncooperative behavior has one of the most problematic factors for doing business in implications for economic activities. On the one hand, the Argentina, with 13 percent of firms having to pay bribes to expectations that certain policies might not endure has secure government contracts (slightly below the regional inhibited firms’ propensity to invest and take advantage average of 14.4 percent). These perceptions tend to of otherwise favorable conditions. The failure of trade correlate with public opinion surveys: about 41 percent of reforms to change industrial behavior during the 1990s respondents in Argentina report the level of corruption as illustrates this point.13 On the other hand, the tendency increasing over the previous 12 months, and believe the of governments to react to economic shocks through government is doing a bad job of fighting corruption; and various redistributive mechanisms (subsidies, public 16 percent report having paid a bribe to a public official to expenditures, fiscal transfers, and taxation of export- get access to basic services (Transparency International oriented sectors) further contributes to undermine 2017). capital-intensive investments because economic actors expect their profits to be confiscated to address short- Over time, endemic corruption can generate significant term budgetary needs. economic and social costs, undermining citizens’ trust in 13  Acuna (1991) shows that export promotion policies did not produce the expected changes in investment decisions by industrial firms because of the uncertainty of the duration of the policies (quoted in Spiller and Tommasi 2003). This is consistent with the general argument that “it is not trade liberalization per se, but credible trade liberalization that is the source of efficiency benefits” (Rodrick 1989). 68 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY public institutions. The challenges related to corruption fight corruption and strengthen public integrity. In 2016, in Argentina are quite broad: they extend through areas the government approved the State Modernization Plan measured by the GCI, taking in ethics, corruption, and (Decree 434/2016). The plan, which is to be implemented undue influence (for example, judicial independence, by the recently created Ministry of Modernization, aims diversion of public funds, public trust in politicians, to achieve a public administration at the service of irregular payments in public contracts, and favoritism in citizens within a framework of efficient, effective, and the decisions of government officials), and with notable good-quality service delivery. The same year Congress weaknesses when compared to peers within the region approved a Right of Access to Information Law (Law in the areas of irregular payments in tax collection 27,275), which entered into force on September 27, 2017. and ethical behavior of businesses. By facilitating the Until the enactment of Law 27,275, Argentina was one inefficient allocation of scarce resources, corruption can of the few Latin American countries that did not have a undermine private investments and competitiveness in law in this area, together with Bolivia, Costa Rica, and the international market. Besides its economic effects, República Bolivariana de Venezuela.15 The government corruption puts the legitimacy of state institutions into has also relaunched an open data policy, which it had question: according to the latest Latino barometer survey, timidly begun with the incorporation of Argentina into the only about one-third of respondents trust the government. Open Government Partnership in 2012. Continuing these Although this is in line with regional and global trends, it efforts is critical to institutional reform. is nevertheless worrying because it can undermine the social contract between the state and the citizens. 14 Recent corruption scandal, such as that of the notebooks, provide an opportunity to deepen institutional reforms by The current administration is putting in place important tackling key historic and structural causes of corruption, changes in the legal framework to promote transparency, including strengthening the independence and efficiency Box 2.1. The notebooks (cuadernos) corruption scandal On August 1, 2018, a large-scale corruption investigation was revealed, which has dominated the news and attention ever since. On August 1, the Justice Department detained five former officials and several busi- nessmen who are accused of having participated in massive bribery schemes associated with public works during the Kirchner administration. The number of former public officials and executives implicated con- tinues to grow. The case is based on information of bribe amounts, names, address, dates, and places that was recorded in notebooks (cuadernos) by a driver of the former Ministry of Planning (Oppenheimer 2018; Politi 2018). Many executives called to testify used plea bargains related to the “Repentance Law” (Law 27,304), sanctioned in late 2016. The detailed information recorded in the notebooks reveals the magnitude of the corruption and rent-seeking behavior of public and private sector elites involved in public contracts in Argentina, where public biddings were allegedly guaranteed to specific companies in exchange for bribes. Although the investigations are still unfolding, they are likely to impact future public contracts, such as the public–private partnerships under way, because four out of six active partnerships involve companies men- tioned in the investigation (Santi and Slipczuk 2018). 14  According to the Edelman Barometer, for example, in 2017 only 41 percent of citizens globally trust their governments. 15  Access to public information in Argentina was regulated at the national level through a presidential decree (Decree 1172 from 2003), which— later reformed by Decree 79/2017—remains in effect until the new law’s entry into force. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 69 of judiciary and oversight institutions. As the fight against the highest in the last decade. Foreign direct investment corruption continues and large-scale investigations are (FDI) is also low, accounting for about 2 percent of GDP revealed to the public (see box 2.1), Argentina should in 2016, below the regional average and the average for remove all obstacles to effectively reducing corruption upper-middle-income countries (3.6 and 2.4 percent of and demonstrate a sustained long-term commitment GDP, respectively). Public investment is low, averaging to the reform agenda, following the experience 2.5 percent in the last decade. Infrastructure investment of neighbor countries like Brazil.16 Some of these strongly relies on public investment (more than 80 obstacles are a historically low level of anticorruption percent), and is much lower in Argentina (at 2.7 percent enforcement; a judiciary still perceived as inefficient of GDP) than the highest infrastructure investors in Latin and corrupt because of opacity in judge appointments America, which invest more than 5 percent of GDP with and instances of political interference;17 the lack of strong private sector participation (Fay et al. 2017). Low credible entities in the administrative jurisdiction with private and public investment has led to a declining the mandate, independence, and capacity to monitor, capital stock. detect, investigate, and sanction unethical behaviors or corruption practices within the public administration; Argentina’s financial and capital markets are shallow the lack of a corporate compliance culture among private compared to those of comparator countries, thus limiting firms, as well as public integrity laws delimiting the use firm activity and private financial investment in key sectors of public funds by civil servants; and the substantial such as infrastructure. Private bank credit is extremely legislative and economic differences among the various low at under 14 percent—compared to the 44–45 percent provincial jurisdictions that would ultimately be in charge average for the LAC region. Argentina’s bank credit is the of applying the federal laws. lowest among the LAC-7 economies18 of which Mexico and Peru are next lowest at 24 and 37 percent respectively. In the broader LAC region, Haiti’s share is higher than Argentina’s, at 17.5 percent of GDP. The domestic equity Pathway 2: Open, outward-oriented market capitalization represents less than 12 percent of development model GDP versus comparator countries, which are closer to 40 percent, and the regional average of 35 percent; and Creating financial capital private bond market issuances stand at under 1 percent of GDP, much lower than comparators (see figure 2.29). Low investment is one factor constraining inclusive and For investor markets in infrastructure, for example, a sustainable growth. Argentina’s investment rate is lower key challenge will be attracting foreign investors given than its regional neighbors, comparable peers, and even the large sums needed in sectors typically seen as risky. its own historical records. Investment to GDP was 16 Incentives will be needed both from a regulatory point percent in 2016, below the regional average (20 percent) of view to facilitate entry into capital markets and in and significantly below the average among upper-middle- terms of credit enhancement instruments to increase the income countries (32 percent). It is also 4 percentage perceived credit quality of such investments to ensure points below the investment rate for 2007, which was private finance. 16  Brazil is lauded internationally for its efforts to combat graft. The country have seen a steady increase in bureaucratic audits, civil servants removed from office and fined, and politicians barred from elections for wrongdoing. The adoption of plea bargaining, the strengthening of antirac- keteering statutes, and the enhancement of anti-money-laundering laws—along with improved fiscal oversight and banking regulations—were vital to building cases against private and public sector officials alike. Over the past twenty years, courts, prosecutors, police, and oversight agencies grew in autonomy, size, and strength, enabling them to undertake real efforts against graft and move investigations forward. Brazil also began slowly shifting away from patronage, adopting rigorous merit-based examinations and reducing the number of political appointees in the civil service (Praça and Taylor 2014; Power and Taylor 2011; Taylor 2017). 17  The latest (2017–18) Global Competitiveness report ranked Argentina 100th out of 138 economies in judicial independence (3.2 score). 18  LAC-7: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela. 70 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.29: Argentina: Low capital market depth for its income level a. Private Credit, 2016 (% of GDP) b. Stock Market Capitalization, 2016 (% of GDP) New HICs 75.6 New HICs 69.1 Regional 50.5 Regional 48.1 OECD 87.6 OECD 79.6 Argentina 13.5 Argentina 11.7 0 25 50 75 100 0 25 50 75 100 Source: Data from World Bank’s FinStats. f Note: HIC = high-income country; OECD = Organisation for Economic Co-operation and Development. Therefore, deepening capital markets and expanding In terms of financial sector stability, the relatively small enterprise and household access to finance is key to banking sector remains very well capitalized with low mobilizing new capital in the economy. Investment and nonperforming loans (NPLs) (see figure 2.30). However, the allocation of capital are inadequately supported by given the recent rise in market volatility that began in financial intermediation given the smallness and risk April 2018, it is important to ensure that contingency averseness of capital markets and financial institutions, plans exist and to have risk mitigation measures in place. respectively—particularly for a country of Argentina’s With high interest rates maintained to stem inflation, income level. The financial sector is extremely limited this could generate increased debt servicing stress on compared to Argentina’s peers, both regional and OECD, enterprise creditors of banks; therefore, banks need to be translating to low financing for infrastructure, housing, prepared. A review by financial supervisory authorities of small and medium enterprises, and the corporate sector. their forward-looking systemic prudential measures would In addition, the financial sector is highly concentrated with be useful to identify any banks that could have shortfalls low rates of banking penetration: the five largest banks in loan–loss provisions if borrower defaults were to rise. own 50 percent of total loans, and only 50 percent of the Stress testing by Banco Central de la República Argentina population has access to a bank account. Only 3 percent is critical, including looking at several scenarios that of micro, small, and medium enterprises have adequate could develop and cause systemic liquidity stress in access to financial products with 50 percent being either the system. In parallel, continued improvements in the unserved or underserved. Given the low base, there is financial payments and settlement systems would help to substantial potential for the Argentine market to unlock identify if any significant gaps in execution exist. financing for several sectors if the credit and capital markets are developed with appropriate instruments to Overall, there is a huge potential for the financial market transition from a high inflation to a stable environment. in Argentina to grow and bring more resources from Housing is the main investment asset for households, but the private sector to add to investment, growth, and lending for residential housing amounts to less than 1 equitable development. Some of the key constraints percent of GDP, thus contributing to a housing deficit and initially identified to unlock this potential include (i) depressed household investment. review of regulatory and cost requirements for the entry ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 71 Figure 2.30: Argentina: Banking soundness indicators a. Regulatory capital to risk-weighted assets, 2007-2016 (%) b. NPLs to total gross loan, 2007-2016 (%) 20 4.0 18 3.5 16 3.0 14 12 2.5 10 2.0 8 1.5 6 1.0 4 2 0.5 0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Data from Banco Central de la República Argentina. Note: The minimum capital/risk weighted asset requirement is 8 percent with a contingent 2.5 percent capital conservation buffer if the minimum is approached. of foreign investors given the funding levels needed; (ii) Creating the infrastructure to support ineffective procedures, regulations, and public listing growth requirements for the streamlined issuance of market securities; (iii) management and mitigation of risks such The quality of Argentina’s infrastructure stock as inflation are needed in order to develop sustainable is deteriorating, and this poses a challenge to mortgage loan and securities markets; (iv) untapped competitiveness. The country faces important challenges identification of revenue and value capture opportunities related to both the quality of infrastructure and the level in the infrastructure project market; (v) suboptimal of investment. Argentina ranks 81st among 152 countries development of risk mitigation mechanisms to protect in the infrastructure pillar of the GCI, well behind the public–private partnerships (PPPs) concessionaries and regional leaders such as Chile (36th) and Mexico (45th) creditors in the infrastructure finance area; (vi) lack of and all structural peers (figure 2.31).19 From 2007 to sufficient development of individual retail and e-finance 2017, Argentina declined in the GCI rankings on overall banking products to broaden the scope of access to infrastructure quality perception, falling 26 places from financial services across the country; (vii) dearth of 80th to 106th. Although this is worse than most regional approaches to augment finance for small and medium and structural comparator countries that have also fallen, enterprises, potentially through innovative instruments perception of quality improved in 2016 and 2017 both and pooling of risks; and (viii) lack of development in the in relative and absolute terms. Ageing infrastructure life insurance and private pension markets to increase is taking its toll on competitiveness, with Argentina individual saving safety nets while generating demand for ranking 96th and 113th out of 144 in terms of road and long-term market investment instruments. The tackling of electricity quality infrastructure in the 2017 GCI (Schwab these constraints and the development of new policies and Sala i Martin 2018). Bottlenecks in the transport and instruments will be a priority to ensure that the infrastructure—essential to connect enterprise to markets government can increasingly rely on the private sector to and people to jobs—pose serious challenges, particularly participate in an economic revival of Argentina. for the Northwest of the country. The great distances that 19  Indicator 2.01 Quality of Overall Infrastructure (Schwab and Sala i Martin 2018). 72 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.31: World Economic Forum’s Global Figure 2.32: World Economic Forum’s Global Competitiveness Index Infrastructure pillar Competitiveness Index quality of electricity ranking, 2017 ranking, 2007 and 2017 KOR KOR MYS CHL CHL URY CHL MYS POL POL MEX PER BRA 81 MEX ARG PER SLV COL COL URY BRA ARG 113 SLV 95 VEN VEN 0 20 40 60 80 100 120 0 20 40 60 80 100 120 140 Rank Rank Source: Data from World Economic Forum (WEF), The Global Competitiveness Report 2007 2017 2017–2018. Source: Data from Schwab and Sala i Martin 2018. separate the Northwest from the ports and the country’s have strong private sector participation. It is also lower main centers of consumption are a key driver for elevated than the rates of its regional peers (figure 2.34) and transport costs. Addressing these costs calls for provision structural peers.21 Traditionally, Argentina has relied of high-quality transport assets and efficient provision of strongly on the public sector (about 76 percent on average ancillary services. The average cost of transporting one between 2008 and 2014).22 To make the situation more ton of cargo from the Northwest to the country’s main challenging, the country also has limited room to increase ports of Rosario and Buenos Aires averages US$73 per public investments. This is true for most of the region, ton, which is between 15 and 20 percent higher than in but faster-growing economies, such as Chile, Colombia, other regions of the country. In electricity, one of the Paraguay, and Peru, are likely to fare better in terms of main challenges inadequate transmission lines. The GCI fiscal space for infrastructure than slower-growing ones, quality of electricity rank for Argentina dropped from such as Argentina, Brazil, and Ecuador (Fay et al. 2017). 95th (in 2007) to 113th (in 2017; see figure 2.32).20 Things are made difficult also by the fact that primary expenditures play an important role in Argentina’s fiscal Infrastructure investment in Argentina is very low with situation. Moreover, given that even PPPs depend heavily limited room for increasing public investment. Argentina’s on government support, limitations to public finance also infrastructure investment rate has been low historically, impose constraints on private finance for infrastructure. hovering around 2 percent of GDP (figure 2.33), and is much lower than the highest infrastructure spenders in Argentina’s logistics performance indicators are generally Latin America (for example, Honduras, Nicaragua, and lagging compared to those of its peers. At 27 percent Panama), which invest more than 5 percent of GDP and of GDP, logistics costs are the second-highest in Latin 20  With respect to ICT the Argentina’s performance is comparable to structural peers and is relatively strong compared to regional peers, as shown by the ITU ICT Development Index, in which the country scored 6.9 out of 10 in 2017 (and is ranked 51 in the World), while structural peers scored 7.0 on average, and regional peers scored 5.7 on average. 21  Structural peers also tended to invest more than Argentina in infrastructure. According to estimates from the structure Hub, which provide slightly higher estimates than the INFRALATAM database (presented in figure 2.34), the average investment in infrastructure as a percentage of GDP between 2007 and 2015 in Argentina was 2.47 percent, which is below the averages for Turkey (2.51 percent), the Republic of Korea (3.21 percent), Malaysia (3.93 percent), and Poland (4.32 percent). 22  For more information, see the INFRALATAM database, http://infralatam.info/. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 73 Figure 2.33: Infrastructure investment as a Figure 2.34: Infrastructure investment as percentage of GDP in Argentina by type, 2008-2015 percentage of GDP in regional peers, 2014 2.0 6 1.8 5 1.6 1.4 4 1.2 1.0 3 0.8 2 0.6 0.4 1 0.2 0.0 0 2008 2009 2010 2011 2012 2013 2014 2015 Peru Colombia Brazil Chile Uruguay Argentina Mexico Public Private Public Private Sources: Data from INFRALATAM database, http://infralatam.info/. Sources: Data from INFRALATAM database, http://infralatam.info/. Note: Latest year with data available for private investment is 2014. Note: Latest year with data available for Uruguay is 2012. America and nearly three times higher than the average challenges to planning: expenditure responsibilities are for OECD countries (World Bank 2017f). According to not accompanied by an equivalent transfer of tax powers, the World Bank’s Logistics Performance Index (LPI), fiscal decentralization is modest, and infrastructure Argentina performs similarly to regional peers, but its is not immune. The system for coparticipación federal performance has not improved in recent years (figure has tried to solve the problem, and approximately 60 2.35). As a result, in worldwide scale it fell from position percent of the provinces’ resources come from nation- 45 in 2007 to 66 in 2016. Some of the factors impacting to-province transfers. To address this situation, it will be logistics performance include (i) a heavy reliance on road important to set clear planning priorities and develop a transport, representing 95 percent of cargo movements; more transparent multisectoral methodology to prioritize (ii) deficiencies in road infrastructure, including lack of and select public infrastructure investments. Special capacity of trunk roads and low levels of road maintenance, attention is required for the logistics network, particularly particularly in provincial and municipal networks; (iii) key corridors, critical exit nodes (such as the ports in the high cost of domestic transportation services; (iv) the the Buenos Aires metropolitan area and Rosario), and restriction in the capacity of waterways and the national major border crossings. Further developing multimodal port system; (v) the weaknesses in trade procedures and transport networks is also key. From the organizational practices, particularly in international border crossings side, infrastructure planning and execution are diluted at and ports; (vi) infrastructure deficiencies in international different layers of government and several other agencies. border crossings with key neighboring countries including In the case of water, for example, provinces tend to wait Brazil and Chile; and (vii) the increased costs of urban for investments made by federal government, without logistics in the main metropolitan areas in the country. fixing their utilities’ performance issues. Construction of new water treatment plants is prioritized over measures Tackling the challenges in infrastructure to reduce non-revenue-water (where physical and commercial losses are huge). Argentina would benefit from Better spending is a key element of improving the a more comprehensive and strategic planning approach status of infrastructure, and heavily depends on better that covers both expansion plans and maintenance and planning between national and provincial levels of improvement of existing infrastructure. This would also government. Argentina’s federal structure poses unique involve a stronger territorial development approach 74 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.35: Logistics Performance Index, 2007 Azumendi 2008).24 Argentina can aspire to regulatory and 2016 bodies with greater levels of autonomy and transparency: the main focus would be tackling the “regulatory” autonomy 3.6 that includes clarity in their responsibility regarding 3.4 particular issues (tariffs, service quality, consumer LPI score (1=low to 5=high) 3.2 complaints, companies’ investment plans, wholesale 3.0 market, anticompetitive behavior, technical standards) 2.8 and powers to enforce its decisions. The main challenge 2.6 is, and will always be, how to find this balance between 2.4 rationality and politics. Agencies also present significant 2.2 gaps in terms of the transparency of appointments. This 2.0 aspect should call the attention of regulators and service MYS POL CHL MEX BRA URY ARG PER SLV COL VEN providers because a fully professionalized bureaucracy 2007 2016 is the last guarantee against undue political influence in Source: Data from World Bank’s WDI. regulatory matters. Improving the mechanisms to leverage private sector that places emphasis on the dimensions of economic financing is an important step in increasing investment, geography. A solid national infrastructure policy should and the government is looking at PPPs as a vehicle to also take into consideration the role played by the address the infrastructure gaps. The government has provinces and municipal governments and a coordination improved the PPPs framework to make it more favorable to of national and subnational resources and priorities. private investors with the implementation of the new PPPs law approved by the Congress in 2016.25 This is supported Better governance in the infrastructure sectors is also by a new capital markets law, approved in May 2018, key, particularly when it comes to regulatory autonomy. to support the development of new long-term financial Argentina is particularly challenged by the coordination investment instruments. The government has announced of regulation between the national government and the an ambitious US$26 billion investment program with provinces. In the power sector, for example, regulation 60 projects to be financed by private capital.26 The plan of electricity distribution is a provincial responsibility, includes investments in capacity and road safety of the which explains the dispersion in final electricity prices national highway network, upgrading existing airports around the country. Argentina has a lower than average and ports, and the construction and expansion of the rail performance in the autonomy index, following closely network, including freight. This is in addition to a large behind El Salvador (Andres et al. 2007).23 Regulatory power generation program with the aim of increasing the governance has distinct effects on utilities’ performance country’s power generation capacity, including renewable indicators (see, for example, Andres, Guasch, and energy, by about 20 gigawatts by 2025. However, private 23  It should be noted that, although the data from the study date from 2007, the regulatory situation in the region has not changed dramatically; therefore, these indexes should provide a relatively accurate indication of the current situation. 24  These estimates for Latin America show that a one standard deviation change in the formal regulatory governance components had a large effect on improving labor productivity (15.9 percent) and reducing the frequency of interruptions (13.8 percent) and residential tariffs (19.0 percent). A one standard deviation improvement in formal autonomy and the characteristics of the agency in terms of setting tariffs was associated with higher labor productivity (11.4 percent) and a reduction in the average duration of interruptions (17.2 percent). It was also associated with a 42.8–49.3 percent reduction in operational expenditure, with consequent improvements in the cost recovery ratio. 25  Among other aspects, it promotes the use of specialized funding vehicles to allow increased private investment in infrastructure projects, a legal regime allowing contestability at both the local and international levels, and regulations facilitating funding of infrastructure through the ca- pital markets. The Ministry of Finance also created a PPPs Unit (Subsecretaría de Participación Público Privada, SPPP) that provides guidance and clearance on the gateway process and advices on the financial structuring. 26  MinFinanzas 2018. https://www.minfinanzas.gob.ar/el-gobierno-convoco-a-los-empresarios-a-invertir-en-una-argentina-que-reforma-su-in- fraestructura/ ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 75 sector financing of a large investment program remains Figure 2.36: Trade openness (trade as a share of challenging, particularly given the amount of financing GDP), percent, Argentina and select countries, 2016 and the limited capacity of the domestic capital market to 140 supply the necessary equity and debt. In the water sector, the lack of definition of roles and responsibilities between 120 provinces and the federal government is one of the key 100 bottlenecks in moving forward transactions in a context 80 in which operators do not generate tariffs to recover 60 even operations and maintenance costs. The financial structures will need to find risk allocations consistent with 40 the appetite of investors even if this comes at the cost of 20 limiting the potential benefit of the PPPs scheme, at least 0 BRA PAK ARG USA URY TUR UK CHL ZAF MEX ROU KOR POL BGR MYS in the first set of projects, until a track record is set and more risk can be shared among sponsors and financiers. Source: Data from the World Bank’s World Development Indicators. Good infrastructure and lower logistic costs are key to Argentina’s growth ambitions. Although financing is a key bottleneck, more focused national and territorial goals 2006 to 26.3 percent in 2016, which is slightly above the and efficient strategies can substantially reduce financing level experienced in 1998 (23.3 percent). Argentina is needs. In addition, upstream reforms will enable the fourth most closed economy in the world after Brazil, Argentina to both improve spending efficiency and attract Pakistan, and Sudan (see figure 2.36).28 From 2010 to private financing on better terms—whether through PPPs 2016, average trade openness, measured by trade as a or commercial borrowing by public enterprises (Fay share of GDP, was only 29.1 percent. Trade in services, as et al. 2017). And efforts to improve public investment a share of GDP, is lower than in all neighboring countries. institutions and frameworks—notably budgeting and Integration to global value chains (GVCs)—that is, global procurement systems—should enable the country to trade in parts and components rather than end products— substantially stretch the resources it already allocates to is limited. Argentina’s average import tariff was 13.6 infrastructure. An improved framework for infrastructure percent in 2015, well above the level of comparator planning, financing, and investing will be a key driver of countries. Nontariff measures (NTMs) further restrict competitiveness, an issue to which this diagnostic turns trade flows, with effects similar to those of tariffs as high in the following pages. as 34 percent. Countries around the world participate, on average, in about 14 free trade agreements each; Creating an economy open to trade, Argentina is a signatory to only one.29 Product market competition, and investment27 regulation, as measured by the OECD–World Bank Group Product Market Regulation (OECD–WBG PMR) database,30 The Argentine economy is poorly connected with the world imposed barriers to trade facilitation that are more economy and particularly closed to trade. Argentina’s restrictive than in other LAC countries. As of January trade flows, as a share of its GDP, have fallen by almost 2018, import licenses for about 1,300 tariff lines were half over the last decade, dropping from 40.4 percent in still not subject to automatic approval. 27  This section is based on World Bank (2018a) and Martínez Licetti et al. (2018). 28  All values come from the World Bank’s World Development Indicators database. 29  See World Bank (2018a) and Martinez Licetti et al. (2018) for a comprehensive assessment of Argentina’s trade, investment, and competition position and reform agenda. 30  The OECD–WBG PMR data are part of the World Bank’s Markets and Competition Policy Database. 76 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.37: Export destinations, 1995-2016, Figure 2.38: Global value chain participation: percent of total exports Argentina vs. comparator countries, 2011 40 50 Forward Backward 45 40 domestic and foreign grass exports 30 Value added as a share (%) of 35 30 20 25 20 15 10 10 5 0 0 Brazil Argentina Australia Netherlands Mexico 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Peru New Zealand South Africa United Kingdom Romania Poland Finland Bulgaria Ireland Malasya Costa Rica Uruguay Paraguay United States China Chile Brasil Source: Data from the World Bank’s World Integrated Trade Solution. Source: Data from Martinez Licetti et al. 2018 based on data from the Organisation for Economic Co-operation and Development–World Trade Organization Trade in Value Added dataset, http://www.oecd.org/sti/ind/measuring-trade-in-value-added.htm. Note: Countries are ranked by backward participation ratios. The potential medium- to long-term gains from integrating new markets. Vegetables, foodstuffs, and wood represent into the global economy are substantial. Reforms to more than 60 percent of Argentina’s export basket, and eliminate an import licensing system that required this proportion has been increasing since 2010. The preapproval for each incoming shipping load is expected top exports are soybean meal (17.6 percent), corn (7.4 to boost GDP by at least 0.14 percent over a period of percent), soybean oil (7.2 percent), and soybeans (5.7 three to five years compared to baseline projections, percent). Export destinations are also concentrated in a according to computable general equilibrium simulations few countries (see figure 2.37). Argentina has somewhat (Martinez Licetti et al. 2018). Removing all export taxes limited integration into GVCs, the 21st century mode of would expand GDP by at least 1 percent over a period of trade whereby a country does not need to produce an three to five years compared to baseline projections.31 A entire export good but rather produces an input as part MERCOSUR–European Union free trade agreement would of the production process (figure 2.38). Argentina is more boost Argentina’s exports to the European Union by 80 likely to be the seller (forward GVC participation) mostly percent by 2030, relative to the baseline. These impulses because of its export of agricultural commodities that would not dissipate over time, but would bring permanent are used as an input in production in other countries (for gains to the economy. example, the use of soy in processed soy products). The country is less likely to buy inputs from other countries As a result of poor integration, export products and to produce higher-value-added exports (backward GVC destinations are undiversified and concentrated in participation).32 relatively low-value-added goods. Concentration has persisted and even increased in terms of products and Much-needed FDI is low and has not contributed to destinations since 1995, reflecting barriers to entry into developing more complex export products. The FDI 31  The potential fiscal implications of this measure also need to be taken into consideration. 32  Forward GVC participation is measured as the share of Argentina’s value added embodied in foreign countries’ gross exports. Backward GVC participation is measured as the share of foreign value added embodied in Argentina’s gross exports. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 77 Figure 2.39: Inward FDI stock, in percent of GDP, 2016 450 400 350 300 250 GDP 200 150 100 Average 50 0 Slovak Republic Slovak Republic Malaysia Canada Estonia Sweden Brazil Argentina Venezuela Israel Netherlands Iceland Australia United States Chile Colombia Peru Mexico Uruguay Chile Czech Republic Uruguay Poland Turkey Korea Luxemburg Ireland Switzerland Belgium Chile Hungary Czech Republic Portugal Latvia Mexico United Kingdom Spain Austria Poland New Zealand Norway Finland Slovenia France Italy Turkey Greece Korea Japan Germany Denmark Regional New high income countries OCDE countries Source: Data from UNCTADstat, 1970–2016, http://unctadstat.unctad.org/wds/TableViewer/tableView.aspx?ReportId=96740. Note: FDI = foreign direct investment; OECD = Organisation for Economic Co-operation and Development. stock in Argentina amounts to only 16.1 percent of GDP In addition to low import competition, many markets compared to 44.9 percent in new HICs and 43.1 percent in feature government interventions that further curb the region in 201633 (see figure 2.39). Weak FDI inflows and domestic competition and distort the level playing field. stock exacerbate Argentina’s already low rate of overall According to OECD–WBG PMR data, Argentina has both the investment; improving this rate is critical for narrowing its most restrictive product market regulation in the region infrastructure gap. Even so, FDI inflows have been quite and more restrictive regulations than other countries of diversified across sectors, with chemicals (15 percent), similar size and income levels (see figure 2.42). Argentine mining (11 percent), and financial (10 percent) sectors state-owned enterprises operate in 17 sectors without accounting for the largest individual shares (figure 2.40). a clear set of rules to guarantee competitive neutrality Other, smaller sectors also contribute to a substantial relative to private investors. These and other direct portion of FDI inflows—including food and beverages government interventions in the market (such as the price (8 percent), communication (7 percent), automotive, control system) can distort the level playing field. machinery and equipment, and wholesale. The challenge, however, lies in ensuring that FDI translates into higher Lack of pro-competition regulation in enabling sectors economic and export complexity. FDI complexity itself in holds back firm competitiveness. Regulatory design Argentina is low at –0.39, below the global average and in key service input markets limits contestability in below other Latin American countries (such as Brazil and communications technologies. For example, regulatory Costa Rica) with similar economic complexity index (ECI) asymmetries explicitly prohibit participation in certain standings (figure 2.41). Unsophisticated, unprocessed segments of the telecommunications industry, preventing products—primarily in the agricultural sector—still the provision of converged and better-quality services dominate Argentina’s export basket, leading to a relatively (companies that offer pay television by subscription low ECI (Argentina’s ECI is –0.502, placing the country can offer telecommunications services, but not vice 72nd in the ranking in 2014). versa). Delays in spectrum assignment processes and 33  Represents the simple average for each country grouping. 78 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.40: Sectoral composition of FDI inflows Figure 2.41: FDI complexity and ECI in 2014, in Argentina, 2010-2015 Argentina vs. comparator countries Others, 12% Chemical industry, 15% 1 IT, 1% ROU POL CRI Textile industry, 3% BOR MEX Machinery and IRL 0 BRA MYS FIN equipment, 4% Mining, 11% FDI complexity ZAF GBR Car industry, 6% ARG AUS Construction, 2% Oil, 6% NZI Transport, 3% -1 PER Commerce, 5% Oils and cereals, 3% Common metals, 3% Agriculture, 1% Communications, 7% Food, beverages, and tobacco, 8% -2 Financial private sector, 10% -2 -1 0 1 2 ECI Source: Data from Martinez Licetti et al. 2018 based on Banco Central de la República Source: Data from Martinez Licetti et al. 2018 based on MIT’s Observatory of Economic Argentina. Complexity, https://atlas.media.mit.edu/en/. Note: FDI = foreign direct investment. Note: ECI = economic complexity index; FDI = foreign direct investment. the absence of rules to protect competitive neutrality average lead time to import or export in Argentina is seven have prevented mobile operators from connecting more days, compared to four days for the average LAC country. people at faster speeds. Between 2000 and 2015, there In part, the underperformance and high costs of logistics were no auctions for assigning spectrum. Currently, services reflect inappropriate sectoral regulations. For only 40 percent of broadband connections in Argentina example, road cargo transport regulations allow truck provide speeds above 4 megabits per second, compared drivers and transporters to jointly negotiate salaries to 67 percent in top performers in the region. Successive applicable to all market participants, including those government interventions in all segments of the energy unaffiliated with the respective associations. Such joint industry have contracted energy supply and affected the negotiation may facilitate or even constitute collusive reliability and prices of energy services. The regulatory behavior. In addition, operators that transport their own setup does not enable price signals to attract investment cargo and exert competitive pressure on public road in electricity generation. Small and medium enterprises freight services face distortive rules: they receive only a lost, on average, 2.4 percent of sales because of outages, 30 percent discount on tolls, whereas public road freight which is double the share in comparator countries. providers receive a 100 percent exemption. In the case of railway networks, and given the vertical connections Firms struggle, in particular, with high-cost, low-quality between majority shareholders and cargo rail transport transport and logistics services, owing in part to rules end users, regulators and the competition authority that do not induce local providers to operate efficiently. could, for example, collaborate to ensure effective third- Logistics costs in Argentina, at 27 percent of GDP, are party access regulations are in place where appropriate. the second highest in LAC nearly three times higher than the average for OECD countries, and have grown The new competition authority, to be set up in 2018, by 40 percent in real terms since 2003 (see figure will need to actively enforce anticartel policy as well 2.43). Argentina performs more poorly on the Logistics as implement effective merger control and competition Performance Index than would be expected from its per advocacy. Government interventions that restrict capita income. It also underperforms on specific logistic competition often enable anticompetitive practices indicators compared to regional peers. For example, the by firms, such as price-fixing cartels. Whereas mature ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 79 competition agencies detect five or more such relatively high concentration in these product markets, anticompetitive agreements per year, Argentina has and the Competition Authority has already selected recently sanctioned the first cartel in many years, after several of these for market investigations.34 detecting only two in the entire decade before. The competition law passed by Congress in May 2018 will help More effective competition can further reignite consolidate initial reform progress by setting up a new and productivity as an engine of inclusive growth. Increasing more independent competition authority, separating the competition in the manufacturing sector would increase investigation and ruling functions, increasing thresholds the annual growth rate of labor productivity by 7 percent, for merger notification, creating a leniency program for on average, with all else being equal. Reducing the cartels, and strengthening the competition advocacy regulatory restrictiveness of competition in the Argentine function of the authority. service sectors (such as energy, transport, professional services, and telecommunications) would translate into More effective competition policy can benefit Argentine an additional 0.1 percent to 0.6 percent growth in annual consumers who pay significantly higher prices for key food GDP, with all else being equal. products sold in relatively concentrated domestic markets. Overall, households in Argentina spend 28 percent of Beyond the empirically well-established gains from their overall consumption on food products, more than integrating into the global economy, the current global the 14 percent in comparator countries. Between 2010 trade landscape also opens specific opportunities for and 2015, the most important food products cost, on Argentina. First, trade in intermediate goods has grown average, almost 50 percent more in Argentina than in faster than trade in final goods, with FDI as a catalyzer for international peer countries and 35 percent more than in GVCs. Building on existing capabilities in specific market Pacific Alliance countries (Martinez Licetti et al. 2018). segments (such as auto and food processing), Argentina This is generally consistent with information on the can attract FDI in these sectors while strengthening links Figure 2.42: Product Market Regulation indicator, Figure 2.43: Logistics cost index (2003=100), Argentina vs. comparator countries, 2013-2016 2003-2014 4 Barriers to trade and investment 145 Barriers to entrepreneurship State control 140 3 135 130 125 2 120 115 1 110 105 0 100 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ARG 2013 ARG 2016 BRA CRI ZAF MEX ROU PER POL BGR IRL FIN AUS NZL UK NLD Sources: Data from OECD Product Market Regulation database, http://www.oecd.org/eco/- Source: Reprinted from Castro, Szenkman, and Lotitto 2015. growth/indicatorsofproductmarketregulationhomepage.htm, and OECD–World Bank Group Product Market Regulation database for LAC countries 2013–16, as of May 2018, https://datacatalog.worldbank.org/dataset/markets-and-competition-oecd-wbg-pmr- indicators-selected-lac-countries-2013-2016. 34  The level of concentration is only one indicator of the intensity of competition. Further analysis undertaken at specific stages of the supply chain would contribute to identifying specific barriers and constraints that might be affecting competition 80 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY with local suppliers in order to reorient the production Priority policy actions in trade, investment, and structure and integrate into GVCs or regional value competition can be complemented by improvements in chains. Second, services trade now represents 20 percent institutional resources and capacities. Key trade policy of global trade. Argentina can leverage comparative actions include lowering tariffs and NTMs in priority advantages in services to increase FDI and exports (for sectors, unilaterally reducing NTMs in input products, example, in knowledge-based service sectors). Unlike removing nonautomatic licenses to increase predictability, the goods sector, exports of services are already more and boosting regional integration agreements to increase diversified than in comparator countries—with 49.7 market access. Competition and trade authorities can percent of total service exports represented by information further coordinate to harmonize technical standards and communications technology (ICT), professional, with trade partners. To improve investment policy, and other services; 18.3 percent by transport; and 31.6 Argentina can revise the incentives framework, introduce percent by travel. Third, ICT tools can facilitate cross- effective policies to promote links with local suppliers, border e-commerce and the participation of smaller and and set up comprehensive regulatory improvement and new entrants in global markets by boosting their ability simplification mechanisms. Through cooperation among to reach a sufficient scale. Retail e-commerce in Argentina competition and investment promotion authorities, grew by 50 percent between 2010 and 2015, much faster the government can open up key sectors to investment. than in peer economies, but Argentina’s share in world To boost competition policy, Argentina can continue retail e-commerce is one-fifth that of Australia and Brazil. strengthening its anticartel enforcement, implement This points to untapped potential. the recently overhauled merger control framework, strengthen pro-competition sector regulation in key The gains from integrating into the global economy for sectors such as telecommunications and transport, and inclusive growth will depend on the degree to which implement competitive neutrality principles to ensure domestic markets encourage firms to operate efficiently that public and private operators compete on a level and price competitively. Ensuring that the gains from playing field. Each of the respective institutions for trade, trade opening are shared across the economy requires investment, and competition policy will need to be well that firms can enter, invest, compete, and have access to resourced, prioritize its engagements and actions, and competitively priced and high-quality inputs. Firms that achieve greater technical independence. already operate or seek to invest in Argentina have faced challenges across all four conditions, and the solutions Enhancing the capacity of firms to benefit to these challenges lie in all three policy areas (trade, from expanded markets investment, and competition) across the four conditions. No single policy can ensure that these conditions are For Argentina to successfully integrate into the global fulfilled and firms can integrate into the global economy. economy, as well as overcome external obstacles such Rather than sequencing reforms among policy areas, as trade barriers, changes within firms will be needed to this report suggests sequencing specific reform options improve productivity. Since 2006, the productivity of all within each policy area so as to advance in all three firms has fallen. Reversing this process will involve further areas simultaneously. If producers and retailers can reforms to improve the external conditions firms face. But exercise market power, they may fail to pass on reduced improving productivity also requires improvements within input costs to consumers. For example, in India, there is firms, including higher rates of technological transfer, ICT evidence that input tariff declines were offset by firms adoption, and innovation, as well as improvements in the raising markups by 11 percent, on average. Similar results managerial quality of Argentinian firms. have been found after Mexico’s tariff decline due to the North American Free Trade Agreement (De Loecker et al. New firms and entrepreneurs face significant barriers at all 2016; Robles Santamarina 2018). stages of the firm life cycle, preventing efficient reallocation ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 81 of resources from low-productivity to high-productivity publications in top journals and universities among the uses. Trade liberalization, the elimination of red tape, top 500 (OECD 2017a). Indicators of private innovative and continued efforts to improve the business climate, activity also lag significantly behind OECD comparator together with increased investment in infrastructure countries, with low business spending on R&D, no and new laws to promote competition and facilitate top 500 corporate R&D investors, and low patenting financing, are poised to pay off provided macroeconomic and trademark activity (OECD 2014). Facilitators of stabilization is achieved. For its income level, Argentina innovative entrepreneurship, such as sources of venture stands out for its poor performance in international capital and access to broadband Internet and other ICT surveys of the environment for conducting business: it infrastructure, are likewise scarce, as well as skills in ranks 92nd out of 137 countries in the GCI (Schwab and science and engineering where Argentina performs better Sala i Martin 2018) and 117th out of 190 countries in the than other Latin American countries but still far behind World Bank’s Doing Business Survey (World Bank 2018c). the average OECD country. Argentina performs close to The evidence also points to a lack of competition in input the OECD average on indicators of networks, clusters, markets as being particularly problematic: Argentina and transfers, including international coauthorship and ranks close to the bottom in the world in GCI pillars international coinvention. Building on these strengths, related to the efficiency of markets, both for final goods the innovation system will require more private sector– and services and for factors of production. In a 2017–18 financed innovation and better knowledge transfer World Bank survey of business owners and top managers, between academia and firms capable of commercializing the biggest obstacles to enterprise growth in Argentina new scientific and engineering breakthroughs. are reported as high tax rates, labor regulations, and political instability. However, the effects of barriers differ To take full advantage of R&D, Argentina should also by type of firm: larger firms perceive labor regulations, invest in complementary factors, such as physical, business licenses, and corruption as the worst obstacles human, and especially managerial capital. Argentina’s to doing business, whereas smaller firms perceive tax challenges with respect to human and physical capital rates, tax administration, and as well as access to finance are known, and are discussed in Chapter 3 and Section Creating the infrastructure to support growth, but the importance of managerial ability at the firm level is Argentina’s firms invest too little in innovation; creating often overlooked. Management quality has a dual impact an innovation ecosystem connecting researchers, on productivity: a direct effect through a more efficient businesses, and government will be essential to enhance use of factors of production and an indirect effect by their productivity and capacity to export. The country increasing the probability of innovating. Figure 2.44, invested 0.6 percent of GDP in research and development for example, shows the correlation between the impact (R&D) in 2014, higher than the average of regional peers of R&D on innovation and good management practices (0.5 percent) but much lower than the new HICs average across countries (Cirera and Maloney 2017). Argentina (1.3 percent) in improving productivity. The country’s lags with respect to best managerial practices, and this Science, Technology and Innovation system will have to negatively affects the efficiency of R&D and the scope play a crucial role. Forty percent of (formal) manufacturing of technological absorption. Also, it makes much more firms did not perform any innovation-related activity, challenging the creation of a vibrant export sector, where and only 13 percent of manufacturing firms have an firms face the challenge of developing and producing R&D department. Business investment in R&D is 0.06 products, and having marketing and distribution practices percent of GDP, and Argentina performs worse than the tailormade to capture new external markets. OECD average on competences to innovate and skills for innovation. Argentina falls below OECD average public There are success stories in Argentina. Firms have managed R&D spending as a percentage of GDP, as well as on to remain at the global frontier despite macroeconomic 82 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 2.44: Management practices and impact of R&D on innovation, 2015 20 10 New Zeland Ireland United Kingdom Singapur España Chile Efficiency of R&D USA Canada Australia Mexico Tanzania 0 Greece Colombia Nicaragua Mozambique Italy Polonia Ghana Sweden China Kenya Germany France Portugal Turquia Argentina Japan Nigeria Zambia Ethiopia -10 Brazil India Myanmar -20 0.0 0.5 1.0 1.5 Distance to manegerial frontier Source: Reprinted from Cirera and Maloney 2017, 81. Note: R&D = research and development. Box 2.2. Argentine wine: A case of export emergence Until the early 1990s the vast majority of wine production in Argentina was dedicated to the domestic mar- ket, and no wine was specifically adapted to be sold abroad. After knowledge of how to make New World wines spread throughout the sector, exports increased dramatically—rising from US$25 million in 1993 to US$806 million in 2017. (Figure B2.2.1 shows the increase in constant US$ 2010 million terms). During the same period the number of countries to which Argentina sold its wines rose from 45 in 1993 to 115 in 2008. By 2008, Argentina had become the tenth-largest exporter of wine in the world, capturing slightly over 2 percent of the world market. How did Argentina do it? Artopoulos, Friel, and Hallak (2014) find that export emergence can be distilled to two critical factors: Finding 1: Consistent exporters adopt a markedly different set of business practices. They also exhibit a common mindset about the importance of adopting these practices and a discourse that suggests that they are mutually complementary. Finding 2: An export pioneer, defined as the first individual to implement the set of export business practices outlined above, was also the first to become a consistent exporter. Export pioneers have a knowledge advantage about foreign markets to which they were previously exposed. In Argentina, the export pioneer was Nicolás Catena Zapata, the first Argentine wine producer to systemati- cally adopt the practices outlined above, achieving consistent sales of New World wines to developed coun- tries. His winery was also the only one to achieve unabated export growth to the OECD from 1994 to 2006. Catena Zapata had taken control of his family winery in 1963 while working toward a PhD in economics at Columbia University. He traveled back and forth from New York to Mendoza, the center of wine production in Argentina, on a regular basis during his studies. Catena Zapata’s efforts to develop a New World wine made in Argentina began after he returned from a three-year stay at the Department of Agriculture and Resource ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 83 Economics at U.C. Berkeley in the early 1980s, where he was a visiting professor. During this time, he visited wineries in Napa Valley, befriending winemakers who had developed and mastered New World winemaking techniques. One of the most important acquaintances he made was Robert Mondavi, one of the leaders of the New World wine revolution in California. According to Catena Zapata, his decision to undertake this transformation was not based on a detailed economic analysis of potential markets, but rather on a desire to emulate the success he had witnessed in the United States. Figure B2.2.1: Argentina: Wine Exports, In the 1990s, the Argentine economy underwent in US$ 2010 million, 1960-2016 economic liberalization reforms, enabling wi- neries to upgrade equipment allowing for New 800 World production techniques. Argentina’s soil is particularly well-suited to meeting a variety of demands in terms of taste because it can ac- 600 commodate up to 28 different grape varieties. However, despite conducive economic and geo- 400 graphical conditions, consistent exporters had to take the next step and adapt production tech- niques to the specific demand tastes and export 200 requirements of foreign markets. 0 Atropoulos, Friel, and Hallak (2014) affirm that export business practices are radically different 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 from those that prevail in the domestic market, Source: Data from United Nations Comtrade database, https://comtrade.un.org. which involve adapting products to foreign de- mand and establishing information channels to keep up to date about evolving patterns. Export business practices also require upgrading production processes to improve quality, complying with the requirements of foreign distributors such as rigorous expectations in terms of quality consistency and timely delivery, as well as other specific requirements like packaging and back-office procedures. Finally, export businesses need to establish and maintain long-term relationships with foreign distributors to secure up-to-date information about foreign markets. Policy implications: Artopoulos, Friel, and Hallak (2014) suggest that public policy that seeks to promote high-wage jobs should include export development policies that promote the diffusion of export business practices. Policy makers could, for example, promote conferences through business associations and edu- cational institutions designed to facilitate the transmission of explicit and tacit knowledge from emerging pioneers to potential followers. volatility and microeconomic distortions. Firms in the with knowledge-intensive sectors such as biotech. Box oilseed complex, for example, collectively became the 2.2 presents a case study of the emergence of Argentina’s first exporting sector of the country thanks to the adoption wine industry, which—despite the barriers to innovation of direct sowing techniques, and this complex is now a and growth documented above—has managed to become world leader in the field (see Penna and Lema 2003). In world class. addition, this led to the creation of new subsectors along the value chain, such as biodiesel, where Argentina is the The skills gap is not limited to managerial skills; it also top world exporter, and to the development of synergies affects the capacity of firms to efficiently fill vacancies 84 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY with the right profile of workers. According to a recent on different populations. Informality is a lot higher for Manpower Survey, 59 percent of firms have difficulty young, female, and low-skilled workers. finding the right skills to fill vacancies (OECD 2017a). The skills gap is wider in Argentina than in comparable Argentina’s firms have a big opportunity to take advantage countries—with 20.8 percent of the labor force having of an opening up of the economy to upgrade their tertiary education, compared with 32 percent in the products, technologies, and business processes. Because OECD, and only 12 percent of students in secondary the potential returns increase with the distance to the education enrolled in vocational programs, compared to frontier (see Griffith, Redding, and Van Reenen 2004), 25.8 percent in the OECD. Recent data from the unmet Argentina’s lackluster productivity performance opens the labor demand survey (Encuesta de Demanda Laboral door for large returns from innovation and technological Insatisfecha) reveals persistent shortfalls in the skills transfer investments. Given the large externalities required by firms when hiring, especially for operatives.35 involved, however, this is not a passive process where the Incentives to upskill in Argentina are also lower than opening up of the economy will naturally bring Argentina in other Latin America countries: earnings premiums to the global productivity frontier, but one that needs an for tertiary education are 48 percent compared with active commitment by public and private actors. First, 55 percent in the OECD and as high as 133 percent in there is a need for macroeconomic stability and policy Colombia and 105 percent in Mexico. predictability. Second, a reduction in government red tape (particularly to ease firm entry and the efficient exit The dual nature of the Argentine economy is a major of low productivity enterprises), getting rid of the barriers limitation for reaping the benefits of expanded market to competition, and over time reducing the burden of access. Alongside the highly productive clusters distortionary taxes36 are important for decreasing costs to described above lie a myriad of firms characterized facilitate business activity. Third, supportive government by their low dynamism and that need high levels of policies can help foster innovation and competition, and protection to survive. Many of these firms operate develop an export sector through policies that promote in the informal economy, limiting their ability to the diffusion of export business practices. Fourth, generate quality jobs and take advantage of improved deepening the financial sector with a larger variety of business conditions. These firms sometimes employ financial instruments will be required to allow firms a disproportionate share of the labor force, especially to benefit from opportunities to innovate and build on low-skilled workers, and any negative shock to them existing capabilities.37 Fifth, Argentina needs to ensure can have significant effects on the more vulnerable education and skills attainment compares well with the portions of the population. The inefficiencies of such best in the OECD from basic education onward to position firms, usually clustered in particular sectors, spread itself for high-wage, differentiated export production. to the rest of the economy through higher prices for key inputs, such as computer equipment, generating a vicious cycle of low productivity and low growth. The dual nature of the Argentine economy manifests itself in the extent of informality and the differential effects 35  In Argentina, the largest skill gap is for operatives (average 40 percent from 2010 to 2015), followed by professionals (36.8 percent), and finally technical labor (23.1 percent). In terms of years of experience, the largest gaps are for workers with no experience (36.5 percent), three to five years’ experience (32.3 percent), and one to two years’ experience (27.4 percent) (OECD 2017a). 36  Argentina comes in 169th in ease of paying taxes in the Doing Business 2018 rankings. 37  The capital markets law (Ley de Financiamiento Productivo) passed by Congress in May 2018 can contribute by fostering financial innovation. A growing Fintech sector offering new sources and methods of finance for small and medium enterprises, such as factoring and crowdfunding, together with new simpler corporate forms such as the Simplified Corporation (Sociedades por Acciones Simplificada, SAS), will be important complements for the innovation ecosystem. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 85 86 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY CHAPTER 3 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 87 TOWARD A MORE recovery in the first four years and a solid improvement since 2007, and the later slowdown of shared prosperity. INCLUSIVE SOCIETY As discussed previously, the slowdown reflects the fact that the rapid growth and poverty reduction in the first period came hand in hand with an unsustainable growth model that started to show its limits in the second period. Recent trends in poverty and shared prosperity—and the challenges ahead Although poverty was reduced in almost all the Latin American and Caribbean (LAC) countries, Argentina’s After the severe economic crisis at the turn of the 21st performance stood out in both phases—but for different century, Argentina experienced remarkable inequality and reasons. Argentina reduced poverty at a higher rate than poverty reduction since 2004, followed by a persistent other countries between 2004 and 2011, but at a slower slowdown of progress since 2011. Although the urban pace during the period 2011–16. For example, the poverty poverty rate and Gini index fell between 2004 and 2016 rate dropped by 17 percentage points in Argentina, 15.3 (from almost 26 percent to slightly below 8 percent and in Brazil, 11.6 in Chile, and 11.1 in Uruguay in the first from 0.48 to 0.42, respectively), two different phases can period, whereas it contracted by 1.1 percentage points in be clearly identified: (i) strong improvement in welfare Argentina, 3.9 in Brazil, 6.0 in Chile, and 2.2 in Uruguay levels and equality, which coincided with a strong recovery in the second period. This difference is related to shared up to 2011, and (ii) stagnant or slightly worsening welfare prosperity developments. Before 2011, Argentina was indicators with slower overall economic growth from 2011 among the best performers with incomes of the poorest to 2016 (figure 3.1 and figure 3.2).1 These dynamics reflect 40 percent of the population (the bottom 40) growing the significant improvement combining a fast postcrisis at almost 9.5 percent annually, and among the worst Figure 3.1: Poverty and inequality in urban Figure 3.2: Urban poverty (US$5.5 a day) by Argentina, 31 main cities, 2004-2016 region, 31 main cities, 2004-2016 45 0.52 50 40 40 45 0.50 40 35 30.3 35 30 25.9 0.48 Poverty rate (%) Gini Coefficient 30 25 0.46 25 20 0.482 20 15 0.44 15 8.9 7.8 10 10 0.42 5 0.424 5 0.423 0 0.40 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Gini Poor (official) Poor ($5.5 a day) NEA Patagonia NOA Cuyo Pampeana GBA Source: Data from SEDLAC (CEDLAS and World Bank), based on Encuesta Permanente de Source: Data from SEDLAC (CEDLAS and World Bank), based on Encuesta Permanente de Hogares–Continua (second semester). Hogares–Continua (second semester). Note: Because of comparability challenges, poverty rates are based on the US$5.50 a day Note: Because of comparability challenges, poverty rates are based on the US$5.50 a day poverty line (in 2011 PPP), which is closer to the current official extreme poverty line. poverty line (in 2011 PPP), which is closer to the current official extreme poverty line. 1  Welfare data are based on the Encuesta Permanente de Hogares survey that covers only the main urban areas (31 agglomerations), representative of only 63 percent of the total population of the country. See box 3.1 on the representativeness of the household survey and the implications for the excluded populations. 88 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY performers in 2011–16, when incomes of the bottom 40 76 percent, relative to the total population, the female and the average did not grow at all (figure 3.3). labor force participation rate has ceased to grow in the last fifteen years. As a result, it currently lags behind other LAC Welfare changes for the bottom 40 in 2004–11 were countries and is the second lowest among peer countries mainly driven by the recovery in labor incomes (figure (Gasparini and Marchionni 2017; Mateo Diaz and Rodriguez 3.4). Family incomes grew largely because of the positive Chamussy 2016). Fast economic growth, increased performance of labor income, particularly among the earnings, and expansion of social assistance might be poorest households, as well as a continued job creation behind this general slowdown (Gasparini and Marchionni after 2007. During this period, employment grew at 2017), but childcare difficulties and preference against a rate of 2.2 percent per year, driven by wage earners hiring women with children may also play a role.2 During primarily in large but also small firms (figure 3.5). This this period, the informality rate among wage employees increase of employment and shrinking of the skill wage was also reduced considerably as a result of both formal gap is associated with the commodity boom, which job creation and formalization of existing jobs (Bertranou, increased demand for low skill workers (Fernandez and Casanova, and Sarabia 2013; Maurizio 2014), but it Messina 2017; Messina and da Silva 2017), in addition stagnated at about one-third in the last few years. Despite to the recovery of idle capacity right after the crisis and this, the unconditional wage gap remained almost at the a consumption growth model with a macroeconomic same level during the whole period, and the conditional scheme that favored national firms (Beccaria, Esquivel, wage gap persisted (Paz 2013; Bertranou et al. 2014). and Maurizio 2005). Fast earnings growth also reflected the strengthening of labor market institutions (Lopez- In addition, government transfers became especially Calva and Lustig 2010; Gasparini and Lustig 2011). important for families in the lower deciles during 2004– 11 and, hence, contributed to extreme poverty reduction During this period since 2004, disadvantaged groups saw (Bustos and Villafañe 2011; Salvia, Tuñón, and Poy 2015). some improvements in their situation. Although female Pensions were an essential source of additional family employment grew faster than male employment and the income—in particular, among the vulnerable—because (uncontrolled) gender earnings gap narrowed from 68 to of the pension moratorium passed in 2005. Pension Figure 3.3: Annualized income growth for the average and the poorest 40 percent, Latin American countries a. 2004-2011 b. 2011-2016 14 14 BOL Annual growth in per capita income of the Annual growth in per capita income of the poorest 40 percent f the population (%) poorest 40 percent f the population (%) 12 12 10 ECU ARG 10 PAN 8 MEX URY 8 BRA 6 CHL 6 MEX CHL 4 4 COL PER SLV COL 2 MEX 2 URY ARG BRA 0 0 -4 -2 0 2 4 6 8 -4 -2 0 2 4 6 8 -2 -2 -4 -4 Annual growth in per capita income of the population (%) Annual growth in per capita income of the population (%) Source: Data from SEDLAC (CEDLAS and World Bank). Note: Argentina is marked in red. Regional peers are marked in orange. 2  Data from Latinobarómetro 2015, Online Data Bank (database). http://www.latinobarometro.org. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 89 Figure 3.4: Decomposition of per capita income growth per decile, by source of income a. 2004-2011 b. 2011-2016 18 18 16 16 14 14 12 12 Percentage Points Percentage Points 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Labor income (male) Public transfer Other incomes Labor income (male) Public transfer Other incomes Labor income (female) Capital income Implicit rent Labor income (female) Capital income Implicit rent Private transfer Pensions Total income Private transfer Pensions Total income Source: Data from SEDLAC (Cedlas and World Bank), based on Encuesta Permanente de Hogares–Continua. Figure 3.5: Labor market performance, 2004-2016 a. Employment growth (2011=100) b. Earnings growth (2011=100) 120 110 110 100 100 90 90 80 80 70 70 60 60 50 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Self-employment Public Sector Self-employment Public Sector Wage (Small firms) Wage (Large firms) Wage (Small firms) Wage (Large firms) Source: Data from SEDLAC (CEDLAS and World Bank), based on Encuesta Permanente de Hogares. coverage among the elderly increased, reaching almost program (launched to address the 2001/02 crisis) was 95 percent, and doubled from about 40 percent to 80 reversed with the creation of the Asignación Universal percent for those in the bottom quintile, giving generous por Hijo (AUH) in 2010,3 which reached 15 percent of starting pensions to new beneficiaries (Rofman and households by 2016. Olivieri 2012; Rofman, Apella, and Vezza 2015). The decline of families receiving social transfers following From 2011 to 2016, family incomes across the whole the phasing out of the Jefas y Jefes de Hogar Desocupados distribution stagnated, primarily because of a contraction 3  The AUH is a noncontributed cash transfer program for all families with school-age children in which neither parent is contributing to the social security program (informal workers, unemployed, or inactive). The conditional part of the transfer is based on children’s school attendance, medical checkups, and vaccinations, as well as pregnancy checkups. 90 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Box 3.1. More than a third of Argentines are excluded from poverty statistics Argentina is the only country in the region in which the survey used to measure poverty does not have na- tional coverage. The Encuesta Permanente de Hogares (EPH) is carried out in only 31 main urban areas and is representative of only 6.3 out of 10 residents. The EPH is an expanded labor force survey covering on a continuous basis the provincial capitals and cities above 100,000 inhabitants. Since 2010, other urban areas with population over 2,000 inhabitants (where a third of people live), are also sampled in the third quarter of the year. However, poverty estimates are not extended to this sample and this dataset is not yet available since 2014, so it is impossible to calculate the poverty rate for this group. In addition, although the rural population represents a relatively small fraction of the total population (9 percent, according to the 2010 Population, Household, and Housing Census), an urban-only household survey, even if the smaller urban areas were included, may underestimate national poverty: rural households are twice as likely to have at least one unsatisfied basic need (18.2 percent compared to 8.3 percent nationally). The exclusion of rural areas also means that certain vulnerable groups are systematically excluded: for example, there are proportionally twice as many indigenous people in rural areas. In addition, available datasets for urban areas (such as the EPH) do not include questions that would allow identifying indigenous peoples or afro-descendants. The Population Census is the only source of information to characterize both rural population and ethnic groups in terms of living standards (dwelling characteristics, education attain- ment, among others). Yet this source does not allow an assessment of whether they are more deprived in terms of incomes or employment than others in the population. in labor incomes compensated only partially by pensions Challenges ahead and public transfers (figure 3.4). The meagre 1.1 annual employment creation during this period was driven Despite the significant reduction over the last 15 years, mainly by public employment and self-employment, income poverty is still high in Argentina. The urban whereas wage employment in large firms remains poverty rate—measured at US$5.50 per capita per day in almost at the same level (figure 3.5). This slowdown in 2011 purchasing power parity (PPP)—is about 8 percent. job creation reflects the limitations of a demand-driven This upper-middle-income country poverty line is similar development strategy, in a context of less favorable terms to the official extreme poverty line, but significantly of trade than in the previous years, which resulted in the lower than the official poverty line. According to this last decline in labor productivity. Manufacturing contracted threshold, 3 out of 10 people would be considered poor by 6 percent between 2011 and 2016, and the main in the second semester of 2016. Poverty is concentrated employment gains came from the expansion of services regionally in three areas—the two northern regions and (including public sector) and commerce. Rising inflation Greater Buenos Aires—where about 70 percent of the poor also reduced the real value of wages (8.7 percent in the live. Additionally, its incidence is twice as high among five years over 2011–16), with the largest losses seen children aged 0 to 14, with one in four children classified among self-employed and small-firm wage employees as poor;4 and among recent migrants (see appendix B). (figure 3.5). Today, two million people live in informal settlements 4  Using national poverty lines, half of children are considered poor. The discrepancy arises because the national poverty line is significantly higher than the one used to make the international comparison. The $5.50-a-day line used in this present text is closer to the national extreme poverty line. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 91 lacking property rights and basic services, which contrasts of Buenos Aires (figure 3.7).5 In addition, children living with the emergence of enclosed neighborhoods where a in poor households are three times more likely to be out large portion of the rich live. Finally, of great concern is of school and live in households with no safely managed the extent of missing information on the living standards water or sanitation; and poor elderly people are two and of a large share of the population (box 3.1). a half times more likely to live in a precarious dwelling and without safely managed water and sanitation (see Access to basic services and resulting social outcomes are appendix B). determined by place of residence and family background, limiting intergenerational mobility. Access to education, Indigenous peoples (IPs) are particularly vulnerable. A health, and piped water or sewerage networks varies larger share of IPs lives in precarious slum-like conditions widely across provinces (figure 3.6). For example, the (24 percent) than do non-IPs (13 percent). In the cities, Northwest region has an average of 0.04 health centers 79 percent of IPs have access to water and 47 percent and 0.09 schools per 1,000 people, against the national to sewerage, compared to 84 percent and 53 percent, average of 0.14 and 0.19 per 1,000, respectively (World respectively, of non-IPs. IPs also lag behind non-IPs when Bank 2017a). Infant mortality declined at a faster rate it comes to access to health and education. Among IPs, 53 in poorer provinces than in richer ones, but coverage percent have some kind of health insurance, compared to for control and prevention of chronic diseases is still 64 percent of non-IPs. In education, although there are significantly better in richer provinces (World Bank no significant differences on average in school enrolment 2017d). Children under five in the poorest provinces in or attainment among IP and non-IP populations, starker the north, such as Formosa, are almost twice as likely gaps emerge for specific groups. For example, a rural to die, and maternal mortality rates in La Rioja and indigenous woman is considerably less likely to finalize Formosa are six to seven times higher than in the City primary or secondary school than a non-indigenous rural Figure 3.6: Access to services, living context and Figure 3.7: Maternal mortality (per 10,000 school attendance, and level of education, 2016 births) across provinces, 2013 100 12 90 10 80 8 70 60 6 50 4 40 2 30 20 0 Water Sanitation Non 3 to 5 yrs 14 to 18 yrs Adults with Catamarca Mendoza Argentina Santa Cruz Tierra del Fuego San Luis Jujuy Neuquén Córdoba Santiago del Estero Entre Ríos Santa Fe Buenos Aires Río negro La Pampa Chubut Misiones Chaco Corrientes Formosa Tucumán CABA Salta San Juan La Rioja precarious complete Acces to safely location School secondary managed attendence or above B40 Poor Total Source: Data from SEDLAC (CEDLAS and World Bank), based on Encuesta Permanente de Source: Ministerio de Salud, Argentina. Hogares–Continua. 5  Source: Data from Estadísticas Vitales. Dirección de Estadisticas e Información de Salud, Ministerio de Salud, Argentina. http://www.deis.msal. gov.ar/index.php/estadisticas-vitales/ 92 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY woman, and an urban non-indigenous woman is almost is not in employment, education, or training (NEET); and four times more likely to finish secondary school than a almost a quarter of women are NEET, one of the highest rural indigenous woman. rates among peer countries (figure 3.10). Within the country, these numbers are particularly worrisome among Labor informality is one of the main challenges today. the Partidos of Greater Buenos Aires, where 23 percent Accounting for about 30 percent of wage employees, of all young people and 28 percent of women are NEET. informality is still high, especially among less educated Associated with this higher incidence among women is women (figure 3.8). Except for Patagonia, more than half of the fact that the adolescent fertility rate (births per 1,000 women with less than complete secondary are informal, a women ages 15–19) is at 63.8, three times as high as in proportion that reaches 70 percent in the northern regions the OECD.7 Because many youth drop out of school before of the country. Informal wage earners not only have fewer finishing upper secondary levels, they lack the necessary perks but also earn lower salaries. The unconditional skills to secure a formal sector job and settle, instead, wage gap between formal and informal jobs was about 42 with informal unstable employment (De Hoyos, Rogers, percent in 2016, a difference that does not disappear even and Székely 2016). Indeed, among the youth with wage after controlling for relevant characteristics. employment, 56 percent are informal (figure 3.11). Labor market outcomes for women are particularly Going forward, the labor market needs to recover lost disappointing. At 46.6 percent, the female participation rate momentum as a force to reduce poverty and inequality. in Argentina is the third lowest among all peer countries, Employment rates, particularly among men and youth, and significantly lower than the average in Organisation ceased to grow and slightly declined since 2011. As for Economic Co-operation and Development (OECD) mentioned in chapters 1 and 2, Argentina requires not countries (54.2 percent). The participation gap between only more jobs but also growth in labor productivity. Two women and men is particularly large among less educated out of three jobs belong to low-productivity industries, in workers (31 percentage points), a difference that closes sectors such as social and personal services, restaurants to 9 percentage points for those who finished university and hotels, or construction (figure 3.11), in which the degrees. Significant levels of informality, especially among informality rate is high. less educated (figure 3.8); reduced opportunities to access better paying jobs; and limited access to affordable In the short run, the transition toward an outward-oriented childcare services are among the reasons behind this gap high-productivity model may bring about challenges for (Beccaria, Maurizio, and Vázquez 2017). Women earn less employment. Theoretically, the lowering of tariffs and than men, even controlling for a set of relevant variables.6 barriers to external competition will lead to a reallocation Women earn on average 34 percent less than men, and the of labor from less to more productive sectors with difference is driven by the fact that they are more typically consequent welfare gains at the aggregate level. Although employed in low-paying jobs (more informal, part-time, and conditions are different from the liberalizations of the in low-paid activities) as opposed to being paid differently 1990s (in terms of the speed of the process), Argentina’s for the same job (figure 3.9). past experience8 with opening the economy highlights the need to ensure that adequate social protection A large proportion of 15- to 24-year-olds are not employed policies are in place to ease the transition. Estimates for or in school, particularly affecting young girls and those in alternative opening models (considering the employment the poorest regions of the country. One in five young adults characteristics of affected sectors) suggest that, in the 6  Based on Mincer equations and Oaxaca Blinder decompositions. 7  Source: WDI based on United Nations Population Division, World Population Prospects. 8  On the distributional effects of liberalization of the 1990s in Argentina on employment, see Sánchez and Butler (2004); Porto (2008); Peluffo (2010); Acosta and Montes Rojas (2014); and Cruces, Porto, and M. Viollaz (2016). On skill premium, see Galiani and Sanguinetti (2003); Galiani ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 93 short run, skills mismatches may result in increased Figure 3.8: Informality rate among unemployment. Also, the wage skill premium might rise wage-employees, second semester 2016 because trade openness might affect labor-intensive 70 industries negatively but provide a premium to higher- value-added services. In addition, given the relatively 60 low level of formalization of both affected and expanding 50 sectors, there might be pressure toward informalization 40 (Lugo, Rodriguez Chamussy, and Viollaz 2018). 30 Beyond this, the demographic transition will increasingly 20 put pressure on the economy. Argentina is currently at a 10 very opportune stage of its demographic transition, yet 0 the country risks not taking full advantage of it. Both the Total Young SI or less SC and UI UC (aged 15 to 24) demographic and the economic dependency ratios are at a historical minimum. Until the aging period starts in the Female Male 2040s (when the dependency ratio9 starts to grow), it is Source: Calculations based on data from SEDLAC (CEDLAS and World Bank). Note: SI = secondary incomplete; SC = secondary complete; UI = university complete; UC necessary to ensure that the greatest portion of the active = university complete. population can generate savings. Estimates suggests that aging alone could represent a drag on growth of Figure up 3.8: to 0.2 Informality percentage rate in points among the next 30 years.10 Figure 3.9: Gender monthly labor income gap, wage-employees, second semester 2016 However, policy measures and socioeconomic forces contribution of characteristics and coefficients could 70 outweigh the demographic trends. Increasing 0.6 All workers Formal sector Informal sector female labor force participation to match that of men in 60 0.4 15 years would increase per capita growth on average by 50 0.2 1 percentage point per year in the next 15 years, and still reach 40 0.3 above the baseline after 30 years—more than 0.0 compensating 30 for the demographic effect. In addition, -0.2 increasing 20 the proportion of workers who contribute to -0.4 the social security system (which now stands at a third 10 -0.6 among wage employees), particularly among the youth, 0 be essential. will -0.8 Total Young SI or less SC and UI UC Characteristics Characteristics Characteristics Coefficients Coefficients Coefficients (aged 15 to 24) Technological change—which may be accelerated by Female Male trade openness—could deepen inequality in the medium and long run, unless accompanied by complementary Constant Selection (IMR) Region Sector Part time Informal sector Non-wage employee Public sector investments in human capital, institutional reforms, and Education Experience (age) Total gap public Source: policies. Calculations data from SEDLACwould Automation based on displace (CEDLAS and part of the World Bank). Source: Calculations based on data from Encuesta Permanente de Hogares–Continua 2016 Note: labor SI =force, secondary incomplete; SC =those particularly who secondary perform complete; routine UI = university tasks. complete; UC (second semester). = university complete. Note: The figure presents the results of Oaxaca-Blinder decomposition for three types of During the past 20 years in Argentina, as well as in other workers: formal sector, informal sector and all workers. and Porto (2010); and Falcone and Galeano (2017). For other countries in the region, the most relevant papers include Goldberg and Pavcnik (2003); Alemán-Castilla (2006); Menezes-Filho and Muendler (2011); Bosch, Goñi, and Maloney (2012); Paz (2014); and Dix-Carneiro and Kovak (2017). 9  The dependency ratio is defined as the ratio between the number of children and elderly (under 15 and over 65 years old) and the working-age population (aged 15 to 64). 10  Calculations based on Bloom et al. (2010), Instituto Nacional de Estadística y Censos, and UN Population estimates. 94 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 3.10: Share of youth (15-24) not in Figure 3.11: Private sector industries with low labor employment, education or training, circa 2016 productivity, share of the Gross Value Added at basic prices (GVAbp) and jobs creation, 2016 30 60 25 50 20 40 15 30 10 20 5 10 0 0 Partidos del GBA Pampeana Cuyo NOA Patagonia NEA Total Regional OECD New HICs CABA GVAbp Total Formal Informal Independent wage-earner wage-earner Domestic service Other social services Private health services Female Male Total Construction Hotels and restaurants Private education services Source: Calculations based on data from SEDLAC (CEDLAS and World Bank), based on Source: Calculations based on data from National Accounts. Encuesta Permanente de Hogares–Continua, and International Labour Organization. Note: Low-productivity industries are those whose labor productivity is lower than 66 percent of the average private sector in the economy. parts of the world (Eastern and Central Europe, Germany, model. Because the labor market represents the main Latin America, and the United States), technological source of incomes for the largest part of the population, change has been reflected in a shift from jobs that are positive employment dynamics—including an increasing highly intensive in routine manual (RM) tasks toward a formalization rate—are key for continued household greater intensity in cognitive tasks (figure 3.12) (Apella welfare increases. Ensuring that the population has and Zunino 2017). This new scenario may cause labor adequate levels of human capital is essential for job market polarization, with an increased demand for high- creation (World Bank 2013). Yet the sharp spatial and earning cognitive work as well as for low-earning non- socioeconomic differences in access and quality of routine-manual (NRM) occupations, accompanied by services limit Argentines’ ability to accumulate crucial a reduction in demand for routine tasks with medium assets needed for taking equal advantage of available earnings (figure 3.13). In this context, there is a clear opportunities and breaking with duality, as well as challenge for public policy associated with the need to for transitioning toward a more competitive economy. train and reassign low-skilled workers to tasks that are Behind these differences lie fragmented social service less susceptible to automation, that is, those that require systems, worsened by a federalist structure with an intensive use of creative and social intelligence. unequal capacity to deliver services and with limited compensation mechanism at the disposal of the state. As a result, investment in children and youth is deficient, undermining the chances for social mobility. In addition, Pathway 3: Releasing constraints to the excessive geographic concentration of economic productive inclusion prosperity means that opportunities in the lagging areas are scarce, and that agglomeration economies are not Argentina still faces challenges to ensure that everyone fully exploited. Finally, the relatively generous welfare is able to contribute and benefit from a successful system, more akin to those of OECD countries (although transition to a sustainable high-productivity/high-wage more heavily biased toward the elderly) is at odds with a ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 95 Figure 3.12: Intensity of the tasks performed Figure 3.13: Intensity of the task performed in a job, Argentina, 1998-2015 across deciles of hourly wage, Argentina, 2015 0.2 1.0 0.8 0.6 0.1 0.4 Task content index Task content index 0.2 0.0 0.0 -0.2 -0.4 -0.1 -0.6 -0.8 -0.2 -1.0 1998 2003 2015 1 2 3 4 5 6 7 8 9 10 Deciles of hourly wage Routine manual Routine cognitive Non-routine manual Routine manual Non-routine manual Non-routine cognitive (interpersonal) Non-routine cognitive (analytical) Routine cognitive Non-routine cognitive Source: Apella and Zunino (forthcoming), based on Occupational Information Network (O*NET) Source: Apella and Zunino (forthcoming), based on Occupational Information Network (O*NET) database, https://www.onetcenter.org/, and Encuesta Permanente de Hogares–Continua. database, https://www.onetcenter.org/, and Encuesta Permanente de Hogares–Continua. Note: Task content index measures the relative importance of a task performed by the Note: Task content index measures the relative importance of a task performed by the average worker in the economy. average worker in the economy. less progressive tax structure, typical of economies the relevant-age students do not finish secondary education middle class aspires to emulate. Despite its generosity, (World Bank 2015b), and the rate of enrolment falls the system might be neither sufficiently prepared to significantly after 15 years of age (particularly for boys) protect the losers of the transition nor cost-effectively (figure 3.15). Internationally comparable test score providing quality social services, particularly for children data show that Argentina underperforms relative to its and youth, to compensate for the prevailing gaps across peers both at the primary and secondary level. Almost groups and across the country. 4 out of 10 students have the lowest performance in reading tests by the third grade. By age 15, two-thirds of Investing in human capital children are not able to solve basic math problems, and half cannot interpret basic texts. The median Argentine In the short term, the underperformance in educational performs in mathematics at an equivalent of 2.5 years outcomes, despite the reasonably high spending levels, below the average of OECD countries (figure 3.14).11 may hinder the country’s ability to increase productivity More worrisome, test scores stagnated at the same time and respond to changing demands. Learning, much that spending was increasing, pointing toward increase more than attainment, has been found to be associated inefficiencies as well as to long-term effects in terms of with economic growth (Hanushek and Woessmann future incomes (World Bank 2015b). Estimates suggest 2008). Although coverage of formal education and that Argentina could raise its average growth rate by public expenditure (at 6 percent of gross domestic two-thirds if it were able to increase its cognitive skills product [GDP]) are high in Argentina, completion rates to match those in peer countries.12 remain low and quality is lagging. More than half of the 11  According to PISA scales: 41 points in mathematics are equivalent to having an additional year of formal education. 12  Calculations based on OECD (2010, 2018). OECD (2010) presents a model of economic growth on workers’ cognitive skills (C), years of schoo- ling (S) and initial GDP , estimated from the OECD countries database. Cognitive skills are proxied using the average PISA test score between math and science. The resulting equation is . This means that one standard deviation change (100 PISA points) raises annual growth rate of per capita GDP by 1.74 percentage points. Applying this model to Argentina assumes that the relationship between covariates and per capita growth is similar to the average of OECD countries. 96 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 3.14: Test scores in mathematics, 25th, 50th, and 75th percentiles, selected countries (OECD average in shaded area), Program for International Student Assessment 2012 (PISA) 700 650 600 550 500 450 400 350 300 PER QAT IDN COL BRA JOR TUN ARG ALB CRI MNE URY MEX MYS CHL THA KAZ ARE BGR TUR ROU SRB GRC HRV ISR HUN USA LTU SWE SVK RUS QRS ITA ESP PRT LVA NOR LUX OECD ISL GBR FRA SVN NZL CZE DNK IRL AUS AUT VNM POL DEU BEL CAN EST FIN NLD CHE JPN LIE MAC KOR TAP HKG SGP QCN 75th percentile 50th percentile 25th percentile Source: World Bank 2018b, based on PISA 2012. Note: The lines represent the interquartile range of test scores. Quality is deficient at all levels of the educational system, Finally, the education system does not adequately and early deficiencies accumulate over time. School prepare students for entering higher education or the readiness and early literacy skills are low, hampering labor market. Low completion rates reflect, in part, the children’s educational development in later years and fact that the secondary model has limited relevance perpetuating inequality across generations. Although given current skills needed, lowering the benefits of coverage of early childhood education (ECE) (ages remaining in school and restricting future insertion in 4–5) and the first cycle of primary education are high, high-productivity jobs. In addition, the limited quality quality remains low, as expressed in low test scores in of basic education has resulted in high school graduates early grades. Ensuring children are off to a good start by who are poorly prepared for higher education, which in improving school readiness and early literacy is key to turn translates into low completion rates and high time- create a strong platform for later years. to-degree indicators. Argentina ranks poorly among the countries in the region in terms of these two indicators In addition, access to quality education is highly unequal (World Bank 2018b). The rapid expansion of higher across socioeconomic groups and place of residence, education over the past 10–15 years disproportionately limiting mobility across generations. Students from benefitted students from the left-tail of the distribution. poorer backgrounds are six times more likely to have low However, many of these students are the first generation educational attainment in science than those from richer in their families to access higher education, are poorly backgrounds, a difference that is twice as high as in informed about higher education programs and returns, advanced economies (OECD 2017b). Of all Latin American and are particularly academically unprepared for countries, Argentina is the one in which the socioeconomic higher education, limiting the equalizing effects of the status of the family most influences learning outcomes expansion in coverage. Global evidence suggests that, in (Ferreira et al. 2013). Primary school students from a this context, the increased access might translate mostly poor background are over three times more likely to into poor completion rates and low—and in some cases perform below the basic standard in math than those even negative—returns to higher education. True equality from a richer background, and these differences worsen of opportunity requires not only improving access to as the child progresses in the educational system (figure tertiary education but also supporting strong remedial 3.16) (Ministerio de Educación y Deportes 2017). and developmental programs. Even more important and ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 97 Figure 3.15: Share of children who attend school, Figure 3.16: Share of students with below basic by age, 2016 knowledge in math, by socioeconomic status, 2016 100 70 90 60 80 50 70 40 60 30 50 40 20 30 10 20 0 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 6th grade of 2nd grade of 5th grade of Age primary secondary secondary Female Male Low SES Medium SES High SES Source: Calculations based on data from SEDLAC (CEDLAS and World Bank)/. Source: Ministerio de Educación y Deportes 2017. cost-effective would be to level the playing field in early In addition, enhancing the efficiency of the educational and basic education. system will call for reassessing the allocation of resources both at the macro (ministry) and micro (school) levels. At Improving learning will require a combination of the macro level, education policy should be progressively measures at all levels of the educational system. guided by evidence-based decision making to identify Improving the quality of ECE and early math and literacy cost-effective initiatives that should be scaled up or interventions could have a substantial effect on improved expanded (or not). This also requires a solid monitoring learning outcomes and completion rates later on. A and evaluation system, and strong management skills for more direct focus on learning calls for strengthening second-tier and intermediate government officials. At the teacher career and professional development, improving micro level, global evidence identifies school principals’ both in-service and pre-service training (including the management skills as a priority area of intervention. reorganization of thousands of atomized institutes into fewer high-quality centers with stringent standards) to Another area where Argentina needs to improve is attract the best candidates to the teaching career and in noncommunicable diseases (NCDs) and injuries, to motivate teachers to perform. Revamping secondary particularly among men, because they can limit further education by supporting a switch from a paradigm of increases in productivity. NCDs and injuries have become acquiring encyclopedic knowledge to one prioritizing the main burden of disease, potentially generating large critical basic cognitive skills and skills for the 21st productivity losses caused by worker absenteeism, century (including socioemotional skills) and rethinking disability, and premature death. Among men, 42 percent the role of universities would be critical to competing of all NCD deaths are among those under 70 years old in the economy of the future. This is the cornerstone of (whereas the proportion among women is 27 percent) the ongoing flagship reform of the secondary model in (figure 3.17). Significantly, more adult men than women Argentina, Secundaria 2030.13 are likely to be overweight, have high blood pressure, 13  See https://www.educ.ar/recursos/132104/marco-para-la-implementacion-de-la-escuela-secundaria-2030. The so-called Secundaria del futuro is to be based on a competence approach, comprising six basic competences: (i) problem solving; (ii) critical thinking; (iii) learning to learn; (iv) team cooperation; (v) communication, and (vi) commitment and responsibility. The document also includes achievement for objectives each cycle of schooling, and on project-based teaching and integration of areas and subjects as well as general guidelines for re-organization of learning, teaching, academic regime, and training and mentoring. Regarding teachers, the project promotes concentration of teaching hours in one school, more time for institutional planning and the creation of stable teaching teams. Implementation will be gradual, and each province will follow its own planning. 98 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 3.17: Proportion of NDC-related deaths Figure 3.18: Risk factors of noncommunicable under age 70, percent diseases, Argentina, circa 2015 60 50 Overweight among adults 40 Prevalence of smoking (aged 15 years and older) 30 Insufficient physical 20 activity among adults 10 Insufficient physical activity among school going adolescents (11-17 years old) 0 Female Male 0 20 40 60 80 100 Argentina Regional New HICs OECD Female Male Source: Data from World Health Organization. Note: New HICs = new high-income countries; OECD = Organization for Economic Source: Data from World Health Organization. Co-operation and Development. and smoke, despite being slightly more physically active differences in basic infrastructure services (such as water (figure 3.18). In addition, children are increasingly obese and sanitation), differences in health outcomes reflect and overweight,14 and Argentina now tops the regional the existence of a fragmented system in which those ranking for those under five.15 Yet a large share of the with access to the contributory social health insurance premature NCD burden can be prevented or controlled get more effective services, at least for prevention and through a reduction of common risk factors associated control of chronic diseases, than those who rely on the witho these diseases, such as unhealthy diets, physical public system. Given that access to different health inactivity, and tobacco use and alcohol abuse. Preventive systems is associated with labor market status, there is care is particularly deficient among the more vulnerable a strong relationship between socioeconomic status and population, who are more likely to be exclusively covered services provision: whereas two-thirds of the overall by the public health system. Those patients are less likely population have access to the contributory social or to have cervical cancer screening (60 percent compared private insurance systems, less than 30 percent of those to 72 percent of the rest of the population), receive in the poorest quintile do so.17 mammographs among women aged 50–70 (48 percent versus 66 percent), and have a high blood pressure Reducing these spatial and socioeconomic differences control test (71 percent versus 82 percent). A shift of in a federal country with a fragmented social system resources toward prevention and treatment of NCDs will might be achieved by creating incentive mechanisms to be required (World Bank 2017d).16 enhance coordination and harmonization of standards across providers, as well as by strengthening the existing Despite improvements in the past 15 years, there are large compensatory instruments. One such example is the inequalities in health outcomes across income levels, experience with the Plan Nacer/Sumar Program, whose migration status, and geographic location. In addition to objective was to improve health outcomes (particularly 14  Almost 40 percent of school-aged children is overweight or obese (Source: Programa Nacional de Salud Escolar 2016 (PROSANE), Ministry of Health), which is more than 15 percentage points higher than in OECD countries (Source: OECD 2015b). 15  Pan American Health Organization (PAHO)/WHO. 16  To address this issue, the Argentine government developed and initiated the implementation of the National Strategy for the Prevention and Control of NCDs and Injuries 2009. 17  Based on Encuesta Permanente de Hogares–Continua 2016 (Instituto Nacional de Estadística y Censos). ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 99 maternal mortality and child morbidity and mortality). Argentines report having an account at a bank or other The program implemented a public insurance strategy and type of financial institution, and that share is only 37 a pay-for-performance scheme in order to solve agency percent among those in the bottom 40.18 Although higher relationships between the Nation and the provinces, and than in other Latin American countries—such as Colombia, between the provinces and the health facility networks, in Mexico, or Perú—such access is still too low when turn. By means of such instruments, the idea was to align compared with new high-income countries (new HICs) the priorities of every involved institutional decision- where, on average, more than 70 percent of adults have maker and to generate incentives that operate on the an account (figure 3.19). In addition, although women teams of healthcare facilities.The impact evaluation of are more likely to access financial institutions than men the program showed that it reduced coverage gaps across (50 percent against 45 percent) and are equally likely provinces and improved health outcomes for vulnerable to borrow money through formal channels, 71 percent of pregnant women and children living in the poorest regions women say they would not be able to raise emergency of the country (Gertler, Giovagnoli, and Martinez 2014). funding, compared to 51 percent among men. The program was successful in increasing the use and quality of prenatal care services and the probability of Access to credit (including to mortgages) is scarce and receiving the tetanus vaccine. As a result, Plan Nacer varies largely depending on income, which reinforces beneficiaries have seen a reduction in the probability of existing inequalities. On average, 1 in 5 borrowed from a stillbirth by 26 percent and the probability of low birth a financial institution, whereas only 1 in 10 did so among weight by 7 percent. the bottom 40. 19 In addition, whereas poorer people tend to rely on personal loans and closed card systems Improving people’s access to markets issued by nonfinancial institutions, a high proportion of the credit taken by richer people is through a mortgage Access to financial services in Argentina is low, limiting (figure 3.20). As a result, the more well-off not only can people’s ability to accumulate assets. Less than half of borrow larger amounts of money and repay over a longer Figure 3.19: Account at a financial institution, Figure 3.20: Debt ratios and kind of credit percent of age 15+, 2017 contribution, by annual remuneration level, July 2015 to June 2016 100 25% 22.8 22.0 21.6 21.1 21.1 20.6 20.2 19.6 80 20% 17.8 60 15% 40 10% 20 5% 0 0% MEX PER COL ARG URY TUR BRA VEN CHL HUN CZE SVK MYS POL OED KOR 45-83 83-107 107-128 128-149 149-176 176-211 211-259 259-342 +342 Annual income range in thousand pesos Male Bottom 40 Top 60 Credit Cards-Closed System Personal Loans Mortagages Pledge Loans Credit Cards-Entities Others Debt-to-Income ratio Source: Data from Global Findex Database 2017, https://globalfindex.worldbank.org. Source: Reprinted from BCRA 2016. 18  Data from the Global Findex Database 2017, https://globalfindex.worldbank.org/. 19  Data from the Global Findex Database 2017, https://globalfindex.worldbank.org. 100 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY period but also pay lower interest rates. On average, only (metro) are high income, less well-off individuals tend to 7.8 percent of Argentines have outstanding mortgage use a combination of railway and buses. This is the result loans (and less than 5 percent of the bottom 40), limiting of the territorial coverage of each means of transport— families’ possibility of owning their own home. there are no subways outside the city of Buenos Aires—as well as its affordability. Subways are the most expensive Not only households but also firms face difficulties means, whereas trains are the cheapest. Because buses in obtaining finance, particularly small firms that and railways require more time than subways to cover the shoulder the brunt of employment and job creation. same distance, and given that jobs are scarcer in poorer Improving access to finance, particularly to small firms, areas, these users spend more time traveling, reducing is fundamental to increase the firms’ productivity. Yet, their spare time for other activities. according to the World Bank’s Enterprise Survey (2010), 15 percent of firms in Argentina identify access to finance Women in more vulnerable neighborhoods are specially as the biggest business environment obstacle, behind tax constrained in their use of public transportation because rates (19.6 percent); and 43.5 percent consider it a major of issues of security and social norms. Preliminary constraint compared to 28.4 percent for the LAC average results of a recent study carried out in Buenos Aires on and 26.5 percent for all other countries in the sample. women’s mobility barriers and facilitators show that, Among female-led firms, the proportion that consider in neighborhoods such as Villa 31 and Ejercito de los finance a major constraint is even higher, at 57 percent. Andes, security issues influenced women’s selection of Lack of finance is substantially worse for small business, public transport modes and time to travel, which led in and the reported gap between small and large firms is several occasions to longer travels. For example, because wider than that reported in LAC (one and a half times of insecurity, some buses that should be traveling inside higher) and all the countries in the sample (three and a the neighborhoods preferred to use alternative routes far half times higher). The differences in access to finance away from the predefined bus stops, increasing users’ across gender are stark: whereas 52 percent of firms exposure to additional security risks. In addition, social managed by a man have a bank loan or line of credit, only norms influence travel behaviors for women. Those with 25 percent of female-led firms do. Similarly, 15 percent young children prefer to work in their communities to be of investments in male-headed firms come from banks, closer to their children, limiting their options in terms compared to 4 percent of investments in firms with a of economic opportunities. Moreover, even when their female top manager. children reach adolescence, mothers prefer to stay near home to ensure their kids do not get involved in criminal People’s access to employment opportunities is also activities, which are more prevalent in these vulnerable constrained by transport efficiency. In Greater Buenos neighborhoods. Finally, the study shows that, even Aires, the average number of jobs per worker accessible if some of the barriers to increase women’s mobility within a one-hour commute depends on the level of depend of the transport sector, such as providing safe income: around richer downtown Buenos Aires it is and alternative forms of transportations, others need a significantly larger than in the Partidos of Greater multisectoral effort (such as childcare provision). Buenos Aires (Peralta Quirós and Mehndiratta 2014). This means that those living in one of the poorest areas Making cities livable, inclusive, and in Argentina have fewer job opportunities or need to productive spend more time traveling to have the same number of labor opportunities. The difference based on income is, Today, Argentina has a system of geographically diverse in part, related to the available means of transport across cities and persistent lagging regions where significant economic groups. Although most of the users of subway differences in access to basic services prevail. The ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 101 proportion of households with unmet basic needs 20 in the in housing and transportation policies. As a result, northern regions of the country is 15.9 percent compared growth opportunities are being lost: evidence indicates to a national average of 9.1 percent (INDEC 2010). The a negative and statistically significant effect of sprawl on past four decades have seen rapid convergence across economic density. A denser city would also reduce the cost provinces in the access to basic services such as safely of basic infrastructure provision, contributing to reduced managed sources of water but not in terms of sanitation. territorial disparities. In places such as the Metropolitan In the case of access to water, although households in Area of Buenos Aires (Area Metropolitana de Buenos the northeastern provinces (Chaco, Formosa, Santiago Aires, AMBA) or Santa Rosa, access to sewage network is del Estero) have the lowest proportions of coverage, that almost universal at the core of the agglomeration, but it coverage still reaches 75 percent compared to 99 percent is below 60 percent for the peri-urban areas (figure 3.22) in the city of Buenos Aires. In the case of sanitation, (Muzzini et al. 2017). The rise in the quantitative housing however, the coverage gap is particularly striking: less deficit between 2001 and 2010 has led to an increase than a fourth of households in provinces such as Chaco, of informal settlements. It is estimated that 17 percent Misiones, and Santiago del Estero are connected to a of the population lives in one of the 4,000 vulnerable sewer, another 60 percent have basic sanitation, leaving settlements in the country, mostly located in peri-urban between 9 and 21 percent of households with unimproved areas.22 Whereas barriers to housing finance have been sanitation services. In the remaining provinces, the latter a binding constraint over the past decades, Argentina figure is less than 6 percent. These conditions increase also faces supply-side constraints that limit access to families’ sanitary and environmental risks, worsening affordable housing. Finally, air pollution in cities such as their social vulnerability, and increasing their exposure to Buenos Aires (factors of six), Cordoba (factor of three) illnesses such as respiratory disease, diarrhea, and iron and Mendoza (factor of two) are a multiple of the World deficiency (World Bank 2017e). Health Organization’s recommended threshold (World Bank 2016a). The population growth in urban areas has not been accompanied by adequate investments in infrastructure Climate change and environmental degradation pose and services, leading to growing informal settlements, a growing challenge to Argentine cities. Urban flooding sprawl, congestion, pollution, and crime, all which is recurrent in AMBA, particularly for those living in the exacerbate social exclusion. Agglomerations in Argentina outskirts. A recent study estimates that 236,000 people have experienced high and increasing levels of sprawl, in the three main basins around AMBA cannot cover with the sprawl index21 increasing from 1.4 in 1990– the basic consumption basket of goods and services, 2001 to 2.3 in 2001–10 (figure 3.21). In many cases, this making them highly vulnerable to impacts of flooding has resulted in low-density, fragmented, and spatially (CABA 2013). The recurrent flooding in the Autonomous segregated cities, characterized by isolated high- City of Buenos Aires (CABA) has a negative impact on income gated communities and low-income informal the livelihood of its 3 million inhabitants and its more settlements marginalized in the city’s peri-urban areas. than 2 million daily commuters—who come to the city to The spatial inequality that arises is reinforced by failures work, study, and access health institutions. Disruption 20  These are households meeting at least one of the following criteria: (1) precarious housing; (2) no access to private toilet in their dwelling; (3) living in conditions of overcrowding; (4) at least one child between ages 6 and 12 does not go to school; and(5) t he household head did not finish primary school and there is a ratio of four to one per employed member (INDEC 2010). 21  The sprawl index measures the increase in the built-up area relative to a benchmark where the urban built-up area would have increased in line with population growth. In Argentina, this is measured in 26 agglomerations. The sprawl index is equal to zero when both population and the urban built-up area are stable over time. It is greater (or smaller) than zero when the growth of the urban built-up area is greater (or smaller) than the growth of population, that is, the city density has decreased (or increased). 22  Refers to Barrios Populares, defined by the government as at least 8 families grouped, where more than half of the population does not have the land title or regular access to two or more basic services (water network, electrical network with meter and/or sewerage network). Relevamiento Nacional de Barrios Populares. December 2016. Jefatura de Gabinete de Ministros. http://datos.gob.ar/dataset/barrios-populares-argentina 102 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 3.21: Sprawl and agglomeration economies 6 Below-average economic density, Above-average economy density, above-average sprawl index Catamarca above-average sprawl index 5 Jujuy Rawson San Juan 4 Metropolitan Sprawl index, 2001-10 San Luis Santa Fe Buenos Aires Sgo. del Estero La Plata 3 La Rioja Bahia Blanca C. Rivadavia Rosario Formosa Mendoza 2 Paraná Resistencia Santa Rosa Tucumán Cordoba 1 Salta Neuquén Viedma 0 Below-average economic density, Posadas Above-average economy density, Corrientes below-average sprawl index below-average sprawl index -1 9.0 9.2 9.4 9.6 9.8 10.0 10.2 10.4 10.6 10.8 11.0 Economic density, estimate of GDP/km2 (logs) based on NTL, 2010 Source: Reprinted from Muzzini et al. 2017. of transportation systems23 has a considerable negative Lack of integrated planning in urban areas has prevented impact particularly on the livelihood of those living in efficient and sustainable urban growth, limiting the the outskirts (an estimated 47 percent of all commuters potential of cities to contribute to the country’s long- belong to the lower quintiles of income). Over time, many term prosperity. Although in development, a national natural runoff systems have been covered up or “tubed” framework to guide urban development does not yet exist.24 and are now blocked, increasing the risk of flooding. Provincial governments usually have weak regulatory The combination of urban flooding and riverine flooding frameworks to oversee municipal land use planning. increases the risk manifold. In recent years, more than Municipalities are responsible for land use planning, but 200 housing developments have been built in the they typically do not use all available planning tools to floodplains of the Parana Delta near Buenos Aires. These guide development of their territory partly because many constructions prevent the natural runoff of water that of them lack capacity or incentives to update land use would cushion the impact of floods, increasing the risk of regulations. The limited responsibilities delegated by urban flooding in the metropolitan area. provinces to municipalities often prevent municipalities from integrating land use planning with transport Solid waste management is also an important problem, systems and from carrying out long-term planning for with approximately 4 million inhabitants without regular public works, for which responsibilities are fragmented collection services, particularly in slums (14.3 percent not across tiers of governments. Successful urban policies are covered). Open dumps remain the most common mode of typically integrative of a wide range of sectors. Integrated disposal in Argentina, particularly in poorer communities: planning across different sectors is critical to (i) ensure nearly 90 percent of the municipalities dispose of waste that investments have a greater impact at the city level, in open or semicontrolled dumps without adequate enhancing inclusive economic growth; (ii) optimize sanitary controls (World Bank 2016a). scarce resources to ensure that long-term objectives 23  In April 2013, CABA experienced one of the heaviest storms recorded in nearly 50 years, resulting in key transportation routes being submerged and mass-transit system shutdowns. Power outages lasted for as long as 15 hours in many neighborhoods and up to several days in a few others. Direct damages and losses of this event amounted to US$300 million. In addition, fiscal impacts (subsidies and tax exemptions) of severe weather events are important—the events recorded in April 2012 and April 2013 were estimated to result in a US$49 million budget impact. Logistics disrup- tions also had a negative impact on the overall economy. 24  The government of Argentina is currently working on the “Política Nacional Urbana y del Hábitat” but has not yet implemented it. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 103 Figure 3.22: Access to sewerage network: core income and the disposable income in Argentina is larger urban areas vs. periphery, 2013, percent than countries such as Chile, Mexico, the Republic of Korea, or Turkey, but still lower than most OECD countries Above-average economy density, Santiago del Estero (figure 3.23).26 above-average San Miguel de Tucumán sprawl index olitan Santa Rosa The large redistributive capacity is mostly due to a strong aires San Salvador de Jujuy social transfer system (especially pensions), in a context San Juan San Fernando del of limited labor policies, regressive energy subsidies, and Valle de catamarca low direct taxation relative to peers. Argentina’s social Mendoza Above-average La Plata security system is a combination of contributory and economy density, below-average Cordoba noncontributory systems. Pensions, family allowance, and sprawl index Metropolitan Buenos Aires unemployment insurance are partially funded through 6 10.8 11.0 0 25 50 75 100 payroll contributions (from employees and employers), Porcentage of population with acces to sewerage system 2010 Core Periphery although general revenues are often needed to cover Source: Reprinted from Muzzini et al. 2017. the deficit. The reforms since the mid-2000s toward the extension of benefits to the uncovered population through the noncontributory family allowances (AUH), the two and sequencing are coordinated across sectors; and (iii) pension fund moratoria, and the new noncontributory optimize impacts on poverty and inequality. Enhancing pension represent an increasing burden to the system.27 coordination of urban policies at the municipal and Yet these transfers substantially reduce poverty and metropolitan levels and promoting sustainable growth inequality, even to a larger extent than other countries in through improved housing policies and urban mobility the region. Unemployment benefits play a small role in will be essential to improve the livelihoods of the urban reducing poverty and inequality because their coverage poor. A more equal provision of basic services such as is limited (about one-tenth of unemployed, mostly water, wastewater infrastructure, and drainage would nonvulnerable), and the benefit is low. Subsidies to require widening and strengthening the financing energy consumption and transfers remain sizeable and options, such as developing clear mechanisms to set regressive -more than half go to the richest quintiles. Yet, up a transparent system of fiscal transfers to provinces recent reforms toward reducing these subsidies while (with an opportunity, for example to design them with creating a social tariff to protect the most vulnerable “performance based” criteria) (Muzzini et al. 2017).25 should eventually improve its incidence, although this might not be immediate (Lakner et al. 2014; Puig and Strengthening social protection for a Salinardi 2015; Giuliano et al. 2018). Direct taxes are more inclusive society close to the average of regional peers but significantly lower than OECD countries. An extremely high-income Argentina’s fiscal system is one of the most redistributive tax threshold (at five times the average income) and low among developing countries and some new HICs. The levels of compliances, combined with a poorly progressive difference in the Gini coefficient between the market social security system with high contributions (at 35 25  This is key in the AMBA context, where managing water within administrative boundaries of municipalities often impedes a more integrated management of water considering the basin, and ignores the upstream–downstream links. This requires better institutional coordination (concept of integrated urban water management). 26  Lustig (2017) and OECD (2017a) both present international comparable estimates of the size of redistribution, and in most cases the rankings are similar. 27  The pension fund moratoria allowed workers with insufficient years of contribution to declare their work history in the informal sector, but gain access to a pension that includes a penalty related to the noncontributed years. In 2016, a universal noncontributory pension system was installed to avoid the need for future moratoria. The pension received is equivalent to 80 percent of the minimum contributory pension benefit. 104 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 3.23: Redistribution: Reduction in the Gini coefficient through taxes and transfers, latest available year, percentage points 30 25 Percentage points 20 15 10 5 0 MEX TUR CHL KOR ISR CHE USA CAN ISL AUS LVA EST ARG NLD OECD LTU NOR SVK SWE POL HUN GBR ESP DNK ITA CZE LUX FRA SVN PRT DEU AUT BEL GRC FIN IRL Source: Reprinted from OECD 2017a. percent) in a context of high informality, result in a limited co-responsibilities, and the existence of nontraditional redistributive impact of direct taxation (OECD 2017a). household arrangements—that might disproportionally affect those that are most excluded in the society Noncontributory transfers (especially AUH) play an (Davolos and Beccaria 2017). Larger efforts are needed to important role protecting the most vulnerable, but 0.5 solve administrative problems and to better understand million children out of 13 million are still excluded from the socioeconomic situation of uncovered households to the benefit. Conceived to universalize the allowances better design policies to close the gap. to families that do not contribute to the formal system, the AUH turns out to be effective in reaching the most Because of the limited and weak policies directed to central vulnerable, with no substantial negative impact on labor ages, the social protection system might be insufficiently participation.28 With a fiscal cost of approximately 0.5 prepared to deal with the transition to an outward high- percent of GDP (one of the highest in LAC), the AUH reaches productivity model. Active labor policies remain limited, 3.9 million children and distributes over 80 percent of its and spending on these programs is well below the OECD transfers to the bottom 40 percent of families (Cetrángolo average (0.05 percent compared to 0.15 percent of GDP). et al. 2017). Given the size of the transfer (equivalent to The unemployment insurance is the main instrument a child’s food basket), AUH is insufficient to lift families available to help cope with the loss of employment. Yet out of poverty—only a tenth of beneficiary families have it has limited coverage, particularly for workers in sectors been able to do it.29 In addition, 4 percent of all children that are likely to lose, where formality is low and, even if are currently not covered by either the contributive or those workers are covered, their benefit is lower to those the noncontributory family allowance system. Coverage in other sectors because of the lack of indexation of their gaps are due to different factors—including delays or incomes. Active labor market policies (ALMPs), conversely, lack of necessary documentation, the noncompliance of have the potential to help retrain and reallocate (through 28  Maurizio and Monsalvo (2017) do not find any significant effect of receiving AUH on labor force participation or hours worked. Conversely, Garganta and Gasparini (2017) do find a positive impact on wages of informal workers and a small negative impact on hours worked, particularly among vulnerable women (primarily secondary workers), but the effect, while significant, is not large. Yet the authors find evidence of a significant disincentive to formalization of new workers but no informalization of current formal employees. Both studies use nonexperimental techniques given that no randomization of the program was done. They differ, however in the control group use, with the former potentially underestimating the impact and the latter overestimating them. 29  Estimates suggest that an additional 2.4 percent of GDP would be needed to lift the recipient families out of poverty (official definition) and another 0.85 percent for the poor nonrecipients. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 105 intermediation services) some of those affected by the Finally, pensions are fundamental for protecting the shift. In the last years, ALMPs have shifted toward the income of the elderly population, but pension spending provision of training and intermediation services against is large and the demographic change will put additional direct employment. Examples include Red de Oficinas de pressure on its fiscal sustainability, maintaining coverage empleo, Programa Jóvenes con Más y Mejor Trabajo (both and adequacy. It is estimated that two-thirds of the from the Ministry of Labor), and PROGRESAR (from the pension moratorium goes to the poorest three deciles of social security administration, ANSES).30 Nevertheless, the the income distribution (OECD 2017a). Yet, with more than absence of a single institution to oversee and coordinate 11 percent of GDP going to the pension system, Argentina these ALMPs, as seen elsewhere in LAC, becomes more spends a higher proportion of its social public spending evident in a landscape where private training providers on the elderly than do its peers, resulting in differential coexist with training centers run by trade unions or gaps between the life cycle deficit curves and the net directly provided by governments at different levels of public transfers (figure 3.24 and figure 3.25). This is the public administration. The incidence of the private sector result of a high level of coverage, as well as of pension in labor intermediation is even more pronounced than in benefit levels that are above its peers. The demographic the case of training. The profit-seeking nature of these transition process toward an older population will put (nonpolicy) actions imposes additional barriers (search pressure on the social security and health/long-term costs) to labor mobility. care system for the elderly and its fiscal sustainability. Currently, older adults benefit much more than do children Enhancing interinstitutional coordination of ALMPs will from net per capita public transfers; however, the family be essential to prevent low coverage and administrative allowance program means that this imbalance is much inefficiency given by the multiplicity of institutions less than exists in other countries (figure 3.26). Estimates, implementing these programs. In addition, a consolidation based on National Transfer Accounts calculated for 2010, of a national labor training policy would facilitate national indicate that future pension expenditure is projected to surveys of employment demand providing systematic reach 15 percent of GDP by the 2050s (figure 3.27). information on what skills businesses need and on the relevance of socioemotional skills both for the more A pension reform that ensures inclusion and equity, while employable population and for those most difficult to place balancing the fiscal burden, will not be straightforward. (such as young people who are not studying or working). One option would be to consider a system that combines It would also enable curricula and skills certification to a universal noncontributory scheme, which provides a be demand-oriented. Although such interventions are basic benefit to all senior citizens who do not reach the not a panacea, they are often more effective when they minimum required contributions, with a contributory combine the various components of such programs pillar proportional to the number of years of contributions (classroom training, internships, development of social and labor income level. On top of these, a voluntary and emotional skills, and so on) (World Bank 2013). In scheme can also reduce the burden to the system terms of intermediation, the use of digital technologies while incentivizing savings. Other reforms include the may reduce costs because of both competence and flexibilization of the retirement age to generate financial length of search periods for open vacancies. It is incentives that motivate the delay ofretirement, even unclear, however, whether these technologies may have more among those workers with higher productivity. As a differential impact along the whole range of labor an important step, Congress passed an adjustment to the qualifications (higher for more qualified workers). current indexation scheme in December 2017. 30  Recent reviews on ALMPs in Latin American countries show that they are particularly effective in increasing formalization, whereas results on increasing the probability of employment or higher earnings are more mixed. Retraining tends to be more effective than help with job search or private sector employment incentives. Results are also better when directed to youth thanton older workers (Escudero et al. 2016; Busso et al. 2017; McKenzie 2017). 106 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 3.24: National poverty incidence by age Figure 3.25: Public pension expenditure relative group, before and after transfer program, percent to peers, percent of GDP 70 15 60 12 50 40 9 30 6 20 3 10 0 0 0 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 to 44 45 to 49 50 to 54 55 to 59 60 to 64 65 to 69 70 to 74 75 to 79 Slovak Republic Argentina Brazil Venezuela Poland Hungary Czech Republic Turkey OECD Uruguay Chile Mexico Colombia Republic of Korea +80 w/o Pensions, AF, UI, PLM, AUH w/o AF, UI, PLM, AUH w/o UI, PLM, AUH w/o PLM, AUH w/o AUH official poverty Sources: Calculations based on data from SEDLAC (CEDLAS and World Bank), http://www.ced- Sources: Data for Argentina, Brazil, Chile, Colombia, Mexico, and Uruguay: Ministry of Finance. las.econo.unlp.edu.ar/wp/en/estadisticas/sedlac/, Encuesta Permanente de Hogares–Conti- Argentina includes provincial expenditure. Rest of the countries from OECD 2015a. nua 2016, extending Rofman and Apella 2015. Notes: Poverty rates are calculated excluding each transfer, in a cumulative manner. AF = family allowance; AUH = Universal child benefit; PLM = pension lower than the minimum; UI = unemployment insurance. Figure 3.26: Ratio of net per capita public Figure 3.27: Projection of total expenditure on transfers between older adults and children retirement benefits and pensions, 2010-2100, in percent of GDP 25% Brazil (2002) Chile (1997) Costa Rica (2004) 20% Uruguay (2013) Peru (2007) 15% Sweden (2003) Argentina (2010) Hungary (2005) 10% Spain (2000) Slovenia (2004) 5% Mexico (2004) Finland (2004) Japan (2004) 0% 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100 United States (2003) South Korea (2000) Taiwan (1998) Maintaining coverage Purely contribution 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Source: Rofman and Apella 2015, using United Nations Population Division data. Note: Projections are based on the estimation of National Transfer Accounts for 2010, when public expenditure on pensions had reached 9.1 percent, which is several points below current estimates. Hence, the figure should be taken to represent pension spending trends, Source: Comelatto (2015). rather than levels. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 107 Creating social capital to curb crime and rise, negatively affecting women’s opportunities for violence development. The latest Victimization Survey (INDEC 2018) provides some sex-disaggregated data, showing Homicide rates remain low relative to the region, but that men and women report similar levels of having the incidence of crime is among the highest. Citizens’ been victims of nonviolent crime, whereas more women security remains a high priority for citizens and (12.7 percent) than men (9.3 percent) report having governments at national and provincial levels. At 6.5 been victims of violent crime. In terms of perceptions, homicides per 100,000 inhabitants, the homicide 85 percent of Argentines declare that insecurity in their rate is one of the lowest in LAC”—the rate is about 26 cities is a serious or very serious problem (particularly homicides per 100,000 in Brazil and Mexico—but it is among women), and less than half feel safe walking three times higher than in new HICs and OECD countries around their own neighborhood. Importantly, about 45 (2.7 and 2.0 per 100,000, respectively).31 Conversely, percent believe that insecurity has worsened where they Argentina’s proportion of people affected by any sort of live. crime (included assault, attack, or other crime) is one of the highest in the region. Whereas on average the Among factors that affect people’s increased sense of victimization rate in LAC is about 43 percent, it reaches insecurity is the fact that the identification of drug-selling 47.1 percent in Argentina (Jaitman 2017).32 Young men points increased considerably during the period 2010– particularly bear a disproportionate share of the risk 15.33 The percentage of people who answer that drugs are of committing crimes, with important repercussions sold in their neighborhood rose from 30.2 percent in 2010 for their life trajectories and society as a whole (INDEC to 46.8 percent in 2015. Even though this pattern was 2017). Violence against women and girls is on the observed across different types of neighborhoods, the Box 3.2. Ni una menos Ni una menos means “Not one [woman] less” in Spanish and comes from a phrase coined by the Mexican poet and activist Susana Chávez in 1995—“Ni una muerta más”—used during protests against female homi- cides in Ciudad Juárez. Chávez was assassinated in 2011, and the phrase became a symbol of struggle. In Argentina, the Ni Una Menos movement began in 2015 to protest GBV and stop femicides (see www. niunamenos.com.ar). The movement was started by a group of Argentine female artists, journalists, and aca- demics, and spread across Latin America. A May 2015 protest became massive when Chiara Paez (14) was found, beaten to death and a few weeks pregnant, buried under her boyfriend’s house. By June, the request for female safety was present in huge demonstrations in front of the Argentine Congress. Following this, street demonstrations also sprang up in other countries in the region—such as Bolivia, Chile, El Salvador, Guatemala, Mexico, Paraguay, Peru, and Uruguay—and in Spain, giving the movement a greater internatio- nal momentum. Ni una menos was able to establish in public and political agendas themes such as femicide, gender gaps and roles, harassment, legality of abortion, and sex worker and transgender rights. 31  Data from the United Nations Office on Drug and Crime, http://www.unodc.org. 32  The victimization rate is defined as the percentage of the population that claim to have been assaulted, attacked, or the victim of a crime in the past 12 months. 33  Bonfiglio, Rival, and Rodríguez Espínola (2016) based on Encuesta de la Deuda Social Argentina, UCA. 108 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY rate grew faster in slums and low-income neighborhoods. main obstacles to removing themselves from the situation Whereas the prevalence was about 25 percent in high- is lack of economic autonomy: often their only source of class neighborhoods, it reached 80 percent and 65 economic support is the perpetrator himself. For example, percent in the informal settlements and vulnerable half of the women who reported living in a relationship neighborhoods, respectively. in which violence is prevalent did not work or have any source of independent income.38 Box 3.2 summarizes Conversely, the majority of crimes are not reported to the the recent Ni una menos movement to protest GBV in authorities mainly because of public mistrust.34 About Argentina. two out of three crimes against people were not reported, and half of them were not reported because victims Different institutions collect data on GBV; however, there do not trust authorities. Among those who reported a is an important challenge in integrating and harmonizing crime, more than half are unsatisfied with the way the the information, and the reporting rates are presumed to authorities handled the report. Most often, the victim be underestimated. Institutions that collect data include felt that authorities were not sufficiently interested in the Supreme Court of Justice, the police, the Observatory the case. Four out of five people believe that protection of Femicide “Adriana Marisel Zambrano,” and the against crime is not ensured or, at least, not satisfactorily National Institute of Statistics and Censuses. There are (Latinobarómetro 2015), which is more than ten points several challenges in collecting accurate and complete higher than in countries such as Brazil, Colombia, or data on GBV. Under-reporting is a serious issue: many Colombia. sources of information on GBV depend on the reporting of the episode, which may not occur because of the Although data on gender-based violence (GBV) are scarce, victim’s lack of confidence, economic autonomy, trust in the few available figures show an alarming situation, authorities, or knowledge about reporting processes.39 mainly for women who lack economic autonomy.35 In its From the service providers’ side, problems include the first two years of operation (2013–14), the free phone lack of knowledge and clear protocols on accounting line created to provide information, orientation, and for what activities constitute an act of violence, and support to women victims of GBV received more than harmonized variables and institutional coordination that 60 thousand calls. In 2016, about 100,000 cases of would allow for a more systematic, integrated collection GBV were registered, and in most cases (98.4 percent) of data at a national level. the perpetrator was the partner.36 In fact, the Argentine Supreme Court reported 254 victims of femicide, of whom 164 were killed by their partner or ex-partner in 2016.37 An overwhelming majority of cases of GBV are related to domestic violence and to repeated situations of violence already registered in the system. Women survivors of intimate partner violence find that one of the 34  People are considered crime victims when they have been victims of a violent theft, pickpocketing, fraud, bank fraud, physical aggression, threat, sexual harassment, or was asked for a bribe by a public agent (INDEC 2017). 35  The UN Declaration on the Elimination of Violence against Women (1993) defines GBV as any act that “results in, or is likely to result in, physical, sexual or psychological harm or suffering to women, including threats of such acts, coercion or arbitrary deprivations of liberty, whether occurring in public or in private life.” As it generally impacts more negatively on women and girls, “GBV” is often used interchangeably with the term "Violence against Women" (VAW). 36  National Action Plan for Prevention, Assistance and Eradication of Gender-Based Violence for Argentina 2017–2019. 37  The 254 registered femicides in Argentina compare to 34 in Chile; and the 164 murders by an intimate partner compare to 122 in Colombia, 16 in Uruguay, and 30 in Spain. See ECLAC, https://oig.cepal.org/es/indicadores/muerte-mujeres-ocasionada-su-pareja-o-ex-pareja-intima. 38  National Action Plan for Prevention, Assistance and Eradication of Gender Based Violence for Argentina 2017–2019. 39  Frequently, the violence module of the standard Demographic and Health Surveys measures the prevalence of GBV, and can be used to bench- mark across countries and regions. In the case of Argentina, this instrument has not been used. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 109 110 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY CHAPTER 4 Image from Uri Gordon. National Secretary of Environment and Sustainable Development. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 111 SUSTAINABILITY AND a threat to the sustainability of the development model the country has followed. Soil-degrading agricultural INVESTING IN NATURAL practices, overexploitation of fish resources, water CAPITAL degradation, and pollution are putting at risk productive assets and affecting people’s quality of life. Deforestation and habitat fragmentation are driving loss of biodiversity and reducing forest resources at alarming rates; intensive agricultural practices risk depleting soils; pollution of air Overview of challenges and and water threaten human health; ineffective solid waste institutional context management affects quality of life; increased frequency and intensity of climate impacts pose severe risks by This Systematic Country Diagnostic (SCD) stresses accentuating the effects of ecosystem degradation such the importance of fiscal, environmental, and social as floods and severe droughts; and pollution due to sustainability aspects of Argentina’s growth and poverty untreated effluents, groundwater depletion in water reduction efforts. Achieving the twin goals of reduced stressed areas, or impacts from glacial retraction are poverty and shared prosperity in the short term, but at degrading water resources. Furthermore, an adequate the cost of sacrificing those same goals in the future, is Environmental Impact Assessment (EIA) framework with a trade-off Argentina does not want to make. Therefore, minimum standards at the national level is missing and sustainability analysis must reconcile the short and the capacities to mitigate risks from investments are weak. long term, and must take into consideration both current and future generations. Fiscal and social sustainability The federal system imposes complexities in natural have been at the core of the discussion on the growth and capital management. Management of natural resources inclusion pathways. This chapter identifies natural capital in Argentina takes place within a complex legal and as a key driver of sustainability in the efforts to achieve institutional architecture. Provinces retain sovereignty the twin goals over the longer term. It focuses on three over the management of natural resources in their key sets of issues: (i) management of natural capital; (ii) territories and over enforcement, and the role of the achieving climate smart development; and (iii) addressing federal government is to inform decision making by diseconomies originating from pollution. As will be shown proposing guidelines and standards for provincial level in the next pages, the three defining characteristics set policy formulation and implementation. In fact, the out in chapter 1—resource abundance, aspirations of the Argentine National Constitution vests the Congress with middle class, and unequal federation—play out through the power to enact rules setting forth “minimum standards the degradation of key assets such as land, forests, and for environmental protection.” The Federal Council of fisheries, and by producing diseconomies and poor Environment (COFEMA), or the Federal Hydrological environmental quality in sprawling urban centers. Council (COHIFE) in the case of water issues, serves as a space to discuss environmental issues and find solutions Argentina faces several environmental and climate in a coordinated way. However, the COFEMA does not change–related challenges that must be addressed have formal power or the resources to ensure compliance, to sustain inclusive economic development and job which has historically hindered its ability to promote creation in the future. Natural resources are facing severe sustainability and avoid environmental degradation in pressures from anthropogenic activities that constitute provinces and municipalities.1 Meanwhile, there is lack 1  In the case of water, the resources cannot be effectively managed at the basin level. There are basin councils in specific cases, but the fact that provinces have the legal jurisdiction over the resource adds a layer of complexity. Current conflicts on Rio Atuel between Mendoza and La Pampa, related to water scarcity, have reached the supreme court. There are also conflicts in El Salado river basin, between Santa Fe and Buenos Aires, La Pampa, related to flooding. 112 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 4.1. Enviroment Performance Index Figure 4.2: Argentina’s ranking across dimensions score, 2018 of Environmental Performance Index, 2018 75 36 Enviroment health SVK 42 Air quality 70 33 Water and sanitation OECD CZE 68 Heavy metals 65 COL 133 Ecosystem vitality URY POL VEN Current 130 Biodiversity and habitad REG Peer PER KOR 120 BRA STR Peer Forest 60 ARG MYS 120 Fisheries ARG CHL 111 Climate and energy 55 168 Air popullation TUR 82 Water resources 4 Agriculture 50 50 55 60 65 70 75 200 150 100 50 0 Baseline Rank Sources: Data from Yale CELP 2018 , https://epi.envirocenter.yale.edu/epi-topline. Sources: Data from Yale CELP 2018, https://epi.envirocenter.yale.edu/epi-topline. Note: Current scores are based on most recent year of data available, and baseline applies Note: Current scores are based on most recent year of data available, and baseline applies to to data roughly one decade prior. data roughly one decade prior. of a strong information system about the state of the The SCD identified several environment-related priority environment to inform decision making and allow for issues. These include (i) forest, land, and natural capital planning, monitoring, and enforcing regulations. This is depletion; (ii) the increasing severity and frequency of reflected in the lack of clear priorities at the federal level. extreme events (including the likely impact of climate change in worsening future disasters and economic As a result of these challenges, Argentina’s environmental conditions in key development sectors); and (iii) pollution performance is low in relation to countries with a similar management, including the low capacity to manage risks level of income and worse than that of its regional in the oil, mining, and infrastructure sectors. These issues and structural peers. The Environmental Performance have both short-term and long-term aspects, and they Index,2 covering environmental health (which measures threaten Argentina’s achievement of poverty reduction threats to human health) and ecosystem vitality (which and shared prosperity in the longer time frame. To measures natural resources and ecosystem services), illustrate this, this section will analyze the relationship ranks Argentina 74th (with a score of 59.30) among 180 between these various environmental sustainability countries in terms of overall environmental performance, issues and the twin goals. below most of its peers except for Malaysia (which ranks 75th with a score 59.22), Chile (84th; 57.49), and Turkey (108th; 52.96) (see figure 4.1). Argentina ranks worst in terms ecosystem vitality (133rd) (figure 4.2). In addition, The role of natural capital in although overall environmental performance improved Argentina’s economy in recent years, it improved less than in most regional peers. Argentina went from 80th to 74th, whereas Mexico Argentina has abundant natural capital, but there is climbed 24 places (going from 96th to 72nd), Uruguay still important scope to turn that capital into an engine climbed 25 places (going from 72nd to 47th), and of sustained growth and employment creation. Natural Colombia climbed 13 places (going from 55th to 42nd). capital has been a key driver of growth in the past. By 2  The 2018 Environmental Performance Index scores 180 countries on 24 performance indicators across 10 issue categories covering environmen- tal health, which measures threats to human health, and ecosystem vitality, which measures natural resources and ecosystem services. These metrics provide a gauge at a national scale of how close countries are to established environmental policy goals. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 113 the second decade of the 20th century, Argentina had structural peers, following Turkey (26 percent), Peru (16 increased its income per capita by 190 percent, compared percent), and Brazil (15 percent). Moreover, Argentina to its level in1870, reaching levels above those of Italy, has more than 20,000 cubic meters per capita of water Portugal, and Spain. The country’s comparative advantage availability, making it a water-rich country. Most of the in beef and wheat, and its trade openness, contributed to population lives in water-abundant areas (but important this performance. However, although growth continued agricultural activities in water-scarce areas are vulnerable in some resource-rich countries over the later decades to inefficient water management and climatic variability). of the 20th century, Argentina’s performance diminished. Of course, natural capital also includes nonrenewable Whereas in 1870 Argentina had a level of income similar resources such as oil, gas, coal, and minerals. Insufficient to that of Canada, Finland, Norway, and Sweden, by 1990 data on potential future rents for Argentina, particularly its income was between two and three times lower (table related to the shale oil and gas reserves in Vaca Muerta, 4.1). There is a large literature showing empirically the so- in Neuquén province, do not allow a similar comparison called resource curse, which shows how natural capital– for total natural capital. rich developing countries have grown more slowly than other developing countries;3 some authors have stressed Soil productivity and abundant water underpin agriculture, how “natural resources are neither curse nor destiny” a traditional driver of economic growth. Argentina has (Lederman and Maloney 2007). taken advantage of its abundant fertile land to develop a strong agriculture sector that has historically represented Natural capital in Argentina includes agricultural soils a key engine of growth for the country. Although growth and pastures, water, forests, fisheries, strong winds in the country has slowed in the second half of the 20th and solar potential, and subsoil assets (oil, gas, coal, century, Argentina ranks among the top countries in the and minerals). Conservative estimates4 suggest that world for production and exports of key commodities such renewable natural capital, captured in the value of as soybeans, soybean oil, lemons and limes, maize, and agricultural land, forest land and protected areas (thus wine (table 4.2). Agriculture value added contributed on excluding, given lack of data, many other resources such average 7.5 percent to the gross domestic product (GDP) as fisheries) represents about 10 percent of Argentina’s between 2010 and 2016, and food5 exports represented total wealth (Lange, Wodon, and Carey 2018). This puts on average 55.4 percent of merchandise exports in the Argentina in the top quartile on the list of regional and same period, significantly higher than the contribution TABLE 4.1. EVOLUTION OF INCOME PER CAPITA, 1870–1990 1870 1913 1990 Argentina 1,311 3,797 6,581 Canada 1,620 4,213 19,599 Finland 1,107 2,050 16,604 Norway 1,303 2,275 16,897 Sweden 1,664 3,096 17,695 Source: Bravo-Ortega and De Gregorio 2007, based on data from Maddison 1995. 3  The most influential article in this literature is probably Sachs and Warner (1995). 4  The numbers for Argentina likely underestimate the value of pasture land, given the relative importance of cattle production compared to poultry, eggs, milk and pork. Rental rates used to estimate pasture land are based on a world average of these factors across the dataset. 5  Food comprises the commodities in Standard International Trade Classification (SITC) sections 0 (food and live animals), 1 (beverages and tobacco), and 4 (animal and vegetable oils and fats) and SITC division 22 (oil seeds, oil nuts, and oil kernels). 114 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY of agriculture to its peers’ economies (Calzada and square kilometers, Argentina has one of the largest Frattini 2017). The agroindustry value chain contributes continental shelves and is rich in marine and coastal significantly to employment, accounting for one out of resources. Both fisheries and forests are affected by six jobs (FADA 2017). The primary sector represents 46 open access, the so-called tragedy of the commons, and percent of jobs in the agroindustry sector, followed by high levels of illegality. Fish endowments, for example, commercialization (26 percent), agro-processing (16 have suffered from overexploitation because of the percent), and transportation (12 percent). With respect to lack of a national management plan for sustainable and value chains, wine, fruits, vegetables, and industrial crops responsible fishing with a long-term vision. In 2017, fish contribute 32 percent of the total jobs in agriculture; represented 3.2 percent of total exports. Forests have also extensive crops and oilseeds, which have experienced been under threat, as shown in the next section. “ the fastest growth rates, represent 35 percent; meat and dairy contribute 23 percent and 9 percent respectively; Argentina’s rich renewable energy potential could also and agricultural machinery contributes 1 percent. Little become an increasingly important source of growth. is known about the state of family farming, but evidence Renewables in Argentina include hydro, wind, solar, suggests that it plays an important role in agricultural and biofuels. Although hydroelectricity accounts for employment: 53 percent of the sector’s employment over one-third of the energy mix, Argentina only uses 20 comes from family farming (see also box 4.1) (Guardia percent of its hydro generation potential. Wind resources and Tornarolli 2010). Family farmers, if better integrated are world class, especially in the southern Patagonia into value chains, could contribute to economic growth region where capacity factors exceed 45 percent; and and rural job creation. They can play a significant role in solar resources are abundant, with the finest resources tackling some challenges of the food system in Argentina— in the northwestern region. In addition, the country is for example, obesity, which is endemic among the poor; already one of the world’s largest producers of biofuels.6 insufficient provision of fresh fruits and vegetables in However, as of 2012, less than 10 percent of total final domestic markets; and huge food waste and losses. In energy consumed came from nonconventional renewable addition, there is an untapped potential for locally grown sources, lower than most countries in the region. food, an area where family farming systems can take Progress toward adopting clean sources of energy is yet center stage. to take place. Installed capacity is 60 percent thermal, 34 percent hydro, 5 percent nuclear, and 1 percent wind. Forests and fisheries are potentially abundant sources Solar represents 8 megawatts (0.02 percent). of rents, but their contribution to the economy is limited. Argentina’s forestry potential remains largely Argentina also counts on untapped nonrenewable energy unexploited. Despite its 1.2 million hectares of plantations reserves, but their development needs to be weighed and 50 million hectares of primary forest, silviculture, against important risks. After a decade of declining timber extraction, and related services contribute only production, the conventional energy sector received 0.2 percent of GDP (2 percent of the agriculture sector). considerable interest after the discovery of the world's Since at least 1990, Argentina has been a net importer second-largest shale gas reservoir and fourth-largest of timber. Although the area under forest plantation has shale oil reservoir in the Vaca Muerta basin. Authorities been increasing, the sector is much less developed than expect these to supply as much as 50 percent of in Brazil or Chile. The next section discusses the threats Argentina’s natural gas needs by 2021, and 60 percent to Argentina’s forests. Fisheries are also a potentially of its oil requirements by 2020.7 Such developments, valuable source of rents. With a surface area of 1 million however, carry important risks. Some of them are related 6  Data from the U.S. National Renewable Energy Laboratory (NREL), http://www.nrel.gov/docs/fy13osti/56792.pdf. This mostly represents bio- diesel. 7  Argentina spent about US$15 billion in 2016 to import gas via its two Liquified Natural Gas (LNG) import terminals and pipeline with Bolivia to meet the gap between its domestic gas demand and domestic production. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 115 TABLE 4.2. ARGENTINA’S WORLD SHARE AND WORLD RANKING IN PRODUCTION AND EXPORTS OF SELECTED AGRICULTURAL COMMODITIES, 2013–16 Production Exports*** World Share % World Ranking World Share % World Ranking All crops 1.9 8 All agricultural products (crops, processed 5.7 3 crops, and primary livestock) Apples* 1.1 15 1.9 12 Grapes* 2.3 12 0.6 18 Lemons and limes* 9.7 4 10.5 2 Maize* 3.8 4 16.2 3 Soybeans* 17.6 3 7.3 3 Sunflower seed* 6.3 3 1.6 10 Wheat* 2.5 12 1.5 13 Oil, soybean** 15.5 4 40.9 1 Oil, sunflower** 5.9 3 5.1 5 Wine** 5.1 6 3.1 9 Meat, cattle* 4.0 4 0.2 30 Meat, chicken* 1.8 11 2.9 9 Milk, whole fresh cow* 1.5 17 0.0 57 Source: Calculations based on data from FAOSTAT, http://www.fao.org/faostat/en/#home. Notes: All shares and rankings based on physical units. * = data for year 2016; ** = data for year 2014; *** = data for year 2013. to the management of potential (and still somewhat important for Argentina to see oil and gas as part of a unknown) environmental and social impacts, for which a broader strategy for the energy sector to respond to solid framework is still needed (see box 4.2). In addition, increasingly pressing domestic and global challenges. as countries around the world transition to sustainable energy in order to keep global temperature rise to below 2 Finally, Argentina’s unique natural landscapes and protected degrees Celsius, Argentina could miss out on the benefits areas system can be a driver of tourism development. The of global technological shifts that allow countries a wider country has a huge variety of climates and ecosystems set of low-cost options to strengthen energy supply and ranging from the tropical and dry forests in the North to extend access to energy.8 Moving forward, it will be the tundra and polar ecosystems in the South. Some key 8  Low carbon transition worldwide can affect fossil fuel–dependent economies through the emergence of a global price for carbon—and the related imposition of border carbon adjustments—and by the country’s own locking into diversification patterns that are highly dependent on fossil fuels. In the case of Argentina, both the oil and gas sector and an evolving renewable energy sector could be impacted. World Bank (2018e)analyzes the optimal strategies for fossil fuel–dependent countries in light of the uncertain yet rapid evolution of climate negotiations. It argues for a careful assessment of the macro-fiscal and structural risks and opportunities of a low carbon transition, and for the development of economic strategies that are robust under climate negotiation uncertainty and that foster cooperation in international climate initiatives. 116 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Box 4.1. The potential of family farming for inclusive growth This SCD argues that agriculture can be an engine of growth, but does this apply to small family farms and can the sector contribute to inclusion? Despite the economic importance of agriculture, rural households are twice as likely to have at least one unsatisfied basic need as urban ones. Scattered across Argentina’s vast territory, these rural populations consist of small family producers, indigenous peoples, and rural wor- kers. A substantial segment of them is made up of vulnerable people who share the rural space with larger landowners and producers of export commodities. Poverty is even more deeply entrenched among rural people living in dispersed settlements. The agricultural sector seems to face challenges to become inclusive. Large-scale soybean production con- tributes little to job creation in comparison with other crops. Hence, support to family farming can be an important engine of inclusive growth, and support to the livelihood of small family producers is key in reducing rural poverty. Within the general policy framework for the agricultural sector, the government has recognized this and Argentina is a pioneer in terms of legislating for the family farming sector and creating institutions to increase the public sector response to the needs of this segment of the rural population. Ac- cess to information, empowerment, and capacity building are among the measures implemented to reduce inequities and asymmetries between small and large producers and between them and other actors in the agricultural value chains, which in turn would contribute to employment and incomes in rural areas. Key policy recommendations to ensure agriculture serves as an engine of inclusive growth include two broad types of policy packages, in addition to maintaining a sector neutral tax burden, including neutral trade policies. First, public investments to stimulate agricultural productivity, such as research and development subsidies, and public investments in education and infrastructure aimed at increasing the productivity of human capital in rural areas. Second, the implementation of social and economic reforms that will increase poverty-reducing effects of agricultural growth, for example, productive inclusion of rural households. landmarks include the Andes, with the highest mountain in broader efforts toward openness and competitiveness. In the world outside the Himalayas, the Aconcagua, the Iguazú addition to agriculture, which was a key driver of growth Falls, the humid Pampas, and the Perito Moreno glacier. at the turn of the twentieth century, Argentina has large Argentina’s tourism represents 7.1 percent of exports of unexploited potential in forestry—including native forests goods and services (and the first in terms of services), and commercial plantations—in fisheries, protected areas and it generates 5.4 percent of employment (Ministerio de and unique landscapes potentially attracting a growing Turismo 2016). However, the country’s tourist assets are number of tourists internationally, renewable energy, likely underutilized. At its current stage of development, and mining. But the country needs to break with the the tourism sector is expected to grow at 2.5 percent per extractive policies of the past and consolidate a policy annum, significantly lower than the forecasted global framework that attracts private sector investments. average growth of 3.9 percent (WTTC 2017). Key challenges Policies, incentives, and enforcement are also required include the scarce diversification in international markets to ensure that the open access that characterizes many with a high dependency on neighboring countries, and a natural assets, such as forests, land, and fisheries, does bias toward low-end markets. not give way to illegality and degradation. Finally, a more sophisticated demand for greener attributes in global Summing up, Argentina’s natural capital, an engine of value chains is already emerging and Argentina has growth in the past, still holds great potential as part of much to gain from developing information mechanisms ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 117 in support of labels and practices that encourage the recent estimate of the cost of ecosystem services due to thriving green businesses throughout the country. These land use cover change between 2001 and 2009 indicates recommendations are presented in more detail in the that the cost ascends to US$80 billion, representing 15 following section. percent of the country’s GDP (Bouza et al. 2016). Deforestation and poverty are related phenomena; even if a clear causality cannot be established, it is not possible Pathway 4: Investing in natural to address one issue without taking the other into capital and ensuring environmental account. There is a positive correlation between the share sustainability of tree cover and unmet needs and between area of tree cover loss and unmet needs.10 Moreover, a comparison Unleashing the potential of natural of 2010 census-based unmet needs data and tree cover capital loss between 1992 and 2015 shows that deforestation took place mainly in areas with high poverty rates and Challenges that the provinces with the highest share of rural poverty also have the highest deforestation (map 4.1). Data also The rate of forest depletion in Argentina is one of the show that provinces with high poverty reduction between world’s fastest”. Argentina’s success in developing a 2001 and 2010 had predominantly high deforestation competitive and productive agriculture sector has come rates, too (World Bank 2016a).11 Agricultural expansion at a high cost in terms of ecological externalities. The into marginal lands has also been accompanied by effective adoption of agricultural technologies resulted displacements of some of the most vulnerable people and in increased profitability and rapid expansion of cropland forest-dependent communities (for example, indigenous into forest lands, often pushing pasture production and criollo in the northern provinces) who lack secure into forest and other higher-value biomes. World Bank comprehensive wealth estimates based on Lange, Wodon, and Carey (2018) suggest that, between 1995 and 2014, Figure 4.3: Average annual forest vs. cropland the positive change in agricultural land value was paired and pastureland capital growth, 1995-2014 with a negative change in forest land value (figure 4.3). In 5 other words, the country has been replacing forest land 4 URY with cropland. This contrasts with the results of Chile and Timber and NTFP capital growth (%) 3 Uruguay, which managed to increase the value of both types of capital over the same period. In physical terms, 2 CHL Argentina is losing its forest land at a faster pace than its 1 SKV TUR POL PER KOR COL 0 MEX BRA peers: between 1990 and 2014 the country lost 21 percent -4 -2 0 2REG Peer 4 ARG 6 8 10 12 VEN of its forests (see map 4.1).9 Loss of forest results in the -1 STR Peer loss of biodiversity and key ecosystem services such as -2 MYS carbon sequestration, water provision and regulation, -3 and pollination, which are crucial in sustaining food Agricultural land capital growth(%) production, protection against floods, and livelihoods. A Source: Estimated based on Lange et al., (2018). 9  In absolute terms as Argentina’s deforestation has been second only to Brazil’s in the Latin American and Caribbean region. 10  Correlation coefficient between tree cover and unmet needs: 0.544 (p=0.000); Correlation coefficient between tree cover and unmet needs: 0.351 (p=0.000). 11  Note that there are also areas with high poverty prevalence and minimal deforestation, such as in the western part of northwest Argentina, which confirms the complexity of the forest and poverty relationship. 118 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY land tenure. The fact that poverty reduction may be percent of agricultural land and 80 percent of land associated with forest loss in the short term is troubling dedicated to cattle ranching were affected by floods in the because forest services may be important to sustain provinces of Buenos Aires, Córdoba, Santa Fe, La Pampa, livelihoods over the longer term. But a true counterfactual and Entre Rios (Ministerio de Agroindustria 2017b). In does not exist. In fact, it is possible that controlling the province of Buenos Aires, between 2000 and 2011 forest loss through sustainable forest management and floods caused nearly US$4.5 billion in losses and affected providing better access to markets to forest dependent 5.5 million people, with a particularly negative impact on communities can contribute to poverty reduction. The poverty alleviation, economic development, and transit government’s efforts to provide access to the Forest Fund connectivity (World Bank 2016c). The impact on poverty to poor communities, even without perfect land tenure, is is large because poor people are exposed to hazards a step in the direction of better inclusion. more often: they tend to live in high-risk areas, live in low-quality houses that suffer more damage when floods Inadequate land use practices, including deforestation, occur, and lose more as a share of their assets when hit may increase the risk of flood occurrence, which most (Winsemius et al. 2018). In fact, this type of disaster can affects the poor. The world’s second-largest reinsurer, push people into poverty. Swiss-Re, ranks Argentina among the 10 emerging economies with the highest flood hazard exposure. This The literature points to the effect of soybean monocrop on exposure translates into significant losses: over the past flooding (see, for example, Nosetto et al. 2012). Moreover, two decades, estimated losses due to floods exceeded deforestation and the replacement of perennial pastures US$3 billion per year, equivalent to 0.7 percent of GDP for annual crops, combined with poor watershed and in 2012. Some of the most severe impacts are felt in wetland management, reduce groundwater infiltration— the agriculture and livestock sector, particularly in the though it may at the same time reduce evapotranspiration— Central and the Northern provinces: in 2017 about 20 and increase erosion and runoff. These results increase Map 4.1: Forest cover, forest loss (1992–2015), and poverty by province (2010) Sources: Data from the World Bank’s Hidden Dimensions of Poverty Dataset; INDEC 2010. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 119 the risk of flooding in the presence of extreme weather control capacity and penalties for illegal deforestation, events that are expected to become more frequent with and transparency in the way that permits are granted climate change (see climate change subsection) (World need to be established. Enforcing the Forest Law also Bank 2016a). When deforestation occurs in the upper requires sufficient resources: resources allocated for watersheds of the main river basins, the water regulation implementation and monitoring have been less those capacity of ecosystems is affected and water runoff stipulated in the law. In addition, a more efficient accumulates further downstream in higher volumes and management of the Forest Fund, with broader access to at a faster pace, often creating floods. Data for Argentina different type of stakeholders, including small holders, are scant, and no correlation can be established between and close coordination between national-, provincial-, deforestation and flood risk. However, a visual comparison and local-level stakeholders is required. between the spatial distribution of deforestation and flooding events suggests that higher riverine floods occur Agriculture is also depleting its very resource base: soils. in regions where deforestation is higher (World Bank Degradation of the Earth’s land surface through human 2016a). More detailed studies are needed to better assess activities is a systematic phenomenon that affects the the impacts of deforestation on flooding in Argentina and well-being of millions of people all over the world. In the identify areas that might become vulnerable to flooding long run, it exacerbates food and water insecurity and in the future as a result of land use changes.12 the effects of climate change (IPBES 2018). In Argentina 75 percent of soils are characterized as arid and semi- Although the country has set a promising land use arid, with high risk exposure to desertification processes planning instrument, its implementation faces (Belausteguigoita Rius 2016). Soils are already highly challenges. In 2007, the Minimum Standard Natural compromised: it is estimated that 37.5 percent are Forest Protection Law (Ley de Presupuestos Mínimos de affected by hydraulic and wind erosion (Casas and Protección Ambiental de los Bosques Nativos, 2007) was Albarracin, 2015).This represents a direct threat to setup to combat deforestation. This law constitutes maintaining high yields in the future and is already a federal compensation scheme by which provinces imposing significant costs to the economy. For example, receive payment for protecting forests through territorial the work of Bouza et al. (2016) on the economics of land planning and enforcement. It established an innovative degradation estimates that the cost of land degradation framework to control deforestation, promote land use on grazing land on milk and meat production was about zoning, implement sustainable forest management, 11 percent of the livestock GDP in 2007. and strengthen collaboration between the national and provincial forest administrations. A Forest Fund was Naturally rich fish resources have declined through established to transfer public resources to provinces overfishing. Fish stocks have suffered from to promote sustainable use of forests and provide overexploitation due to the lack of a national management payment for environmental services. To date, all plan for sustainable and responsible fishing with a provinces have implemented land use zoning; however, long-term vision. A proxy for weak marine resources although deforestation rates have decreased in recent management is the amount of marine protected areas (as years, forest loss remains high and about half is illegal. a percentage of territorial waters; figure 4.4). Argentina, In addition, deforestation persists in areas zoned for with just under 9 percent, has a shortage” compared conservation, often because clearing permits are granted to other countries in the region, such as Brazil (20 in nontransparent ways. Law enforcement, largely the percent), Mexico (19 percent), Colombia (17 percent), responsibility of provinces, has weaknesses: stronger and República Bolivariana de Venezuela (17 percent). The 12  In a study for Malaysia, Tan-Soo et al. (2016) stress the importance of using disaggregated land use data, controlling for potentially confoun- ding factors, and applying appropriate estimators in econometric studies on forest ecosystem services. Their results do show that the conversion of inland tropical forests to oil palm and rubber plantations significantly increased the number of days flooded during the wettest months of the year. 120 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY maximum allowable fish catch systematically exceeded which hold control over natural resources management levels of acceptable biological catch. Argentina lacks decisions. To foster collaboration between the national monitoring and control systems, and there is an absence government and the provinces, it will be key to further of selective fishing devices to avoid capture of juvenal fish develop information systems that are able to track (Fundación Vida Silvestre 2011). Stocks of Patagonian performance on land use change, forest degradation and hake (Merluza común), the main species exploited, were fishery management. Such information systems can be in crisis between 1986 and 2011 when the country lost used in turn to feed performance-based systems for the about 60 to 80 percent of this resource (ibid.). As a result, channeling of resources, such as the ones in the national captured volumes have decreased in recent years, in part Forest Fund. A stronger information base on natural because of fishing restrictions that were set to address resource management will also be key to improve private overexploitation and illegal fishing. Argentinian shortfin sector decision making. squid (calamari illex) and shrimp have now become important products that contribute large volumes to fish The role of policies, investments, and landings; given the crisis in Patagonian hake stocks, some markets fishing firms have replaced this species with calamari and shrimp. In 2017, shrimp capture increased by 30 percent Harnessing natural capital for growth requires in relation to 2016 (Ministerio de Agroindustria 2017a). appropriate policies and incentives. The fiscal regime has been important in determining the fate of the nature- Reversing natural resource depletion trends will require a based sector. For example, Argentina’s agriculture combination of enforcement, incentives and institutional sector has suffered from extractive rent policies coordination between the national government and the (especially exchange restrictions, and taxes and quotas provinces. As noted earlier, renewable natural capital, on agricultural exports) that reduced profitability and including soils, forests, protected areas and fisheries undermined incentives to invest in the sector. The results can be an important engine of growth. But degradation of these adverse policies were pronounced: despite a is taking place at a fast rate. To reverse this situation, boom in global commodity prices, investment in the enforcement is key, particularly by the provinces, sector fell dramatically and productivity growth slowed. From 2002 to 2013, the average productivity growth in Brazil, Paraguay, and Uruguay was 30 percent higher Figure 4.4: Marine protected areas as percent than in Argentina; and in 2013 the Food and Agriculture of territorial waters, 1990, 2000, and 2014 Organization’s Agriculture Production Index was between 20 percent and 30 percent higher in these countries than 25 in Argentina. Extractive rent policies affected particularly 20.5 20 19 beef and wheat production, which led to increases in 16.9 16.8 prices of beef and wheat-based products. ºNew economic 15 13.5 policies that address these issues also be climate-smart 12.2 and help reduce vulnerability to weather-related risks. % 10 8.9 7.7 6.8 Climate change will likely pose important challenges to 5.8 5 5.1 3.9 agriculture, particularly in the central part of the country, 2.5 2.7 2.8 3.3 1.6 2.4 1.8 because it will increase water variability in terms of 0.3 0 flood intensity and water availability for agricultural Brazil Venezuela Argentina Mexico Colombia Peru Chile Uruguay production. 1990 2000 2014 Policies and institutions can be used also to encourage the Source: Data from the World Bank’s World Development Indicators. sustainable management of natural capital by reducing ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 121 the scope for free-riding. The trade in forestry products is Figure 4.5: Average annual change in produced a case in point. Although well-regulated cross-provincial capital and natural capital, 1995-2014 trade in timber would benefit the country as a whole, 9 each province may realize a gain by encouraging its own 8 CHL exports of timber. Provincial forest administration and 7 control systems have evolved autonomously, resulting PER Natural Capital(%) 6 in great differences between forest management and 5 ARG URY timber transport regulations. These disparities create 4 REG Peer BRA POL the condition for the illegal harvest of timber and lost 3 OECD VEN STR Peer MYS KOR opportunities for the formal economy. If appropriately 2 TUR 1 COL implemented, the 2007 Forest Law (discussed earlier TUR SVK 0 in the chapter) can unlock opportunities in Argentina’s -1 0 1 2 3 4 5 6 7 8 forestry sector. A key line of action is the effective Produced Capital(%) targeting of economic incentives, such as the Forest Source: Data from Lange et al (2018). Fund.. Translating the Forest Law into action requires broadening access to Forest Fund resources as well as close coordination between national, provincial and local In addition to good policies, harnessing natural capital level stakeholders to improve Fund performance.13 for growth requires investment. Traditional investments in produced and human capital and the management of Policies to deal with open access are crucial in the fisheries natural capital can go hand in hand. Figure 4.5 shows sector as well. A more sustainable fishing model must that countries that invest more in infrastructure tend be adopted. It is recommended that Argentina manages (with some exceptions) also to invest more in the value fisheries under an ecosystem-based framework, as an of natural capital. The same relationship holds between integrated management strategy that takes into account human capital and natural capital. This is a key element all components of the ecosystems and aims to align social of the growth narrative in resource-rich countries: to and economic needs with the preservation of ecosystems. put natural capital to work, it is necessary to invest in The first step in this direction would be to develop a access to markets, irrigation, technology, and transport, national policy of sustainable fisheries management. among others. An example of this is agriculture. In In addition, the development and implementation of addition to its favorable climatic conditions, Argentina a legal framework for the sector is essential. It is also has become a leader in technological development and key that estimates of biologically acceptable captures adoption for the agricultural sector. This has resulted in from the National Institute for Fisheries Research and both the intensification of production and expansion of Development are adopted by the National Fisheries the agricultural frontier, mainly driven by the expansion Council, when setting maximum catch allowances. Key of genetically modified soybean crops in no-tillage also is investment in fisheries research to be provide systems.14 Yet Argentina has probably lagged behind its accurate information for the design and management of true potential because of its low level of investment. For fish resources. Finally, the promotion of certifications can example, the sector faces high transport and logistics generate incentives to adopt sustainable fishing practices costs (which account for approximately 35 percent of the (Fundación Vida Silvestre, n.d.). free on board price of a ton of soy). 13  The recent government of Argentina decision to remove restrictions requiring formal tenure to access Forest Fund resources has generated an opportunity to increase the share of fund resources flowing to poor communities (particularly indigenous and campesino) that were previously excluded because of their unclear tenure status. 14  Today Argentina produces 17 percent of world’s soybean and is the third major producer after the United States and Brazil. 122 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Investments, public and private, can be crucial in boosting by the Renewable Energy Law. In addition, the recently productivity in sectors that rely on natural capital goods approved Law 27,424 for distributed generation allows and services. For example, Argentina could harness its consumers to produce their own electricity and inject soil and water abundance into a more sophisticated it back into the grid. The main challenge ahead is to and sustainable agricultural sector. New Zealand is one maintain the momentum in the industry and make sure of the countries that followed a growth strategy led by that the many ongoing tendering processes and projects agricultural exports. New Zealand’s agriculture today in the first stages of implementation get to financial is the most deregulated in the world, and government closure and are commissioned by the expected deadlines. support is provided mainly through expenditures on general services such as agricultural research and Moreover, investments in restoration will be key biosecurity controls for pests and diseases (OECD 2011). to generating production, reversing trends in land Many initiatives in support of private sector investments degradation, and diminishing the need for infrastructure. in the New Zealand’s agriculture sector have taken place Short-term gains from unsustainable land management over the years. The Primary Growth Partnership was practices often result in long-term losses, making the launched in 2009 as a government–industry initiative to initial avoidance of land degradation an optimal and invest in significant programs of research and innovation. cost-effective strategy (IPBES 2018). Estimates show The Community Irrigation Fund was established in 2007 that the returns to taking action to stop land degradation to assist rural communities in difficulty to address water and restore degraded land in Argentina are at least supply risks as part of New Zealand’s sustainability and four times higher than the cost of action (Bouza et al. climate change initiatives. 2016). Restoration efforts may help meet increasing demand for livestock and agricultural products and Another example of the role of investments, particularly would simultaneously provide options to diversify farmer private, relates to Argentina’s renewable energy potential. income, sequester carbon for improved soil health, and The high dependency of the wholesale power market reduce soil erosion and desertification processes. The and electricity concessions on government transfers has recently launched National Program to Restore Degraded increased the risk perception of investing in the sector. To Native Forests constitutes a move in the right direction address these barriers, the country has issued (in 2015) to address degradation, and its implementation will be and is implementing the Renewable Energy Law 27,191. key. Implementation will require technical knowledge, This law sets ambitious mandatory renewable energy extension services, incentives, and support for land- targets of 20 percent of overall electricity consumption owners to help overcome upfront costs. In addition, critical by the end of 2025 and has mandated the creation of a information and adequate baseline data on the state of Fund aimed at injecting funding and offering guarantees soils are needed to further understand the magnitude for renewable energy projects. The Ministry of Energy of the issue, and to implement effective monitoring and Mining established the RenovAr program, releasing strategies and verification systems along value chains. renewable energy power purchase agreement (PPA) These would allow consumers throughout supply chains tenders, and developed Trust Funds for the Development to make better-informed commodity choices that reward of Renewable Energy (FODER) designed to cover ongoing responsible management practices. PPA payments (that is, liquidity support) and payment obligations emerging from a “put option (IFC 2017).” Finally, growth based on the principle of sustainable Moreover, since 2017 large energy consumers are allowed management of resources can be a great source of to sign PPAs directly with renewable energy producers. opportunity in global value chains. An analysis of global The Executive Resolution, Resolución 281-E/2017 on the value chains in Uruguay, which might also provide Régimen del Mercado a Término de Energía Eléctrica de interesting insights for Argentina given the similar resource Fuentes Renovables, has built on the framework laid out and comparative advantage patterns of the two neighbors, ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 123 finds important growth prospects and attractive price river flows. Climate impacts for the first half of the 21st margins in the niches of sustainable beef, nongenetically century might be addressed by timely adaptation policies modified (non-GMO) soy, and organic milk powder (World in key sectors including agriculture, water, energy, and Bank 2018e).15 Argentina could also gain by strengthening health. However, by the end of this century, under extreme its international offer of adventure tourism and ecotourism, greenhouse gas (GHG) emissions and business-as-usual and explore the potential for exporting knowledge- scenarios, the projected warming could reach an average based, biotech, and e-commerce services (all areas with change of about 3.5 degrees Celsius in the north of the a low environmental footprint and in which Argentina country, relative to present-day conditions. Recurrent has a competitive edge). Argentina’s private sector has droughts and floods in the most productive areas of already used sustainable practices as a key driver of the country will produce important social, economic, trade competitiveness in sectors such as horticulture and and environmental impacts. Dealing with these impacts wine making, among others. The public sector however will require strong policy shifts to satisfy household, has not kept pace, and initiatives by the Ministry of industrial, and environmental water competing needs to Agroindustry and the Secretary of Commerce have been ensure and sustain resilient growth. narrowly focused. Going forward, it is important to develop environmental information data that would back up the Argentina lags in terms of adaptation readiness. Although green attributes of export products (for example organic, Argentina is less vulnerable to climate change than most ecological, bio, and fair trade). Developing niche markets countries (it is ranked 40th out of 181 countries in terms on differentiated products may present new opportunities of vulnerability)16 and ranks similarly to its peers, its lack for regional economies and family farming. of a safe and efficient business environment makes it less ready than most of its peers to effectively use investments Pursuing climate-smart growth for adaptation. (figure 4.6).17 In addition, Argentina’s performance on reducing vulnerability and increasing Across most of Argentina, average temperatures have readiness to deal with climate hazards has been worse shown an upward trend since the beginning of the 20th than that of its peers: figure 4.7 shows, on the vertical axis, century, with an increase in the number of extremes that the vulnerability component related to the ability of and occurrences of heat waves during the most recent society to reduce potential damage and to respond to decades. There has been a remarkable increase in negative consequences of climate events has improved precipitation over most of subtropical Argentina, (that is, decreased) in recent years, but it has done so less especially since 1960. Although the climatic changes rapidly than most of its regional peers. When it comes have favored agriculture yields in the last decades and to improve readiness, the country has not been able to the extension of crop lands into semiarid regions, it also improve its capacity to make effective use of adaptation at induced desertification processes in productive areas the pace its regional peers have (figure 4.7).18 and produced frequent heavy rainfalls and consequent flooding of rural and urban areas. In addition, glaciers Argentina has defined a target for GHG emissions in the Andean region have continued to recede, reducing reduction and a set of adaptation needs that would 15  While here the focus is on agriculture, Argentina is also rich in tourist assets that are likely underutilized. At its current stage of development, the tourism sector is expected to grow at 2.5 percent per annum, which is significantly lower than the forecasted global average growth of 3.9 percent (WTTC 2017). 16  The University of Notre Dame’s Global Adaptation Initiative (ND-GAIN) Country Index measures vulnerability as the propensity to be negatively impacted by climate hazards and it depends on: exposure to hazards; sensitivity to hazards, and adaptive capacity. For more information, see https:// gain.nd.edu/. 17  The readiness indicator includes the investment climate, political stability, control of corruption, rule of law, regulatory quality, social inequa- lity, information and communications technology infrastructure, education, and innovation. 18  The adaptive capacity indicator includes: medical staff per 1000 people; access to improved sanitation facilities; protected biomes; engage- ment in international environmental conventions; quality of trade and transport infrastructure; percentage of paved roads; electricity access; and disaster preparedness. 124 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Figure 4.6: Matrix of vulnerability to climate Figure 4.7: Matrix of capacity to act against climate change risks and readiness to act, 2016 risks and the economic readiness to accept investments for implementation. Evolution between 1995-2014 0.7 0.65 1995 0.6 0.60 0.55 0.5 PER 1995 Vulnerability TUR 0.50 1995 2014 Capacity MYS KOR 0.4 COL SVK URY CHL 0.45 1995 1995 VEN ARG 1995 0.3 TUR POL 0.40 1995 2014 2014 1995 2014 0.2 0.35 2014 2014 2014 2014 0.1 0.30 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.3 0.4 0.5 0.6 Readiness Readines Median Median Argentina Mexico Uruguay Brasil Chile Colombia Peru Venezuela Source: Reprinted from University of Notre Dame Global Adaptation Initiative (ND-GAIN), Source: Reprinted from University of Notre Dame Global Adaptation Initiative (ND-GAIN), https://gain.nd.edu/. https://gain.nd.edu/. allow it to contribute to combatting climate change The ability of the country to sustain low-carbon and and its impacts. Through its Nationally Defined resilient growth will require the removal of several Contributions under the Paris Agreement, Argentina has binding constraints and alignment of national climate committed not to exceed a net emissions level of 483 strategies and international commitments. First, it is million tons of carbon dioxide equivalent by 2030. This important to encourage smart planning through access to is an ambitious target and ought to be delivered with a climate research and information, awareness, and early series of economic targets focused on both adaptation warning systems. Timely and accessible information and mitigation actions. These actions include road maps on climate risks and impacts can transform the way for the enhancement of renewable energy, climate- vulnerable sectors plan climate-smart development. For smart agriculture, sustainable forest management, low- example, access to short- and medium-term forecasts carbon transport, and waste management. Moreover, can allow small and medium-size farms to take full Argentina has reaffirmed the commitment to the 2030 advantage of years with favorable conditions for rain-fed Agenda for Sustainable Development, which includes crop production and reduce risks in less favorable ones. climate change. The targets can be achieved through Second, as Argentina fills its infrastructure quality gap, substantial efforts from all sectors of society, but it will need to comply with low-carbon and resilience adequate integration of climate-smart policies and standards. If the right investment choices are not made means of implementation will need to be designed and today, the country will be locking into high-carbon followed through. Currently, Argentina has not costed infrastructure for the next 40 to 70 years. The public out the actions needed to meet either GHG emissions sector will have to take a leading role, but private sector reduction commitments or the large set of adaptation solution providers will also have to step up to the plate.19 measures that need to be implemented. Climate finance Third, managing risks through contingency planning and remains a key challenge for the country. financial and risk-sharing instruments will be needed to improve the ability of vulnerable populations to hedge 19  It is important to note that the country is still missing an effective energy efficiency policy, one that should complement the renewable energy policy currently under implementation. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 125 impacts from recurrent risks and economic impacts. For Poor air quality in urban areas impacts on the population, example, agricultural insurance is limited or not available especially the most vulnerable groups. In 2015, 97.3 to medium and small farmers—although efforts to expand percent of Argentines were exposed to levels of PM2.5 coverage are ongoing. Finally, there is important scope (fine particulate matter with a diameter less than 2.5 for integrating adaptation and mitigation agendas. The micrometers) that exceeded World Health Organization integration and coordination of existing climate change (WHO) guideline values. This rate for Argentina was policies for both adaptation and mitigation in key sectors similar to exposure rates in structural peers (98.1 percent) (energy, transport, industry, waste, and agriculture, but higher than the in region (79.8 percent) and in forestry, and other land use) is a unique opportunity Organisation for Economic Co-operation and Development to accelerate both resilient and low-carbon growth countries (65.8 percent) (World Bank 2018a). In addition, development in the country. modeling estimates from the Country Environmental Analysis (World Bank 2016a) indicate that (i) air pollution Managing pollution and the diseconomies in the main urban agglomerations is far above the WHO of growth recommended thresholds, (ii) Buenos Aires exceeds the levels of pollution of other cities by significant amounts, Environmental degradation from pollution and waste and (iii) despite slight decreases in air pollution in large has direct impacts on the economy because of health cities and acceptable levels in small cities, increasing costs and loss of productivity. Most Argentines live in urban population and traffic are expected to contribute to urban areas where urbanization processes have created higher levels of pollution in the future.20 Today, ischemic environmental externalities such as air and water heart disease, lower respiratory infections, and chronic pollution, and led to unsanitary waste disposal practices. obstructive pulmonary disease are among the four main Without adequate management, pollution can offset the causes of death in Argentina,21 and are all linked to poor economic gains from agglomeration. Air pollution are poor air quality World Bank 2016a). The share of deaths wastewater and waste management are important threats caused by lower respiratory tract infection has increased to human health. According to the Lancet Commission by 25 percent between 2005 and 2016,22 by 11.6 percent on Pollution and Health, 8.4 percent of all deaths in in the case of chronic obstructive pulmonary disease Argentina in 2015 were caused by pollution in air, water, and by 7 percent in the case of ischemic heart disease. or soil. Although this is below the average for lower- Distributional impacts of air pollution are biased toward and upper-middle-income countries (10.3 percent), it is the poor, who tend to be more exposed to air pollution and higher than the average for high-income countries (7.3 less aware of the possible negative consequences. Poor percent) (GAHP 2017). The cost of air pollution on society health due to air pollution impacts people’s productivity was estimated at about 1.8 percent of GDP, and annual and their ability to work (Graff Zivin and Neidell 2018). For costs from health effects related to inadequate household children, reduced productivity translates into educational water, sanitation, and hygiene were 0.4 percent of GDP in underperformance, with long-term negative effects for 2012 (World Bank 2016a). In rural areas the exploitation economic performance (ibid.) and poverty alleviation. of mineral resources imposes important trade-offs: Although information on air quality in Argentina remains although it can contribute to GDP growth and generate limited, the available evidence points to increased use of important revenues, it carries risk and imposes negative vehicles and traffic congestions as the main sources of environmental and social impacts. urban air pollution. 20  According to the model used in this assessment, PM2.5 pollution is above the WHO recommended threshold of 10 microgram per cubic meter in Buenos Aires (six-fold), Córdoba (three-fold), and Mendoza (two-fold). Pollution is at the WHO threshold in Rosario and below the threshold in Salta and San Salvador de Jujuy. 21  Data from the Institute for Health Metrics and Evaluation, available at http://www.healthdata.org/argentina. 22  Data from the Institute for Health Metrics and Evaluation, available at http://www.healthdata.org/argentina. 126 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Water pollution from domestic activities, industry, information systems (including information on air and agriculture is increasing in many watersheds and quality), strengthening monitoring capacities, enabling degrading surface water, which is the main source for stronger management, and implementing target policies water consumption. Surface water is vulnerable to to the most polluted sectors. In the case of water, current pollution from discharges of untreated wastewater or management of water resources is not grounded on good- domestic activities, industrial effluents, or agricultural quality information about resource availability and use. runoff. There are 16.7 million people, or 42 percent This hinders the development of policies and planning of the urban population, who do not have access to instruments to manage water resources, address conflicts wastewater systems: only 65 percent of municipal waste among users, protect the environment from pollution, water is collected and only 12 percent is treated before and reduce vulnerability to extreme weather events. In disposal. Treatment levels for fecal effluents are less addition, lack of data hinders the capacity of regulators than 20 percent nationally, posing a clear health risk to monitor utilities’ performance and charge adequate to people living near contaminated waters. Given that tariffs for water use and water discharges. Stronger many regions of the country report high levels of arsenic management, by means of building capacity in institutions in groundwater, increasing pollution of surface water is and improving regulations is also key. To address local of particular concern. Although central and provincial air pollution, Argentine cities can learn from other Latin governments are making significant investments in American cities that in the past two decades have begun wastewater infrastructure, the water safety and sanitation to deal more seriously with this issue. These cities have sector faces substantial sustainability challenges that can strengthened their environmental institutions, upgraded put these investments at risk. their environmental measurement and monitoring systems, and imposed environmental standards for Pollution from increased use of agrochemicals is vehicles, fuel quality, and industries. The recent launch of also a source of concern. The shift toward industrial the Red Federal de Monitoreo Ambiental (Red FEMA)—a agriculture came with an increase in the use of fertilizers data management system that aims to produce periodic and herbicides, especially glyphosate; and the use of and systematic information to facilitate monitoring of air, agrochemicals rose by 1000 percent in the last 20 water, and soil quality at the province level—is a move in years.23 The use of glyphosate and other herbicides has the right direction but one that needs continuity to ensure carried important economic benefits, especially through all the provinces join the system and use the information the promotion of zero-tillage agriculture, allowing the for decision making. sector to exploit Argentina’s comparative advantage for soybean production and establish its role in the modern Inefficiencies in solid waste management directly affect global economy (Bouza et al. 2016). However, glyphosate citizens’ quality of life and livability in cities. An unclean is classified as probably carcinogenic to humans, and and disordered environment affects health, livability, high concentrations of this agrochemical have been property values, attractiveness for business and tourism, found in the Parana basin (Etchegoyen et al. 2017; Ronco and sense of security. The inclusion chapter described et al. 2016). Case studies increasingly warn about severe how many Argentines still lack access to regular collection harmful effects of glyphosate on human health and the services and how open dumps remain the most common environment, Further investigation is required to assess mode of disposal. In addition, landfill organic waste the trade-offs associated with GMO crops that rely heavily (about 50 percent of total waste produced) is an important on agrochemicals. source of vector-borne disease and a significant cause of GHG emission (World Bank 2016a). In addition, reuse Key strategies to address pollution are improving and recycle rates are low: only 11 percent of total waste 23  Data from the FAOSTAT database of the Food and Agriculture Organization of the United Nations, http://www.fao.org/faostat/en/#data. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 127 Box 4.2. Oil, gas, and environmental compliance The current administration is focusing on rebuilding Argentina’s energy industry and seeks to capitalize on the nation’s enormous unconventional oil and gas potential. So far, the government has made progress in amending the complex system of domestic oil tariffs and subsidies introduced by the previous adminis- tration. Local price distortions led to considerable underinvestment in the energy industry, which turned the country into a net energy importer despite its tremendous unconventional oil and gas resources. The rewards of rebuilding this industry are large, considering that Argentina’s technically recoverable shale oil reserves come to 27 billion barrels—60 percent of the country’s technically recoverable crude. The Vaca Muerta formation is ranked by the U.S. Energy Information Administration as the world’s second-largest unconventional oil and gas reserves. Argentina’s national (and largest) energy company, YPF, has commit- ted to investing US$30 billion over the next five years to exploit the potential of Vaca Muerta. The company will attempt to match the U.S. shale oil and gas boom. Because YPF lacks its own expertise, capital, and workforce, foreign investments are particularly important if Argentina is to realize its full energy potential. These massive investments, if realized, must avoid undue harm to livelihoods and the environment. This area is still full of unknowns. For example, there are concerns that fracking may contaminate drinking water supplies with harmful chemicals, raising public health issues. Fracking may change local geology in a subs- tantial way, leading to earthquakes. Moreover, fracking can be characterized by methane (a potent GHG) leakage, reversing one of the potential advantages of gas over “dirtier” fuels such as coal. More effective governance of social and environmental issues in unconventional oil and gas developments is needed. Some of the main challenges associated with new developments include water use and management, surface planning to minimize disruption of other local productive activities, public disclosure of chemicals, air emissions, and GHG from flaring and venting. Government must improve coordination of the issuance of regulations and actions taken by energy and environmental authorities, particularly between federal and provincial levels. Such improvements could result in, for example, (i) minimizing potentially negative en- vironmental and social impacts of oil and gas operations on regional economies, (ii) harmonizing environ- mental regulations, (iii) planning infrastructure expansion, and (iv) increasing local content of supply and services. New unconventional hydrocarbon developments must engage properly with potentially affected communities. is recycled (compared with 46 percent in Organisation programs, already exist; but increasing their capacity and for Economic Co-operation and Development countries), increasing separation of waste at the source remain main and most of that material is estimated to be recovered challenges. mostly by informal waste pickers (cartoneros) (Bioenergy Consult). In Ciudad Autonoma de Buenos Aires, despite Accelerating a transition toward a circular economy a “zero waste” plan set by the Ley 1854 Gestión Integral would enable a more efficient use of resources and de Residuos Sólidos, the ambitious target to reduce the improve livability, but this transition needs coordinated amount of recyclable materials being sent to landfills actions. Solid waste management has followed an by 2020 is still far from being met. However, there are inefficient linear model with low reuse and recycling important opportunities to reduce impacts of inefficient rates that if improved could result in significant savings, waste management and reduce GHG emissions: in many social opportunities, and environmental benefits. MAyDS parts of the country, facilities that collect and combust is currently promoting a circular approach for integrated methane from landfills, and recycling and composting waste management, with the National Plan for Circular 128 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Economy (Plan Estratégico Provincial PEP para la gestión from an environmental standpoint, can pose risks to the integral de residuos sólidos urbanos hacia una economía investments in the sector (box 4.2). Minimum standards circular). This plan set the guidelines for “Provincial need to be established, and capacities to enforce Strategic Plans of Waste Management toward a Circular regulation at the provincial level need to be strengthened. Economy,” instruments the provinces must develop, with the participation of municipalities, to identify guidelines, actions, and policies for improving waste management at the province level. The development of these plans is a step in the right direction toward pursuing a circular model that maintains the value of products and materials for as long as possible and minimizes waste and resource use. The circular model is also expected to reduce the long- term costs related to dependence on landfills, provide substantial net materials savings, provide opportunities for innovation, and contribute to job creation. A key element to achieving environmental sustainability is to identify and assess the risks and impacts associated with investments and policies. This is the role of Environmental Impact Assessment (EIA), when it comes to projects, and Strategic Environmental Assessment (SEA), when it comes to policies and programs. Although the federal environmental framework requires that the relevant authorities (provinces and sectors) conduct EIAs for projects with significant impacts, there are no regulations at the federal level that establish minimum requirements for the use of this instrument across all provinces and sectors. Compared to international best practice, shortcomings include (i) lack of standardized criteria to evaluate risks and impacts; (ii) lack of adequate screening to identify the projects that should be subject to EIA; (iii) limited public participation; and (iv) weak monitoring to ensure that the mitigation measures proposed by the EIA are implemented (World Bank 2016a). As a result, EIAs have largely been used as procedural permitting tools to allow major projects to move forward, rather than as tools to guide project design through impact assessment and stakeholder buy- in. This situation needs to be fixed: it poses a risk not only to the environment but also to growth, as noncompliant projects can be attacked and eventually stopped by public outcry. Oil and gas developments, if not well managed ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 129 130 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY CHAPTER 5 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 131 PRIORITIES FOR Argentina can learn from the lessons of its previous reform episodes. Many past reform efforts underestimated A SUSTAINED AND the importance of a proper sequencing, necessary INCLUSIVE GROWTH complementary policies, or the social costs of the transition. Without broad-based support and appropriate safeguards for the vulnerable, for example, the reform process might stall, and could even be reverted. The proposed reforms can, however, face a different fate than The main objective of this study is to identify what are previous efforts in that they seek to put a comprehensive for Argentina the most critical factors constraining or package of policies in place to tackle, at the same time, driving growth, inclusiveness, and sustainability. The growth challenges, inclusion concerns, and the potentially constraints emerge from the analysis presented in large scope for productivity improvements and natural the previous sections, based on recent evidence and capital-based growth. studies carried out by the World Bank and other national and international institutions as well as the academic Moving along the reform path will not be easy. The forces literature. In this chapter, the constraints are listed, and that caused political and economic volatility in the past further distilled, with the help of a prioritization exercise. still linger and are likely to influence the future. Just as This section also highlights areas where there are data this report was about to be completed, high devaluation and knowledge gaps (see appendix C). pressures forced Argentina’s government to increase its focus on short-term macroeconomic stabilization Prioritizing reforms for shared priorities. Important reforms cannot be carried out prosperity if certain preconditions haven’t been met. Not only is ensuring macroeconomic stability, for example, a A prioritization and sequencing of reforms is critical given precondition for other priorities but failure to do so can the broad reform agenda Argentina faces. The country has also undermine most of the progress achieved across embarked on the transition to becoming a more globally other dimensions. integrated, competitive economy. Such a shift implies a large reallocation of factors of production away from Some of the reforms identified in this chapter are already non-tradable, low-productivity sectors into more dynamic underway, but there is a risk that the present context will tradable sectors, which necessarily entails winners mask the sense of urgency of key structural reforms whose and losers in the short to medium term. The transition results are seen in the longer term. Continuing with the occurs when the government is also tackling persistent reform process is crucial, but the short-term focus in the macroeconomic imbalances and significant currency country is, rightly so, on dealing with the macroeconomic turmoil that make the country vulnerable to external imbalances and the pressing fiscal challenges. Sustaining shocks and domestic tensions. In this context, a careful a long-term commitment to policy reform on behalf of design in terms of setting priorities and sequencing is key, politicians, the private sector, and the population at large as is putting in place social policies and sectoral plans is challenging given the complexity and extensiveness of to mitigate the adverse impacts of the economic reform the reform agenda. Clearly communicating the gains and program. Current government policies are consistent with longer-term impact can help, as will political dialogue this approach, which not only protects the vulnerable, but around interventions to minimize social conflict and increases the probability of a lasting social consensus generate the political capital needed. Over time, results developing in support of the reform program. achieved in these areas may serve to build political support and shift incentives. 132 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Prioritization process country knowledge and SCD filters; (iii) a description of the priority areas identified; (iv) a systematic With the long list of constraints identified throughout this prioritization exercise to identify opportunities within the Systematic Country Diagnostic (SCD), it was necessary priority areas; and (v) a description of the opportunities to distinguish those that are most critical to achieving identified (figure 5.1). The consultations resulted in broad sustainable and inclusive growth. To prioritize among the agreement on the cross-cutting necessities and a number constraints to growth and shared prosperity, the report of priority areas albeit with some differences in view and uses the following criteria: approach. • Impact on the twin goals: This filter looks at the potential impact of removing a constraint on reducing poverty and increasing the welfare of the poorest 40 Priorities percent of the population. Priorities are organized into two categories: (i) cross- • Complementarities: This filter assesses the degree cutting institutional factors to enable growth and (ii) to which an opportunity identified in one area might thematic priorities.. Cross-cutting enablers are “drivers have positive impacts in other priority areas. There are of success” for the more traditional thematic priorities. strong connections across a number of the challenges, Enablers can magnify the effects of other reforms and and addressing one set of constraints might also their impacts on growth, inclusion, and sustainability over trigger or be a condition for progress in other areas. the long term. They tend to be institutional in nature. As highlighted in chapter 2, the architecture of Argentina’s • Sequencing: This filter identified those constraints political and economic institutions plays a fundamental that need to be tackled before others in order to role as the underling determinant of policy outcomes. achieve sustainable and inclusive growth. Moving toward a sustainable and inclusive development model can therefore prove difficult without addressing In addition, the analysis reveals a number of cross-cutting some of the more pressing institutional challenges priorities that need to be in place for the reform program and governance constraints. The design and successful to succeed and enable growth. These necessary cross- implementation of policies—in any sector or at any cutting institutional factors emerged out of several of the level of government—are, to a large extent, determined diagnostics on constraints. by the strength of the institutions and the coordination across levels. This section introduces the set of cross- The SCD prioritization criteria were applied throughout cutting institutional factors to enable growth, which the prioritization process, which had five elements: (i) a have emerged from the analysis and consultation process diagnostic of growth, inclusiveness, and sustainability; across most of the areas, and the sector-specific list of (ii) an analytical benchmarking exercise combined with priorities identified.   Figure 5.1: Prioritization process Benchmarking Country Country Identified Oportunities Diagnostic Knowledge Knowledge priority areas identified SCD filters SCD filters ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 133 Cross-cutting institutional factors to of government can undermine policy making. In addition, enable growth transparency reforms and open data initiatives can promote rational decision making based on best available Strengthening the independence and efficiency of evidence. Further efforts are needed to promote the reuse accountability institutions will ensure law enforcement of these data and the dissemination of information to and reduce corruption. Transitioning toward a sustainable increase public scrutiny. In a context of often politicized and inclusive development model will prove difficult debates on where and how to allocate scarce public without addressing some of the pressing and fundamental resources, evidence-based policy making can help bridge institutional challenges and governance constraints, the ideological divide and support a rational debate including the need to ensure an impersonal application about policy goals and strategic priorities. By centering of rules (from the “rule by law” to the “rule of law”). The on expected outcomes and rigorous assessment of the experience of many countries shows that constitutional impact of public policies, an evidence-based approach constraints become self-reinforcing when power in the can help government focus policy making on effectiveness system is distributed evenly and when powerful elites of social interventions and efficiency of resource use. and the political “system” accept the law’s limitations This approach can help mitigate polarization among (Fukuyama 2010, 2014; North, Wallis, and Weingast political and economic actors and increase the chances of 2009).For this transition to happen in Argentina, further bipartisan agreement. efforts are needed to ensure better contract enforcement, an independent judiciary, and stronger accountability In addition, Argentina can establish institutionalized institutions across all levels of government to be able to spaces for consultation and public deliberation to prosecute and sanction corrupt behavior.  Over the past increase the legitimacy of proposed policy trajectories three years, Argentina has made important strides in and maximize compliance by all stakeholders involved strengthening accountability and anticorruption efforts: in the reform process. The process whereby policies it has passed or is discussing new or overhauled laws are adopted and implemented is as important for in the areas of corporate criminal liability, access to success as the specific content of such policies. For this information, ethics and integrity, plea bargaining, and reason, the adoption of important policy and regulatory asset recovery; and accountability mechanisms have reforms across sectors should involve the creation of been strengthened significantly, such as those of the Anti- institutionalized spaces where multiple interest groups, Corruption Office. In part, the revelations surrounding the business associations, and ordinary citizens can have cuadernos scandal—which are increasing in number and a bigger say in the content of the proposed reform. The scale on a daily basis as this report is finalized—are fruits public nature of such spaces will be critical to reduce of such strengthened institutions. But this can only be a risks of capture, thereby rebalancing the influence of beginning of the necessary deep-rooted changes. more powerful interest groups. The recent experience of subsidy reforms suggests that public deliberation and Supporting evidence-based decision making that participation mechanisms can also be an effective—and uses high-quality data and information systems could legally enforced—mechanism to overcome polarization contribute to reaching consensus and advancing reforms. and increase support for highly contested reforms, Good, comprehensive data and information systems are achieve early wins, and mitigate adjustment costs.1 This necessary for the diagnosis, design, implementation, and strategy is particularly relevant for regulations aimed at monitoring and evaluation of key policy areas. Yet the improving the business environment because compliance challenges in data availability across sectors are large, is usually higher as a result of the co-participation of and the sharing practices even within different sectors various actors in the decision-making process. 1  Subsidies to energy and transportation were introduced in 2006 to dampen the impact of rising prices and protect incomes of the poor. These 134 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Making federalism work by promoting cooperative improvements in the intergovernmental fiscal transfer behavior across governmental levels will be central to system. These improvements could include the rollout ensure successful implementation of policies. As indicated of federal guidelines on public financial management to above, the need to provide homogeneous services across better monitor expenditures and promote more efficient heterogeneous provinces generates perverse expenditure allocation of resources. In this sense, incentives could be and revenue collection incentives, resulting in substantial provided for the provinces in the form of results-based fiscal challenges. Historically, the policy instruments and grant schemes and conditional transfers that reward processes used to negotiate these distributional tensions efficiency in public spending, prudent fiscal management, between the national and provincial governments, and compliance with federal guidelines, policy regulations, (including participaciones to provinces, public transfers, and jointly agreed reform priorities. The Council of pensions, subsidies, and taxation) have made it difficult Australian Governments may serve as an example for for Argentina to achieve its long-term development Argentina’s ongoing efforts to institutionalize rules-based objectives. Moreover, in many cases, decision making and forms of coordination and cooperation between the federal implementation are decentralized to various regulatory government and the provinces (box 5.1). agencies, without appropriate coordination mechanisms, which leads to increased fragmentation and undermines Thematic priorities the capacity of the federal government to guide implementation. Argentina therefore urgently needs to make Inclusive and sustainable growth will require progress on federalism work by promoting more cooperative behavior both equity and productivity fronts, as well as ensuring in which national, state, and local governments interact macroeconomic stability and enhancing environmental cooperatively and collectively to solve common problems. sustainability. The analysis done as part of the SCD To this end, stronger central coordination would assist in process identified a large set of economic priorities making government actions more coherent and aligned with 12 considered to be core. These priorities have with the overall strategic priorities and orientation of the been also assessed in terms of their impact on the country’s development agenda. Coordination of policies twin goals, their complementarity with the rest of the can be improved also promoting reforms (such as those priorities, and their role as essential preconditions to the needed in education) that create incentives for subnational successful achievement of the remaining priorities. This governments to improve public spending efficiency and assessment is presented in table 5.1 and has been largely comply with national policy guidelines and regulations, confirmed through the systematic consultation with similar to the existing ones used in the health sector (Plan national and international experts. Thematic priorities Sumar). Although the institutional architecture that defines are grouped according to the pathways toward inclusive the nature of fiscal federalism in Argentina is hard to change and sustainable growth: (i) putting the macroeconomic in the short term, the “fiscal pact” signed in November 2017 fundamentals in place, (ii) opening the economy, (iii) by the federal government and 23 of 24 provinces2 suggests fostering an inclusive economy, and (iv) investing in there might be opportunities to introduce incremental natural capital and ensuring environmental sustainability. subsidies reached almost 5 percent of GDP by 2016. Families paid on average between 15 and 20 percent of the total cost of the subsidized services, with a large proportion of the subsidies going to the middle class and the rich. After two months in office, the new government announced that energy subsidies were to be phased out gradually until 2019, and it created a social tariff system to protect low-income households. A few months after the announcement, the Supreme Court ruled that the hike in gas prices was illegal and must be postponed until the government organized public deliberations, as required by the constitution. These were held in September 2016, and the tariff change was passed a month later. Since then, new tariff increases for both piped gas and electricity were preceded by similar public deliberations with the active participation of civil society (the last one took place November 13–17, 2017). 2  The agreement addresses some of the long-lasting fiscal disputes between different levels of government in Argentina. Its mechanisms include the implementation of fiscal rules, the gradual reduction of distortive taxes at the provincial level, the resolution of lawsuits against the federal go- vernment, political support to change the pensions indexation formula, and a partial redesign of the revenue transfer system to compensate for the historical discrimination of the Province of Buenos Aires. The draft bill is expected to be sent to each subnational congress for ratification. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 135 Box 5.1. Setting incentives to promote intergovernmental cooperation: The Australian experience The Council of Australian Governments (COAG), established in 1992, is the highest-level intergovernmental forum in Australia, comprising the prime minister (chair), state premiers, territory chief ministers, and the president of the Australian Local Government Association. The role of COAG is to initiate, develop, and monitor the implementation of policy reforms that are of national significance and that require coordina- tion and cooperative action by Australian governments. Where formal agreements are reached, these may be embodied in intergovernmental agreements, including National Agreements and National Partnership Agreements. COAG has a strong record of driving reforms that have improved the lives of all Australians. For example, the package of economic reform policies linked to national competition policy in the mid-1990s left a legacy of a more competitive, efficient, and flexible economy that has enabled Australia to meet key economic challenges in the last 20 years.a Australia’s National Competition Policy (NCP) linked untied performance grants to states achieving certain regulatory reform objectives intended to promote economic growth. An important feature of the institutio- nal framework was the use of financial incentives — in the form of performance-based grants —made by the Australian Government to the States and Territories to ‘return’ the fiscal dividend from their implementation of agreed reform commitments. Prior to the scheduled payment of the transfer in each year, an indepen- dent body - the National Competition Council (NCC) - assessed whether each State had met the specified performance targets and provided recommendations for consideration by the Australian Government in terms of rewards or sanctions (reduction of the size of the grant to be transferred). The NCP is recognized as having made a significant contribution to Australia’s welfare, aligning the incentives of central and state government toward meeting jointly-defined reform commitments. The Australian experience also demons- trates that the grants involved need not be large, because the policy was based on an intergovernmental agreement and a mutually accepted settlement scheme rather than imposed from above. a. Information from COAG’s website, http://www.coag.gov.au/. Source: Parker 2009; Commonwealth of Australia 2009. Proper sequencing of the reforms will be a key element implementing large structural reforms reveals substantial for government actions. Although the priorities identified potential gains; however, prior experience has also shown in the table below are fundamental for sustainable and that proper sequencing and monitoring are essential to inclusive growth, the sequencing of reforms is essential success. Comprehensive reform programs to deepen for success. Macroeconomic instability, as mentioned competition and open up the economies to trade and before, is a basic precondition for the success of the investment in Australia, Mexico, and Sweden took a reform effort. It is also undeniable that improving the decade or more to put in place. In addition, appropriate quality of social spending and investing in human capital interinstitutional coordination at the federal level and are priorities that will see their fruits in the medium and between the national and subnational governments, as long run, but today’s inaction can prove costly. Within well as public–private dialogue, is required to achieve some of the priorities, sequencing of specific measures early wins and consolidate the reform process. Finally, is also fundamental—for example, deepening domestic improving infrastructure spending appears not only as a competition prior to successfully integrating the country precondition but also to have strong complementarities into the global economy. International experience with with other policies identified. 136 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY TABLE 5.1. HEAT MAP WITH FILTERS Impact on twin Priorities (12 highest out of 29) Complementarities Sequentiality goals Ensure sound macroeconomic management    Improve fiscal policy for growth and equity    Improving infrastructure    Develop and deepen financial and capital markets and    household access to credit Increase integration into the global economy    Reduce barriers to competition and lower logistic costs    Improve the quality and relevance of education    Increase the efficiency of spending in health and    education while ensuring equal quality for all Close the gaps in the provision of basic infrastructure    services Ensure pensions are sustainable    Harness natural capital endowments through policies    and investments Foster climate smart growth for the short and the long-    term Note: The number of boxes next to each of priorities reflects the average importance of the priority for each of the filters, as derived from the analysis and confirmed by polling with internal and external stakeholders.  denotes that the priority is “very important” for the relevant filter;  denotes that the priority is “important” and that a high proportion of consulted stakeholders confirmed this; and  denotes that, although the priority is “important,” a lower proportion of consulted stakeholders consider it so. The prioritization exercise suggests two tiers of First-tier reforms priorities. Reforms included in the first tier are of first- order relevance, or very important across the three These reforms are led by sound macroeconomic filters. These priorities include sound macroeconomic management, which is also key in the short run, given management, better infrastructure, improved quality current financial distress. This reform builds from the and relevance of education, and increased efficiency of diagnosis that macroeconomic mismanagement and spending. Improved fiscal policy for growth and equity frequent economic policy reversals have been a source can be pooled in the first-tier group, though with slightly and outcome of successive boom-and-bust cycles and less impact on the twin goals. A second tier is headed by welfare swings. In this context macroeconomic stability closing the gap in the provision of basic infrastructure is a precondition for the actual unfolding of the reform services, important across the three dimensions, and agenda. This is tightly linked to an improved fiscal policy includes the other priorities that have varying degrees of for growth and equity because sound macroeconomic importance across the three filters. management also entails a rebalancing of fiscal policy ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 137 to reduce economic distortions and have an expenditure education, and increasing the efficiency of health and and tax policy that better supports growth and equity. education provision while ensuring equal quality for Public expenditure needs to move to a sustainable level all. On the quality and relevance of education, school in relation to economic output. Given the size of current readiness and early literacy skills are low, despite fiscal imbalances, a fiscal consolidation is essential relatively high coverage. A focus on quality will also to stabilize public debt. Cuts to subsidies and other call for strengthening teachers’ careers by improving inefficient government programs need to continue, and training curriculum, consolidating the network of the medium- to long-term aim should be to increase the training institutes, and creating the conditions to attract share of spending on growth-enhancing measures such as teachers and motivate them to perform. Recent reforms priority public investment projects. The tax system needs establishing annual standardized testing of students’ to be redesigned to reduce the weight of distortionary learning outcomes, enforcing the communication of taxes and to broaden the tax base. This should include results to schools, and pre-service teachers’ evaluations a clear definition of expenditure responsibilities across should contribute toward focusing the system on quality, different levels of government, a sound intergovernmental although teacher evaluations are still pending. In fact, fiscal transfer system to ensure the efficient and equitable resistance by teachers’ unions to education reforms are provision of public services, and improved subnational generally focused on changes in teachers’ professional revenue-collection incentives. development. In addition, it will be essential to revamp secondary education, focusing on developing critical Enhancing infrastructure is also seen as an objective of first- basic cognitive and (21st-century) soft skills in line with order importance. The quality of Argentina's infrastructure Secundaria 2030. stock is deteriorating, and this poses a challenge to competitiveness. Infrastructure investment is historically With respect to increased efficiency in health and low, with very low participation of private sector financing, education, completion rates are low, learning outcomes and is unlikely to grow much because of limited fiscal are poor, and health outcomes high and unequal across space. Moreover, logistics performance indicators are provinces. Unequal access to quality services and generally lagging. Good infrastructure and lower logistic inefficiencies reflect highly fragmented systems that lack costs are key to Argentina’s ambitions in terms of growth. coordination mechanisms across systems and subnational Although financing is a key bottleneck, more focused entities. Increasing efficiency will require making policies national and territorial goals and efficient strategies can that are increasingly guided by evidence to help identify substantially reduce financing needs. In addition, upstream cost-saving initiatives, and a solid system of monitoring reforms will enable Argentina to both improve spending and evaluation. In health, efficiency could be substantially efficiency and attract private financing on better terms— improved by establishing an appropriate model of care, whether through public–private partnerships or through where (i) several providers, including a main primary commercial borrowing by public enterprises. Efforts to care provider, work together in an integrated, coordinated improve public investment institutions and frameworks— manner to provide care for an individual (with integrated notably budgeting and procurement systems—should information systems) and (ii) there is an emphasis on enable the country to substantially stretch the resources it actively expanding effective coverage at the primary care already allocates to infrastructure. An improved framework level. As a result of these efforts, the health system would for infrastructure planning, financing, and investing will be indeed be better placed to strengthen the prevention and a key driver of competitiveness. control of noncommunicable diseases, especially in the context of an aging population. This also calls for the Two first-tier reforms are related to fostering an inclusive reduction of common risk factors associated with these economy: improving the quality and relevance of diseases, such as unhealthy diets (particularly among 138 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY children, where obesity is high), physical inactivity, Two reforms directly linked to the open economy tobacco use, and alcohol abuse. development strategy stand out for their impact on the twin goals and complementarities: increasing integration Second-tier reforms into the global economy and reducing barriers to competition and lower logistic costs. Key trade policy This group of very relevant reforms with a slightly lower actions include lowering tariffs and nontariff measures in level of priority is led by closing the gap in the provision priority sectors, unilaterally reducing nontariff measures of basic infrastructure services. Broad disparities in input products, removing nonautomatic licenses to persist in basic services, informal settlements, and increase predictability, and boosting regional integration connective infrastructure across regions and within large agreements to increase market access. Competition and agglomerations. Access to safely managed water and trade authorities can further coordinate to harmonize sanitation services varies significantly across regions and technical standards with trade partners. To improve between the core and the peripheries of large cities. There investment policy, Argentina can revise the incentives are 4,000 informal settlements in the country. Closing framework, introduce effective policies to promote basic infrastructure service gaps, investing in connective links with local suppliers, and set up comprehensive infrastructure, and strengthening local capacity will be regulatory improvement and simplification mechanisms. key for the convergence of living standards and for linking Jointly among competition and investment promotion populations to economic opportunities. This will require authorities, the government can open up key sectors enhancing integrated planning across different sectors, to investment. On the competition and logistics side, as well as widening the financial options and developing Argentina can continue strengthening its anticartel clear mechanisms to set up transparent systems of fiscal enforcement, implement the recently overhauled merger transfers across different levels of government. control framework, strengthen pro-competition sector regulation in key sectors such as telecommunications A closely related priority refers to the development and transport, and implement competitive neutrality and deepening of financial and capital markets and principles to ensure that public and private operators household access to credit, which could be thought of compete on a level playing field. The competition authority as access to basic financial services. Argentina’s very will need to be well-resourced, prioritize its engagements shallow financial markets reflect a gap in mechanisms and actions, and achieve technical independence. that could better support growth, infrastructure, housing, and enterprise development for the private sector. Two priorities on natural capital and environmental Households, particularly those that are more vulnerable, sustainability stand out. On the one hand, “foster climate- have limited access to credit for productive investment smart growth for the short and the long term” relates to and asset accumulation. Poorer people rely on personal the climate impacts that are rapidly coming to the fore loans or credit cards, with high interest rates. Expanding of Argentines’ lives and economic activities. Whereas credit and mortgage markets will be essential. The appropriate adaptation policies in key sectors including new legal frameworks are encouraging, but substantial agriculture, water, energy, and health can help deal with regulatory and institutional rollout measures are needed impacts in the present, a more systemic approach can offer to ensure that financial and capital market products can more robust outcomes. By the end of this century, under operate in an enabling environment. These measures will an extreme emissions scenario, the projected warming also ensure that the government works with the private could reach an average change of about 3.5 degrees sector in developing new and innovative instruments to Celsius in the north of the country, relative to present-day promote long-term finance for productive purposes and to conditions. This will produce important social, economic, generate new asset classes of financial instruments that and environmental impacts that will require strong policy can be more transparently priced and traded. shifts. Priorities to adapt to climate change involve proper ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 139 Box 5.2. SCD consultation process During the SCD preparation, the team carried out broad and intensive consultations both within the World Bank Group and with a large number of relevant stakeholders in the country. These consultations, carried out jointly by the World Bank and the International Finance Corporation, helped identify the key challenges and constraints, and the crucial analytical pieces that fit into the analysis. Internal consultations in Buenos Aires and Washington, DC, began during July–August 2017 and included the broader Argentina country team, the Latin America and Caribbean Chief Economist office, the Environment Chief Economist Office, the Global Practices, and the Country Management Unit. They continued throughout the preparation of the SCD, and in the last phase they included several country team meetings for the internal prioritization exercise. A list of external participants can be found in appendix E. External consultations were held in Argentina on several occasions. A first round took place in Buenos Aires during November and early December 2017, with experts, civil society, private sector representatives, and politicians. These discussions were crucial to validate the diagnosis and receive feedback on emerging priorities. Given the SCD’s emphasis on institutional constraints to development, the team organized a one- day closed-door workshop on the political economy of institutional reforms in November 2017, targeting high-level politicians (including former presidential candidates, congressional representatives, and provin- cial ministers), the private sector (International Finance Corporation clients NXTP, Vicentin, Afluenta, and CMF), and national academics (including institutional economists and political scientists). The meeting was chaired by the country director and facilitated by a local nongovernment organization, Fundación RAP (Red de Acción Política), and organized in two sessions. In the first session, the discussion aimed at validating and enriching the team’s preliminary diagnostics by identifying a long list of institutional reforms (20) nee- ded to address the most important constraints to inclusive and sustainable growth. In the second session, a short list of reforms was prioritized according to their potential for economic impact and their political/ social feasibility. Among the reforms that are perceived as most impactful and most likely, the following were highlighted: addressing educational challenges, clarifying functions and responsibilities across levels of government, and improving efficiency and transparency of national and subnational expenditures. A se- cond round of consultations took place in March 2018 with with a select group of cross-sectoral experts who examined and validated the preliminary priorities. A second round of consultations—held between April and May—involved presenting the set of identified constraints to external audience, in order to further validate the list of priorities and ensure the widest consensus around the proposed policy recommendations. This second round included, first, a meeting with three renowned academics, each asked to comment on the pillars of growth, inclusion, and sustainability. Guiding the discussion pillar by pillar resulted in a wide discussion that went beyond the specific areas of interest of each of the guests; this wider discussion helped the team bring the different elements together into a coherent story. In addition, a follow-up closed-door event—which included high-level politicians, members of the academia, and the private sector—was carried out in collaboration with Fundación RAP. There was an overall consensus on the identified priorities. Importantly, there was strong support for the report’s emphasis on the institutional foundations as the necessary preconditions for successful implemen- tation of the proposed technical priorities. 140 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY costing of climate action, contingency planning, and a currently guaranteed given the demographic transition closer integration between the mitigation and adaptation and the current rules. There is a need to consider options agendas. that balance the high levels of generosity (which has recently increased with the Reparación Histórica that On the other hand, “harness natural capital endowments recalculated and adjusted benefits retroactively and through policies and investments” stresses the need to going forward) with the broad coverage while ensuring leverage natural resources for growth in a sustainable future sustainability. This is particularly important as the way. Natural capital in Argentina includes agricultural government starts discussions on a future pension system soils and pastures, water, forests, fisheries, strong wind reform. In this sense, the December 2017 parametric and solar potential, and subsoil assets (oil, gas, coal, and reform will help make the system more sustainable by minerals). Some assets, particularly forest ecosystems changing the pension indexation mechanism to one that and fisheries, are under significant pressures. Argentina ties benefit changes more closely to changes in prices (and has lost 21 percent of its forest cover in less than 25 up to a minor extent to changes in wages). Nonetheless, it years. At the same time, fish stocks have suffered from would be desirable also to broaden the agenda to revise overexploitation because the country lacks a national all the parameters and components of the system, both management plan for sustainable and responsible fishing contributory and noncontributory. with a long-term vision. Yet these resources, along with the strong renewable energy potential, can be important Knowledge and analytical gaps sources of economic rents, jobs, and sustainable livelihoods. Unleashing the potential of natural capital The SCD also underlines critical knowledge gaps and requires breaking with the extractive policies of the areas for further research in Argentina. The most salient past and consolidating a policy framework that attracts areas are described in table 5.2. private sector investments. Policies, incentives, and enforcement are also required to ensure that the open access that characterizes many natural assets, such as forests, land, and fisheries, does not give way to illegality and degradation. Finally, a more sophisticated demand for greener attributes in global value chains is already emerging, and Argentina has much to gain from developing information mechanisms in support of labels and practices that encourage the thriving green businesses throughout the country. Finally, an additional item will become increasingly important as Argentina’s population ages: the need for a social consensus to ensure pensions are sustainable. Pensions are fundamental for protecting the income of the elderly population: poverty rates would be substantially higher without the recent reforms that expanded coverage. Two-thirds of the moratorium goes to the three poorest deciles. But, with 11 percent of GDP already going to pensions, the mid-term sustainability is not ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 141 TABLE 5.2. DATA AND KNOWLEDGE GAPS Sector Data and knowledge gaps Agriculture - Characterization and trends of family farming. - Economic complexity analysis for the sector. - Analysis of the effect of land ownership on productivity growth - Distributional implications of current policies for the sector Education - Early childhood development (ECD) assessments and detailed data on the quality of ECD is not available, as well as on teacher practices and school management skills. - Detailed diagnostic of the sources of inefficiencies in the education sector and the identification of successful interventions to reduce school dropout in Argentina. Environment and natural - Understand causality between poverty and deforestation in rural area. resources - Understand environmental and social impacts to oil and gas development. - Air quality and health impact assessment with local epidemiology data. Cost of environmental degradation. Health, Population and - Recent household survey to assess the health status of the population or the Nutrition quality of the provision of health services provided Growth, Macroeconomics and - Official, homogeneous and updated data on Provincial GDP. Fiscal Management - Firm-level microdata for productivity analyses. - Access to administrative records the tax system (equity and efficiency issues). - Full assessment of the monetary and fiscal frameworks under fiscal dominance. Full assessment of the monetary framework under Poverty and Labor Markets - Poverty and labor market household survey data for rural and small urban areas that will allow for national estimates currently nonexistent - Data and analysis of economic mobility across time for more than one-year period, and of economic mobility across generations. Social Protection and Labor - Data to estimate skill mismatch, linking type of skills demanded by the productive sector that can be matched to supply (labor force survey) - Information on the type of task performed by workers in their occupation, and task content. - Government social spending (national and provincial) cannot be analyzed by age group, considering not only cash transfers but also in-kind transfers. 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POVERTY MEASUREMENT IN ARGENTINA All of this report’s data attributed to “SEDLAC (CEDLAS from 2013 to 2015, official estimates were not released. and the World Bank)” rely on a harmonized version of Third, although INDEC relaunched the publication of this the urban-only household survey data from the Encuesta indicator for the second quarter of 2016, it indicated that Permanente de Hogares–Continua (EPHC). The EPHC is its value was not comparable with previous numbers collected by Argentina’s Instituto Nacional de Estadística because of methodological changes as well as changes y Censos (INDEC) on a continuous basis, and reported related to the use of more up-to-date information on quarterly. The survey is representative of 63 percent of consumption patterns to define the poverty line. Finally, the population, living in the 31 largest urban areas in the different changes related to the treatment of missing country. The harmonization undertaken by CEDLAS and income information and the projections of population the World Bank increases the comparability of household growth were introduced in the EPHC since 2003 that surveys among various Latin American and Caribbean affected comparability. countries, allowing for internationally comparable indicators. Poverty rates are estimated using a US$5.50 International poverty estimates (SEDLAC dataset) are per person per day poverty line, adjusted to US$ in 2011 able to overcome some of these difficulties. For the period purchasing power parity. 2007–16, local inflation comes from private estimates. These estimates do not address changes in the treatment Several issues affected comparisons in official poverty of missing information on incomes and in the projections rates over the years. First, official poverty statistics of population growth, which could affect poverty levels. produced by INDEC were under critiqued from 2007 to However, differences in levels are not significant and, 2013, primarily because of concerns over the consumption importantly, do not modify the trends of different indexes. price index used to update the poverty line. Second, ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 153 APPENDIX B. PROFILE OF THE POOR AND THE BOTTOM 40 Second semester, 2016 (31 Total Poverty ($5.50/day line) Shared prosperity largest cities) Poor Nonpoor B40 T60 T10 Poverty rate and bottom 40 Share of population 100.0 7.8 92.2 40.0 60.0 10.0 Share of households 100.0 4.9 95.1 Recent immigrants 100.0 22.6 77.4 45.1 54.9 19.2 Regions GBA 100.0 7.2 92.8 37.5 62.5 11.9 Pampeana 100.0 8.8 91.2 38.9 61.1 9.3 Norte grande 100.0 9.1 90.9 52.7 47.3 4.5 Cuyo 100.0 9.1 90.9 45.7 54.3 4.7 Patagonia 100.0 3.0 97.0 25.8 74.2 15.4 Demographic characteristics of poor, nonpoor, and bottom 40 Households with female head 39.3 48.5 38.8 40.0 39.0 41.2 (%) Households with four or more 35.9 72.3 34.1 68.8 23.3 7.7 members (%) Average household size 3.1 4.9 3.0 4.4 2.6 1.8 Dependency ratio Children (aged 0–14) per adult 0.4 0.9 0.3 0.7 0.2 0.1 (aged 15–64) Elderly (aged 65+) per adult 0.1 0.0 0.2 0.1 0.4 0.1 (aged 15–64) Age groups Children (aged 0–14) 22.4 41.4 20.8 34.6 14.2 6.8 Adults (aged 15–64) 65.1 57.0 65.8 62.2 67.0 70.3 Elderly (aged 65+) 12.5 1.7 13.5 3.1 18.8 22.9 154 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Second semester, 2016 (31 Total Poverty ($5.50/day line) Shared prosperity largest cities) Poor Nonpoor B40 T60 T10 (selected) Assets and labor outcomes of the poor, nonpoor, and bottom 40 Access to basic services (% of HHs) Access to safely managed water 99.6 97.9 99.7 99.0 99.8 99.9 Access to safely managed 69.1 41.7 70.5 51.2 76.0 89.7 sanitation Less than 1.5 people per room 96.4 79.1 97.3 88.6 99.5 100.0 Precarious location 1.9 6.4 1.7 3.5 1.3 0.7 School attendance Children (aged 3–5) 96.0 96.2 96.0 95.1 97.5 100.0 Children (aged 14–18) 85.2 76.9 86.4 81.4 90.2 98.1 Coupled deprivations (% of its age group) Children (aged 3–17) out of school and no safely managed 0.9 2.3 0.7 2.8 1.0 0.0 water and sanitation Youth (aged 18–25) not 24.9 51.0 22.2 37.2 13.8 3.0 studying or working Elderly (aged 65+) in precarious dwelling and no safely managed 26.4 68.9 25.9 48.6 23.5 8.6 water and sanitation Adult (25+) Below complete secondary 45.0 71.0 43.7 64.2 37.2 14.8 Complete secondary and above 55.0 29.0 56.3 35.8 62.8 85.2 Labor (aged 18+) Unemployment rate 8.0 30.6 6.9 15.2 4.8 1.3 Nonregistered wage earners (as 32.1 77.2 30.7 55.7 23.3 11.7 % of wage earners) Self-employed (as % employed) 17.7 23.0 17.5 24.1 17.4 14.9 Source: Encuesta Permanente de Hogares–Continua, 2016 second semester. Note: Representative of 63 percent of the national population. For reference, the $5.50 per day line per person (in 2011 purchasing power parity) is closer to the national extreme poverty line, which is on average about $4.60 per person per day. The national poverty line is on average for all regions about $11.40 per person per day (2011 purchasing power parity). Bottom 40 (B40) = bottom 40 percent of the income distribution; GBA = Greater Buenos Aires; HH = household; T10 = top 10 percent of the income distribution; T60 = top 60 percent of the income distribution. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 155 APPENDIX C. SELECTED WORLD BANK GROUP ANALYTICAL WORK Sector Selected World Bank Group Analytical Work Agriculture - Argentina Agriculture Sector Report (World Bank 2016) - Logistica de la Soja—Argentina, Uruguay, Paraguay (Gauthier et al. 2016) Education - Argentina, Notas de Políticas Públicas para el Desarrollo. Capítulo 7: “Mejorar la calidad de la educación.” (World Bank 2015b) - World Development Report 2018: Learning to Realize Education’s Promise (World Bank 2018b) Energy and extractives - Diagnóstico de la Prestación de Servicios de Agua, Saneamiento y Electricidad en 10 Provincias del Norte Argentino - Argentina, Notas de Políticas Públicas para el Desarrollo. Capítulo 1: “El Futuro de los Subsidios Residenciales en Argentina.” (World Bank 2015b) Environment and natural - Argentina Country Environmental Analysis (World Bank 2016a) resources - Argentina: Cambio Climático Proyectado y su impacto en la agricultura (2050– 2100). (Fernandes 2016) - Inclusive Green Growth. The Pathway to Sustainable Development(World Bank 2012b) - The Changing Wealth of Nations (Lange, Wodon, and Carey 2018) Governance - World Development Report 2017: Governance and the Law (World Bank 2017b) Health, Population and - Argentina: Toward Universal Health Care Coverage (World Bank 2017d) Nutrition - “Results-Based Financing for Health in Argentina: The Plan Nacer Program” (Cortez et al. 2012) - “Rewarding Provider Performance to Enable a Healthy Start to Life: Evidence from Argentina’s Plan Nacer” (Gertler, Giovagnoli, and Martinez 2014) - “Long-Run Effects of Temporary Incentives on Medical Care Productivity” (Celhay et al. 2015) Growth, Macroeconomics and - “The Anatomy of a Multiple Crisis: Why Was Argentina Special and What Can Fiscal Management We Learn from It?” (Perry and Serven 2003) - “The Credibility of Economic Policy Making in Argentina, 1989–2015” (Rosenblatt 2016) - Argentina: Country Partnership Strategy for the Period of FY2015–18. (World Bank 2014b) Poverty and Labor Markets - “Wage Inequality in Latin America: Understanding the Past to Prepare for the Future” (Messina and Silva 2018). - “Shared Prosperity and Poverty Reduction in Urban Argentina”. (Cord et al . 2015) Social Protection and Labor - Argentina, Notas de Políticas Públicas para el Desarrollo. Capítulo 3: “Protección social y trabajo en Argentina.” (World Bank 2015b) - World Development Report 2013: Jobs (World Bank 2013) 156 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Sector Selected World Bank Group Analytical Work Social, Urban, Rural and - Leveraging the Potential of Argentinean Cities (Muzzini et al. 2017) Resilience - World Development Report 2009: Reshaping Economic Geography (World Bank 2009) - Raising the Bar for Productive Cities in Latin America and the Caribbean (Ferreyra and Roberts. 2018) Transport and ICT - Argentina Transport Engagement Strategy (World Bank 2017f) - “Northwestern Road Development Corridor Project” (World Bank 2017a). - Argentina, Notas de Políticas Públicas para el Desarrollo. Capítulo 5: “Inversión en la Anticuada Infrastructura de Argentina.” (World Bank 2015b) Trade and Competitiveness - Strengthening Argentina’s Integration in the Global Economy: Policy Proposals for Trade, Competitiveness, and Investment (Martinez Licetti et al. 2018) - Trouble in the Making? The Future of Manufacturing-Led Development (Hallward-Driemeier and Nayyar 2017) - “Convergence to the Managerial Frontier” (Maloney and Sarrias 2017) - The Innovation Paradox: Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up (Cirera and Maloney 2017) - “Investment in ICT, Productivity, and Labor Demand : The Case of Argentina” (Brambilla and Tortarolo 2018) Water - Diagnóstico de la Prestación de Servicios de Agua, Saneamiento y Electricidad en 10 Provincias del Norte Argentino (World Bank 2017e) ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 157 APPENDIX D. DATA DIAGNOSTICS FOR WORLD BANK GROUP CLIENT COUNTRIES PREPARED BY THE DEVELOPMENT DATA GROUP OF THE WORLD BANK. COUNTRY: ARGENTINA Section 1: General Information about the Statistical System Legal status of NSO Agency of the Secretariat of Economic and Regional Planning in the National Minis- try of Economy and Public Works and Services Statistical Legislation Statistics Law, 1968, 1993 (latest) NSDS/Statistical masterplan Los lineamientos del Programa Estadístico Nacional 2007–11 Section 2: Micro data Second Optional disaggre- Latest Representati- Data acces- gation (Y/N) Type of census/survey latest (Year) veness sibility (Year) Sex Regional Censuses Population census External 2010 2001 National — — repository Agriculture census 2018 2008 — — — — Business/establishment 2004–05a — — — — — census Household survey on Urban settle- income/consumption ments (61% of External 2018 b 2017 Y Y total popula- repository tion) Household survey on MICS 4 education 2011–12 — — — Y — Household survey on health 2013 National Survey on Se- xual and Repro- ductive Health MICS 4 — — — — (ENSSyR) 2011–12 2013 National Survey of Risk Factors (ENFR)c Labor force survey Urban settle- External 2018 2017 Y Y ments repository Business/establishment Enterprise Enterprise External survey Survey National — — Survey 2010 repository 2006 a. National Economic Census 2004/05, https://www.indec.gob.ar/cne2005_index.asp. b. Encuesta Permanente de Hogares Continua 2017, http://microdatalib.worldbank.org/index.php/catalog/9423. c. Instituto Nacional de Estadística y Censos, https://www.indec.gob.ar/bases-de-datos.asp?solapa=2. 158 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY Section 3: Macro data SDDS Does the country subscribe to the IMF SDDS or participate in the eGDDS? Periodicity Timeliness If SDDS SDDS Country SDDS Country National accounts: GDP by production and Q Q 1Q NLT 1Q expenditure at current and constant prices Consumer price index M M 1M NLT 2W Central government operations M M 1M 1M Balance of payments Q Q 1Q NLT 1Q External debt Q Q 1Q NLT 1Q Merchandise trade M M 8W (4–6W encouraged) 3W Production index M M 6W (1M encouraged) NLT 1M Employment Q Q 1Q 75D Unemployment Q Q 1Q 75D Producer price index M M 1M 3W Section 4: Compliance with WBGs core data standards Actual yearly WBG Standard Compliant (Y/N) interval or % Household survey of income or consumption One every 3 years Y 1 year PPP price survey One every 3 years N 12 years CRVS 80% of births registered Y na 60% of deaths registered Y na with cause of death Section 5: STATISTICAL CAPACITY INDICATORS (2017) Method 80.0 Source Data 90.0 Periodicity 86.7 Overall 85.6 Section 6: DATA OPENNESS INDICATORS Open Data Barometer Score 23.78 Open Data Index Score 60% Note: CRVS = ; eGDDS = ; IMF = International Monetary Fund; M = ; MICS = ; NLT = ; NSDS = ; NSO = ; PPP = ; Q = ; SDDS = ; W = ; WBG = World Bank Group. ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY 159 APPENDIX E. CONSULTATIONS THE SYSTEMATIC COUNTRY DIAGNOSTIC TEAM CONDUCTED EXTERNAL CONSULTATIONS WITH SPECIALISTS AND STAKEHOLDERS FROM THE FOLLOWING ORGANIZATIONS: Type Detail Universities and Universidad Austral nongovernmental organizations Universidad Católica Argentina Universidad de Buenos Aires Universidad de la Plata (CEDLAS) Universidad del CEMA Universidad Di Tella Universidad Nacional de San Martín CADE CEDES CIPPEC Educar 2050 FARN Fundación RAP Fundación Vida Silvestre Genesis Government organizations Instituto Nacional de Asuntos Indígenas Organización de Estados Iberoamericanos para la Educación Private firms and consulting A16 companies Afluenta Bain & Company Banco CMF Celulosa Argentina Despegar Econviews Farmacity HSBC 160 ARGENTINA: ESCAPING CRISES, SUSTAINING GROWTH, SHARING PROSPERITY THE SYSTEMATIC COUNTRY DIAGNOSTIC TEAM CONDUCTED EXTERNAL CONSULTATIONS WITH SPECIALISTS AND STAKEHOLDERS FROM THE FOLLOWING ORGANIZATIONS: Type Detail Private firms and consulting Macroview companies Medanito NXTP Labs Poliarquía Vicentin Members of Congress and Coalición Cívica other politicians GEN PJ PRO UCR Public authorities Federal government Autonomous City of Buenos Aires Province of Buenos Aires Province of Córdoba Province of Salta Province of Santa Fe The World Bank 1818 H Street, NW, Washington, DC 20433, USA. www.worldbank.org