Argentina’s Subsidy Policy Raises the Specter of Nationalization

Beyond the political uproar caused by the loss of control of the Argentinean parliament by the Kirchners in the legislative elections held last Sunday, some economic indicators are beginning to worry experts – increasing informal employment, declining demand for labor, increased state subsidies and a growing number of companies that are in crisis and risk being privatized.

More than 77,000 workers in various industries receive a monthly salary of US$160 through Argentine government subsidies. The goal is to prevent those people from losing their jobs. The more than 53,000 companies affected by this program are bankrupt. So far this year, the government of Cristina Fernández de Kirchner has spent some US$48 million on the program, known as REPRO (the Federal Productive Reconversion Program) and created in 2002 by then-president Eduardo Duhalde amid the deepest social and economic crisis in the history of Argentina. At the time, the government of Fernando de la Rua had fallen, bank deposits had been confiscated and the Argentine currency had been devalued.

Although the current crisis is not as serious as that one, employment is one of the indicators beginning to suffer the consequences of the deterioration in the local and global economy. Through the subsidies authorized by REPRO, the administration of Fernández de Kirchner avoided a half-point rise in unemployment, now at 8.4%, according to INDEC, the National Institute of Statistics and Census. The official figures don’t include any social spending plans. According to critics of INDEC, the government has intervened under the supervision of Commerce Secretary Guillermo Moreno and changed the methodology for measuring unemployment. INDEC’s credibility has been further challenged by private reports that predict unemployment of about 10% by the end of the year.

According to Enrique Déntice, researcher at UNSAM, the National University of San Martin, “In comparison with the unemployment rate of 2002 [when unemployment reached 24.1% in the second half of the year], we can’t say that we should be alarmed. The main point is that the required levels of employment are not growing, and this is worrisome. The jobs-production elasticity ratio has slowed to very close to 0.3%. The average forecast is for unemployment of 9.3% in 2009, and 10.3% in 2010.”

According to Agustin Salvia, head of the social research center at Pontifical Catholic University of Argentina (UCA), “Unemployment in Argentina has now reached 11.8%. This is the equivalent of 1.928 million urban unemployed. That means there are 565,000 more unemployed people than in the official statistics published by INDEC.” In addition, the latest report on employment and social development published by UCA’s economics department states: “The signs of deterioration in unemployment appeared between the third and fourth quarter of 2008, since the number of unregistered salaried workers in the big urban areas increased by 176,000. As a result, at the end of the year, informal employment will be at a level of about 40% of total employment.”

According to the Index of Labor Demand published by the business school of Torcuato Di Tella University, employment contracted 44.53% between May and the same period in 2008.

Tools for the Crisis

REPRO is not the only tool that the government uses in its efforts to try to maintain the level of employment. There is also unemployment insurance, which the government provides to some 150,000 unemployed people. According to experts, that program should be brought up to date because it dispenses barely US$400 a month per worker. “Considering that the average salary in the formal economy is about US$745, it is clear that this provides a very meager – and practically irrelevant – amount of protection,” notes the UCA report. There is also the Jefes program, which provides one million payments to beneficiaries who entered the program during the crisis of 2002.

In addition, a trust fund using money from ANSES, the National Social Security Commission, was created to rescue the Argentine paper company Massuh over a period of 12 months. This company will now be overseen by Commerce Secretary Moreno, the same person who supervises the INDEC indicators.

In addition, the Argentine government will finance part of General Motors’ operations in the country by providing a loan of US$18 million, at an average rate of 11.75%. The funds will be used for a project that will manufacture low-cylinder vehicles. That way, the company will maintain the same employee payroll. The same may happen with other companies such as Mercedes Benz and Peugeot-Citroen, which could receive some US$53 million. In addition, the administration of Fernández de Kirchner is looking for buyers of two manufacturers of auto parts – Paraná Metal and Mahle Rosario – that are also at risk of bankruptcy.

What’s certain is that between REPRO, unemployment insurance, the Jefes program, subsidies for public transportation fares, and tax exemptions for some industries, there is no precise or clear way to calculate how much money the government is providing in assistance.

Analysts see both positive and negative aspects to the government subsidies. On the one hand, Diana Mondino, director of international relations at the University of CEMA, and a professor of finance, argues: “Within the subsidies that the government applies, there is a policy of discretionality — of not guaranteeing equal treatment for every company. It is not good to subsidize some companies while not helping those that are more efficient. It would have a more positive impact to cut taxes for everyone equally in order to avoid discretionality. In addition, these measures don’t develop the economy; they just maintain current levels of employment. It is easier to change tax rates than to increase subsidies, which are operationally more difficult.”

According to Déntice, the government has to be more cautious about subsidies because “it is more profitable for society to maintain this kind of policy during periods of crisis than to have a policy that permits an adjustment in the relative price of salaries that – as we saw during the 1930s – leads to a deepening of the crisis. In this sense, I also see a clear message: to wait until the second half of 2009 for any signs of recovery.”

The sectors that receive the most help from government subsidies are the textile industry, metal production factories, automotive and auto parts industries, tanning industries (processing of skins and leather for various uses), and cold storage plants.

State Intervention

The current policy of subsidies reawakens the phantom of corporate re-nationalization. Since Nestor Kirchner and Cristina Fernández de Kirchner have been in power, several companies have returned to state ownership including Estado Aguas Argentinas (the Argentine national water company); the post office; the railroads; the radio broadcasting company that was in the hands of Thales Spectrum; part of oil and gas company Repsol YPF; and Aerolineas Argentinas. There is also a precedent in the nationalization of Sidor on the part of President Hugo Chávez in Venezuela. That company had belonged to Techint, an Argentine company.

“It is very troubling that the government tries to intervene and nationalize companies because, so far, [the government] has not shown that it is efficient in those cases where it has taken power,” says Mondino. “It can wind up harming society if, for example, the government tries to achieve many goals at the same time, such as stimulating consumption by selling products at lower prices. That lets companies become less profitable, and it hurts its shareholders who are its own retirees.”

According to a report published by UNSAM, “We see possible nationalizations as cases of abandoning the private sector because profits don’t wind up being so attractive, and the company [in Argentina] must compete in order to help out its head office…. We are not Venezuela, and our business community is very intelligent and skillful, and has shown itself to be very mature and capable of dialogue when times are difficult.”

To prevent companies from declaring bankruptcy and prevent the government from having to intervene in their management, Mondino proposes “focusing on seeing which sectors [Argentine] companies are competitive in, and looking for transparency in governmental assistance. Another tool for trying to alleviate the problem of unemployment is unemployment insurance, which has shortcomings in Argentina. In addition, we need to look at technical training, although there is no information about the particular needs of companies and various sectors.”

Déntice agrees that unemployment insurance “needs to be reformulated so that it provides more coverage and is more comprehensive, such as, for example, in Spain [which provides the highest and broadest coverage of any country in its region]. That is a real problem for our economy.”

According to the UCA report, “Clearly, if we are going to make a large scale contribution to generating jobs, we absolutely have to undertake reforms that improve the business climate, and reduce the impact of bureaucracy and costs associated with taxes, labor laws and social security. We also need to improve the way government is managed, especially when it comes to social programs. This is an ambitious agenda, which requires creativity, managerial skill and a broad political consensus.”

The Economic Agenda

Jobs are not the only issue that must be on the economic agenda of the Argentine government. According to UNSAM, there needs to be a focus on public-sector spending, “which is almost 35% of GDP, when you include federal, provincial and municipal agencies. This means that the expenditure growth rate is higher than the revenue growth rate. In addition, we can’t forget inflation. All of these topics are going to change from here to the end of the year; as will the degree to which the provinces become financially connected.

For Mondino, another important aspect is “the fiscal surplus, which is very hard to maintain in times of crisis. We also need to devote more investment to infrastructure projects, instead of devoting all of it to current expenditures. Doing that does not improve companies’ productivity, and it leads to a lack of confidence in policy and a lack of transparency.”

In any case, “until December 10 – when the new congressmen elected on July 28 take office – these issues will remain unresolved. Until then, we won’t know which corrective measures the government will take to deal with its current problems. As for the [current] 2010 budget, it is based on the assumption that there won’t be any ‘super powers’ –that is, any possibility that the government imposes measures by decree without going to the Congress – and that the budget will have to be adapted more to reality,” Mondino says.

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