ArgentinaTradePolicy MartinRedrado Sec IntTrade Vi

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ARGENTINA’S TRADE POLICY Martín Redrado Secretary of International Trade ARGENTINE REPUBLIC

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In the 90s, Argentina started along a road of ambitious reforms: openness, privatization, State reform, deregulation. However, 10 years after the beginning of that process, the results are poor: a 4-year-long recession, 20% unemployment and 45% of the population living below the poverty line. Regional Risks: the pendulum reaction Thinking that everything that was done was a mistake and beginning a counter-reform (closing the economy, increasing State ownership, market regulations) Quite the contrary, some unfinished reforms should be completed (Public Sector reform) and new reforms should be encouraged, tax reforms and social expenditures, among others

CAUSES OF THE CRISIS: 

CAUSES OF THE CRISIS Internal: Lack of systemic competitiveness: structural deficit in the current account Permanent fiscal deficit: increase in the public debt External: Competitive devaluations in emerging markets (Asia, Latin America) Reversion of capital flows to developing countries

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INTERNAL CAUSES: EVOLUTION OF PUBLIC DEBT Source: Ministry of Economy

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EXTERNAL CAUSES FINANCIAL FLOWS TO DEVELOPING COUNTRIES Source: Institute of International Finance

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Recession with a procyclic tax system led to fiscal insolvency There was no room for the application of a countercyclic fiscal policy The constant rise in country risk exacerbated the financial asphyxia Markets considered the fiscal deficit as unsustainable Any financial engineering (bail-out I and II, mega-swap) proved inadequate There was consensus on the existance of an inescapable exchange rate trap Economic policy fluctuated between facilitating a deflationary adjustment and an expansionary fiscal policy Partial Fiscal incentives plans collided with the “zero deficit policy” IN EARLY 2001 THE TERMINAL STAGE OF THE CRISIS STARTED:

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This scenario triggered the trauma that led to: - Devaluation - Default - Pesification and the freeze on deposits “corralito” As the result of the crisis, we now have: Institutions that have successfully overcome the political crisis A new exchange regime under way A real exchange rate closer to the break even point A context of uncertainty that will slowly fade away.

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What is the challenge? 1) To travel the best path, which is not necessarily the easiest or most popular one (populism) 2) To avoid the worst of Argentine mistakes: the economic pendulum What does this mean? - To correct and improve, without destroying all that has been done - If economic reforms have had defects, they must be improved

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WHAT IS THE WAY OUT? FISCAL SOLVENCY AND AN EXPORT-ORIENTED MODEL Systemic Competitiveness + Openness  DEVELOPMENT    Competitiveness is the axis of Argentina´s New Economic Program Openness is the guiding principle of Argentina´s New Trade Policy Openness and Competitiveness enhance each other and must be simultaneous 

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SYSTEMIC COMPETITIVENESS Requires a New Generation of Reforms State Reform Making Public Social Expenditure more efficient. Tax Reform New Fiscal Regime between the Federal Government and the Provinces

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FOCUSING SOCIAL EXPENDITURE Distribution of Students in the State Education System

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THE PROBLEM IS NOT RESOURCES... BUT EFFICIENCY Variation in Public Social Spending (in percentages) 0 5 10 15 20 25 30 35 40 Total Education Health (%) Variation% 2000/93 Variation% 2000/96

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MISMATCH BETWEEN REVENUE AND EXPENDITURE

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REGIONAL DISTRIBUTION OF TRABAJAR EMPLOYMENT PROGRAMS

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TRANSFERS TO PROVINCES PER INHABITANT (includes revenue sharing and other items)

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SOCIAL INDICATORS AND REGIONAL ALLOCATION OF FEDERAL EXPENDITURE (population-weighted averages) Region Average Income (pesos) Unemployed (% PEA) Poverty (% NBI) Infant Mortality (%) Federal Expenditure Per capita (pesos)* Central 261.3 17.5 13.3 20.8 566.8 Cuyo 232.8 11.5 14.2 17.7 882.9 NW 183.8 17.1 25.6 20.9 751.9 NE 162.8 11.3 26.4 20 387.9 Patagonia 297.9 11.3 13.8 17.4 763.1 * Pesos as of 1999

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AN AGRESSIVE AND ONGOING TRADE POLICY: Openness is the guiding principle of Argentina´s new Trade Policy THE PILLARS: - Multipolar Negotiation Strategy - Development of markets

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A new Managing Model

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Multipolar Strategy False dichotomy USA or EU, Mercosur or FTAA It is MERCOSUR and FTAA and EU and USA

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GENERAL BALANCE MODEL SIMULATED SCENARIOS FTAA MERCOSUR + EU FTAA + (MERCOSUR + EU) 4 + 1 (free trade area between MERCOSUR and the US) Free world trade (framework)

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AGGREGATE RESULTS ARGENTINA GDP GROWTH Source: CEI Full variant* * Growing yields to scale, trade-related externalities and capital accumulation in the medium term

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AGGREGATE RESULTS GROWTH OF ARGENTINE EXPORTS Full Variant 8.9 14.2 15.7 27.2 28.5 0 5 10 15 20 25 30 4 + 1 FTAA MERCOSUR + EU FTAA + (MERCOSUR + EU) Free World Trade percentage Source: CEI

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Multipolar Negotiation Strategy Country per country, product per product

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Multipolar Strategy Country per country, product per product First results: U$S 2.200 million of new markets Product Country U$S million Cars Brazil Cars Mexico 310 Cars Chile 270 Meat Europe 300 Meat (aditional Hilton quota) Europe 65 Cooked Meat United States 60 Food, Timber, Clothing United States 570 Steel United States 150* Medicine Brazil 50 Food (Phitosanitary barriers) Brazil 50 Flours, oils Chile 90 This is not a new market, instead negotations prevented from its disappearance 300

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MARKET DEVELOPMENT POLICY Our priority is to help launch the private sector to world markets Through market intelligence and democratization of market information By turning every government office into a window to offer Argentine products (goods, tourism and services) With an active agenda of trade mission to unexplored markets (i.e. South Africa) Communicating our export supply offer to the world through a new official website Identify any potential demand for Argentine goods and services

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CONCLUSIONS: - The typical “Argentine pendulum” should be avoided - A sustainable balance should be sought - Once macro-financial stability has been restored, Argentina´s economy has considerable growth potential - FISCAL SOLVENCYand the EXPORT-ORIENTED MODEL (systemic competitiveness) are the pillars for a sustainable development, the only way to honour our commitments.

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ARGENTINA’S TRADE POLICY Martín Redrado Secretary of International Trade ARGENTINE REPUBLIC

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