Saturday, May 18, 2024

ARGENTINA | 11-05-2024 17:33

Mercedes Marcó del Pont: Argentina is an outlier in disregarding the role of the state in attracting investments

The spirit of incentives for big investment contemplated in Javier Milei's REGI investment scheme reflects the end of industrialisation, the promotion of extractivism and stricter foreign restrictions.

Needless to say, Argentina requires an increase in long-term public and private investment which will make economic growth sustainable, improve productivity, generate quality jobs and modify its primary profile in its insertion into the international market. 

In order to foster a virtuous process of those characteristics, not only is a regulatory framework required providing companies with foreseeability when it comes to assuming the risk of investment, but also the alignment of incentives offered by the state with the goals of national development. 

The Régimen Especial de Grandes Inversiones (REGI) scheme which President Javier Milei’s government has included in its new version of the ‘omnibus’ law, however, moves away from the primary objective of driving up the industrial, labour, technology and territorial development of Argentina. Except for a single mention of the promotion of development when listing its goals, throughout its content the bill makes no reference to either investment priorities or specific objectives in terms of added value, technology transfer, creation of quality jobs and development of suppliers. These and other conditions are necessary to spark investment which not only results in profit but, at the same time, achieves a quantitative and qualitative leap of national industrial capabilities. In fact, the REGI scheme promises to dismantle the scaffolding protecting national industry. 

A relevant element of context here is that the REGI goes against the strategies for investment promotion developed around the world. It grants tax benefits to companies without any requirement of reciprocity in terms of industry drive and technological development, which doubtless will lead by momentum to the promotion of mining investments, whether via domestic or international capital. 

What is the rest of the world doing today? Unlike during other stages of the globalisation process, today the balance of power in our country is favourable when it comes to setting conditions for territory and technology transfer. This is due to the fact that Argentina has critical natural resources and renewable energy – lithium, copper, gas, wind, solar and nuclear power, among others – required by developed nations as they progress with energy transition. Our country also has industrial, human and technology capabilities enabling it to take part in new industrial chains around the energy transition. 

Once again, it is essential to look at what other nations (like Argentina) are doing with critical minerals which are essential if we are to make the global energy transition viable. Across a wide spectrum of nations – ranging from Australia to Chile or Indonesia – plenty of state activism can be found, setting conditions that ensure maximum added value within their territories.

Today the exercise of active, industrial and technological policies is a common denominator among developed economies, and increasingly in developing countries too. For over a decade now, the United States and many European countries have started a race to recover jobs and production capabilities displaced to Asia, particularly China, back in the trade and financial hyper-globalisation stage. 

This trend has accelerated based on the disruption of global supply chains which (first with the coronavirus pandemic and then the war in Ukraine) have put the security of national production processes at risk. The transition towards “green” energy is the scenario which illustrates this tug-of-war for the domination of new technical and production capabilities. 

The United States has been pushing huge fiscal packages through its Inflation Reduction, CHIPS and Science acts – all cases with strict requirements for those accessing benefits that promote the location of industrial and technological development stages within its borders. The European Union quickly came up with its Green Deal industrial policy with strong guidelines in the same direction. 

What is Argentina’s government proposing? In this global and regional scenario, the Milei administration has decided to push for an investment promotion system granting generous fiscal and foreign exchange benefits. Not only does it not ask for any requirement stimulating industrial and technological development and quality job creation in return but among its incentives it offers to dismantle the scaffolding protecting national industry, as well as the state’s minimum degrees of freedom in ensuring the local supply of goods or strategic supplies.

The REGI scheme proposes the waiver of import duties and other levies on imports of the approved bills (Article 235). This entails the vulnerability of the national industry or, in other words, promotes the replacement of national production with imported options. 

This situation worsens with the release of import and export controls from the bills in question (Article 238), setting aside a series of statutes, mechanisms and controls (such as “Buy local”), a development of suppliers, export reference prices, a priority of internal supply, export quotas – all of them stimulating a direct relationship between favourable conditions for investment and the development of the national production network and the creation of quality jobs. 

Access to the foreign exchange market to meet foreign commitments is doubtless a requirement to ensure the inflow of long-term risk investment. In the meantime, the REGI scheme goes well beyond, eliminating not only the restrictions for normal foreign trade and financial transactions of the bills in question. Indeed, it defines the lack of any obligation to bring in export dollars in growing percentages up to zero in the third year (Article 243). For those classified as a strategic export, this term is reduced to two years. It proposes that companies may access the foreign exchange market to pay for profits and interest (Article 245), which is reasonable, but if they have the right to make the remittances linked to the payment of their debts and to transfer their profit abroad, should export dollars not enter this country?

There is vast empirical and theoretical evidence showing that foreign investment always helps developing countries, provided that it contributes to modifying its profile of primary specialisation, improving productivity, creating quality jobs and developing technology. If that does not happen, foreign direct investment can worsen the restrictions of our economies by increasing foreign commitments in the form of interest, royalties, profits, imports, capital repatriation, etc. This sequence can be seriously heightened in a bill releasing imports, eliminating the development requirements of local capabilities, and which also does not guarantee the entry of export dollars. The maturing of these bills would lead within the logic promoted by this regime to a deeper structural insufficiency of dollars, which is doubtless the main source of macroeconomic instability.

A different section contains a proposal for the state to stop regulating the supply of goods generated by the bills, based on the needs to supply the domestic market (Article 245).

This reduces the degree of sovereignty in defining policies which add value within the territory. Once again, the proposed statute goes against the grain of what is happening in other economies across the world, where there is a growing presence among those with strategic resources for transition towards a green economy of the regulation of exports to encourage local industrialisation. For example: Australia has pushed its Critical Minerals Strategy 2023-2030 with that goal; Indonesia has redirected investment to the industrialisation of its mining resources ever since it banned the export of nickel and other critical minerals; Chile has set a 20-percent quota of its lithium for many years to move forward in the other links of the lithium chain, and already has projects for investment for the production of cathode dusts, the second link of that chain which trebles the value of the export of a ton of lithium carbonate.

To sum up, the REGI scheme proposed by President Javier Milei’s government is consistent with its contempt for the role of the state in promoting development. As it stands, this will lead to de-industrialisation, an emphasis on our primary profile and the structural worsening of our foreign restriction.

The deregulation suggested on all fronts by the scheme will not only significantly condition the possibilities Argentina’s economy has to stabilise, it will also waste a unique opportunity to allow our nation to participate as a relevant player –by deploying, in addition to our natural resources, our industry, technology and labour capabilities in the new chains generated around the energy transition.


* Mercedes Marcó del Pont is an economist. A former national deputy, she has previously served as Strategic Affairs secretary to the Presidency, head of the AFIP tax agency, governor of Argentina’s Central Bank and president of Banco Nación.

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