Executive Summary STRENGTHENING ARGENTINA’S INTEGRATION IN THE GLOBAL ECONOMY Policy proposals for trade, investment, and competition Martha Martínez Licetti, Mariana Iootty, Tanja Goodwin, José Signoret, and Roberto Echandi Acknowledgements This publication was prepared at the request of the Government of Argentina and in collaboration with various teams within Argentina’s Ministry of Production. The report was prepared by a World Bank Group team led by Martha Martínez Licetti (Trade and Competitiveness Global Practice, or T&C) and Mariana Iootty (T&C) under the guidance of Jesko Hentschel (Country Director for Argentina, Paraguay, and Uruguay), Marialisa Motta (Practice Manager, T&C), José Guilherme Reis (Practice Manager, T&C), Cecile Fruman (Director, T&C), and Anabel González (Senior Director, T&C). Principal authors of the report, all from the T&C Global Practice, are Martha Martínez Licetti, Mariana Iootty, Tanja Goodwin, and José Signoret. The report is based on three individual background papers written by technical teams across the T&C Global Practice. The following team members led work on specific topics and sections of the report. José Signoret coordinated a team working on trade liberalization estimations, analysis of trade policy, and trade in services that included Syud Amer Ahmed, Maryla Maliszewska, Martín Molinuevo, Nadia Rocha, and Marinos Tsigas. Roberto Echandi directed the team working on investment policy and promotion, which included Valeria di Fiori, Daniela Gómez Altamirano, Gabriela Llobet, José Ramón Perea, and Erik von Uexkull. Tanja Goodwin led the team working on markets and competition policy issues that included Seidu Dauda, Soulange Gramegna, Marta Camiñas, Lucas Grosman, Diego Petrecolla, Florencia Saulino, and Lucía Villarán. The report draws on a mapping of the automotive sector prepared by an International Finance Corporation team led by Guillermo Foscarini. Specific inputs were provided by Aarre Laakso, Morgane Fouche, and Guilherme de Aguiar Falco. Administrative assistance was provided by Osongo Lenga, Cara Zappala, Flavia Dias Braga, Elena Feeney, and Geraldine García. The authors wish to thank the Government of Argentina for valuable inputs and feedback throughout the elaboration of the report, in particular Juan Carlos Hallak, Francisco Mango, Gabriel Michelena, Lucas Rosconi, Lorena Triaca, Martín Goñi, Esteban Greco, Lucía Quesada, Marina Bidart, and Germán Coloma, under the leadership of Miguel Braun and Shunko Rojas. Special thanks go to all staff of Sub-Secretaría de Comercio Exterior, Agencia Argentina de Inversiones y Comercio Internacional (AAICI), and Comisión Nacional de Defensa de la Competencia (CNDC) for sharing their views and collaborating with the team during the missions. The team also received thoughtful insights from private sector representatives and their respective chambers, including the Cámara Argentina de Comercio y Servicios, Cámara de Exportadores de la República Argentina, Cámara de Comercio de Córdoba, Unión Industrial de Córdoba, and Cámara de Supermercados y de Autoservicios de Córdoba. The report has benefited greatly from comments, advice, guidance, and technical discussions with Emily Sinnott, Fernando Giuliano, Daria Taglioni, Frank Sader, Tania Begazo, Najy Benhassine, Alain de Serres, Lusine Lusinyan, David Tinel, and many others. Anabel González and Marialisa Motta have provided critical guidance to the team on policy advice. On international experience with microeconomic structural reform programs, the team benefited greatly from discussions with Allan Fels, Eduardo Peréz-Motta, Jarosław Beldowski, Mårten Blix, and Paul Phumpiu. Executive Summary The administration of President Macri in measures (NTMs) further restrict trade flows with Argentina faces an economy that is poorly effects similar to having tariffs as high as 34 percent. connected with the world economy. Argentina As of October 2016, for around 1,600 tariff lines needs to lift and stabilize economic growth to import licenses are still not subject to automatic create more jobs while reigniting productivity to approval. Countries around the world participate, bring income closer to more advanced economies on average, in about 14 free trade agreements each; (Figure I).1 Integration into global markets provides Argentina is a signatory to only one.3 opportunities to unleash the country’s growth and higher productivity potential by creating conditions Foreign direct investment in Argentina is low. and incentives for markets to function better and The value of foreign direct investment (FDI) inflows resources to be used more efficiently. into Argentina amounted, on average, to only 2 percent of GDP between 2000 and 2015, below the regional average and the average for upper- Argentina has substantial space to middle-income countries (3.6 and 2.4 percent of integrate further into the world economy. GDP, respectively).4 Consistent with low FDI inflows, stock of FDI is also low, and well below the level of comparator countries (Figure III). Weak FDI inflows The economy is particularly closed to trade. and stock exacerbate Argentina’s already low rate Partly as a result of policies put in place by previous of overall investment, which is critical for closing governments, Argentina’s trade flows have fallen by its infrastructure gap. Gross capital formation almost half over the last decade. They dropped from in Argentina was 16 percent of GDP in 2016, 42 percent of gross domestic product (GDP) in 2002 below the Latin America and the Caribbean (LAC) to 26 percent in 2016—slightly above the 1998 level regional average (19 percent) in the same year of 23 percent.2 Trade in services is lower as a share of and significantly below the average among upper- GDP than in all neighboring countries. Argentina’s middle-income countries (32.3 percent) in 2015.5 average import tariff was 13.6 percent in 2015 (Figure II), similar to Brazil (13.5 percent) but well The lack of integration with global markets is above the level of comparator countries. Nontariff mirrored by a lack of competition in domestic 2 markets. New data collected jointly by the Lack of integration could be associated with Organization for Economic Co-operation and the significant price differentials observed Development (OECD) and the World Bank Group among essential food products, sold in (WBG) suggests that product market regulation relatively concentrated domestic markets. Executive Summary (PMR) is not conducive to competition in key sectors Overall, households in Argentina spend 28 percent of the economy, including transport, energy, and of their overall consumption on food products, retail. In fact, according to 2016 data, product market more than the 14 percent in comparator countries.6 regulation is 30 percent more restrictive in Argentina International price comparisons conducted for this than the average across 19 LAC countries and highest report using panel data for the 2010-2015 period among relevant comparator countries (Figure IV). suggest that prices for a series of food products Figure I. GDP growth accounting in Argentina, 1992-2016 15 10 5 0 -5 -10 -15 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Factor Productivity NonICT Capital Contribution ICT Capital Contribution Labor Quality Contribution Labor Quantity Contribution Growth of GDP. log change Source: Data from Conference Board database. Figure II. Average import tariff in Argentina vs. comparator countries 16 13.6 14 12 10 8 Average tariff in comparator economies: 5:5 6 4 2 0 Argentina Brazil South Africa Mexico Malaysia Costa Rica Bulgaria Romania Netherlands Great Britain Finland Ireland Poland Autralia Peru New Zealand Source: Data from World Trade Organization. 3 that make up 85 percent of the food consumption dairy products, wheat bread, and white rice are basket were, on average, almost 50 percent higher significantly higher. This is generally consistent in Argentina when compared to international peers with information on the relatively high degree of and 35 percent higher than countries in the Pacific concentration in these product markets; however, Alliance. Households in Buenos Aires paid, on the level of concentration is only one indicator of average, 13 percent more for basic food products the intensity of competition, and further analysis than their peers in capital cities worldwide.7 These would need to be undertaken at specific stages of results take into account different income levels, the supply chain, as other factors also determine import tariffs, and transport costs. Prices for chicken, effective competition.8 Figure III. Inward FDI stock over GDP in Argentina vs. comparator countries, 2015 (% of GDP) 286 300 250 200 150 102 100 35 35 37 39 40 40 43 44 46 50 15 0 Argentina Finland Brazil OECD New Poland South Australia Mexico United Netherlands Ireland Zealand Africa Kingdom Source: Data from OECD database (https://data.oecd.org/fdi/fdi-stocks.htm) Note: Inward FDI stock is defined as the value of foreign investors' equity in and net loans to enterprises resident in the reporting economy. Figure IV. PMR indicator: Argentina vs. comparator countries, 2013/2016 (Index scale 0 to 6 from least to most restrictive) 4 Barriers to trade and investment Barriers to entrepreneurship State control 3 2 1 0 Arg Arg Brazil Costa South Peru Mexico Romania Poland Bulgaria Ireland Finland Australia New UK Netherlands 2013 2016 Rica Africa Zealand Source: Data from WBG OECD PMR database, 2013, 2016. 4 The current administration is tackling cartel, presented a new competition bill to Congress, these challenges head-on, with notable and promoted changes to strengthen competition early progress. in the card payment market.13 Executive Summary Complementing macroeconomic and fiscal Argentina has much to gain from reforms, the government lifted foreign exchange continuing to pursue its strategy of controls and rolled out reforms to stimulate opening markets and integrating into private investment. The administration approved the world economy by boosting trade, a new public-private partnership framework competition, and investment. and gradual reductions in energy and transport subsidies.9 Trade-related reforms have included the reduction of export taxes and the establishment of Partial and general equilibrium analyses suggest a new import administration system to replace the that trade, competition, and investment policy mostly discretionary licensing regime in place until reforms will boost growth and productivity. This 2015, Declaración Jurada Anticipada de Importación report presents a set of robust empirical analyses to (DJAI), with a simpler monitoring system, Sistema assess the potential impacts from trade, competition, Integral de Monitoreo de Importaciones (SIMI).10 Even and investment policy reforms. just this import licensing reform is expected to boost GDP by at least 0.14 percent over baseline Argentina’s strategy of pursuing unilateral trade projections by 2020.11 policy reforms and regional trade integration will yield permanent gains, if implemented Argentina is displaying a renewed interest in successfully. Using a Computable General engaging in trade negotiations and taking a Equilibrium (CGE) model tailored specifically to more active role in the international policy arena. Argentina, this report assesses the effects of several Argentina has accelerated negotiations for new Free trade reform measures. Simulations of the potential Trade Agreements (FTAs) with the European Union gains from unilateral trade policy reform suggest (EU) and countries of the Pacific Alliance, and has that: bid successfully for the G20 Presidency and the • Removing all export taxes would expand GDP by at hosting of the World Trade Organization (WTO) 11th least 1 percent over baseline projections by 2020. Ministerial Conference. The potential fiscal implications of this measure need to be taken into consideration, however.14 The government has taken steps to restructure • Expanding the import licensing reform (initiated and strengthen its institutions for investment at the end of 2015) would boost the GDP gains promotion and competition policy. The renewed already achieved through the removal of investment promotion agency (IPA), Agencia the DJAI to at least 0.22 percent over baseline Argentina de Inversiones y Comercio Internacional projections by 2020.15 (AAICI), has already facilitated investment in at least 195 cases. This has contributed to the announcement Simulations of the potential gains from of 455 new investment projects in the first 12 months successful trade negotiations suggest that: of this administration, totaling US$ 55 billion in new • A more integrated Mercosur—with lower external investment.12 This is more than double the annual tariffs and streamlined internal NTMs—would amount between 2012 and 2015. The new head and expand Argentina’s economy by at least 1 percent staff at the competition authority, Comisión Nacional over baseline projections by 2030.16 de Defensa de la Competencia (CNDC), have already • A Mercosur–EU FTA would boost Argentinian reduced the time required for merger reviews by exports to the EU by 80 percent over baseline almost 50 percent, sanctioned one price-fixing projections by 2030.17 5 • A Mercosur–Pacific Alliance FTA would boost jobs in response to trade reforms. Overall, for most Argentinian exports to Pacific Alliance countries by of the trade integration scenarios modeled, sugar, 25 percent over baseline projections by 2030.18 metal products, footwear, auto parts, and other manufacturing are sectors that are expected to be more susceptible to experiencing large or moderate Given that the gains would accumulate losses in formal employment. On the other hand, over time, Argentina faces the cost of not some sectors emerge as formal employment pursuing these reforms with every year generators, regardless the trade integration scenario that passes. under consideration. These include services and the other agriculture and meats sectors. Trade liberalization reforms would involve the Argentina can gain even more from “deeper” reallocation of labor across sectors; employment trade agreements and complementary would shrink in certain sectors and would regulatory reforms that foster domestic need to be absorbed by expanding activities. competition. Partial equilibrium analysis suggests Simulations drawn from the CGE model suggest that that “deep provisions” such as commitments with certain sectors would be more susceptible to losing regard to competition and investment in regional Economic impact of trade reforms: a CGE analysis The CGE analysis conducts a comparison between economic outcomes (including GDP, exports, imports, output, and others) that would accrue from policy reforms and the baseline projection of the economy with current policies in place through the medium and long term (2020 and 2030). Figure V illustrates how to interpret the CGE results. The estimated impact of the reform in the long run, for example, is represented by the vertical distance (α) in the figure between a baseline projection of the economy through 2030 without reform and the alternate scenario reflecting the policy changes. Certain effects, such as the potential effect on GDP, can accumulate over time (represented by the area between the curves). Overall, the simulated effects of potential trade opening scenarios using CGE models may underestimate the actual impact.19,20 The results for Argentina are of similar dimensions as those for CGE simulations of trade reforms for other countries, such as Brazil.21 Figure V. Interpreting CGE results α = estimated impact of reform Variable of interest (e.g., GDP) policy reform α baseline projection 2017 2030 Source: Author’s own elaboration. 6 trade agreements, as well as reforms that tackle makes up over 20 percent of global trade.24 Third, anticompetitive business practices, remove entry information communications technology (ICT) tools barriers, and modify product market regulations that can facilitate cross-border e-commerce and the restrict competition would translate into tangible participation of smaller and new entrants in global Executive Summary gains.22 markets by boosting their ability to reach a sufficient • With a Mercosur agreement as deep—in terms scale. of the number of enforceable provisions—as the agreement between the EU, Colombia, First, Argentina has the opportunity to connect and Peru, Argentina would export between 1 to specific segments of regional value chains and 9 percent more parts and components to (RVCs) and GVCs by facilitating trade in Mercosur members. intermediate goods, attracting strategic FDI, • Increasing competition in the manufacturing and building on existing capabilities in specific sector would increase the annual growth rate industries. Trade in parts and components is of labor productivity by 7 percent, on average, higher, on average, for countries that have signed with all else being equal. deeper agreements with provisions on investment, • Reducing the regulatory restrictiveness of competition, and others.25 As mentioned above, competition in Argentinian services sectors evidence provided in this report suggests that (such as energy, transport, professional services, a deeper Mercosur agreement would boost and telecommunications) would translate into Argentina’s trade in parts and components with an additional 0.1 percent to 0.6 percent growth its regional partners. Foreign investors who seek in annual GDP, with all else being equal. efficiencies in Argentina—as opposed to resources or market access—offer the opportunity to connect domestic firms, and in particular small and medium The new global trade landscape opens enterprises (SMEs), to GVCs. For example, building up three specific opportunities for on existing capabilities in specific market segments Argentina: connecting to certain regional (such as auto and food processing), Argentina can and global value chains through foreign attract FDI in these sectors while strengthening direct investment, trading services, and linkages with local suppliers in order to reorient the expanding e-commerce. production structure and integrate into GVCs and/ or RVCs.26 Trade is not growing as quickly as before, and Second, Argentina can leverage comparative its nature has been evolving rapidly, leading advantages in services to increase FDI and to the emergence of new opportunities. Setting exports. Argentina is competitive in knowledge- global economic integration as a priority may seem based services such as software and information to be an unusual choice in light of protectionist technology services, business services, and threats worldwide and slower growth in total trade audiovisual services. Twenty-eight clusters already volumes, but the changing nature of trade over host 1,000 companies and employ 37,000 workers, the past decade opens up specific opportunities and Argentina has attracted some of the world’s for Argentina. As a result of technological changes, leading information technology (IT) companies the content and mode of trade have shifted. First, to invest in the exporting business. Proper trade in intermediate goods has grown faster than interinstitutional coordination across federal and trade in final goods, and FDI has played a crucial provincial governments may help to attract more role in such global value chains (GVCs).23 Second, FDI into the knowledge-based services sectors, but services can be traded by virtually connecting investment incentives need to be well coordinated, provider and consumer, or by one or the other applied in a (fiscally) conservative manner, balanced, moving across borders. Today, trade in services competitively assigned, and properly monitored. 7 Third, Argentina can foster inclusive trade by market policies (such as job search assistance and facilitating cross-border e-commerce for SMEs. training) and passive policies (including income Retail e-commerce in Argentina grew by 50 percent support and social insurance programs) have between 2010 and 2015, displaying much stronger proven to be effective. Complementary policies and progress than selected peer economies in the region reforms in other markets (such as housing, credit, and the average in Latin America. However, its share and infrastructure) play a crucial role in facilitating in world retail e-commerce is one-fifth that of Brazil mobility, thereby reducing adjustment frictions.27 and Australia, which points to untapped potential. Updating legislation on electronic transactions Argentina has recently put in place adjustment and signatures, privacy and data protection, and programs to help domestic workers and consumer protection for online purchases could companies become more competitive, which enhance the growth of e-commerce. By the same is a step toward facilitating the reallocation token, trade facilitation efforts (in particular, in of labor in a context of trade opening and cross-border procedures) need to be enhanced technological changes. Argentina launched the significantly to facilitate e-commerce and trade Programa de Transformación Productiva at the end more broadly. of 2016. This adjustment program is designed to help companies enhance their competitiveness through mechanisms that facilitate improving Argentina can implement mitigation productive processes; implementing jumps in measures to offset the transition costs of scale or technology; developing new products; and opening up to the global economy. reorienting production toward more competitive and dynamic activities that demand long-term, high-quality employment. Within three months Integrating into the global economy and of the launch of this program, about 20 firms had taking advantage of available opportunities presented expansion or conversion projects with will entail transition costs in some segments the potential to add up to 1,000 more workers. The of the economy. Microeconomic reforms, trade government has also launched the Programa “111 integration, and the associated changes in relative mil, aprende a programar,” an initiative that seeks to prices would trigger a reallocation of production train “100,000 programmers, 10,000 professionals, factors (within and between firms and sectors) that and 1,000 technological entrepreneurs” in the next entail efficiency gains, but also adjustment costs. four years to meet the demand from companies in Some segments of Argentina’s manufacturing the knowledge-based services sector. Additional sector are susceptible to adjustment costs. programs of this kind, together with policies to According to data from the Argentinian Chamber protect workers and reduce adjustment frictions, of Commerce and Services, the total number of will increase the social benefits of trade integration. workers in the private sector in sensitive sectors such as automobiles, home appliances, and textiles represents close to 1.7 percent of Argentina’s total International experience in structural labor force, and these industries are concentrated microeconomic reforms reveals potential mainly in Buenos Aires and the central region, gains. However, prior experience has particularly in Córdoba and Santa Fe. also shown that proper sequencing and monitoring are essential to success. International experience suggests that there is no one-size-fits-all strategy for effective mitigation measures, but that protecting workers instead The economy-wide benefits of trade of jobs is good practice. When well-designed and liberalization are well established, and tailored to the country context, both active labor- studies of countries that have executed 8 more comprehensive structural reform structured efficiently and allow complementarity packages suggest that FDI and competition and coordination among them. policy improvements are complementary. A • According to international experience, successful microeconomic reform program to open markets to institutions in charge of promoting FDI have Executive Summary competition in Australia complemented unilateral certain good practices in common: a precise trade liberalization and added 2.5 percent to mandate that allows effective interaction with GDP.28 Substantial structural reforms that opened investors, separate regulatory and promotional Sweden up to FDI in the early 1990s encouraged functions, and a clear sector strategy. Activities private sector participation and strengthened related to trade promotion and investment competition, and these reforms were followed by promotion have, by nature, different needs in the highest productivity growth rate in the OECD terms of staff expertise, skills, target audiences, (aside from the United States) during the period clients, and stakeholders. Best practices point, from 1995 to 2011, together with wage increases. in general, to a split between trade promotion Mexico complemented its early moves toward trade and investment promotion, although some openness with important domestic market reforms IPAs with joint mandates have been successful over the last decade.29 These country case studies in attracting FDI. Ireland’s IDA and the Republic are discussed in this report and can inform not of Korea’s KOTRA are good examples of IPAs only the sequence and nature of reforms, but also with separate and joint mandates, respectively. successful compensation mechanisms to support Another feature of the most effective the adjustment process and mitigate social costs. investment promotion agencies is that they focus on promoting a specific location and do Based on international experience, such not have regulatory roles. A precise mandate ambitious reform programs require a long-term to serve investors, to focus on foreign investors national commitment and interinstitutional and not just domestic investors, and to target coordination. Comprehensive reform programs in strategic sectors—as in the case of knowledge- Sweden, Mexico, and Australia were gradual and based services in Argentina—is also key to took a decade or more. Argentina’s new strategy a conducive investment climate. To address should therefore aim at results beyond this legislative these responsibilities, IPAs can benefit from staff period. Argentina could consider establishing a with a private-sector-minded culture and deep national policy and respective institutional setup business knowledge. that can sustain a comprehensive reform package • Effective competition agencies design and to integrate into the global economy over the implement enforcement and advocacy tools to coming decade. ensure the greatest impact on market outcomes, work to embed competition principles in broader public policies, and operate under technical and To scale up and sustain reform efforts functional autonomy. Autonomy can be critical for a successful transition toward a to applying effective sanctions and issuing more competitive, open, and inclusive recommendations based on objective criteria economy, this report highlights best alone and without political interference. More practices in terms of institutional setup than half of the world’s 120 competition agencies and policy implementation. are institutionally independent from ministerial control. Of these independent agencies, 22 are in developing and transition economies.30 To Institutions in charge of trade, investment, and use scarce public resources effectively, effective competition policy are key to implementing a competition authorities also typically focus on broad national policy of integration into the the most harmful violations of competition— global economy. Successful institutions are typically cartel agreements—and use other antitrust 9 tools, such as merger control, as a residual tool. Against this backdrop, the report maps Agencies set appropriate thresholds for merger key challenges that firms have been notifications to be able to focus on transactions facing in Argentina as they attempt to that are large and may reduce competition integrate into the global economy. To significantly in the medium term. A comparative address these challenges, this report review across 82 countries suggests that these proposes measures in the areas of trade, thresholds are generally aligned with the size of investment and competition policy. the economy. Through dedicated competition advocacy units, agencies also identify and recommend changes to rules and regulations Successful integration into the global economy that may facilitate anticompetitive practices in relies on the following four conditions faced by the first place. Authorities also developed joint firms: (i) opportunities to enter and invest; (ii) access programs and/or collaboration mechanisms to efficient input markets; (iii) ability to compete on with sector regulators in order to foster pro- a level playing field; and (iv) capacity to expand and competition economic regulation. thrive in global markets (Figure VI). • Preparation and conduct of negotiations, as well as implementation of their outcomes, are Specific measures designed under trade, the core responsibilities of trade institutions. investment and competition policy areas can To ensure effective trade negotiation, best influence these conditions and bring positive practices highlight three main responsibilities: effects on market and productivity dynamics analysis, communication and coordination, and while boosting shared prosperity. Figure VII representation. Trade institutions should have illustrates how particular policy measures under institutional capacity to collect, analyze, utilize, these three policy areas are associated with each and disseminate trade-related information, of the four conditions firms face to integrate into and to ensure independent assessment of global economy. If implemented in a coherent the negotiated agreement. Communication way, these measures can bring positive effects and coordination with all stakeholders is also on productivity dynamics, consumer welfare and important. Countries such as the United States generate better jobs. For example, opportunities have set sophisticated interagency coordination to enter may depend on licenses (which might processes to ensure the flow of information be general or sector-specific), approval from the among all involved government agencies. In CNDC to acquire or merge with a local company, terms of consultation and legitimization of potentially an incentive (especially for foreign internal negotiations with the private sector companies) from investment promotion agencies during trade negotiations, countries like Mexico, to cover the risk and cost of investment, approval to through the Coordinating Body of Foreign Trade import (import licenses and tariffs) inputs, and so on. Business Associations (COECE), have successfully When this condition is given, the domestic markets established a recognized consultation process are more contestable, can benefit from knowledge that channels the participation of the private spillovers, and generate new and better jobs. sector and strategic social groups. These functions are best served by representatives Based on this framework, the report highlights who are fully trained in trade policy and potential reforms across these policy areas negotiation techniques and institutions that are to address business and market challenges equipped with crucial resources and skills that in Argentina. Evidence collected for this report ultimately guarantee the predictability of trade suggests that firms that already operate or seek agreements. to invest in Argentina have faced challenges across all four conditions and that the solutions to these challenges lie in all three policy areas (trade, 10 Figure VI. Essential conditions for successful integration into global markets For Argentina to become more competitive and integrate into the global economy… Executive Summary Firms need to have… Opportunities to enter 1 and/or invest as a domestic or foreign firm into a new domestic market Access to efficient input markets 2 (besides labor and capital) through competitively priced inputs and services of quality and variety Ability to compete on a level 3 playing field through nondiscriminatory access to essential facilities and nondistorted market conditions Capacity to expand and 4 thrive in global markets investment, and competition) across the four in the short term and can achieve tangible results. conditions. That is, no one policy alone can ensure Argentina should focus first on policy steps that that these conditions are fulfilled and firms can remove key bottlenecks and yield results in the short integrate into the global economy (Figure VIII). A term, and later on those that require significant summary of policy recommendations is presented resources or comprehensive legal reforms. Table in the matrix at the end of this summary (Table I). It I organizes the recommendations along these reflects the result of a systematic review of all policy lines. For example, removing import bans on areas and regulatory frameworks in key sectors, as used machinery, equipment, and others would well as a prioritization process described below. arguably benefit in particular smaller businesses that cannot afford new machinery and equipment. Rather than sequencing reforms between policy Setting up a systematic inventory of incentives is areas, this report suggests sequencing specific a small but necessary step toward conducting a reform options within each policy area so as thorough evaluation and streamlining of incentive to advance in all three areas simultaneously. programs. Raising merger notification thresholds When assessing the potential sequence of reforms, is an urgent step toward more efficiently using priority should be given to reforms that are feasible the scarce resources of the competition authority. 11 Figure VII. Associations between trade, investment, and competition policy areas and conditions for successful integration into global markets For Argentina to become more competitive in the global economy… Firms need to have… This requires adequate implementa- …generating the following ...and boosting shared tion of Trade, Competition and effects on market and prosperity. Investment Policy instruments at productivity dynamics… the national and subnational level… Opportunities to enter Investor Entry Regimes Knowledge spillovers from Consumer welfare: and/or invest as a Incentive Regimes FDI (especially vertical, More product variety domestic or foreign Investment Promotion Policies through backward and firm into a new and Capacity forward linkages) Better jobs: domestic market With international Market access to domestic Reduced exercise of market standards and markets (import output tariffs power potential for and NTMs) knowledge transfer Custom procedures/border Between-firm/sector from FDI management productivity improvements Reallocation of market Merger control policies shares toward higher-pro- Exclusive rights/monopolies ductivity firms Within-firm productivity Favorable labor and improvements capital markets and Incentives to invest in new innovation infrastructure technologies, cut managerial slack, adopt new management Access to efficient input Conducive environment for Consumer welfare: practices, change input markets linkages with local suppliers Better deals and more variety, improve production through competitively variety for essential processes, change the priced inputs and services Import input tariffs and NTMs consumer products in output mix, and diversify of good quality and variety domestic markets, too Competitive neutrality (with distributional effects) Market regulation in key sectors Ability to compete on a (access, nondiscrimination) level playing field Antitrust enforcement through nondiscriminatory access to essential facilities and undistorted market conditions Capacity to thrive in Investment protection Better Jobs: global markets Investment grievance management More productive jobs Investment aftercare (retention, (learning by exporting, expansion, and diversification) deepening linkages with local suppliers) Export taxes and border management Merger control policies Antitrust enforcement (cartels and abuse of dominance) Note: Purple-colored policy instruments refer to trade instruments, blue to competition policy instruments, and green to investment policy instruments. 12 Strengthening the capacity to investigate cartels Argentina can provide investors with is a critical prerequisite for an effective leniency access to more efficient input markets by program, under which the first cartel member strengthening procompetition regulations. to come forward can seek exemption from fines Executive Summary in return for assistance in pursuing the rest of the cartel. In addition, ensuring the autonomy of the Improved regulatory design in key service input competition agency is key to tackle the most markets could achieve higher contestability in harmful private and public barriers to competition. communications technologies, allow for price signals to attract investment in electricity generation, and reduce the risk of collusion among transport Argentina can open up opportunities providers. Currently, only 40 percent of broadband to enter and invest by addressing connections in Argentina are above 4 megabits per challenges in the business-enabling second, compared to 67 percent in top performers environment. in the region. SMEs lost, on average, 2.4 percent of sales due to outages, which is double the amount in comparator countries. Logistics costs have increased Currently, entrepreneurs generally face difficulties in by 40 percent since 2003, in real terms. starting a business, registering property, and paying taxes. Obtaining a construction permit, for example, In industrial input markets, investors seeking more takes almost a full year. Argentina ranks in the competitive inputs from abroad face nonautomatic bottom third of the Doing Business 2017 ranking licenses and other NTMs, as well as local content of the overall ease of doing business. Some firms requirements. Since 2005, Argentina has increased cannot invest at all because of absolute barriers to its use of temporary barriers to trade (i.e., entry, such as limits to foreign investments in air antidumping measures in place)more rapidly than transport. Where firms want to invest, there is little many other middle-income countries.32 A review predictability in terms of which incentives they can of the market characteristics of products affected access and they are often required to negotiate with by these temporary measures suggests that these several levels of government. barriers may often reinforce market dominance. Argentina can address the red tape and bureaucratic Argentina can strengthen procompetition hurdles by setting general procedures for regulatory regulation in key network sectors, such as transport, simplification and establishing a broad application electricity, and telecommunications. It can further of the silence-is-consent rule. The government strengthen anticartel enforcement, in particular in can further open up key sectors for investment homogenous input markets, and simultaneously and eliminate barriers that limit market entry (for reduce NTMs, including nonautomatic licenses example, in the air transport sector) and improve for input products. Finally, Argentina can actively the incentive framework by setting up systems to promote linkages with domestic firms by setting up help adjudicate, monitor, and evaluate incentive online databases of national suppliers, redesigning schemes. Finally, the government can facilitate entry performance requirements, and avoiding local of firms that organize their activities around imports content requirements. of final goods rather than investment on production by lowering tariffs and NTMs in protected sectors such as furniture, and home appliances, as it was Argentina can strengthen the level playing recently done with computers.31 The large number field and ensure undistorted market of measures related to product standards reveals conditions to allow the most productive opportunities to streamline regulations to lower and efficient firms to grow. trade costs. 13 Argentinian state-owned enterprises (SOEs) operate tax and regulatory neutrality principles for SOEs. In in 17 sectors without a clear set of rules that addition, it can fully revoke instruments that can— guarantee competitive neutrality relative to private even if gradually being phased out—eventually investors. These and other direct government allow for discretionary application, such as the interventions in the market (such as the price Supply Law that enables price control.33 control system) can generate business risk and reduce investor confidence. Argentina can promote firms’ capacity to To ensure that government interventions in the expand and thrive in global markets and market do not reduce predictability for potential to fully integrate into the global economy market entrants, Argentina can establish rules that by reducing nontariff measures, boosting set the right incentives for SOEs to compete in the investor confidence, and facilitating more markets or that simulate competitive outcomes. For efficient review of proposed mergers and example, it can incorporate SOEs under the same acquisitions. regime as joint-stock companies and introduce Figure VIII. Proposed policy actions for Argentina and how they relate to the policy areas of trade, investment, and competition TRADE INVESTMENT • Lower tariffs and NTMs in priority sectors • Revise incentives framework • Unilateral NTM reduction in input products Strengthen the • Introduce effective policies to promote • Remove nonautomatic licenses legal framework linkages with local suppliers to increase predictability for e-commerce • Set up comprehensive regulatory • Boost regional integration agreements improvement and simplification mechanisms to increase market access Address red tape and bureaucratic hurdles that affect ease of doing business and Harmonize trading across Open up key technical standards borders sectors for with trade partners investment COMPETITION • Strengthen anticartel enforcement • Overhaul merger control framework • Strengthen procompetition sector regulation in key input services • Implement competitive neutrality principles 14 In the past, adverse government interventions have institutions. By the same token, the CNDC’s objective prevented investment from expanding and thriving. of ensuring a level playing field among domestic Participation in global production networks has been and foreign competitors could be hampered by stifled by high tariff and nontariff barriers on parts potential discretionary and selective investment Executive Summary and components. As of October 2016, over 1,600 incentives relevant to AAICI. Similarly, attempts by tariff lines are still subject to import licenses that are the Ministry of Production’s Undersecretariat for not subject to automatic approval, and other NTMs Foreign Trade (Sub-Secretaria de Comercio Exterior) and procedural obstacles remain. Existing import to expand market access for Argentinian exporters bans on used capital goods constrain expansion, could be impaired by distortive regulation of input and potentially more so for SMEs that are less able services (such as logistics, telecommunications, to afford new machines. Furthermore, Argentina and energy). The CNDC can also act as a market has an unfavorable track record on investor-state intelligence institution, providing recommendations disputes, even though most of these arose under and analysis on market structure and dynamics previous governments. to other public bodies in order to foster more contestable markets. Argentina can reduce NTMs, harmonize technical standards with trade partners and therefore facilitate Ultimately, Argentina could design better both exports and imports. It can establish clear policies and regulations to break down barriers protocols for addressing problems faced by foreign to competition. In some cases, this will involve investors and proactively create a legal obligation for jointly removing or overriding rules that hinder regulatory agencies to publish proposed regulations competition; in other cases, it means designing before they are enacted. A systematic investor different rules and regulations that achieve response mechanism could also increase investor public policy objectives while minimizing market confidence. Finally, Argentina can overhaul the distortions and preventing that firms do not engage framework for reviewing mergers and acquisitions in anticompetitive behavior. A comprehensive to accelerate efficient firm consolidation. regulatory reform agenda with clear prioritization, improvement mechanisms, and monitoring can tackle this systematically. Given the connections To achieve the full potential of Argentina’s among trade, investment, and competition reintegration into the global economy, policy—in theory and in practical application—all institutions will need to effectively institutions will need to coordinate to ensure that coordinate so that reform initiatives are integrating Argentina into the world economy elicits concurrent, coherent, and integrated in the greatest possible gains in terms of increasing design and implementation. the welfare of the broader population. Looking forward, Argentina could benefit from Reforms in these areas need to be implemented a comprehensive strategy to improve data in a coherent way to ensure that positive payoffs availability—especially at the firm level—as stemming from reforms on one front are not well as further analytical work. Systematic curtailed by inappropriate (or lack of) reforms data collection and statistics are key for detailed on the other two fronts. In this way, firms can design of reform options and estimations of enter and invest in the market, access inputs to potential further reform impact. While individual their products, compete on a level playing field, and surveys such as the Pilot Survey on Innovation expand and thrive in global markets. In line with and Employment Dynamics (Encuesta Nacional Figure VIII, the AAICI will not be able to promote FDI de Dinámica de Empleo e Innovación, or ENDEI, in in GVCs successfully if trade in parts and components Spanish) yield valuable information, Argentina is obstructed by NTMs involving other government could aim to collect firm-level panel data in a 15 consistent manner and make it publicly available enforcement and advocacy implementation. This to academia, specialized government units, and would allow a broader body of research to become private think tanks, making sure to adhere to the available as an input into effective, evidence-based usual data protection standards. This information policy design and as a means to help identify can also be complemented by market-level policy changes that could foster additional reform information stemming from competition momentum. TABLE I. Matrix of policy recommendations Short Term Medium Term Long Term Quick wins: urgent policy actions that Important milestones: policy actions Policies that require high-level, are relatively feasible with short-term that require more substantive legal complex institutional reforms, could impact reforms, negotiations, or institutional encounter substantial political efforts with substantial impact opposition, and/or involve significant external constituencies Open up further opportunities to enter and invest Lower tariffs and NTMs in priority sectors Limit nonautomatic licenses to Unilateral tariff reduction for highly Harmonize standards among the minimum (such as hazardous protected sectors Mercosur parties imports) Pursue FTA with EU Pursue “community reforms” at Mercosur Improve incentive framework to more effectively attract efficiency-seeking FDI Introduce a systematic inventory of Procedural mapping of steps to incentives adjudicate incentives Strengthening monitoring and evaluation of incentives Open key sectors for investment and eliminate barriers that limit market entry Limit government’s liability for losses Eliminate “public hearing” for granting Open domestic air transport market of Aerolineas Argentinas new licenses to foreign carriers Address red tape and bureaucratic hurdles that affect ease of doing business, particularly in the entry phase Better regulation efforts to improve Broad application of “silence is General procedure for regulatory the ease of doing business in key consent” rule simplification areas Enhance access to more efficient input markets for firms Unilateral NTM reduction in input products Remove import ban on used Reduce NTMs for key industrial inputs machinery, equipment, instruments, devices, and parts Introduce effective policies to promote linkages with domestic firms Develop a central (online) database Redesign performance requirements of national suppliers and local content rules, for example revising tax benefits in auto industry Introduce behavioral incentives for firms to enhance capacities Strengthen anticartel enforcement, especially in homogeneous input products Strengthen cartel investigation Elevate sanctions for cartels techniques (IT forensic capabilities) Introduce leniency program 16 TABLE I. Continue Short Term Medium Term Long Term Quick wins: urgent policy actions that Important milestones: policy actions Policies that require high-level, Executive Summary are relatively feasible with short-term that require more substantive legal complex institutional reforms, could impact reforms, negotiations, or institutional encounter substantial political efforts with substantial impact opposition, and/or involve significant external constituencies Enhance access to more efficient input markets for firms Strengthen procompetition sector regulation in key input services Implement rules to protect Fully enforce Mobile Virtual Network Allow pay TV companies to offer competitive neutrality in the telecoms Operator (MVNO) framework telecommunication services sector Guarantee effective nondiscriminatory Review toll exemption rules for - access in rail freight private (‘self’) cargo transport and public cargo transport (to third parties) Enhance predictability and a level playing field for the private sector Implement competitive neutrality principles and eliminate instruments that can limit competition Eliminate the government’s ability to Incorporate SOEs under the same Introduce regulatory and tax neutrality control prices regime as private joint-stock principles for SOEs companies Enhance the capacity of firms to thrive and expand Remove nonautomatic licenses to increase predictability Limit nonautomatic licenses to the minimum (hazardous imports) Reduce regulatory and legal uncertainty through broad regulatory improvement mechanisms Introduce a clear procedural protocol Legal obligation for regulatory Establishment of a systemic investor to enforce problems faced by foreign agencies to publish text or proposed response mechanism investors and arising from regulatory regulations before enactment conduct Strengthen the legal framework for e-commerce Remove exemptions to e-signatures Strengthen consumer protections and e-documents; give validity to all specific to electronic consumers types of e-signature Overhaul merger control framework Raise notification threshold for Introduce fast-track procedures mergers for mergers unlikely to have anticompetitive effects Improve procedural effectiveness in reviewing mergers Note: While this table identifies short-, medium-, and long-term priorities based on the binding constraints, medium- and long-term priorities should be addressed simultaneously with short-term priorities if they require changing the same law. The reforms may also involve other third parties (such as regulators, cancillería, parliament, and others), which this table does not highlight. 17 Notes 1 As seen from the growth accounting exercise, 11 With the removal of the DJAI, the NTM ad valorem total factor productivity has in fact been dragging equivalent is reduced by five percentage points down growth rather than boosting it over the past for many goods sectors. The Computable General few years. Equilibrium (CGE) exercise compares the resulting 2 All values from the World Bank’s World economic outcomes accrued by the introduction Development Indicators (WDI) database. of SIMI/replacement of DJAI versus a baseline 3 Argentina is party to five partial-scope agreements, projection through 2020 without the reform. CGE according to the World Trade Organization’s results show that real GDP would be 0.14 percent regional trade agreements database. higher than the baseline value by 2020. 4 World Bank Group (WBG) analysis using data from 12 Based on Telam (2017) and AAICI (2017). the Argentinian Central Bank shows that, between 13 The competition authority (CNDC) had determined 2012 and 2015, half of this FDI constituted that the payment card acquirer, processor and reinvestment of earnings, artificially boosted, at point of sale operator Prisma (owned by Visa and least in part, by restrictions on repatriation of 14 Argentinian banks) had a dominant position investors’ profits. in the market and recommended changes to the 5 See WDI database. Low (private and public) legal framework for payment cards, many of which investment has led to a declining capital stock have since been implemented. In September 2017, in Argentina, with direct effects on infrastructure CNDC accepted a divestment plan by Prisma that quantity and quality. According to (World Bank, also obliges the firm to offer its payment processing 2015), Argentina dropped 62 positions in the services to competitors in a nondiscriminatory way. worldwide ranking of infrastructure quality In March 2017, banks, payment card companies, between 2006 and 2015, as per the World and chambers of commerce in Argentina agreed Economic Forum survey. Investing more in on a plan to gradually interchange fees from 3 infrastructure would be a key driver to increase percent to 1.8 percent by 2021. the country’s competitiveness by enabling firms 14 See discussion on the fiscal implications in the to reap the benefits of further integration with the main report. global economy. FDI can play a pivotal role in this 15 As mentioned above, CGE results show that the area. removal of DJAI and introduction of SIMI at the end 6 Percent of household final consumption of 2015 would increase real GDP by 0.14 percent expenditures spent on food that were consumed above the baseline value by 2020. This “elimination at home (in 2016), as computed by Economic of DJAI” scenario is considered a partial reform Research Services of US Department of Agriculture. in the sense that nonautomatic import licenses The comparator countries are the same as used still cover a share of trade in certain sectors; as of across this report. When considering only the October 2016, about 1,600 tariff lines remained developing economies in this comparator group, with import licenses that were not subject to the average share is 18 percent. Data available at: automatic approval. CGE simulations suggest that https://www.ers.usda.gov/data-products/food- expanding this reform to eliminate all remaining expenditures.aspx nonautomatic licenses would bring the GDP gains 7 Estimations based on Numbeo data for the 2010- from 0.14 to 0.22 percent above the baseline 2015 period. projections for 2020. 8 Argentina’s competition authority has initiated 16 This scenario includes a reduction in tariffs in market studies in some of these product markets. all Mercosur countries for world imports by 50 9 The exception is the social tariff for transport percent (tariffs within Mercosur are essentially services targeted to poor people. zero), a 15 percent cut in NTMs within the borders 10 The elimination of the DJAI and introduction of Mercosur, and the elimination of export controls of the SIMI, at the end of 2015, eliminated the among Mercosur parties. preapproval process. This new regime maintained 17 This scenario includes reciprocal tariff reductions, about 1,400 tariff lines subject to nonautomatic where the average tariff applied to EU products licenses. Subsequent resolutions have modified by Argentina would fall from about 11 percent to the list of nonautomatic licenses, with the end about 3 percent by full implementation in a ten- result of increasing tariff lines to 1,626 in October year time horizon, while the average tariff in the 2016. EU for Argentinean products would fall from about 18 3 percent to close to zero. Also, NTMs would be The literature refers to these new trade agreements streamlined by 15 percent and export controls as “deep” to distinguish them from traditional FTAs eliminated among the parties. that focus only on market access commitments— 18 This scenario is similar to the Mercosur–EU sometimes referred to as “shallow” (Osnago, et al., Executive Summary agreement, but with lower tariff reductions. The 2015). average tariff applied by Argentina to products 26 A more detailed GVC analysis could offer insights from the Pacific Alliance would fall from about 1 into the potential for upgrading and diversifying percent to 0.3 percent, and the average tariff in the these exports. Pacific Alliance on products from Argentina would 27 Evidence suggests that adjustment frictions can fall from 2.3 percent to 0.3 percent. reduce the gains from trade. In the case of Mexico, 19 The CGE model does not include some possible Kambourov (2009) finds that a lack of flexibility in dynamic factors proposed in the literature, such the labor market slowed the reallocation of labor as productivity increases from endogenous in response to trade reform, so that the benefits of growth effects via technological spillovers and the reform were as much as 30 percent less than “learning by doing,” as well as FDI and foreign would have been achieved under a more flexible technology inflows that may be induced by the labor market. Similarly, Dix-Carneiro (2014) finds reform. Moreover, certain policy changes that are that the reallocation in the labor market following often difficult to quantify, such as reforms related trade liberalization in Brazil would accelerate to NTMs in goods and services and restrictions to from fourteen years to four years if capital were investment, present analytical challenges that may completely mobile. affect the estimated economic effects. CGE results 28 See Productivity Commission (2005). may underestimate the likely impacts due to these 29 See Dougherty (2015) for further discussion. limitations. 30 See UNCTAD (2011) for further discussion. 20 Ex post evidence in the trade reform literature tends 31 Import tariffs for certain computer items were to suggest larger gains than ex ante analysis such as brought down to zero in March 2017. that presented here. See, for example, Casacuberta et 32 Estimations based on the World Bank’s Global al. (2011); Wacziarg & Welch (2008); Salinas & Aksoy Antidumping Database (Bown, 2016) measuring (2006), Felbermayr et al. (2011), and Falvey et al. the stock of anti-dumping (AD) measures (AD (2012). investigation resulting in AD measures, minus 21 See, for instance, Petri & Plumer (2016) and Araujo measures revoked over time) in Argentina and & Flaig (2016). other 32 economies. The average number of 22 Empirical estimations used as inputs for these measures in place in Argentina in the period 2005– results include: a gravity model on trade in parts 2009 was 79, which increased to 103 by the period and components, a panel-data estimation with 2010–2014 (a 30 percent increase). Middle-income firm-level data on price-cost margins and firm- countries in the database accounted for 936 level productivity, and a panel-data estimation measures in place in 2005–2009, which increased of the link between regulatory restrictiveness in to 1,070 measures by 2010–2014 (a 14 percent services sectors and growth in industries that increase). High-income countries accounted for use such services intensively among OECD and 565 measures in 2005–2009, which decreased to additional developing economies. 532 measures by 2010–2014 (a 6 percent decrease). 23 Trade in intermediate goods contributed more By 2010–2014, Argentina would be the top-seven than trade in final goods did to the growth of total user of AD measures, after India, the United States, manufacturing trade in 2001–2008 and 2009–2014 Turkey, Brazil, China, and the EU. 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