Report No. 6990-AR

ArgentinaIndustrial Sector Study

April 11, 1988

Industrial Deve!opment DivisionIndustry and Energy Department

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIV/ALENT

ACRONYMS

CFI Consejo Federal de InversionCKD Completcly Knocked DownDNFH Direccion General de Fabricacion MilitaresERP Effective Rates of ProtectionGIP Gross Industrial ProductGDP Gross Domestic ProductINDEC Instituto Nacional de Estadisticas y CensoriSIC International Standard Industry ClassificationIVA Impuesto de Valor Agregado (Value-Added Tax)REER Real Effective Exchange RateSICE Secretaria de Industria y Comercio Extcrior

FOR OMCIAL USE ONLY

ARGENTINA: INDUSTRIAL SECTOR STUDY

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSION................................***.* * ... i - xi

CHAPTER I* THE TRADE REGIME AND THE SHAPING OF THE ARGENTINEINDUSTRIAL SECTOR: 1970-1987 ...................... 1

I. Introduction ... eo................. ,....o.oo.o 1II. The Trade Policy Regime ...................... 5

A. The Liberalization of the Trade Regime:1976-81 oo............. *... ..............- 0 6

B. The Structure of Protection in 1987 ... oo.. 12III. Conclusions .................................. 18

CHAPTER II* IMPORT SUBSTITUTION AND INDUSTRIAL PROMOTIONIN ARGENTINA

I* Introduction ................................. 21II. The System of Industrial Incentives:

Evolution, Current Framework and Fiscal Cost . 21III. Economic Impact of the Investment Incentives . 27

A. Allocative Impact of the Incentive Regime.. 27B. Investment Incentives and Industrial

Concentration ............................. 36C. Investment Incentives, Intersectoral

Mobility and Firm Conduct ................. 41IV. Conclusions o..0*0*0.............. ..0...*.. 45

This report was written by Claudio Frischtwk (team leader, IENIN),Jean-Michel Doublet (IENIN), Barbara Mierau (LA3TF) and Marilou Uy (LA2TF),following a mission in April/May 1987. Information was drawn from thereports of the following consultants: Daniel Azpiazu (Investment Incen-tives); Javier Cardozo (Footwear); Graciela Gutman and Fernando Porta(Dairy Products); Edgardo Lifachitz and Bernardo Kosakoff (IntereensalComparisons of Industrial Structure); Edgardo Lifchitz (Price LinkagesCoefficients); Hugo Nochteff (Consumer Electronics); and Enrique Scala(Metal Mechanics). The MICOM unit of the IENIN division provided wordprocessing services and Valerie Chisholm secretarial assistance.

Thi document has a restricted distribution and may be used by recipients only in the tserformanceof their official duties. Its contents may not otherwise be disclosed witho'it World Dank sutho$.i*tjon.

TABLE OF CONTENTS (Cont.)

Page No.

CHAPTER III THE IMPACT OF THE POLICY REGIME ON COMPETITION ANDINDUSTRIAL PERFORMANCE: EMPIRICAL EVIDENCE *....... 47

I. Introductfon .... eeooeoe*e*oe..e00000000000 47II. A Discussion of Selected Structural

Characteristics 00 .......................... 47A. Overall Levels of Concentration .......... * 48B. International Comparisons ................ 48C. Concentration Dynamics ................... 51

III. An Assessment of Competition ................. 54A. Determinants of Competition .............. 54B. Domestic Competition ..................... 55C. Barriers to Import Competition and

Export Rivalry ...... ..................... 60D. Assessment of Competition ................ 62

IV. Impact of the Policy Regime on IndustrialPerformance o.................................. 65A. Industrial Growth and Structural Change .. 65B. The Policy Regime and Economic Efficiency. 67C. International Competitiveness and

Export Performance ....................... 71V. Conclusions 75

CHAPTER IV. AN APPROACH TO POLICY REFORMoo.o. .................. 77

Io Introductiono.......... 0.00o0o................ 77II. The Direction, Scope and Coordination of

Industrial Policy Reform ..................... 78III. A Unified Strategy of Reform of the Trade

Regime and the System of Price Controls ...... 80A. Trade Reform ....o.ooo*4,o*#*#$ooo*o**o 80B. Phasing out the System of Price Controls . 81C. Coordinating and Phasing Price Decontol

and Trade Liberalization ................. 82IV. Reform of the Investment Incentive Regime ...., 85

A. Bias Toward Capital Intensity ............ 85B. Bias Toward Low Value-Added Activities 000 86C. Sectoral Biases *o.........o..o....o*oooo 87D. Bias Toward Provincial Concentration

of Incentives o#oooooooooooo*oo****ooo*ooo 87E. Excessive Fiscal Costs ................... 87F. Investment Incentives as an Element

of Competition Policy o..oo.o.o..o..ooo... 88G. Legal and Administrative Complexity o.oo 90

V. Concluding Remarks **0oe0000oo *oooo* 90

Bibliography ........... o***o*o**ooooo 93

TABLE OF CONTENTS (Cont.)

TABLES

Table 1.1 Selected Manufacturing IndicatorsTable 1.2 Nominal and Effective Rates of Protection, 1969Table 1.3 Comparison of Price Differentials aad Tariff Levels (1976-77)Table 1.4 Nominal and Effective Rates of Protection 1976 and 1977Table 1.5 Nominal Rates of Protection in the Argentine Manufacturing

Sector, 1987Table 1.6 Nominal Tariff Rates, Mean and Standard Deviation of Tariff

by CountryTable 1.7 Quantitative Restrictions in the Argentine Manufacturing

Sector

Table 2.1 Argentina - Nature of Sectoral IncentivesTable 2.2 Argentina - Nature of Regional Investment Incentives 1987Table 2.3 Fiscal Costs of Investment IncentivesTable 2.4 Argentina - Effective Subsidy from Industrial IncentivesTable 2.5 Argentina - Effective Subsidy and Cost Advantage of the

Investment Incentive SystemTable 2.6 Effective Rates of Protection (ERPs) in Consumer Electronics

(Color TV) 1983-86Table 2.7 Argentina: Distribution of all Employment and Investment

of Promoted Projects, 1974-1987Table 2.8 Ranking of Sectors by Total Promoted Investment Relative to

Value-Added in Sector, Current US$000Table 2.9 Distribution of Promoted Investment Across Broad Industrial

Categories, 1974 to 3/1987Table 2.10 Share in Value Added of New and Indigenous Industries in

La Rioja, 1973 and 1984Table 2.11 Argentina - Provincial Distribution of Promoted Investments

anc Gross Domestic ProductTable 2.12 Promoted Projects, Employment and Investment

1974-March 1987, by Degree of ConcentrationTable 2.13 Argentina - Structural and Behavioral Characteristics

of Major Projects with Investment IncentivesTable 2.14 Distribution of the Top 50 Promoted Projects 1974-87

by OwnershipTable 2.15 Changes in the Structure of the Textile Industry, 1973 and

1984 (% of Production Value)Table 2.16 Argentina: Linkages in Capital and Production Structure:

The Case of Petroquimica de Bahia Blanca, 1985

Table 3.1 Industrial Concentration in ArgentinaTable 3.2 Comparison of Four-Firm Concentration Ratios in IndustryTable 3.3 Distribution of Industries by Four-Firm Concentration RatioTable 3.4 Indicators of Concentration for Manufacturing Industry,

1973-84Table 3.5 Distribution of Concentration LevelsTable 3.6 Average Differences in Concentration Indices by

Sector, 1973-84Table 3.7 Size and Output Distribution of Firms in Manufpcturing

Industry

TABLE OF CONTENTS (Cont.)

TABLES

Table 3.8 Ease of Entry by Type of GoodsTable 3.9 Distribution of Sectors in the Economy by Degree of

Domestic CompetitionTable 3.10 Main Intermediate Goods Subsectors with Low Domestic

CompetitionTable 3.11 Main Capital Goods Subsectors with Low Degree of Competition-Table 3.12 Domestic Competition by BlocksTable 3.13 Distribution of Tradeable Goods Subsectors in the

Economy by Degree of Import CompetitivenessTable 3.14 Export Performance and Rivalry (1984)Table 3.15 Distribution of Seetors in the Economy by Degree of

Global CompetitionTable 3.16 Argentina: Share of Manufacturing Value-Added in GDPTable 3.17 Indicators of Performance for Some Skill-Intensive High

Value-Added SubsectorsTable 3.18 Estimates of Costs Incurred Due to Scale Diseconomies

(To Firms Surveyed; in X of Actual Costs)Table 3.19 Relative Changes in Factor Productivity for Subsectors

with a Low Degree of Competition, 1973-84Table 3.20 Comparisons of the Price of Aluminum, 1986/87Table 3.21 Comparisons of Prices of Intermediate Goods, Argentina and

3rasil, 1987Table 3.22 Leading Export Manufacturing SubsectorsTable 3.23 Export Shares, 1966-83 Regional Exports as a Percentage of

World Exports

Table 4.1 Argentina: Price and Import Liberalization MatrixTable 4.2 Argentina: Promotion Levels and Extent of Competition

FIGURES

Figure 1.1 (a) Real Effective Exchange 'ate Index(b) Monthly Inflation Rates(c) Real Wage Index(d) Real Regulated Lending Rates

Figure 1.2 (a) Imports of Intermediate Products(b) Imports of Consumer Goods(c) Imports of Machinery and Equipment

Figure 1.3 Manufacturing Value Added, 1970-85Figure 1.4 Manufacturing Employment, 1970-85

Figure 2.1 Argentina: Cement Production and Installed Capacity, 1970-85

Figure 3.l Trends in Manufacturing Value-Added by Type of GoodsFigure 3.2 Trends in TFP and Labor Productivity, 1970-85

TABLE OF CONTENTS (Cont.)

APPENDIX TABLES

Table Ti Argentina: Major Recipients of Promoted Investments(1974-87)

Table T2 Argentina: Evolution of Industrial Concentration ofIndustries that Received the Major Share of PromotedInvestments Between 1974 and 1987 (March)

Table T3 Argentina: Characteristics of the Top 50 Projects by Type ofGood (1974-87 March)

Table T4 Distribution of the Top 50 Promoted Projects Between 1974 and1987 by Type of Ownership

Table T5 Comparison of Scales of Production, Argentina and U.S. inMotal Mechanical Industries

Table T6 Optimal and Actual Scales According to Firms Surveyed inVarious Sectors

Table T7 Price Comparisons (Ex-Factory, 1983)

Table T8 Comparison of Industry Average Ex-FactoryPrices Between Argentina, Brazil and tbe U.S., 1983

APPENDIX PIGURE

Figure F1 Distribution of Gross Industrial Product by Size of Firms,1984(a) Wood Industry(b) Food Manufacturing(c) Chemical Industry(d) Textiles(e) Paper Industry(f) Manufacturing Industry(g) Mechanical Industry(h) Other Industries(i) Metal Industry(j) Non-Ferrous Metal Industry

AN

A2 Methodology for Estimation of the Effective SubsidyA3. Methodology, Data Sources and Results

I. Definition of the Indicators UsedII. Assessment of Domestic CompetitionIII. Assessment of Import CompetitionIV. Assessment of Export RivalryV. Assessment of Global CompetitionVI. Price Linkage CoefficientsVII. A Note on the Linkage Between the Herfindahl Index and

Industry Price Cost Margins

TABLE OF CONTENTS (Cont.)

ANNEX TABLES

Table A3.1 Differences in Technical and Economic Concentration, 1973-84Table A3.2 Matrix of Correlation CoefficientsTable A3.3 Assessment of Domestic Competition in Argentine Manufacturing

Industry, 1986-87Table A3.4 Assessment of Import CompetitionTable A3.5 Assessment of Import Competition in Argentine Manufacturing

IndustryTable A3.6 Export Performance and Rivalry, 1985Table A3.7 Assessment of Global Competltion in Argentine

Manufacturing Industry 1986/87

ARGENTINA: INDUSTRIAL SECTOR STUDY

SUMMARY AND CONCLUSION

i. This report examines Argentina's trade and industrial policyregime and its impact on industrial structure, competition and perfor-mance. It suggests that, since the mid-1970s, a combination of macropolicyshocks and highly distortiouary trade and industr.al policies have led to adecline in industrial performance and international competitiveness. Incontrast with most middle-income developing countries, average manufactur-Lig growth was already low in the 1966-73 period (4.4% p.a.), and turnednegative (-1.6% p.a.' in 1973-83. Over the 1966-83 period, manufacturingexports grew by just 1.5%, with Argentina's share in world manufacturingexports falling from 0.8% to 0.4%.

The Policy Regime and Industrial Si:agnation

ie. The erosion of Argentina's relative position is rooted in theperverse synergy of two factors. First, severe macroeconomic instabilityand the repeated policy shocks generated excessively risk-averse andanti-competitive economic conduct. Second, high trade barriers andgenerous, long-lasting investment incentives to domestic firms, graduallydeterred competition and mobility, reinforcing established producers Inmture and declining subsectors.

iIi. Frequent policy changes have caused substantial fluctuations inprices and rendered the economic environment very unstable. Partly as aresult, Argentine industrialists have become unusually risk-averse in theirinvestment decisions. Produ ers, 'acing increased variance in prices, pro-fits and institutional arrang.eaentsi, have diversified away from the real orperceived higher risk of directly productive activities. Also, in anattempt to insulate themselves against market shocks, firms haveconsolidated their positions and in:reased their market power by verticaland horizontal integration.

iv. The serious difficulties in firms' planning and decision-makingcombined with unattractive rates of risk-adjusted profitability, contri-buted to the decline in the rate of investment, which fell from 21.22 to11.3% of GDP between 1970 and 1985; private investment fell from 13.1% to7.5Z. At current rates, gross fixed domestic investment barely coversdepreciation of capital assets.

v. The adverse impact of an unstable macropolicy environment on thelevel of investment and the pattern of resource allocation has been furthermagnified by two key features of the policy frame toward industry: thetrade regime and the system of investment incentives.

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vi, Trade barriers decreased Import compatition for most establishedactivities; many sectore have had infinlte protection for extendedperiods. New areas of production, on the other hand, have faced negativeprotection. The infant industry argument was turned upside down: relieffrom import competition was provided for the more mature and declining sub-sectors, while new or innovative activities were penalized. High profitsfrom domestic operations enabled firms to operate in isolation from Inter-national markets, shielding them from export rivalry. Even during reces-sions, small production scales and costly inputs deterred exports.Argentine producers became as a result insulated from the exacting cost,quality and performance requirements of export markets.

vii. Non-tariff barriers constitute the core of the country's presentsystem of import restrictions. The prevailing non-tariff barriers do nottake the form of outright quantitative restrictions. Rather, they consistof a system of complex and cumbersome licensing procedures. This system ischaracterized by a lack of transparency, leaves plenty of room for dis-cretionary actions, distorts resource allocation, and encourages collusivebehavior among producers.

viii. The most heavily protected sectors are food products and tex-tiles, where 60% and 49% of total production is completely sheltered withimports prohibited through both the restrictive list and systematic rejec-tions under the prior consultation regime. In addition, products includedin certain sectoral promotion programs (such as petrochemicals and steel)have benefitted from heavy protection during project start-up and beyond.

ix. Nominal tariff protection in Argentina is, on the other hand,relatively moderate: ad valorem duties range from 0% to 48%, with a smallnumber of items subject to higher duties reaching 87%. The mean unweightedtariff for manufacturing industry is 31.9%, with a standard deviation of10.1%, roughly comparable to that for the economy as a whole. A substan-tial dichotomy exists, however, between tariffs levied on goods not locallyproduced vs. goods which are produced domestically. Protection Is, thus,particularly strong for traditional sectors such as textiles and apparel,while tariffs are below average in electric machinery and scientificequipment.

x. A system of investment incentives, comprising tax and otherexemptions, has been the other major barrier to competition and structuralchange. Through the incentive system, established firms obtained unitcost advantages which have helped them consolidate their market position.Entrants, competing for scarce fiscal resources, were at a disadvantagerelative to well-informed incumbents that had already demonstrated theability to fulfill domestic demand requirements. The system's bias infavor of capital-intensive techniques and low value-added activities, inwhich Argentina has no obvious comparative advantage, and its emphasis onmature and declining subsectors, deterred investment in new industrialsegments, slowing down positive industrial restructuring.

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xi. Simulation results show that the investment incentive subsidy perunit of value added rises with capital intensity. For a share of value-added in production of 48% (1984 national average), the subsidy per unit ofvalue-added increasas from 39% to 82% as capital intensity (the share ofcapital income to value-added) rises from 10% to 85%. The incentive systemhas also favored low value-added activities, with subsidies often exceedinggenerated value added. The subsidy per unit of value-added increases from63% to 75% as value-added share of the production value falle from 75% to48% (using for share of capital earnings in value added, the 1984 itndustryaverage of 73%). At a 15% value-added level, incentives would account fornearly 1.5 times the value added.

xii. Fiscal incentives have enabled firms to lower costs by 13% to41%. They have heavily favored process industries, particularly of inter-mediate goods. Since 1974 over 50% of projects and 81.5% of promotedinvestment amounts were in intermediate products. Capital goods, consumerdurables and consumer non-durables have accounted for a minor part ofpromoted investment, respectively 2.2%, 2.3% and 13.9%. Finally, about 80%of promoted investments benefitted large dominant firms. Thus, nearly allthe realized promoted investments in cement, paper paste, fertilizer,plastics and resins, and pulp wood, were undertaken by one of the top eightfirms in the industry.

xiii. The basic proposition of this report is that industrial stagna-tion in Argentina cannot be understood without reference to these biases.While succeeding in promoting rapid industrialization in the post-warperiod, these policies came to imply higher levels of protection andpromotion to process (particularly intermediates) and assembly industries,while penalizing design and fabrication activities.

xiv. In addition, these policies, instead of promoting new activities,have come to protect those sectors characterized by large sunk costs,outdated processes and receding markets. They strengthened the marketposition of leading incumbents in mature and declining industries, to thedetriment of entrants in areas of emerging comparative advantage. Ulti-mately, they slowed down the flow of resources to new activities, byinsulating domestic producers from the forces of competition and structuralchange.

An Approach to Policy Reform

Xv. The damage done to the industrial sector by the policy regimecannot be reversed in the very short term. Producers will take time toreadapt their expectations concerning the economic and policy environmentin Argentina and to change their conduct. Nonetheless, it is reasonable toexpect that with a more stable macroeconomic environment, and a less biasedand protective policy regime, Argentine producers will respond by expanding_nvestment and directing resources toward more productive activities.

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xvi. The Constitutional Government has already taken a number ofimportant steps to provide greater macroeconomic stability, a more open andtransparent trade regime, and a less distorted incentive structure. Tosome degree, however, the limited nature of many of these steps has con-strained the response of industrial firms. It is now essential to movedecisively with a trade and industrial strategy aiming at a more competi-tive economic environment, and a progressive integration of Argentineindustry into the reglonal economy and world markets. , accelerate firms'supply response the Government may also want to support entry of new entre-preneurs and development of industrial technology through limited andtargeted (at the "point of distortion") functional intervention. Thus,certain gaps in financial markets, for example, might call for the provi-sion of seed and innovation finance (through risk-sharing arrangements suchas conditional loans and other quasi-equity instruments).

xvii. The Scope of Policy Reform. Changes need to be introduced in theway the Government regulates and promotes industrial activities and how itmanages international trade. The technical, allocative and managerialinefficiencies resulting from policy-determined barriers to competition andgrowth need to be dealt with first, by lowering these barriers, stimulatingexport rivalry and introducing a greater measure of import competition; andsecond, by supporting entrants and innovators in areas of actual or emerg-ing comparative advantage.

xviii. To create a competitive, growth-inducing environment, it isessential that the Government change not only its policies, but also itspractices in a number of areas. It is of particular importance thatentrants be able to threaten and penetrate stable markets dominated by fewlarge firms, including public sector enterprises, which currently areshielded from competition by existing regulations. Although this reportfocuses on the trade regime and the system of investment incentives, thescope for policy reform is considerably larger. Regulatory controls onentry, such as those found in the sectoral programs, for example, should beabolished; such controls are anti-competitive devices that protect andtransfer rents to incumbents.

xix. The public sector procurement system is another area that needsto be part of a comprehensive package of policy reform. First, the biddingand evaluation procedures are not sufficiently clear and transparent toensure that the most competitive bidder will be awarded the contract.Col:.usion, agreements on market sharing, price rigging and other non-competitive strategies are stimulated by the system. Most firms regardprofitability on public contracts as superior to what prevails in thedomestic market. The second aspect stems from the fact that, since theearly 1960s, excessive preference has been given to national suppliers(even in case of monopolies), providing an additional shield from externalcompetition. There is, in sum, considerable scope for the Government tomove forcefully with an entry-inducing, pro-competitive, policy inprocurement.

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xx. Coordination of policy reform. To ease the transition and mini-mize the possibility of creating new distortions, changes in industrialpolicies need to be coordinated with adjustments in the trade regime.Rapid import liberalization in an environment where producers are con-strained by regulatory barriers to entry and growth, including pricecontrols, would limit economic gains and could result in costs that ulti-mately might lead to a reversal in trade reform. For import competition tobe a progressive instrument of industrial development, domestic producershave to be free to allocate resources and price output in response tomarket signals, to provide an equal basis for competition with imports.

xxi. On the other hand, if prices are freed from controls in a marketwhere entry and expansion are precluded or hindered by regulatory fiat, orcompeting imports are blocked through binding trade barriers, the exerciseof market power by incumbents could lead to the gouging of consumers.Producers would not face the threat of actual or potential competition;they could extract from buyers the rents generated by protection.

xxii. As part of a coordinated strategy of industrial and treale reform,the lowering of trade and regulatory barriers to competition should betimed to be implemented pari-passu with the decontrol of industrialprices. The process of reform presumes that rents will be competed awayprogressively by lowering policy-induced barriers to competition and reduc-Ing, or eliminating, a substantial part of investment incentives. At thesame time, freedom of pricing in a more competitive environment will ensurethat producers are rewarded by the market for their efforts in engagingefficiently and innovatively in the business of production.

xxiii. Finally, trade and industrial policy reform can play an importantrole in the management of inflation. An effective anti-inflationary strat-egy would require, inter alia, minimizing the scope for intermediate goodssubsectors (which are often characterized by increasing returns andmonopolistic organization) to amplify price increases.

xxiv. When scale economies are large relative to the domestic market,the predominance of "natural" monopolies or oligopolies is economicallyjustified, and technical efficiency losses from their break-up may not beoffset by the gains from having more actors in the market. In thesecircumstances, trade competition becomes the only feasible means to driveproducers to efficient price-output combinations (short of regulatorycontrols).

xxv. Thus, in an environment characterized by limited domestic com-petition and high natural entry barriers, the ability to decontrol priceswithout rekindling inflation is predicated an increasing the extent ofimport competition. The process of import liberalization tends, however,to have only a gradual impact on the competitive behavior of domesticproducers. There are informational lags (buyers' knowledge of the expandedset of opportunities is initially limited) and, more important, marketfrictions, that preclude imports from Immediately driving domestic pricesto border levels. New importers are often unable to establish, at least in

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the short term, effective distribution channels, provide technical assist-ance, etc. Commonly, dominant producers become dominant importers. Thishas been observed in Argentina and other countries in the initial phases oftrade liberalization. To the extent that these lags and frictions aresignificant, price liberalization in the least eompetitive sectors could becomplemented by transitional controls to ensure that domestic prices do notexceed the cif price of competing imports.

xxvi. In conclusion, for the Government to carry out a process ofpolicy reform which stimulates competition and growth while preservingprice stability, it would need to move on a number of fronts simulta-neously, providing a greater extent of trade competition, reforming thesystem of price controls, changing the system of investment incentives andlowering or eliminating regulatory barriers to mobility.

A. Trade Reform

xxvii. Two critical dimensions of competition are associated with atrade regime reform: import competition and export rivalry. Both need tobe stimulated In Argentina. Reform of the Import regime is needed both toinject discipline in markets dominated by few firms, and to promote intra-industry specialization. Through pre-announced changes in the traderegime, domestic and border prices should be brought into line progres-sively, with border prices guiding domestic producers to a more efficientallocation of resources.

xxviii. Recently, the Argentine Government has initiated a number ofreforms designed to stimulate exports and to gradually reduce the restric-tiveness of the current import regime. The Government has announced itsintention to eliminate the prior consultation list by early 1988, transfer-ring all products from this list to the "automatic" category.

xxix. Trade policy reform should now focus on phasing out the remainingquantitative restrictions by (i) implementing the present Government pro-posals of eliminating the prior consultation list, (ii) ending non-tariffrestrictions established by sectoral programs, and (iii) further simplify-ing import documentation requirements. This process should be supported bya stable exchange rate policy which would effectively channel resourcestoward the production of exportables and efficient import-competing activi-ties. The transition period could be facilitated by temporary tariffsurcharges with a clearly defined time schedule of short duration, a coursethat the Government is presently considering.

xxx. The Government should also strive to reduce and eventually elimi-nate the widespread use of tariff exemptions and special tariff sur-charges. They tend to undermine the validity of the tariff system, whilereducing its transparency, introducing discretionary elements and increas-ing the dispersion of effective protection. The tariff system should,instead, be made to fully bear the weight of protection.

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B. Phasing out the System of Price Controls

xxxi. For competitive subsectors, full price decontrol should beintroduced immediately. In uncompetitive markets, progressive removal ofbarriers to mobility and competition, including substaxatial reduction intrade barriers, should accompany the decontrol of industrial prices. Thetransition period to a decontrolled system should be short (not more, say,than six months to a year).

xxxii. For those subsectors in which price decontrol will be gradualand coordinated with an increase in import competition and a lowering ofbarriers to mobility, prices should be fixed at import price levels. Thisshould be regarded as a transitional policy, until import competitionbecomes fully binding and regulatory barriers to entry are phased out.Prices should be liberalized completely, except in the few cases of non-contestable monopolies producing non-tradeable goods and services.

C. Coordinating Price Decontrol and Trade Liberalization

xxxii. A staggered removal of price controls and a progressive reductionof the extent of protection is recommended. Were there neither transactioncosts nor institutional constraints, a once-and-for-all removal of distor-tionary policies would be preferred. However, with significant sunk costs,considerable friction in factor mobility, and imperfectly competitivemarkets, a more gradual approach may be indicated. A strategy of gradu-ated, yet decisive elimination of barriers to competition may also helpbaild support and thus achieve sustainable progress of reforms.

xxxiv. In the absence of knowledge about effective rates of protection,one cannot argue for a specific sequence in the process of import liberali-zation. Nonetheless, it ie particularly important to subject the leastcompetitive industries to ti6e discipline brought about by import competi-tio.i. Among the least competitive industries, intermediate goods (charac-terized by very high price linkages) have the largest economic impact.Liberalizing imports (and tightening investment incentives) of these indus-tries would erode the rents being transferrod to them, while providingeconomy-wide benefits in the form of lower prices.

xxxv. A number of countries that have been able to sustain reforms inthe trade regime have initiated them with intermediate goods, primarilybecause this first stage of liberalization raised the effective rates ofprotection of users, which had often been negative, and promoted a largeinterest group backing reform. However, if this process raises alreadyhigh levels of effective protection among some final users, steps must betaken to simultaneously lower nominal protection to those producers. Aninitial focus on intermediates would also generate support because theytend to have the highest price linkages to the rest of the economy. Assuch, they become a critical link in the mechanism which propagatesinflationary pressures. Import competition would help severe this link.

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xxxvi. Price decontrol should be pursued simultaneously, immediatelyintroduced in competitive industries. Price liberalization for subsectorsshould move in tandem with lowered restrictions on firm mobility, andbinding import competition, measured by the degree of import penetrationand by the domestic/border price differentials.

D. Reform of the Investment Incentive Regime

xxxvii. The investment incentive system has generated a heavy fiscalburden: its estimated fiscal cost (in terms of revenue foregone) in 1986was 1.9% of GDP or 53% of the public sector deficit. The investmentincentive regime has also been very costly in economic terms, by favoringactivities characterized by high capital intensity and low value added.The system also seems to promote industries with high concentration andhelped foster oligopolistic practices among leading incumbents. In termsof the regional allocation of incentives, the system has favored a fewselect Provinces. While achieving only limited regional deconcentration ofindustrial activities, it has resulted in very large economic efficiencylosses.

xxxvIii. Currently the Government is attempting to rationalize investmentincentives. It should aim at reducing the amount of fiscal incentives andthe period of their application, making them available to all industries inall Provinces. The project selection criteria should be improved, with anemphasis on export-oriented investments. The bias against entrants andhigher value-added or more labor-intensive activities should be elimi-nated. A new investment incentive Law, under discussion in Congress, couldconstitute a major step in helping modernize Argentina's industry if basedon these considerations.

(1) Bias Toward High Capital Intensity

xxxix. The bias toward capital-intensive activities would be partiallyoffset (a) by substantially reducing the length of time (from 15 to say 5years) during which investors may avail of tax deferments and profit taxexemptions; (b) by subjecting tax deferments to interest payments; and(c) by removing the value added tax exemptions from purchases.

xl. SICE's new procedures in ranking projects have already reducedthis bias, since the fiscal costs per employment generated (the variableused to rank projects) tend to be higher for more capital-intensiveactivities, giving them the lowest priority. Since changing this rankingcriteria, labor intensive activities have moved up the scale relative tocapital-intensive goods.

xli. Further reduction of tax deferments to investors and of exemp-tions from taxable profits would make the system more neutral. Tax defer-meLts, for instance, should be payable within not more than five years;they should be fully and immediately reimbursed if projects are not carriedout within 2-3 years of approval. Exemptions from taxable profits shouldbe more limited, and be given for at most five years.

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xlii. Reducing the tariff exemptions from imported capital equipmentand from all imported inputs would also lessen the incentives toward capi-tal use. It Is recommended that tariff exemptions from Imported capitalequipment be granted only once and at the initial stage of the project, andthat firms in Tierra del Fuego be exempt only from tariffs on capitalequipment Imports, and not on inputs.

(2) Bias Toward Low Value-added Activities

xliii. Reducing the time horizon of value-added tax exemptions wouldpartially offset the bias favoring low value-added activities. To elimi-nate it, value-added tax exemptions should be phased out altogether. Sincemany promoted firms already avail of these incentives, to merely eliminatethem would signify that such firms would have an unfair advantage overentrants. Incumbents, therefore, should also be denied access to this taxincentive. This is possibly the only way to effectively deal with the verysubstantial economic and fiscal distortions arising out of value-added taxexemptions (and deferrals), while preserving horizontal interflrm equity(by not penalizing entrants and discouraging their investment). Sinceeliminating these exemptions to incumbents may be difficult, a program ofphased reductions in incentives may have t- be considered.

(3) Sectoral Biases

xliv. The same set of intermediate goods which have been most favoredin the past--petrochemicals and chemicals, ferrous metals, and cellulose--remain under special sectoral incentives. Since these industries takeextensive advantage of provincial incentives, the set of procedures devel-oped by SICE, by reducing the importance of these industries in the alloca-tion of provincial incentives will, in part, reduce this bias.

xlv. Phasing out the sectoral programs is essential. These indus-tries, especially the heavy intermediates, have been receiving substantialbenefits for the past two decades. Since many are declining, the Govern-ment may want to consider interim measures to facilitate adjustment to newtechnological and demand conditions, rather than merely continuing tostimulate growth. Sectoral incentives should be replaced by horizontalpolicies promoting entry of new entrepreneurs (through the provision ofseed finance, technical assistance and training), and modernization andtechnology development of industry. Promotion should be moderate, well-focused and time-bound.

(4) Bias Toward Provincial Concentration of Incentives

xlvi. Investment incentives are especially generous to a selected setof Provinces with special programs and to the National Territory of Tierradel Fuego. Firms responded accordingly by relocating their plants to theseareas. Provinces with lower per capita incomes had no access to similarpromotional instruments. It is quite critical to avoid undue concentrationof incentives among few Provinces and Tierra del Fuego. To carry out the

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objective of economic deconcentration more effectively, the Goverrmentshould eliminate the special programs for Catamarca, San Luis, San Juan, LaRiojs and Tierra del Fuego and replace it with a program of strengtheningprovincial infrastructure which would address distortions of past policiesin this respect.

(5) Excessive Fiscal Costs

xlvii. The incentives of the Industrial Promotion Law need to be down-sized significantly, in order to make the associated fiscal costs compati-ble with the requirements of fiscal balance in public sector accounts andto lower the economic efficiency losses associated with regional disloca-tion of industrial activities. When, in 1983, authority was shifted to theProvinces, the number of promoted projects rose five times and the fiscalcost of the system doubled. Moreover, there is no evidence that thepromoted relocations enhanced commensurably industrial productivity.

xlviii. An improved Industrial Promotion Law could require substitutingpresent tax exemptions, notably the value-added tax, by a system of taxcredits. Generally, and within a declining ceiling of fiscal incentives,industrial promotion should be accessible to industries in all Provinces,preferably under equal conditions, on the basis of realistic evaluations oftax revenues foregone. Therefore, maximum amounts would have to be set notonly for individual Provinces but also individual investment activities.

(6) Investment Incentives As An Element of Competition Policy

xlix. One of the paramount goals in revising the system of investmentincentives is to encourage competition and to reduce the transfer of rentsto selected industries. The proposed reforms in both sectoral and provin-cial programs would reduce the bias of the system in favor of subsectorswhich are the largest recipients of incentives and also the most uncompeti-tive. The presumption is that the profits normally absorbed by these sub-sectors are quite sufficient to finance their investment needs.

1. SICE's new ranking procedure already lessens the bias towardhighly concentrated subsectors by de-emphasizing heavy process activities.Many of the features of the evaluation methodology being developed at SICEcould serve as useful starting points for developing provincial criteriafor project approval. Making the system of screening automatic and moretransparent, and removing extensive consultations ("consulta previa")between major producers and Government officials, would also lessen theselection bias toward leading incumbents. By phasing out sectoral programsand removing their entry-restrictive provisions, reforms would also addressthe pro-incumbent bias of the system. Government permits for steel andcellulose production are still required, and so are plant scale require-ments for petrochemicals, etc. Entry is also deterred by the cost advan-tage to incumbents benefitting from fiscal incentives for extended periods,which should be accordingly reduced quite drastically.

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(7) Legal and Administrative Complexity

11. The current system maintain several laws and decrees, each oneoutlin'ng different provisions for each sectoral program. With theautoAomy granted to promoted provinces, each province has also set up itsown regulations and criteria. It is suggested, therefore, that the Laws beintegrated and simplified (possibly within the scope of a single Law),whereas the criteria for screening should also be made transparent andconsistent with overall industrial policy objectives.

lit. In a truly automatic regime, both stages of the screening processshould be changed or the consultation stage eliminated and the remainingone refined. If both stages are retained, the first-stage criteria shouldbe made consistent with the overall objective of relating the proposedInvestments benefits with their fiscal costs. The current changes in thecriteria for ranking projects as developed by SICE are a significant stepin the right direction; they could be improved further by giving moreemphasis to the export content of the product.

(D-254q)

CHAPTER I

THE TRADE REGIME AND THE SHAPING OF THE ARGENTINE INDUSTRIAL SECTOR

1970-1987

I. Introduction

1.01 This study examines Argentina's industrial policy regime and itsimpact on the performance of the manufacturing sector. Since the mid-1960sgrowth of manufacturing value-added has slowed significantly (Table 1.1).In contrast with most other middle-income developing countries, averagemanufacturing growth was negative (-1.6% p.a.) in the 1973-8^ period. Inaddition, both the share of manufactured exports in manufactured output(8.6% in 1983) and its rate of growth (1.5% in the period 1966-83) havebeen extremely low.

Table 1.1: SELECTED MANUFACTURING INDICAIORS

Growth of Manufacturing Share of Growth Rate ofGDP Value Added Manufacturing Manufacturing

Per Capita Exports in GHD Exports1984 1966-73 1973-83 1966-83 1983 a/ 1966-83(US$) () (X) (%) (2) (%)

Argentina 2,230 4.4 -1.6 0.8 V.S 1.5

Brazil 1,720 8.6 3.4 4.8 11.9 8.8Chile 1,700 2.0 -1.6 -0.4 33.7 7.2Colombia 1,390 7.8 2.1 4.5 15.5 5.4Japan 10,630 13.4 5.9 11.0 16.2 11.9Rorela 2,110 21.9 11.8 18.7 36.9 2.3.4Mexico 2,040 9.8 4.4 6.4 9.7 6.3Tirkey 1,160 9.5 4.4 8.0 11.1 10.6

Q GMO - Gross mmnufacturing output.

Source: IENIN data base.

1.02 The erosion of Argentina's position relative to other middle-income countries over the last 20 years is rooted in a perverse synergy oftwo factors. First, severe macroeconomic instability and repeated policyshocks generated excessively risk-averse and anti-competitive economicconduct. Second, high trade barriers and generous, long-lasting investmentincentives to domestic firms, gradually deterred competition and mobility,reinforcing established producers in mature and declining subsectors.

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1.03 Frequent policy changes have caused substantial fluctuations inmwst prices and rendered the economic environment very unstable. Particu-larly since the 1960s, policy-makers have been groping for a means ofreconciling macroeconomic stability with a resource-intensive process ofimport substitution and a multiplicity of conflicting societal demands.Domestically, Governments have attempted, generally unsuccessfully, toraise resources through a combination of taxation and borrowing withoutresorting to an inflation tax. External balance has been equally hard toachieve, in view of the economy's inability to expand exports to financethe needs of an import-intensive industrialization process.

1.04 The extent of price instability can be observed in Figure 1.1(a-d). The real effective exchange rate (REER), for example, first rose(appreciating the peso), in the early 19709, to 70X above its 1970 level (alevel generally regarded as fairly close to an equilibrium exchange rate),and subsequently fell 50X below this base line. An attempt to use the REERas an anti-inflationary instrument in the late 1970s led again to a 40Xappreciation with respect to the 1970 level. Other key prices, such asinterest rates and real wages, show a similar history of sharposcillations.

1.05 Partly as a reflection of these fluctuations, Argentine indus-trialists have become unusually risk-averse in their investment decisions.Producers, facing increased variance in prices, profits and institutionalarrangements, have diversified away from the zeal or perceived higher riskof directly productive activities. Also, in an attempt to insulatethemselves against market shocks, firms have consolidated their positionsand increased their market power by vertical and horizontal integration.

1.06 The serious difficulties in firms' planning and decision-makingcombined with unattractive or negative rates of risk-adjusted profita-bility, contributed to the decline in the rate of investment, which fellfrom 21.21 to 11.31 of GDP between 1970 and 1985; private investment fellfrom 13.1% to 7.51. At current rates, gross fixed domestic investmentbarely covers depreciation of capital assets.

1.07 The adverse impact of the macropolicy environment on the level ofinvestment and the pattern of resource allocation has been magnified bytwo key features of the policy frame toward industry: the trade regime andthe system of investment incentives. Industrial stagnation in Argentinacannot be understood without reference to their biases or dual nature.While succeeding in promoting rapid industrialization in the post-warperiod, these policies have come to favor: established incumbents overpotential entrants, once subsectors were consolidated; certain assembly andprocess activities (particularly of intermediate goods), to the detrimentof more skill-intensive and higher value-added production; and mature anddeclining industries against innovative and high-growth sectors.

(A) REAL EFFECTIVE FIGURE 1.1 (8) L nuTION RATES

Is

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1970197* M17210133974 197610976197719761979tMIUSO81 19021283IM4 0414 19670 6076 9P 10167.51974 0970 190 #76107 701011900ON1501 11212 cooS tftSO

(C) REAL WAGE InDEx(i) REA REGUATED LEwnPIG RATES

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1.08 The duality of the policy regime is expressed first, in thehigher levels of protection and promotion given to process (particularlyintermediates) and assembly industries, while penalizing design andfabrication activities (see Section II below and Chapters II and III).These policy biases have been particularly important in the contexc of thetrade reforms of the late 1970s, when the costs of adjustment were bornedisproportionately by the industrial users of intermediates, which facedvastly different competitive conditions in input vs. output markets.Between 1975 and 1982, the share in total manufacturing value-added ofseven key intermediates-paper, basic and other chemicals, petroleumrefineries, non-metallic minerals, iron and steel and non-ferrousmetals-rose from 27.6% to 33.5%. The share of eight major downstreamsubsectors--printing, rubber products, glassware, metal products,non-electric and electric machinery, transport equipment and scientificequipment--fell from 33.0% to 27.9%.

1.09 Second, import substitution policies, instead of promoting newactivities, have come to protect those sectors characterized by large sunkcosts, outdated processes and receding markets. Policies strengthened themarket position of leading incumbents in mature and declining industries tothe detriment of potentially innovative entrants. In contrast, Argentina'sinitial phases of import substitution were characterized by considerablestructural change, with the establishment and expansion of many new indus-trial activities. Between 1938 and 1970, the share of non-durable consumergoods in manufacturing value-added fell from 56% to 34%; the share ofcapital and durable goods rose from 13% to 37%; and the share of inter-mediate goods also rose from 20% to 25%. However, over time, importsubstitution policies led to increasingly high barriers to entry; theydiscouraged innovation and the search for new markets, by insulatingdomestic producers in diverse yet complementary ways.

1.10 Trade barriers decreased import competition for most establishedactivities; many sectors have had infinite protection for extendedperiods. New areas of production, on the other hand, have faced negativeprotection. The infant industry argument was turned upside down: relieffrom import competition was provided for the more mature and decliningsubsectors, while new or innovative activities were penalized. Highprofits in domestic operations have enabled firms to operate in isolationfrom international markets, and have shielded them from export rivalry.Even during recessions, small production scales and costly inputs deterredexports. Argentine producers became insulated from the exacting cost,quality and performance requirements of export markets (Section II belowand Chapter III).

1.11 A system of investment incentives, comprising tax and otherexemptions, has been the other major barrier to competition and structuralchange (Chapter II). Through the incentive system, established firmsobtained unit cost advantages which have helped them consolidate theirmarket position. Entrants, competing for scarce fiscal resources, were ata disadvantage relative to well-informed incumbents that had alreadydemonstrated the ability to fulfill domestic demand requirements. Thesystem's bias in favor of capital-intensive techniques and low value-added

.- 5 -

activities, in which Argentina has no obvious comparative advantage,deterred investment in new industrial segments, slowing down positiveindustrial restructuring.

1.12 This and the next chapters will explore these different dimen-sions of the trade and industrial promotion regime. It will be argued thatwhile this regime has protected a core of rent-absorbing subsectors, it haspenalized potentially innovative and high-growth activities. Overcomingthis duality, as proposed in Chapter IV, is the key to a new industrialstrategy. Such strategy would focus on increasing the extent of competi-tion, bringing about a larger degree of intraindustry specialization, andstimulating Argentine producers to enter new areas and exploit paths ofcomparative advantage. The modernization and internationaliregional inte-gration of Argentine industry would require significant changes in thetrade regime, coordinated with a progressive decontrol of industrialprices; a reform of the system of investment incentives; and a set ofcomplementary measures to stimulate industrial competition.

-I. The Trade Policy Regime.

1.13 Through the 1920s, Argentina-ranking with developed countriessuch as Canada and Australia-benefited from a steady expansion of land-intensive agricultural exports, and from economic policies favoring freetrade, foreign investment and immigration. However, the depression of the19309 severely curtailed exports of traditional agricultural products, andled to a profound reorientation of the country's development strategy.Over the next half century, Argentina pursued a strategy of import substi-tution industrialization. Successful in the beginning, this strategyeventually led to a highly distorted allocation of resources and anunstable growth path that prevented the country from fully realizing thepotential of its rich human and natural resource endowments. Today,Argentina's per capita income is more than 80% below that of Canada andAustralia.

1.14 Table 1,2 shows the structure of protection from import competi-tion in 1969, when tariffs constituted the main instrument of protection.The nominal rate of protection for the manufacturing sector was on average57.1%, ranging from 6.8% for processed foods to about 109.0% for transportequipment. The effective rates of protection (ERP) were even higher due tothe escalation in tariffs with degrees of processing. Generally, capitalgoods received the highest degree of protection, followed by intermediategoods and consumer durables, whereas consumer non-durables received com-paratively low levels of protection. This regime became progressively moreprotective, until in the mid-1970s a new Government started a process oftrade liberalization.

Table 1.2: NOMINAL AND EFFECTIVE RATES OF PROTECTION, 1969

Nominal Effective ProtectionSector Protection Balassa Corden

Processed Food 6.8 44.0 34.9Beverages and Tobacco 50.8 94.5 76.9Construction Materials 29.1 31.4 26*5Intermediate Products I 55.9 146.0 109.0Intermediate Products II 69.3 99.3 96.4Non-durable Consumer Goods 57.4 49.8 43.5Durable Consumer Goods 88.7 144.5 112.5Machinery 89.7 120.3 108.4Transport Equipment 108.7 207.0 148.3

Manufacturing Total 57.1 111.0 89.3

Source: J. Berlinski and D. Schydlowsky, "Argentina", in Bela Balassa andAssociates, Development Strategies in Semi-Industrial Countries,Baltimore: Johns Hopkins University Press, 1982.

A. The Liberalization of the Trade Regime: 1976-81

1.15 After an expansionary phase during the early 1970s, Argentina washit by a particularly severe cyclical downturn in 1975; compounded bypolitical difficulties, it prompted a military coup d'etat in 1976. Thenew Government adopted an economic program that, for the first time inArgentina's post-war history, attempted to open the country to importcompetition. During the initial phase of the reform program, between 1976and early 1979, most domestic producers were affected only mildly by thetariff reductions due to significant redundancy in the tariff system. As aresult, firms made only limited adjustment efforts. Table 1.3 shows how,despite sizeable tariff reductions between 1976 and 1977, tariffs stillexceeded existing price differentials, particularly for durable consumergoods ard machinery products.

1.16 Table 1.4 gives a more detailed view of the 1976 and 1977 tariffstructure. Nominal tariffs, which on average had risen from 57Z to 98%between 1969 and 1976, were cut substantially to 37% in 1977./ Thereductiou in effective rates of protection (ERPs) was even more protiounced:they went from an average of 111% in 1969 to 39% in 1977. Most notablewere the low and even negative ERPs for capital goods (except electrical

1/ See Julio Nogues, "Proteccion Nominal y Efectiva: Impacto de lasReformas Arancelarias Durante 1976 y 1977," in Ensayos Economicos,No. 8, December 1978.

Table 1.3: 0OMPARISON OF PRICE DIFlFE!RE ALS AND IARIFF U VELS (1976-77)

Price Differentials legal Tariffs(February 1977) (October 1976) (December 1977)

Effective Nominal Effective Nominal Effective Nominal

Value Final Value Final Value FinalAdded Product Inputs Added Product Inputs Added Product Inputs

Non-durable Consmr Goods 44 46 48 352 200 106 155 95 56

Durable Consumer Goods 17 29 44 197 134 88 122 74 40

Intermediate Goods 57 41 28 133 84 51 49 43 35

Nachinery 10 33 54 176 132 112 169 94 66

Transport Equipmnt 7 26 54 74 86 104 63 60

Average 39 37 37 132 94 68 63 53 43

Source: Julio Nogues, "Proteccion Nominal y Efectiva: Impacto de las Reformus Arancelarias Durante 1976 y^.7,," in Ensyos Economicos, n. 8, Dec 1978, pp. 147-212.

(D-254o)

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machinery) which had received high levels of protection until the mid-1970s. However, relatively high ERPs were maintained for a number ofimportant intermediate products (steel, non-ferrous metals, paper andchemicals), and for certain mature industries (e.g., textiles and clothing)indicating non-unif4rmity in liberalization efforts. In fact, the tradereforms tended to reinforce the position of a number of largely oligo-polistic producers of intermediate goods, while subjecting the remainingsectors to substantial competitive pressures and market shocks.

Table 1.4: NOMINAL AND EFFECTIVE RATES OF PROTECTION, 1976 AND 1977(Based on Sample of 40 5-digit ISIC Industries)

1976 1977

Effective AverageNominal Nominal Protection Legal

ISIC Industry Protection Protection (Balassa) Rates a/

321 Textiles 107.7 41.1 85.3 57322 Clothing 200.0 79.2 131.6 95341 Paper and Paper Products 28.9 30.8 74.9 29351 Chemical Substances 78.6 36.6 60.0 35352 Other Chemicals 98.8 0.0 -14.8 17355 Rubber Products 110.0 29.6 29.3 45362 Glass 94.3 12.3 14.6 42369 Cement 66.0 0.0 -1.9 11371 Iron and Steel 88.8 60.7 84.5 48372 Non-Ferrous Metals 68.5 47.0 88.0 45381 Metal Products 132.9 10.1 -11.5 46382 Non-Electric Machinery 98.3 19.7 -4.7 66383 Electrical Machinery 89.1 55.7 77.6 61384 Transport Material 127.0 29.7 3.5 87385 Scientific & Professio-ial

Equipment 80.0 73.3 92.6 50

Average 97.9 37.1 39.1 53

Source: J. Berlinaki, La Proteccion Efectiva de Actividades Seleccionadasde la Industria Manufacturera, Buenos Aires, 1977; and J. Nogues, op.cit.

a/ Since the legal rates differ substantially within each 3-digit ISIC group,these averages should be considered approximations.

1.17 The liberalization measures introduced in 1979, during a secondphase of the reform program, gradually increased the exposure to importcompetition in a number of product groups. Initially, adjustment lags andmarket frictions continued to shield domestic producers from the full

impact of the liberalization. Since time was needed to set up effectiveimport distribution channels, the pressure of imports on domestic priceswas not felt immediately. Also, firms that produced importable goodsbefore liberalization became retailers for the foreign substitutes, sellinginitially at prices not much below those previously charged for domesticproducts; this phenomenon became known as tariff privatization.

1.18 During late 1979 and 1980, reduced protection combined withsubstantial currency appreciation meant that import-competing firms felt astrong pressure from foreign competition. Most businesses were unprepared,having adopted a wait-and-see attitude toward the new policies. Evidenceindicates that external competitive pressures affected small firms themost. Many of them became financially distressed with the major increasein real interest rates during 1980. The decline in their numbers duringthe late 1970s--18 on average between 1974 and 1981--was considerablyhigher than the average for large firms--11X for those with more than 400employees. Larger firms, particularly those organized as conglomerates,generally were financially more flexible, had easier access to credit andmore market power, facilitating their survival. As a result, concentrationduring this period increased throughout most of the manufacturing sector.The production-weighted average share of the largest four plants of eachsector rose from 38% in 1973 to 41% in 1984 (Chapter III).Z/

1.19 As Figure 1.2 (a-c) illustrates, import competition was felt moststrongly in consumer products, followed by capital goods. Intermediategoods were much less affected; competitive imports in this sector rose onlyslightly relative to the surge in imports of consumer product imports.These response patterns reflected in part the prevailing tariff structure:intermediate products, with lower tariff reductions than other sectors,were the least affected by import competition. For example, steel, non-ferrous metals, paper and, to some degree, chemicals were substantiallyless affected than consumer goods, which experienced sizeable tariff cutsand suffered the most. Also, in the intermediate goods sector, the importpermit system (such as for steel) compounded the protective effect of thereduced tariff rates.3/ Finally, government regulations restricting ordiscouraging entry into several of the intermediate goods subsectors--steel, petrochemicals, aluminumr-accentuated the differential cross-sectoral impact of the protective structure.

2/ It should be noted that this trend toward high concentration was notuniform across subsectors. In the shoe industry, for example, smallfamily shops operating in the black market were able to survive underunfavorable market conditions. As a result, the degree of intercensalconcentration did not rise.

3/ In the steel sector, the import permit system offered particularlylarge potential for additional protection, since the authority forissuing permits was granted to the Direccion General de FabricacionesMilitares, which largely controlled the state-owned steel plants. Thisregime was instituted in 1979, at the height of trade liberalization.

D -* * S' . I

'Ia I"' IIrg

i,- 1ElSR'

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1.20 mhus, even as the economy was opening up, the tariff regime, incombination with import licensing procedures and entry regulations, con-tinued to protect many intermediate goods producers. As a result, firmswere able to maintain non-competitive behavior, rather than having toadjust their pricing strategies and degree of productive efficiency to amore competitive market. With the linkage effects of intermediate goods todownstream users, this conduct had serious consequences for the competi-tiveness of Argentina's industrial sector as a whole.

1.21 Once the firms affected by the trade liberalization started toadjust to the new economic environment, the country was hlt by one of themost severe depressions since the 1930s. Figures 1.3 and 1.4 illustratethe severity of the economic decline: manufacturing value added plunged by25% between 1975 and 1982, employment by nearly 60% during the same period.The combination of strong competitive pressures in opening up the economy,sharply increased exchange and interest rates, and the subsequent severeeconomic downturn led to a series of bankruptcies and financial crises.Firms that were highly leveraged, had little market power or faced heavyreductions in import protection were most affec':ed. Large firms withsubstantial market power, such as conglomerates, generally had lessdifficulty.

Figure 1.3: MANUFACTURING VALUE ADDED, 1970-851970 - 100

40

.o

1~ IvI,

- 12 -

Figure 1.4: MANUFACTURING EMPLOYMENT, 1970-851970 - 100

20'

120.

110-

Go.'

00 .

so

70 -4

1.22 By 1982, the Government again applied non-tariff barriers in aneven more restrictive manner than prior to trade liberalization; the newprocedures required importers to obtain approval of import licenses fromrespective producers' associations. These licensing procedures became themost important trade policy instrument and have remained so to thepresent. While tariffs were generally maintained at their reduced rates,licensing procedures have served as serious impediments to importcompetition.

B. The Structure of Protection in 1987

1.23 The Tariff System. Nominal tariff protection in Argentina iscurrently moderate: ad valorem duties range from 0% to 48%, with a smallnumber of items subject to higher duties reaching 87%. The mean unweightedtariff for manufacturing industry is 31.9%, with a standard deviation of10.1%, roughly comparable to that for the economy as a whole (Table 1.5).The dispersion of duties across major product categories is quite narrow:the unweighted tariff is highest for consumer goods (37.7%), about averagefor capital goods (32.1%), and slightly lower for intermediate goods(28.5%). This pattern is the reverse of the tariff structure of the 1960sand 1970s, when consumer goods were the least protected, followed bycapital goods and intermediate goods, with large deviations withinsectors.

1.24 When tariffs are weighted by imports, the average tariff falls to31.4%; when weighted by production, it reaches 37.3%. The difference ofsix percentage points is an indication of how binding are trade barriers inArgentina. The low import-weighted average tariff suggests that imports ofgoods facing higher tariffs are effectively curtailed; thus, the weight ofimports is inversely proportional to the tariff level. Similarly, a highproduction-weighted average tariff indicates that higher tariffs are indeedprotective of domestic production.

- 13 -

Table 1.5: NOMINAL RATES OF PROTECTION IN THE ARGENTINE MANUFACTURING SECTOR, 1987

Average Tariff Import ProductionNo. of Value Value

Weighted Weighted Std. Tariff (US$ mil.) (US$ mil.)Sector/Subsectors Unweighted by Imports by Prod. Dev. Positions 1985 1985

Whole Economy N.A. N.A. N.A. N.A. 11,463 3,688 N.A.Intermediate Goods 28.5 30.5 36.1 11.5 3,939 1,474 1,765Capital Goods 32.1 32.0 36.3 9.9 4,893 845 277Consumer Goods 37.7 34.7 35.6 8.9 2,142 687 1,802Manufacturing 31.9 31.4 37.3 10.1 10,974 3,005 3,843

Standard Mbnufacturing Subsectors

1. Food, Beverages andTobacco 32.4 36.2 33.0 5.9 419 83 989

2. Textiles 46.7 42.7 44.3 3.0 1,090 42 4793. Wood 44.1 42.8 44.9 4.0 101 30 724. Paper and Printing 37.3 36.7 35.6 11.5 195 74 1915. Chemical Products 24.6 25.8 33.6 12.9 3,635 1,008 8836. Non-metallic Minerals 37.6 36.7 38.0 10.3 206 35 1247. Basic Metals 35.6 36.1 36.6 12.3 547 276 2168. Machinery and Other

Netallic Products 32.9 33.1 41.7 10.4 4,519 1,439 8779. Other Manufacturing 32.9 33.5 39.1 9.8 262 18 12

Note: Values may not be equivalent due to rounding. N.A. - Not available.

Source: SICE; own computation.

1.25 A substantial dichotomy exists between the tariffs levied ongoods not locally produced vs. goods which are produced domestically. Forexample, in capital goods, the tariffs on products not manufactureddomestically are between 10% and 20%, while those on domestically produceditems average about 48Z.4/ This disparity highlights the ftat thatprotection is particularly strong for traditional sectors such as textilesand apparel, while tariffs are below average for non-traditional productssuch as electrical machinery and scientific equipment.

4/ See Enrique Scala, "Politicas Economicas;, Estructura y Comportamientoen la Industria Metalmecanica Argentina," mimeo, Buenos Aires, 1987.

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1.26 In comparison with other developing countries, Argentina chargesmoderate dutiss. In a sample of ten developing countries, only four(Hungary, Yugoslavia, Morocco and Mexico) have charged lower averagetariffs for manufactured imports than did Argentina (Table 1.6). A furthersectoral disaggregation shows that the same pattern applies to intermediateand consumer goods. In contrast, tariff rates on capital goods aresomewhat higher than the average for other developing countries.

Table 1.6: NOMINAL TARIFF RATES, MEAN AND STANDARD DEVIATION OF TARIFFS BY COUNTRY I(% ad valorem)

Intermediate Capital Consumer ManufacturingGoods Goods Goods Industry

Country Mean Std Dev Mean Std Dev Mean Std Dev Mean Std Dev

Argentina 30.5 11.5 31.2 9.9 37.7 8.9 31.9 10.1Bangladesh 97.9 60.0 80.5 18.1 116.1 82.0 100.8 67.3dhina 78.9 55.7 62.5 47.8 130.7 66.9 91.2 63.4Hungary 14.2 27.3 14.0 51.4 22.6 17.5 20.9 15.0India 146.4 55.6 107.3 48.1 140.9 38.4 137.7 52.8Mbxico 23.5 16.3 23.5 17.3 32.2 26.4 24.7 19.0Merocco 21.6 16.9 18.1 12.0 43.0 20.5 27.8 20.4Thailand 27.8 20.4 24.8 16.2 48.5 38.7 33.5 28.6Turkey 29.4 25.0 34.9 18.3 55.3 40.6 37.1 30.9Yugoslavia 18.0 4.9 20.7 4.2 20.0 6.4 19.0 5.5

Source: SINTIA country tariff files.

a/ Includes CET + other import duties + flat duty (if any); excludes exmptions, discountsand other relaxations.

1.27 A certain degree of caution is, however, required when incerpret-ing the results presented in Table 1.5, due to another feature of theArgentine tariff system: the pervasiveness of duty exemptions and reduc-tions (as well as temporary surcharges). Various industrial promotionschemes provide numerous exemptions from tariffs for approved imports(Chapter II). In the first half of 1985, 34% of all imports subject totariffs were declared exempt, and 65% entered at tariff rates of not morethan 10%.I/ As a result, realized tariffs are likely to be considerablybelow nominal tariffs.

5/ World Bank Report No. 6467-AR, Argentina - Economic Recovery andGrowth, Working Note 9.

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1.28 Tariff exemptions present a sizeable loss in Government taxrevenue. Also, to the extent exemptions have grown in importance, therehas been a corresponding increase in the degree of arbitrariness of thesystem. On the other hand, a number of products are subject to specialsectoral promotion regimes that grant tariff protection not captured inTable 1.5. These products are mainly in the electronics sector, includingconsumer electronics, electric motors and special machine tools (ChapterII). the special programs for these s-ctores initiated from 1986 to 1987bring tariff protection up to 100% in the'iirst year of effectiveness,decreasing gradually to 6C% over four years. Temporary tariff protectionis also granted for certain sectors covered by sectoral pfomotion programs(e.g., petrochemicals, steel).

1.29 In addition to the basic tariff dutie3, a temporary surcharge of10% (included in the above tables) and the value-added tax, importers mustpay: (a) a fee of 3% on the CIF value of imports; (b) a 12% tax on freightcharges for the Merchant Marine Fund; and (c) a tax of 0.5% on the CIFvalue of imports for the Export Promotion Fund.

1.30 Non-Tariff Barriers. If tariffs have been relatively moderate,non-tariff barriers are considerably more important. Although severalsteps have been recently taken toward gradual liberalization, thesebarriers still constitute the core of the country's present system ofimport restrictions.

1.31 The prevailing L* -tiriff barriers do not take the form of out-right quantitative re,;;4..crions. Rather, thev consist of a system ofinvolved, cumbersome licensing procedures. This system is characterized bya lack of transparency, leaves plenty of room for discretionary actions,distorts resource allocation, and encourages collusive behavior amongproducers.

1.32 At present, imports require an application for Governmentapproval of a permit, termed a DJNI (Declaracion Jurada de Necesidad deImportacion). Depending on the classification of the product, threedifferent procedures apply:

(1) Automatic List. For goods on the automatic list (5,934 tariffpositions out of 10,974), importers can obtain approval of DJNIsfollowing two different paths. In case of "fully automatic'products, the importer proceeds directly to the bank that willprovide import financing. The Bank then applies and is automati-cally granted an import permit from the Secretary of Industry andTrade (SICE). For the remaining products, the importer files areapplication with SICE, which "automatically" grants the importpermit after three working days. Products in the automatic listcover about 43% of the value of production (Table 1.7).

(M) Restricted List. Products on the restricted list (861 out of10,974 tariff positions) are subject to prior government approvalon the basis of health and public safety considerations. Pro-ducts in this category cover about 4% of the value of production.

- 16 -

(3) Prior Consultation List. Products on the prior consultation list(the remaining 4,181 tariff positions, equivalent to about 53% ofthe value of production), are mainly imports competing withdomestic production. They are subject to discretionary authori-zation of imports. Import license applications for these commod-ities are referred to the producers' associations, which assesswhether local production is available to satisfy the needs ofpotential importers. Price competitiveness and quality require-ments play only a minor role in this assessment. In 1987, theproducers' associations rejected import license applications for2,259 of the 4,179 tariff positions on the prior consultationlist, or 28% of the total value of production. Prnducts in thisgroup clearly are restricted. For the remaining 1,923 tariffpositions, import license applications were approved only to theextent that producer's associations deemed that domestic supplywas insufficient. Reforms in early 1987 have streamlined proce-dures and reduced restrictions by ruling that once imports of agiven product have been authorized by a producers' association,there is no need to consult the association for future importrequests regarding the same product.

1.33 Table 1.7 shows the impact of the import licensing system acrosssectors. The most heavily protected are food products and textiles where60% and 49% of total production is protected completely, with importsprohibited through both the restrictive list and systematic rejectionsunder the prior consultation regime. Only 16% and 9% of total productionin these two sectors correspond to automatically approved imports, while24% and 41% are subject to prior consultation procedures. Table 1.7 doesnot capture, however, non-tariff restrictions provided by certain sectoralpromotion programs (such as petrochemicals and steel) during projectstart-up, and often beyond.

1.34 As with the tariff regime, a substantial dichotomy exists betweenthe restrictiveness of the licensing requirements for goods produced in thecountry-many in mature or declining industries--and those with little orno domestic production. In capital goods, for example, the overallimportance of locally produced products which may be imported freely isbelow 10%. A much higher percentage of products not produced domesticallymay be imported freely.

1.35 The system of import licensing, particularly the prior consulta-tion scheme, generates a number of distortions. The system carries sub-stantial uncertainty and discretionary powers, and is time-consuming andcumbersome. The prior consultation scheme induces firms to import productswith more sophisticated technology than required, since such products.generally are not produced locally and can be brought in without priorconsultation with producer associations. Also, since such products areviewed as non-competitive, they can be imported at lower tariff levels. Asa result, the rejection rates of DJNIs presented to producer associationsare generally low; potential importers seem to apply only for DJNIs ifthey are reasonably certain the product is not produced domestically or isin insufficient supply.

Table 1.7: (MJNTIATIV CICrCS IN IK ARW5 In I :IDUI UClR 81(early 1987)

Frequcy Dlistribution of TariffPreq.iecy Distribution of Tariff Positions Subject to LicensingPositions Subject to Licersing lased on Share of Production

(2) (1)

Prior hAto- Prior Auto- No. of Import ProductionRestricted Consultstion atic Prohibited Consultation matic Tariff Vale Value

-_____________________ _ Positions (US$'000) (US$'000)Sector/Subsector R CR (R4CR) (C-CR) (C) A R CR (R4CR) (C-CR) (C) A

Whole Econoty 7.6 20.7 28.3 17.4 38.1 54.3 NLA. NA. N.A. NLA. NLA. NL. 11,463 3,688 N.A.Intermadiate Goods 10.0 9.4 19.4 13.7 23.1 66.8 1.3 17.5 18.8 18.0 35.5 61.9 3,939 1,474 1,765,210Capital Goods 0.6 27.3 27.9 17.8 45.1 54.3 0.2 27.5 27.7 15.5 43.0 56.8 4,893 845,678 276,639Consumer Goods 10.5 28.4 40.4 22.0 50.3 37.6 6.6 37.2 43.8 34.0 71.2 22.1 2,142 687,847 1,802,006Manufacturing 7.8 20.6 28.6 17.5 38.2 54.1 3.7 28.0 31.7 25.3 53.3 42.9 10,974 3,005,527 3,843,854

Standard Mmnufacturing Subsectors

1. Food, Beverages andTobscco 1.0 49.9 50.9 18.9 68.8 30.3 4.8 55.5 60.3 23.6 79.1 16.0 419 83,374 989,698

2. Textiles 0.1 63.5 63.6 26.6 90.1 9.8 0.1 49.1 49.2 41.3 90.4 9.4 1,090 41,550 479,2453. Wood 0.0 27.2 27.2 25.7 52.9 46.5 0.0 27.4 27.4 49.7 77.1 22.9 101 29,679 72,3064. Paper and Printing 0.0 21.5 21.5 31.8 53.3 46.7 0.0 22.3 22.3 35.0 57.3 42.7 195 73,894 191,1325. Chemmical Products 20.5 6.2 26.7 12.8 19.1 60.5 10.4 4.7 15.1 16.8 21.5 68.1 3,635 1,007,561 882,6436. ton-setallic Minerals 1.5 6.8 8.3 34.0 40.8 57.7 0.6 11.9 12.5 46.0 57.9 41.5 206 35,306 124.2227. Basic Metals 0.0 2.6 2.6 3.3 5.9 94.2 0.0 1.0 1.0 4.3 5.3 94.6 547 276,243 216,0528. Machinery and Other

Metallic Products 2.4 22.2 24.6 19.1 41.3 56.4 0.4 19.3 19.7 25.2 44.5 55.1 4,519 1,439,447 876,8569. Other Manufacturing 1.2 11.8 13.0 19.1 30.9 67.9 0.4 8.8 9.2 36.7 45.5 54.2 262 18,473 11,701

Note: Numbers way not add up because of rounding. NLA. - Not available.

a/ The categories are defined as follows: R - Restricted list for health and safety restrictions.C - Prior consultation list.

CR - Prior consultation list with zero isport value (can be considered prohibited).A - Automatic list.

Source: SIC(; own computation.

- 18 -

1.36 In product-markets where the suppliers are monopolies or arehighly concentrated-frequent with intermediate goods-end users wayrefrain from asking for DJNIs for fear of retribution by their suppliers,particularly when suppliers also are importers (for most small and medium-sized end users, it is uneconomical to import small quantities) .6/Furthermore, in these highly concentrated markets, systematic priorconsultation with the producers' associations function ae a facilitatingpractice for collusive behavior by setting a precedent for future coordi-nated actions among local producers. More generally, in an economy charac-terized by low levels of domestic competition, import licensing ' _blesincumbents to exert considerable market power, since actual protection forlocal producers is indeterminate and may approach infinity in extremecases.

1.37 The major distortion of the trade system is possibly the resourcemisallocation it generates over time. By protecting mature and decliningindustries with tariff and non-tariff barriers, and encouraging conaerva-tive firm behavior, the system slows the adjustment and structural changewhich the industrial sector would normally undergo. By symmetry, thesystem discourages potential new producers from enterlng areas whereArgentina may have a dynamic comparative advantage, thus deterring growthand technical change.

-II. Conclusions

1.38 A strategy of import substitution industrialization has beenconsistently pursued by Argentina in the last half century. This strategywas modified briefly in an attempt to liberalize the trade regime towardthe end of the 1970s. However, this episode actually led to continuedprotection of the more mature industries and reinforced the market positionof certain intermediate goods producers (see also Chapter II)* Theseproducers used their market position to insulate themselves from the manypolicy shocks and abrupt changes in the economic environment. They emergedfrom this period less battered than other subsectors which suffered thefull impact of reduced protection and economic recession.

1.39 The current trade regime is based both on moderate levels oftariff protection and a substantial extent of binding non-tariff barriers.The system continues to show a marked dichotomy: on the one hand, itfavors well established activities, in a number of mature and decliningindustries; on the other, it deters producers from entering new but

6/ A particular but troubling import approval procedure involves basicmetals. Imports are submitted to the Direccion General de lasFabricaciones Militares for approval. Fabricaciones Militares, anindustrial corporation controlled by the Ministry of Defense, is amajor shareholder in SOMISA and Zapla (a smaller steel firm). The DGFMcan deny import licenses without giving any justification of itsdecision. In 1986, for many key steel products there were no imports,in spite of price differentials well above the tariff rate.

- 19 -

unprotected areas that require the more intense utilization of humanskills. As will be argued in the next chapter, the other aspect of thepolicy regime that explains the inability of Argentine industry to exploitnew paths of potential comparative advantage As the system of investmentincentives. Together with the trade regime, It constitutes a majorinstrument for implementing Argentina's import substitution strategy.

(D-254o)

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CHAPTER II

IMPORT SUBSTITUTION AND INDUSTRIAL PROMOTION IN ARGENTINA

I. Introduction

2.01 The early phase of import substitution induced substantial growthin Argentina's manufacturing industry. Import protection and investmentincentives were the major tools used to stimulate industrial expansion.These instruments promoted a broad range of industries, with emphasis onmetal and chemical-based inputs, vehicles and certain consumer durables.

2.02 By the 1970s, the scope for growth through import substitutionhad been dramatically reduced. The policy regime failed, nonetheless, torespond to the new economic conditions. The system of investment incen-tives, in particular, continued to promote and induce capacity growth inmature and declining industries. Well-established firms and economicgroups in those industries used the incentives to integrate operations,deter entry and consolidate oligopolistic control, protecting themselvesagainst competition from entrants and hedging against market fluctuationsresulting from an unstable macroeconomic environment.

2.03 This chapter shows that the investment incentive regime, in addi-tion to being extremely costly in fiscal terms, has introduced significantbiases in the allocation of resources and choice of techniques. The incen-tive system has favored the production of intermediate goods, discouragedtechnological learning, and pushed for capital-intensive and lowvalue-added activities. High effective protection and heavy industrialpromotion by regional incentives have enabled high-cost segregatedmulti-plant operations to survive in several subsectors, and stimulatedassembly industries.

2.04 This chapter explores the nature and impact of the investmentincentive system. Section II discusses its evolution, current frameworkand fiscal cost. Section III analyzes the allocative impact of the invest-ment incentive system and its consequences for industrial structure andfirm conduct. Section IV draws the main conclusions.

II. The System of Industrial Incentives: Evolution, Current Framework andFiscal Cost

2.05 Starting in 1959, the Government established a number of specialprograms for investment promotion using fiscal incentives.) They focused

7/ A formal system of investment incentives was introduced for the firsttime in 1944. It enabled the executive branch to assign prioritysectors, promoting them through the use of protective tariffs, importquotas and, in a few cases, direct subsidies. Firms judged to be inthe national interest were also favored by easy access to credit,exemptions from tariffs on imported machinery and access to importpermits.

- 22 -

on heavy intermediate industries--ferrous metals, petrochemicals and chemi-cals, cellulose and paper, non-metallic minerals, fishing, and forestry.Automobiles, tractors, tractor motors, machinery and shipbuilding were alsopromoted but outside the formal investment incentive regime. Since then,few changes have been made in the sectoral programs, in spite of majortechnological and market shifts that would have recommended phasing out andredirecting these incentives. Incentives for automobiles, tractors andinternal combustion engines were limited after 1979 to protection throughimport licensing restrictions and tariff exemption on some importedinputs. The Government also revised the petrochemical program in 1982,introduced a electronics program in 1986, and terminated the incentives totractors in December of 1986.

2.06 Regional promotion schemes were started in 1964 to encourageindustrial growth outside of rienos Aires. The first decree targettedPatagonia (including Tierra del Fuego), the Northeast and the Province ofCorrientes, three of the less developed regions. In 1974 and 1975, tieGovernment introduced more specific programs for Catamarca, La Rioja, SanLuis, Southern and Northern Patagonia, the Northeast, and the Provinces ofJujuy, Salta and Santiago del Estero. Special provincial programs withenhanced incentives were then implemented for La Rioja (1982), San Luis,Catamarca, San Juan (1983) and Tierra del Fuego (1982). These four Pro-vinces and the National Territory of Tierra del Fuego were then granted theauthority to approve projects (when investments did not exceed a pre-established amount), resulting in a sharp rise in the number of projects,the amount of promoted investments and the fiscal cost of the system.

2.07 Legal Framework and Fiscal Instruments. The Government whichtook office in 1976 introduced a new industrial promotion legislation,effective in 1977 (Law 21.608). This law, which remains the legal basisfor the current investment incentive regime, aimed to improve efficiency inindustry through firm growth and plant modernization. Foreign investmentbecame eligible for sectoral and regional promotion. Key instruments havebeen temporary restriction on competing imports, with eventual removal ofnon-tariff barriers and tariff levels declining over time; exemptions fromtariffs on capital gocds imports; and exemptions or deductions on profitand value-added taxes.

2.08 Sectoral programs under the current investment incentive regimeprovide for tax deferments, a deduction of up to 75% of the investment,except for ferrous metals, for which 100% of the investment may be deductedfrom the profit tax base (Table 2.1). Other incentives include exemptionsor deferments of taxes on profits and capital, exemptions from importtariffs on capital goods, and exemptions from value-added taxes on output.Unlike regional programs, value-added exemptions for sectoral programs arelimited to output taxes, except for petrochemicals, for which value-addedtaxes on capital goods are also exempted. The law also regulates privateownership in ferrous metals and shipbuilding. Pecrochemical firms aresubject to minimum plant scales, and must give priority to using locallyavailable hydrocarbon inputs.

Tae 2.1: MI1lI - NO= OF SK MAL DUEIIV

ftEuptions to EMPtIan suaq2ioI fran Iqwt ValuAdded Tax F Btiu

I1 ?&byr. Sectors Invetors fra Prfit lx Capital Gaim Tax Tariffs Stayp on Q(tput on p Ok Inwertmet (t*w

Ferrm MBtaa Deduction (1O1 of Deferred 10 ye Deferred 10 yer E (K)* E 10 yrs - tiOnal

lnemmt) participation(49,100)

D177/74 0a1ll an Deferunt or Peduction for S Deferred 2 yes E (K) E 10 years DerrE - - -

RA. 1704, Pae deductim (75) years in set

1802,2186, proporiaise2206

t22095, P e Defeannt (501) Deferred 6, 8, Defered 6, 8, E (K) E 10 years Deferred 6, - E (a)

D554181 or dedutim (752) 10 years 10 yrs. (depaiig 8, 10 years

(depeiag on on product) (depuilg

product) o product)

MineralsOveral Etio Emed - - RPled for - - -

deducted (1001) 15 year

Speca Defermeit of 7W Reductim for 15 Reduced for 15 E (K) E 15 ya Graual - - -

or deduction oF lrs (gradual yeas gadal dltm f ra

25Z of Iw. de1im fram decie fran 10( 100 to 102

IOD to lI) to l(1)

Naval - Dction of 101 - - E 10 years Deferred 5, - - P1tio

of fitte 7, 10 to rticiation

iuvestmants. depeuuig o (25)

product.

D1177/74 Fba try Defeent or Peductim for 5 Deferred 2 years.deduction of 752 dependiof inves_it o product & year.

* Nt foraly stated onk ti decree, bit cm be attafnM after abtwrizatiob inistry of Kanlnq.

* logth of time of defermt aqes frao 5 to 10 years.

Note: E K eti K - capital S)ods

So : Secretary of Industry man Foreig Trade (SICE).

(D-254b)

- 24 -

2.09 Regional incentives currently include: tax incentives toinvestors; exemptions or deductions from tax on profits; exemptions fromcapital gains, stamp taxes and import taxes on capital goods and parts; andexemptions from taxes on value added, purchases of investment goods and, insome cases, of inputs (Table 2.2). Generally, the most valuable incentivefor a promoted firm is the exemption from value-added taxes on output andpurchased inputs, followed by exemptions from import tariffs (for firmsoperating in Tierra del Fuego), and tax deferments for investors.

2.10 The time schedule of declines in exemption varies with projectlocation. Tierra del Fuego receives the most extensive benefits and thehighest reduction in costs to the investing firm. The production ofconsumer electronics are the predominant manufacturing activity in thatarea. The Provinces of Catamarca, La Rioja, San Luis and San Juan underthe special programs receive the next best package, followed by Chubut,Neuquen, Rio Negro and Santa Cruz.8/

2.11 Project Selection. Selection of projects outside the specialsectoral programs are based on criteria established by the Secretary ofTrade and Industry (SICE) and the provincial governments. Applications forinvestment incentives under the general regime are screened in two stages:the consultations under SICE's Direccion National de Evaluation deProjectos (consulta previa) and project ranking by SICE's central staff.Applications for regional incentives are screened by provincial authori-ties; in case of Tierra del Fuego, projects are first submitted to;'consulta previa' and then evaluated by local officials.

2.12 The Secretary's National Directorate for Project Evaluationscreens applications according to rate of return, location, commercialprospects, available infrastructure and other parameters specified byResolution R773/77 for project evaluation. At a series of consultations(consulta previa), investors and Government analyze the proposed projects,modifying them until they are acceptable to both parties. This revisionprocess may explain why, at this preliminary stage which lacks clearselection criteria, only about 5% of the applications are rejected. At asecond stage, SICE's central staff ranks accepted projects to establishincentive amounts and timing of disbursement.

2.13 Fiscal Cost of the Incentive Regime. The need to attain macro-economic stability and the corresponding requirements of fiscal restrainthave led to attempts to contain the cost of these incentive programs. Thecurrent Investment Incentives Act (Law 21.608/77) indexes the value ofdeferred taxes so that their nominal values do not disappear with highinflation. While up to 1985, the deferred tax applied to 752 of theinvestment, since then and for the thirteen provincial programs, investorscan defer only up to 45% of the totaL investment. Also, since 1982, theCentral Government has not granted exemptions from value-added taxes.

8/ Firms under the special provincial programs receive additional deduc-tions from their profit tax base, which include 100% of investmentsmade to improve the living conditions of employees, 75% of investmentson "consumption" goods, 65% of salaries paid, and 100% of firm sharesheld by employees.

TI. 2.2: A (1 L -Dl NlllE 1987

an (E.s) i) nau m oIai CL) or Ln wssv to T1 m nos BM Valur-MAddd T-Iotw

Dete CD) Ivetom ftoflz 1m Coltal aa CaStae m T Pazdu of Pardim of

D 261/115 1 A 45 1 29, 4 48 I 0l0 15 27 E,l 1 1 almst--lt 1Caol

rdota 45 D 36,5 61 U too, 15 53 " nnwtaim 45 D46,7 77 B 100* , I5 S" n

Cow 45 D 46,7 77 t 100t 5 i3 sn

nJ4W 45 D 46, 7 77 1 100, 15 53 la Papa 45 D 46. 7 77 a 10, 1S 53 " nn*do= 45 D 36, 5 61 E 00 15 53 n n

)fflaS 45 D 46, 7 77 E .I0, 15 53 n Snte 45 D 46,7 77 n IOD, 15 53 n asn a Fe 45 D 36, 5 61 8 I10, 15 53 n nSold del hero 45 D 46, 7 77 E 100,1 53 nT lMO 45 D 46, 7 77 E 1i0 15 53 n n _

nt lreU14s 45 D46, 7 77 8 100,15 3 " n

D 2332/83 ut D 57 8 92 B l OD 10 89 "" 89nAUn 157, 6 85 8 100, 10 83 "n 83

nRlo Negr E 57, 6 85 B 100,1t 83 "n 83n cta amz D 57, 9 98 E 1o0 10 95 n 95

D 246/84 Forma 75 E 3SZ 82X E 100, 10 72 "" 72

Breclal ftovncla PrVV

L 22702 (tmrca I B 8L 22021 la Rioja 75 E871 871X 100,1S 87 1, T 87

L 22973 Sai.hui 1 E 1L2272 Sla d | EL 19640 lr de1 Rep 75 lO00 IOC8 IOD, n 100 8, T10(3

( L)Ite) (d scaeof ctomvtm, ai

* hr eptt _ a convexte to pr v ab In camn Whae ay ams.

thas: 8 - _ntim D - defeen D- d&stc Ilmabs g T - anl invesent hob n - all ftm yae

Smzcs: Stay of l9Mty ad FMip Trade (S().

(D-254b)

- 26 -

2.14 Nonetheless, the fiscal cost of the incentive regime in 1986equalled about 1.9% of gross domestic production (Table 2.3). This Is anextremely large figure. It represents 53% of the total public sectordeficit for 1986 and 96% of the non-financial deficit on a cash basis.Moreover, fiscal costs have risen in real terms by over 52% annuallybetween 1981 and 1986, while industrial investment has been declining at anannual rate of 10.6%.

Table 2.3: FISCAL COSTS OF INVESTMENT INCENTIVES a/(million australs at 1985 prices)

1981 1982 1983 1984 1985 1986

Ministry of Industry 259.6 122.9 336.4 237.5 297.1 308.2

Special Programs:

La Rioja 10.5 16.7 38.3 52.8 67.5 81.1

San Luis - - 2.3 40.5 207.8 349.5

Catamarca 0.6 6.9 37.5 60.9

San Juan 1.2 35.0 66.6

Tierra del Fuego - - n.a n.a n.a n.a

TOTAL 270.1 139.6 437.6 338.9 645.0 866.30

TOTAL/GDP (%) ... 0.26 0.75 0.60 1.3 1.9

a/ Excludes those of Tierra del Fuego for which information is notavailable. Includes projects approved until end-1985.

Source: Secretary of Finance.

2.15 The rapid increase in fiscal costs of incentives during the pastfive years is basically due to the transfer of administrative control overthe special provincial industrial programs from the central to localgovernments. From 1983 to 1986, the share of regionally-approved projectsin total fiscal costs increased from 9% to more than 60% (Table 2.3). Thenumber of investment projects receiving fiscal incentives also rose from171 in 1983 to 713 In 1984, as La Rioja, San Luis, Catamarca, San Juan andTierra del Fuego were granted autonomy in project approval, and thus theability to exempt projects from value added and other taxes.

2.16 The Government-imposed ceilings on fiscal cost ("quotas') havebeen difficult to implement, with provinces evading the limits by under-estimating the initial costs and loading the balance unto subsequent

- 27 -

years. Recently, the Central Government has required provinces to declarethe average annual fiscal cost of the project if it exceeds the estimatedfiscal cost of the first year. Provincial governments also attempt toavoid restrictions on their ability to approve projects above a specifiedsize, by splitting the project into smaller components. The CentralGovernment also contributed to escalation in fiscal costs by choosing notto apply the fiscal limits to import tariff exemptions, or to the Tierradel Fuego regime, as well as by extending the incentive horizon forindividual projects from ten to fifteen years.

III. Economic Impact of Investment Incentives

2.17 The economic impact of Argentina's investment incentive systemhas been quite adverse due to the system's bias toward certain capital-intensive process industries, as well as low value-added assembly or easyto relocate activities. The analysis of this section suggests that, overthe longer term, the system has been instrumental in moving Argentineindustry away from areas of comparative advantage. Ultimately it contri-buted to slow growth, structural change and technical progress in industry.

2.18 The incentive regime has, in addition, affected the structure ofthe more heavily promoted industries, the conduct of leading firms and theextent of competition. In many industries, producers first used theinvestment incentives to increase oligopolistic power, and then to consoli-date it. This pattern was particularly evident after the mid-seventies.The investment incentives stimulated vertical and horizontal integrationthrough mergers and buy-outs which worked as hedges against demand fluctua-tions while serving to deter further entry. Finally, the cost advantagesprovided by the incentives reenforced these barriers against potentialcompetitors, allowing producers to extract substantial rents. _

A. Allocative Impact of the Incentive Regime

2.19 The investment incentive system has affected resource allocationthrough its impact on factor prices and the rents it made available topromoted firms. What follows is an analysis of the system's inherentbiases and of the actual regional and industry-wide distribution ofpromoted investments.

2.20 (a) Factor Prices and Effective Subsidy Rates. The investmentincentive system has lowered the cost of capital to promoted firms, encour-aging capital-intensive activities. Simulation results show that theinvestment incentive subsidy per unit of value added rises with capitalintensity (Annex A2 describes the method of calculation). For a share ofvalue-added in production of 48Z (1984 national average), the subsidy perunit of value-added increases from 39% to 62% as the share of capitalincome to value-added rises from 10% to 50%; as papital intensity reaches

9/ The level of rents extracted has varied with the effectiveness of thesebarriers. It is not, for instance, easy to preclude entry in growingindustries or in industries where the sunk costs are small.

- 28 -

85%, the subsidy rate further rises to 82% (Table 2.4). This bias has astrong implication: the incentive system has encouraged the development ofcapital-intensive industries to the detriment of those making intensive useof skilled labor, thus moving resources away from activities in line withArgentina's comparative advantage.

Table 2.4: ARGENTINA - EFFECTIVE SUBSIDY FROM INDUSTRIAL INCENTIVES a/(Subsidy Per Unit of Value Added)

Share of the Share of Value Added in Production ValueReturn toCapital in 0.05 0.15 0.30 0.48 b/ 0.60 0.75Value Added

0.10 3.26 1.12 0.59 0.39 0.32 0.270.30 3.37 1.24 0.70 0.50 0.44 0.380.50 3.49 1.35 0.82 0.62 0.55 0.500.73 3.62 1.48 0.95 0.75 0.68 0.630.85 3.68 1.55 1.02 0.82 0.75 0.70

a/ The set of incentives provided by the special provincial programs wasused for the calculations.

b/ Industrial average according to the 1984 Census.

Source: Own estimates.

2.21 The incentive system has also favored low value-added activi-ties, with subsidies often exceeding generated value added. The simulationclearly illustrates this tendency: the subsidy per unit cS value-addediacreases from 63% to 75% as the value-added share of the production valuefalls from 75% to 48%, assuming a share of capital earnings in value addedof 73%, the industry average in 1984. At a share of value added to productvalue of about 15%, incentives would account for nearly 1.5 times the valueadded. The exemption from the value-added tax on inputs, a benefit pro-vided under the special provincial programs, has contributed heavily tothis bias. These simulations explain why low value-added activities,particularly assembly operations, have tended to receive the greater partof incentives under the special provincial programs.

2.22 The subsidy rate, defined as subsidy per unit of value added, hasa wide range: depending on the provincial programs and the specific sub-sectors, it varies from 29% to 87% (Table 2.5). On a regional basis, thehighest subsidy rates go to firms in Tierra del Fuego (due to the exemptionin import tariffs): they range from 73% to 87%, followed by investments inChubut, Rio Negro and other provinces with special programs. For producersin Buenos Aires and other areas, effective subsidies are at their minimum,and range from 29% to 38%.

- 29 -

Table 2.5: ARGENTINA - EFFECTIVE SUBSIDY AND COST ADVANTAGE OF THEINVESTMENT INCENTIVE SYSTEM

Effective Subsidy Cost AdvantageSector (Subsidy/value added) (Percent decrease)

Minimum Maximum Minimum Maximum

31 Food Products 0.38 0.87 14.1 32.2

32 Textiles, Garmentsand Leather Products 0.33 0.80 15.3 34.5

33 Wood, Wood Products 0.32 0.74 14.3 32.5

34 Paper, Paper Products 0.31 (.60) 0.77 15.3 34.5

35 Chemicals andPetrochemicals 0.29 (.60) 0.84 18.6 40.8

36 Nonmetallic MineralProducts 0.29 0.70 14.7 33.3

37 Basic Metal Products 0.34 (.32) 0.79 14.7 33.3

38 Metal Products,Machinery and Equipment 0.35 0.75 13.0 30.0

39 Other Industries 0.29 0.73 15.6 35.1

* The figures are calculated given the variety of regional promotionschemes. Minimum subsidy rates and cost advantage are given to thoselocating in Buenos Aires. The maximum rates generally apply to theregime in Tierra del Fuego. The figures in parentheses apply tosectoral programs. For basic metals, the rate concerns only ferrousmetals.

Source: SICE; INDEC; own estimates.

2.23 The sectoral programs generally have lower subsidy rates than dothe special provincial programs, as exemption from value-added tax is notprovided. Paper and paper products, and chemicals and petrochemicalsreceive the greatest potential sectoral benefit, followed by ferrousmetals. 1 0/

10/ This ranking may be too rigid, since capital intensity and importcontent are assumed to be fixed in the calculations. If the substitu-tion possibilities are larger in some industries than in others, theranking will change.

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2.24 Fiscal incentives have enabled firms to reduce costs by 13% to41% (Table 2.5). Those falling under the Tierra del Fuego and specialprovincial programs have a cost advantage of about 30% to 40%, largelybecause these programs exempt inputs and outputs from value-added tax.This exemption also gives a larger cost advantage to capital-intensivefirms; it reduces the cost of industrial chemicals and basic non-metallicminerals by more than is the case with foodstuffs and textiles. This largecost advantage has led to a substantial relocation of productive activitiesto provinces with special programs.

2.25 Firms respond not only to the effective subsidy embodied in theinvestment incentives, but also to that provided by the trade regime. Theconsumer electronics industry in Tierra del Fuego illustrates this proposi*-tion. Prior to 1981, the electronics industry was characterized by rela-tively integrated production, with firms producing both parts and end-products. Since then, changes in the trade regime increased projectiondisproportionately in favor of end-products, to the detriment of prod-ictionof parts and components. In combination with exemptions from value-addedtax on inputs and certain import taxes, this pure-assembly bias pushedfirms to change the scope and technological content of their productionactivities, and to relocate to Tierra del Fuego. There, they basicallyassemble imported completely knocked down (CKD) kits of consumer electronicgoods. The differences in effective rates of protectioa (ERPs) betweenelectronic end-products and components, show a substantial bias toward theformer (Table 2.6).

Table 2.6: EFFECTIVE RATES OF PROTECTION (ERPs)IN CONSUMER ELECTRONICS (COLOR TV) a/

1983-86

ERPsERPs (with investment incentives)

Intermediate components/parts 50 72

Final goods 193 377

a/ In percentages.

Sources: Nochteff (1977); own estimates.

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2.26 (b) Distribution of Promoted Investments by Industry Segment.In addition to stimulating the assembly of end-products, at the expense offabricating activities, fiscal incentives have heavily favored processindustries, particularly of intermediate goods. Table 2.7 shows that since1974 over 50% of projects and about 81.5% of promoted investment amountswere in intermediate products. Capital goods and consumer non-durableshave accounted for a minor part of promoted investment, respectively 2.22and 13.9%. At the more disaggregated 5-digit level, the major incentiverecipients were cement, basic industrial chemicals, paste for paper andfertilizers; these products represented 66% of total promoted investmentsduring the period (Table T1).

Table 2.7: ARGENTINA: DISTRIBUTION OF EMPLOYMENT ANDINVESTMENT OF PROMOTED PROJECTS

1974-1987 (MARCH)

Number of Employment AuthorizedProjects Generated Investment

Non-durable Consumer Goods 32.0 32.4 13.9

Intermediate Goods 51.7 51.3 81.5

Consumer Durable Goods 8.9 9.6 2.3

Capital Goods 6.8 6.4 2.2

Other Goods 0.6 0.3 0.1

TOTAL 100.0 100.0 100.0

Source: Azpiazu (1987).

2.27 The skewness of the investment incentive regime towards inter-mediates is also observed in Table 2.8. It shows that when the value ofpromoted investments is weighed by the value-added generated in the sub-sector, intermediate goods are still the top recipients of incentives.Among the 3-digit ISIC subsectors that present the lowest ratio of value-added to total promoted investment (thus being the most promoted relativeto their economic importance) are cement, paper, wood and chemicals(including fertilizer).

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Table 2.8: RANKIN OF SECTORS BY TOTAL PROMOTED INVESTHENTRELATIVE TO VALUE ADDED IN SECTOR

CURRENT US$'000

Isic Value Added Value of promoted RatioCode Sector in 1984 investments 1974-1987 VA/INV

369 Cement 210,382.7 1,072,566 0.20341 Paper 267,150.5 1,084,807 0.25331 Wood 81,715.0 325,099 0.25351 Chemicals 703,395.5 2,036,501 0.35361 Ceramics 101,055.0 83,695 1.21356 Other Plastics 81,686.3 67,188 1.22321 Textiles 938,633.6 708,931 1.32371 Steel & Iron 1,055,077.6 476,513 2.21311 Meat/Fish 1,440,996.0 525,785 2.74324 Shoes 100,198.4 35,362 2.83322 Clothing 121,027.8 39,870 3.04332 Furniture 26,521.9 8,170 3.25323 Leather 101,187.3 24,129 4.19381 Metal 408,400.4 93,917 4.35382 Machinery 590,29.2 103,093 5.73352 Paints and Detergents 567,507.8 80,267 7.07372 Non-ferrous 229,529.0 31,582 7.27384 Transportation equipment 847,035.3 93,568 9.05383 Electronics/Communication 490,871.2 47,540 10.33390 Other manufacturing 39,800.3 3,759 10.59354 Petrochemical 109,589.5 8,774 12.49362 Glass 83,245.8 6,198 13.43312 Tea and Coffee 173,022.6 9,268 18.67385 Scientific/Photo 41,060.7 2,050 20.03342 Printing & Publishing 280,596.6 9,273 30.26355 Rubber/Tires 266,612.0 6,222 42.85314 Tobacco 724,582.9 7,477 96.91313 Beverages 314,046.2 1,795 174.96

Source: INDEC; D. Azpiazu (1987).

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2.28 While intermediate goods have remained dominant, their shareshave declined from an average of 83X in the 1974 to 1983 period to 731 in1984 through March 1987 (Table 2.9)* Chemicals and petro¢hemicals are theexception: their share of promoted investment jumped from 25.9Z to over66%. Since 1984, a shift toward food and metal products is observed.Marine products, auto parts and construction materials, minor recipients ofthe incentives before 1984, have received a significant boost (Table TI).

Table 2.9: DISTRIBUTION OF PROMOTED INVESTMENT ACROSS BROAD INDUSTRIALCATEGORIES, 1974-87 (MARCH)

Industry Group 1974-83 1984-3/87 1974-3/87

Food products 6.4 16.1 7.7Textiles, garmentsand leather 12.6 4.4 11.5

Wood and furniture 5.2 1.6 4.7Paper and printing 17.9 0.3 15.6Chemicals andpetrochemicals 25.9 66.8 31.3

Non-mentallic minerals 18.9 1.1 16.5Basic metals 8.3 - 7.3Metal products, machinesand equipment 4.8 9.7 5.4

Other manufactures 0.1 - 0.1

Total 100.0 100*0 100.0

Source: Azpiazu (1987).

2.29 (c) Resource Allocation Across Regions. The new, more generousregional incentive programs have had a strong influence on firms' decisionto relocate. As a result, industrial structure in promoted provinces hasshifted in significant ways. La Rioja's indigenous industries declinedwhen investment incentives were introduced in 1979, while the promotedtextiles, chemicals and machinery subsectors expanded (Table 2.10). Mostnew firms are engaged in low value-added and assembly operations, dependingonly marginally on local suppliers or buyers. Chubut has had an influx ofrelocated plants, encouraged by sectoral incentives, as well as of synthe-tic textile and aluminum firms. Tierra del Fuego, which initially had verylittle local industry, now concentrates all production of consumer elec-tronics. Tucuman, on the other hand, has lost almost 70% of its localindustry, apparently because its investment incentives were less generousthan those provided by other provinces.

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Table 2.10: SHARE IN VALUE ADDED OF NEW AND TRADITIONAL INDUSTRIESIN LA RIOJA, 1973 AND 1984

Industry Group 1973 1984

I. New Industries 75

II. Traditional Industries 100 25

(31321) Wines 38.6 6.8(31132) Fruits and Vegetables 28.0 6.8

Others 43.4 11.4

Source: Consejo Federal de Inversion (CFI).

2.30 Regional incentives have encouraged multi-plant expansions andthe geographical dispersion of units, patterns often running counter totechnical efficiency considerations. At the onset of the special regionalincentives for Catamarca, La Rioja, San Juan and San Luis, many firms foundit profitable to establish plants in the various promoted areas, whilemaintaining their parent company in Buenos Aires. Some firms just trans-ferred a segment of their operations. Between 1973 and 1987, in mostindustries firms expanded the number of plants and increased their geogra-phic dispersion. The ratio of economic to technical concentration between1973 and 1985 rose in some industries from * to about 1.5, an indicationthat some of the big plants had subdivided their operations into smallerunits (see Annex A3).

2.31 This trend toward fragmentation and dispersion introduced anadditional bias in the incentive system, since certain technologies lendthemselves to multi-plant operations better than others. Industriescharacterized by few and easily coordinated processing stages, and notrequiring extensive complementary infrastructure would stand to gain mostfrom the incentive system. Thus, the trade-off between gains from subsi-dies and losses from production inefficiency, managerial difficulties andtransaction costs from relocation favors some product groups--textiles,garments, basic metals, shoes and chemicals-which have taken considerableadvantage of regional programs.

2.32 While the regional incentive program was designed to encourageinvestments in all less developed areas, the redistribution has in factfavored only a few promoted provinces. The shares of promoted investmentsin the four developed areas--Buenos Aires, Cordoba, Mendoza and Santa Fe-have been less than their shares in gross domestic product (Table 2.11),indicating that the regional incentives have succeeded in redirectinginvestment. However, the distribution among the poorer areas has been

- 35 -

uneven. In four provinces (Misiones, Tierra del Fuego, San Luis andCatamarca), the ratios of their shares of promoted investments to theirshares in GNP are over ten times the average, 26.3, 25.5, 21.0 and 10.3,respectively. Together, these provinces have received over 53% of promotedinvestments. Moreover, the correlation of provinces' shares in total grossdomestic product (or in GDP per capita) and in promoted investments is notsignificantly different from zero. Thui, the allocation of incentives hasbeen unrelated to the level of the provinces' economic development.

Table 2.11: ARGENTINA - PROVINCIAL DISTRIBUTION OF PROMOTEDINVESTMENTS AND GROSS DOMESTIC PRODUCT

(X)

Level of GDPDistribution of per capita rela-

Promoted Investments Distribution tive to totalProvince (1980-85) of GDP GDP per capita

Buenos Aires 14.1 30.9 0.80Capital Federal - 26.3 2.52Catamarca 4.1 0.4 0.57Cordoba 2.9 7.5 0.87Corrientes 1.2 1.4 0.58Chaco 1.5 1.2 0.48Chubut 4.3 1.7 1.89Entre Rios 0.6 2.6 0.81Formosa 0.2 0.4 0.40Jujuy 2.2 1.3 0.87La Pampa 1.3 0.8 1.14La Rioja 1.9 0.3 0.50Mendoza 1.2 4.2 0.98Misiones 31.6 1.2 0.57Neuquen 1.8 1.2 1.44Rio Negro 0.4 1.3 0.93Salta 0.1 1.5 0.63San Juan 1.6 1.0 0.59San Luis 12.6 0.6 0.86Santa Cruz 0.2 0.8 2.00Santa Fe 1.4 9.4 1.07Santiago del Estero 0.1 1.0 0.42Tierra del Fuego 5.1 0.2 2.00Tucuman 9.6 2.8 0.80

Total 100.0 100.0 1.00

Sources: CFI, SICE and own estimates.

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B. Investment Incentives and Industrial Concentration

2.33 A few key industrial subsectors have shown a tendency towardgreater concentration. While the number of highly concentrated subsectorshave declined over the decade, their share of national output has beengrowing. These dominant subsectors have coincided markedly with thoseheavily supported by investment incentives. Indeed, most industries withthe most important promoted projects registered a considerable increase lntechnical and economic concentration between 1973 and 1984 (Table T2). Themost notable increases are found in basic industrial chemicals, ferrousmetals, plastic and resins, spinned fibers, flshing and pulp wood. Indus-trial concentration fell, in paper and cardboard.

2.34 The largest 50 projects promoted belong almost completely tothese "core" industries. Between 1974 and March 1987, about 30 of thelargest projects, accounting for about 52% of promoted investments were inhighly concentrated industries, defined as those with an eight-firm concen-tration ratio of more than 50% (Table 2.12). The top 50 projects went to20 subsectors (5-digit level), 12 of which were highly corcentrated. About39 of the top 50 projects involved intermediate goods, wit. chemicals and

Table 2.12: PROMOTED PROJECTS, EMPLOYMENT AND INVESTMENT1974 TO MARCH 1987, BY DEGREE OF CONCENTRATION

(values, US$000)

No. of Projects Employment Promoted InvestmentDegree ofConcentration Quantity % Quantity Z US$000 X

HCR 119 18.9 15,538 27.6 3,629,617 51.6MCR 289 45.8 23,414 41.5 2,636,367 37.5LCR 182 28.8 12,217 21.7 607,676 8.6

Subtotal 590 93.5 51,169 90.7 6,873,660 97.7

Unclassified 41 6.5 5,223 9.3 161,340 2.3

Total 631 100.0 56,392 100.0 7,035,000 100.0

Notes:

HCR - Highly concentrated subsectors (where the top eight firms accountfor more than 50% of productions).

NCR - Moderately concentrated subsectors (where the top eight firmsaccount for 25% t 45.9% of productions).

LCR = Unconcentrated subsectors (where the top eight firms account forless than 25% of productions).

Source: SICE, Azpiazu and Khavisse (1984).

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petrochemicals accounting for the major share. These intermediate goodsproducers represented more than 90% of the invested amounts of the top 50promoted projects (see Table T3).

2.35 These indicators may underestimate the extent to which investmentpromotion is associated with industrial concentration, since the 5-digitsubsectors industrial category is usually broader than specific productmarkets, and firms tend to be sole producers of differentiated items withinan industry (as in the case of petrochemicals). If markets are redefinedmore narrowly than the subsector, or are confined to products with veryclose substitutability, then the degree of concentration of certain highlypromoted intermediate goods may be higher than is indicated at thesubsector level.

2.36 The fact that about 80% of promoted investments involved largefirms, often one of the top eight firms in the industry suggests an evenstronger connection between investment incentives and economic concentra-tion. Table 2.13 identifies the major projects in the key industries, thenames of the firms that carried them out, and the five-digit level sub-sector to which their products belong. Practically all the realized pro-moted investments in cement, paper paste, fertilizer, plastics and resins,and pulp wood, were undertaken by one of the top eight firms in theindustry.

2.37 The level of concentration of productive activity tends to beeven more pronounced when production is categorized by ownership. 39identified owners control the top 50 projects (see Table 2.14). The topfive owners accounted for nine projects, whose investment represented 33.3%of the total for the 765 projects approved between 1974 and 1987. The top10 owners control 19 projects and just over 45% of the investment, whilethe top 20 have 31 projects with just under 61% of the total investment ofall approved projects since 1974.

2.38 The degree of concentration is also apparent when investmentprojects are classified by type of controlling firm (Table T4). Economicgroups or conglomerates accounted for 20 of the 50 projects, with 50.7% ofthe total investments. Conglomerates also had partial control of thirteenother projects, accounting for an additional 19.6% of total investment.Other types of proprietors were local independent owners and multinationalswith investment shares of 10.9% and 8.5% respectively of the total promotedinvestments. State enterprises were jointly involved with conglomerates insix projects, but had sole responsibility for just one project, correspond-ing to 9.8% and 2.0% of promoted investments respectively.

Table 2.13t ARGENTINKA - SIRUCIURAL AND BEHAVIORAL CHARACTSRISTICS OP MAJOR PROJECTS W1T INJEIENT INCENTIVES

Project Recipients Concentration b/ Firm Strategy

Rank a/ Techical EconomicControlling Type of

SECTORS Firm Rams Production Employment 1973 1984 1973 1984 Group Strategy */

Paper Fl 34111 3 2 96.4 100.0 96.4 100.0 01 IF2 34111 1 1 G1 IF3 34111 2 2 G2 IV

Chemicals and F4 35131 1 1 52.4 60.7 56.3 65.2 G3 IPetrochemicals

F5 35120 3 3 66.6 74.6 74.0 77.5 04 IP6 35232 7 5 42.4 55.2 42.4 57.8 G5 III

Cement P7 36921 3 6 77.4 72.6 99.2 100.0 G6 IF8 36921 9 13 G7 IIIF10 36921 8 9 G8 I

Ferrous Metals P11 37100 6 6 71.0 89.3 74.3 91.7 09 1

Textiles & Footwear P12 32116 12 12 31.4 39.4 32.7 46.4 G10 I113 32116 10 11 G10 7F14 32116 16 16 G1 ItF15 32401 42 4 14.0 13.0 14.0 14.6 G10 I

Food P16 31172 3 3 86.8 76.8 87.7 81.1 ll IF17 31131 1 4 66.7 72.2 68.8 72.2 G12 IV

Other P18 36100 11 12 68.3 66.1 73.4 69.4 013 IVP19 36100 4 9 G14 III

A/ Censo Economico, 1985.

b/ Technical concentration is the value of production covered by the top 8 establishments vhereas economic concentrstionconsiders the share of the top 8 firms.

c/ I - Firms already in the activity and addltional investment was meant to solidify oligopoustic control.II - Firms already In the activity and whose additional investment consolidated position In industry.

III - Firms entering industry to further vertical Integration of productiv* activity.IV - Firms enteriag Industry to diversify productive activities.

Source: SICE; Aaplasu (1987); own elaboration.

(D-254b)

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Table 2.14: DISTRIBUTION OF iHE TOP 50 PROMOTED PROJECTS1974-87 (MARCH), BY OWNERSHIP

Number of Projects Promoted Investment

Rank of Proprietor Quantity % of total Million $ X of total

First group of 5 9 1.2 2,344 33.3Second group of 5 10 1.3 840 11.9Top 10 19 2.5 3,183 45.2Top 20 31 4.1 4,273 60.7Top 30 41 5.4 4,823 68.6Top 40 50 6.5 5,084 72.3

Source: Azpiazu (1987).

2.39 The role of investment incentives in shaping industrial structureis illustrated by some individual industry case studies.

2.40 Paper and Cellulose. Investment incentives in this subsectorhave benefitted a small group of industry leaders mainly in cellulose and,to a lesser extent, in the paper industry. The incentives supported a setof investment plans of Celulosa Argentina which enabled it to gain about95% of its product-market segment. With the decline in demand after 1980,firms with approved promoted projects implemented them only partially butdid not abandon them, to preserve the incentives, were demand to improve.This preemptive behavior deterred entry of potentially more competitivefirms.

2.41 Ferrous Matals. Exit has been substantial in the ferrous metalsindustry; between 1974 and 1984, the number of firms dropped from 56 to 39,the number of plants from 665 to 244. Both shutdowns and firm mergers werecommon. The majority of the exiting firms had less than 10 employees, butthe number of large firms also fell. In that period, the major enterprisesin ferrous metals took advantage of available regional and other fiscalincentives to acquire semi-integrated firms that were exiting the industry.

2.42 By 1984, four heavily integrated firms had emerged, three ofwhich were major conglomerates: Acindar, Techint and Aceros Bragados.They had absorbed a significant number of rolling mills and semi-integratedfirms. Accounting for more than 90% of production at every stage, thesegroups came to produce a diversified set of metal inputs anr steel pro-ducts, whereas earlier they tended to specialize in end-products.

- 40 -

2.43 Textiles and Garments. The number of textile and garment facto-ries fell dramatically between 1973 and 1984. This trend was in part aproduct of the brief trade liberalization period in 1977 to 1981, which ledmany small establishments to close down. With the help of the system ofinvestment incentives, many large textile firms responded to the decline innumbers by a movement towards vertical and horizontal integration. As aresult, the share in textile production of Integratea firms rose between1973 and 1984 (Table 2.15). The exit of small firms and increased integra-tion by large firms explain the rise in industrial concentration in 16 of24 industrial categories in textiles.

Table 2.15: CHANGES IN THE STRUCTURE OF THE TEXTILEINDUSTRY, 1973 AND 1984(X OF PRODUCTION VALUE)

Rama Description Share of Integrated Firmsin the total number in the top

of firms eight firms

1973 1984 1973 1984

32111 Preparation of Cotton Fibers 9.7 13.9 24.3 30.432112 Other Fibers - 59.0 - 59.332114 Spinning of Textile Fibers 10.2 12.8 37.8 31.332115 Finishing of Textile Fibers 18.9 32.8 38.0 58.232116 Weaving of Textile Fibers 14.8 27.7 45.0 59.6

Source: INDEC, CEPAL.

2.44 Cement. The decline in production and increase in installedcapacity were dramatic in cement (Figure 2.1). Despite slow growth indemand, productive capacity increased by 50% due to investments receivingregional incentives during the 1978 to 1980 period. Between 1980 and 1985,demand ectually contracted. Nevertheless, about eight large investmentprojects were approved during the period; three were executed. As aresult, installed capacity rose by 20X, while capacity utilization droppedfrom 70% to 50%. Finally, the output share of the top three firms carryingout incentives-induced expansion increased substantially.

- 41 -

FIGURE 2.1

ARGENTINA: CEMENT PRODUCTION AND INSTALLED CAPACITY1970-85

12 -

1'

4 1:970 1972 1974 1976 147' 1980 19R2 1964

0 INSTALLED CAPACIV m PROODUCTION

C. Investment Incentives. Intersectoral Mobility and Firm Conduct

2.45 In addition to inducing concentration and delinking responses ofleading firms to declining markets, the investment incentive system hasbeen important in limiting entry and in stimulating anti-competitiveconduct.

2.46 (a) Regulatory Barriers to Mobility and Growth. The set ofsectoral incentives has included not only fiscal incentives to industry,but also special subsectoral promotion programs that contain regulatoryprovisions inhibiting entry, in addition to the tax holidays. The publicsector has controlled entry into ferrous metals by requiring that firmsseek a permit from Fabricaciones Militares. The petrochemicals programrequires entry permits and sets minimum plant scales. For paper andcellulose, annual production levels are set for various categories ofgoods; proposals to manufacture items already produced by national firmsare not approved. Such regulatory practices act as serious entry barriers,since rejection of new capacity reduces the ability of entrants to competeand displace incumbents at the margin.

- 42 -

2.47 The high incidence of incentives awarded to incumbent firms alsohas been an entry limiting factor. The favoring of incumbents has been afunction of how incentives are awarded, the process and criteria of projectselection. Intensive consultation between SICE's National Directorate ofProject Evaluation and the applicant takes place at the first stage ofapplication. The consultations are highly arbitrary and often includeofficials already involved with the industry and probably biased towardincumbent firms. This first step represents the stage where approval ordenial actually takes place, since the subsequent stage merely givespriority ranking to projects, in order to determine incentive packages.

2.48 The Government also has reinforced the incumbents' position byusing the incentive system to finance fresh investment by leading firms,in spite of declining markets. Since the mid-seventies, the number ofestablishments in ferrous metals, petrochemicals, textiles, cement andtishing industries has declined sharply, while the market share of largerestablishments has increased. This trend is not surprising, since industryleaders tend to remain in a declining industry longer than do smallerfirms. Most investment during this periou was the result of investmentincentives. As indicated, in some cases such as cement, installed capacityrose despite a fall in production as a reflection of demand contraction.With full or partial execution of a project, incremental productionexpanded the market share of the incumbent firm.1l/

2.49 (b) Incentives to Anti-Competitive Behavior. The ease with whichentry was pre-empted and the promotion of dominant incumbents 'n shrinkingmarkets has contributed to the emergence of an industrial structure inwhich a few incumbent firms dominate and behave oligopolistically. Accord-ing to the industry associations, pricing issues, for example, are normallydiscussed openly and are jointly settled by the producers rather than beingdetermined by market forces.

2.50 Generally, the competitive strategies adopted by promoted firmshave been highly influenced by the system of investment incentives. Incum-bent firms have used the investment incentives to hedge against marketfluctuations and pre-empt new entries. They have done so by not abandoningapproved projects in times of recession, thereby retaining the benefits incase demand increased. Completion of the projects was delayed, stemmingapproval for projects of potential competitors.

11/ In some cases, the government heavily subsidized firms through favor-able pricing of inputs provided by state enterprises. For instance,the petrochemical firms have used state-produced hydrocarbon, withprice often set to maintain profitability of large incumbents. Thismeasure has further delinked firm response to market signals.

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2.51 Table 2.13 shows the ownership of the firms which undertook theeighteen most important promoted investment projects and the strategyadopted by each firm in pursuing their project. In eleven of the largesteighteen projects, the promoted investments served to consolidate oligo-polistic structures and stimulate anti-competitive strategies. Projectsgenerally involve the expansion of production by leading incumbents. Mostoften they pursued it through horizontal integration, resulting in higherproduct-market shares. In four projects, entrants used the incentivesintegrate vertically: two integrated cellulose paste and paper production,and the production of cement and construction work. In contrast, owners ofthree projects diversified product mix.

2.52 The investment incentive system may have solidified oligopolisticcontrol further through vertical linkages in production and overlappingstructures of control and ownership. In petrochemicals, many firms receiv-ing investment incentives, leaders in their respective sub-markets, weresituated downstream, and belonged to a few conglomerates. These largeeconomic groups usually owned the firms producing the inputs; often userfirms actively participated in the activities of suppliers. The linkagesin ownership and production structures for the promoted enterprises underPolo Petroquimico Bahia Blanca is shown in Table 2.16.

2.53 The strengthening of non-competitive structures discouragedtechnological efforts in many subsectors. Producers of heavily protected,and promoted intermediate goods did not utilize the investment incentivesto bring their technology to the world frontier. They generally resortedto buying turn-key packages requiring minimal technological learning. Incase of consumer electronic goods, the investment incentive and traderegimes combined to encourage assembly operations and the demise of inte-grated electronics firms. Technology for assembly operations was readilyaccessible and normally required no local development. As a result, engi-neering expertise of electronics firms is now more limited than prior to1982.

2.54 Finally, the system of regional investment incentives has induceda number of unproductive activities. Some firms resell inputs purchasedwithout value-added tax. Arbitrage between those exempted from the pur-chase value-added tax and those that are not has been difficult to monitor;several cases of abuse have been detected in the Province of San Luis.Othter firms have submitted applications for projects they have no intentionof carrying out to obtain the deferred tax privilege given to projectapplicants; they have not been penalized. In sum, the incentive system hasstimulated firms to undertake anti-competitive and rent-seeking activitiesto the detriment of the business of production.

- 44 -

Table 2.16: LINKAGES IN CAPITAL AND PRODUCTION STRUCTURETHE CASE OF PETROQUIMICA DE BAHIA BLANCA, 1985

Firm Product ME a/ DGFM a/ Ipako Electroclor Indupa

Petroquimica de Ethylene 34 17 21 11 5.5Bahia Blanca Propylene

Induclor Chlorine for 30 b/ 70.0 c/Monomeros V.,caustic soda

Nonomeros Vinyl chloride 30 70 d/Vinilicus

Polisur Polyethylene 30 70(low density)

Petropol Polyethylene 30 70.0 e/(high density)

Electroclor Polyvinyl (Owned by Duperial and Celulosa Argentina)Chloride (PVC)

Indupa Polyvinyl (Owned by Group Richard, 87.5%, and Progil,Chloride (PVC) 12.5%)

a/ ME - Ministry of Economy; DGFM - Direccion General de FacbricacionesFamiliaries.

bI Required by the sectoral incentive law to have state capital of atleast 30%.

c/ Through Inquiba, a firm owned by Indupa and CIA.d/ Through Viniclor, a firm controlled by Electroclor and by Indupa.e/ Through Polyfinas, a firm controlled by Indupa.

Source: Azpiazu (1987).

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IV. Conclusions

2.55 The investment incentive system has been a very costly instru-ment. It is estimated that its fiscal costs were 1.9% of GDP and 53% ofthe public sector deficit in 1986. There are, however, economic coststhat, in many ways, are even more detrimental for Argentina. The systemhas had a significant, distortionary impact by favoring heavy intermediateindustries, capital-intensive techniques and lower value-added activities.Regional incentives in particular stimulated technologically simple assem-bly operations, uneconomic plant relocations, and multi-plant expansions.The incentive system has continued to promote industries even as theymature and decline.

2.56 The investment incentive system was also instrumental in increas-ing concentration in some industries, particularly since the early seven-ties. Investment incentives have been appropriated in great measure bylarge firms. During the recent period of declining demand, leading incum-bents have used the incentives to expand capacity and market shares, oftenby integrating production horizontally and vertically. Tbgether with sub-stantial exit by small firms, this movement has led to increased concen-tration of production among major producers.

2.57 The system has reduced intersectoral mobility and stimulatedanti-competitive behavior. Whereas in the early period of industrialpromotion the incentive system stimulated entry, later with the contractionin domestic demand, the system of investment incentives has inhibited it.Increased concentration and decreased mobility have hindered industrialcompetition. Limited competition and a focus of protection and industrialpromotion largely on stagnant or declining industries help explain the poorperformance of Argentine industry.

(D-254r)

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CHAPTER III

THE IMPACT OF THE POLICY REGIME ON COMPETITION AND

INDUSTRIAL PERFORMANCE: EMPIRICAL EVIDENCE

I. Introduction

3.01 This chapter assesses the impact of the industrial and tradepolicy regimes on market structure, competition and performance.Section II examines some key structural characteristics of manufacturingindustry, focusing on concentration levels and its recent dynamics.Section III attempts to establish the extent of competition in Argentineindustry by building on the analysis of industrial concentration andintroducing indicators of entry and intrasectoral mobility.12/

3.02 The resulting 'competition matrix" suggests a relatively lowdegree of domestic competition; other cross-sectoral indicators point outthe very limited extent of import competition and export rivalry. Manyfirms are quite sheltered from competition and, as a result, do not feelcompelled to minimize costs, improve product quality and aggressively seekto innovate and find new markets. Section IV suggests that Argentina'suneven economic performance is fundamentally related to the policy regimeand its impact on competition, efficiency and the ability of the economy torespond to new market opportunities and exploit its comparative advantagein relatively skill-intensive activities. The last Section draws the mainconclusions.

II. A Discussion of Selected Structural Characteristics

3.03 Concentration is considered to be both an outcome and an indica-tor of market power. The successive questions examined in this Sectionare: (i) what is the overall level of concentration in Argentine manufac-turing industry; (ii) how does it compare with other countries; and(iii) what has been its evolution over the decade? The evidence highlightssome of the linkages between concentration and market power.13/

12/ See Annex A3 for a detailed discussion on the methodology and datasources for building the indicators of concentration, mobility andcompetition.

13/ A word of caution needs to be added concerning the significance of theconcentration ratios. The ratios mostly refer to technical concentra-tion (share of total output produced by a given number of the largestplants) rather than of economic concentration (share of leadingfirms). Yet, the relevant unit of analysis for the evaluation ofmarket power are firms and not plants. As a result, the conclusionsmade about concentration are likely to underestimate the extent ofmarket power enjoyed by the leading oligopolists.

- 48 -

A. Overall Levels of Concentration

3.04 Table 3.1 presents the four-plant and eight-plant concentrationratios, as well as the Herfindahl index for a number of industrial sub-sectors. The data indicate that fairly high levels of concentration (aHerfindahl Index of .15 or above) prevail in Argentine manufacturingindrstry.l4/ Such high concentration levels are most common in the inter-mediate goods sector. The mean concentration level (eight-plant ratio) ofintermediate goods, capital goods, consumer durables and non-durables arerespectively 67.3%, 56.5%, 48.9% and 54.0%. Of these sectors, onlyintermediate goods has a mean level that is significantly different (at alevel of 5% confidence) from the others.

3.05 The higher concentration in the intermediate goods sector ispartly related to the sector's production technology. Due to increasingreturns to scale, the optimal number of plants for each intermediate goodsproduct category is much lower than in other sectors. Yet, the differencein total number of plants does not explain the differences in concentrationlevels completely.15/ Other factors--including the policy regime-led toconcentration levels well above what is required by minimum economicproduction scales.

B. International Comparisons

3.06 Argentina has concentration ratios below other major developingcour.tries, but markedly higher than concentration levels in France in 1969or the US in 1972 (Table 3.2). Argentina's higher concentration relativeto these two countries may well be justified in industries with positivereturns to scale due to the relatively small size of the Argentine market.Taking this characteristic into account, the overall levels of concentra-tion do not appear to be abnormally high.

14/ The criteria set by the US anti-trust legislation to determine whatare acceptable degrees of concentration in a given sector in the USindustry are useful points of reference. With a Herfindahl indexabove 0.18, an industry is considered too highly concentrated andauthorizations for new mergers normally are not granted. In Argentineindustry, even though the Herfindahl index measured here is computedon a per plant basis (which under-estimates economic concentration),25 subsectors (or 14.5% of manufacturing industry) are above thatmark. These subsectors produce 19.5% of total gross industrialvalue. This, of course, is in part related to the fact that theArgentine market is much smaller than the U.S. market.

15/ To show this the following regression was run:

PROD8 - aN + bD + E

Where PROD8 is the 8-plant production ratio, N is the number of plantsper sector, D is the dummy variable equal to 1 for the intermediategoods sectors (zero otherwise), and E is the error term. As expected,the coefficient of N is negative and highly significant. But thecoefficient of D is positive, and also highly significant (at the 5%level).

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Table 3*1: INDUSTRIAL CONCENTRATION IN ARGENTINAFour-plant, Eight-plant Concentration Ratio (in %)

and Herfindahl Index - 1984 a/

Four-plant Eight-plantConcentration Concentration HerfindahlRatio (X) Ratio (Z) Index

Consumer Goods

Food Products 39.8 52.2 0.11Beverages 46.2 63.5 0.10Tobacco 79.9 95.0 0.25Footwear 36.0 42.9 0.10

Intermediates

Textiles 42.2 55.4 0.12Wood and Cork 32.6 43.9 0.06Pulp, Paper Products 41.9 53.7 0.21Chemicals 58.6 72.6 0.18Rubber and Plastic 66.9 82.1 0.16Cement 43.9 72.6 0.09Basic Metals 69.8 83.2 0.16

Capital Goods and ConsumerDurables

Netal Products 32.8 43.8 0.06Non-Electrical Machinery 51.1 62.2 0.17Electrical Machinery 47.4 59.6 0.09Transport Equipment 45.2 58.4 0.10

a/ The three index-numbers were computed separately using 5-digit-leveldata, and taking an unweighted average for the sectors. For example,among the subsectors which make up transport equipment (i.e., autos,two-wheel vehicles, trucks, etc.), the average four-plant concentrationratio is 45.2 percent.

Source: INDEC, National Census of Industry, 1985. Preliminarytabulations.

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Table 3.2: COMPARISON OF FOUR-FIRM CONCENTRATION RATIOS IN INDUSTRY

Unweighted average of four-firm Number ofCountry Year concentration ratios (X) industries

Argentina 1984 43 172Brazil 1972 72 68Chile 1979 50 41India 1968 55 22Mexico 1972 73 73Pakistan 1968 66 51Turkey 1976 67 125US 1972 40 323France 1969 28 48

Sources: For Brazil, India, Mexico, and Pakistan from original sourcescited in Leff (1979, Table 1); for Chile, de Melo and Urata(1986); for Turkey calculated from Tekeli et al. (n.d.); for theUS, Scherer (1980, p. 70); for France, Jacquemin and de Jong(1977, Table 2.9); for Argentina, INDEC's preliminary tabulationsof the 1984 Industrial Census.

3.07 A more detailed comparison of the extent of concentration inArgentina and India is shown in Table 3.3. This information reinforces theproposition that Argentina's industrial sector is characterized by lowerlevels of concentration than other major developing countries (in thiscase, India). In particular, the proportion of sectors with a four-plantconcentration ratio of over 60% is 25.6% in Argentina and 88% in India).

Table 3.3: DISTRIBUTION OF INDUSTRIES BY FOUR-FIRM CONCENTRATION RATIO

Argentina (1984) India (1983)Concentration No. of Percent No. of PercentRatio Sectors Sectors

0-19 33 19.2 10 9.220-39 59 34.3 9 8.240-59 36 20.9 15 13.860-79 27 15.7 15 13.880-100 17 9.9 60 55.0Total 2/ 172 100.0 109 100.0

Sources: INDEC, op.cit; CMIE, Market and Market Shares, Bombay, March1986.

a/ There is an evident methodological problem in comparing industries thatare not defined with the same degree of aggregation. However the sense,if not the magnitude, of the bias is clear and justifies thiscomparison.

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C. ConcentratioA Dynamics

3.08 Concentration levels in Argentina appear to have increased onlyslightly between 1973 and 1984 (Table 3.4). Nevertheless, there is clearevidence of a marked shift toward larger firms producing a larger share ofdonestic output.

Table 3.4: INDICATORS OF CONCENTRATION FOR MANUFACTURING INDUSTRY, 1973-84

1973 1984

Average X of sectoral gross productionproduced by:

4 largest plants 41.0 43.38 largest plants 54.0 55.9Herfindahl index 9.2 11.0

Sectoral gross production-weightedaverage concentration:

4 largest plants 38.2 41.38 largest plants 51.2 53.5Herfindahl index 7.3 9.3

Source: INDEC, National Industrial Censuses, 1974 and 1985.

3.09 First the share of the largest four plants of each sector in-creased more than that of the eight largest plants (Table 3.4). Second,while the number of highly concentrated subsectors with many plants hasremained the same, the number of highly concentrated subsectors with fewplants has declined sharply (Table 3.5). Total production of the subsec-tors in the most concentrated group increased by just over 3%, while thenumber of concentrated subsectors decreased from 61 to 35. The averageshare of production of these 35 highly concentrated subsectors has, as aresult, increased very sigpiticantly relative to the whole manufacturingindustry. On the other hand, the ebere of total production of the leastconcentrated group hardly expanded, even though the number of those subsec-tors more than doubled in the period. Their average share of productionmust, therefore, have fallen sharply.

Table 3.5: DISTRIBUTION OF CONCENTRATION LEVELS

Concentration Number of Subsectors Production Value (Z)Level 1973 1984 1973 1984

High, few firms 61 35 25.2 28.3High, many firms 32 32 20.6 20.7Mbderate 54 42 33.0 29.2Low 25 63 21.1 21.7-

Source: INDEC, National Industrial Censuses, 1974 and 1985.

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3.10 These trends support the view that fewer firms produced more oftotal production and possibly developed greater market power in certainmanufacturing sectors. In others, production did not expand, while thenumber of plants (and probably of firms) increased as indicated by areduction in the Herfindahl index. These two phenomena suggest, on onehand, leading producers enjoying more market power and, on the other, acompetitive fringe becoming more fragmented. Table 3.6 lists some of thesubsectors where the increase in concentration indices has been particu-larly dramatic; these include non-ferrous metals, leather-cuttingmachinery, basic iron and steel, and railroad equipment.

Table 3.6: AVERAGE DIFFERENCES IN CONCENTRATION INDICES BY SECTOR, 1973-84

Four-plant Eight-plant HerfindahlConcentration Concentration Index

Ratio RatioType of Goods (%) (Z)

Consumer Durables 4.66 4.32 0.00Intermediate 2.82 2.96 0.00Non-durables 1.35 0.77 0.01Capital -0.34 0.66 -0.04Key Subsectors

Railroad Equipment 21.74 20.44 0.06Machine Tools 19.84 22.06 0.02Metal Working Machinery 13.97 17.38 0.02Automobile Manufacturing 18.15 7.26 0.02Radio Television 13.22 17.27 0.02Non-ferrous Metals 36.90 31.49 0.09Leather Cutting 25.98 21.46 0.09Basic Metals (Iron & Steel) 23.77 18.23 0.04Paper Paste 18.00 3.58 0.41Other Basic Chemicals 17.65 19.12 0.02Newspapers 15.64 12.92 0.04Beer and Malt Beverages 7.06 9.22 0.01

Source: Same as Table 3.5

3.11 Table 3.7 shows the evolution in size distribution of Argentina'smanufacturing firms between 1973 and 1984. As with the overall level ofconcentration, evidence shows no significant changes in size distributionbetween 1973 and 1984. The differences appear to be based on the destina-tion of goods produced (intermediate or final) and on the specific indus-trial sector considered (Figure Fl). Sectors in which large firms grewrelatively rapidly have been: basic metals (in which firms with more than300 employees account for over 80X of production); non-ferrous metals;paper; and food manufacturing. In chemicals and petrochemicals, thedistribution remained the same; in the textiles and mechanical industries,the share of larger firms diminished.

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Table 3.7: SIZE AND OUTPUT DISTRIBUTION OF FIRMS INMANUFACTURING INDUSTRY

Size Class 1973 1984 1973 1984

Number of FirmsOver 300 employees 571 512 0.3% 0.3%from 101 to 300 1,407 1,541 0.7% 0.8%from 51 to 100 2,038 2,360 1.0% 1.2%from 11 to 50 12,601 15,957 6.2% 7.9%from 6 to 10 12,869 16,954 6.3% 8.4%from 1 to 5 175,161 164,291 85.6% 81.5%

Total 204,647 201,615 100.0% 100.0%

Share of Gross ProductOver 300 employees 99,320 1,780,328 45.0% 43.9%from 101 to 300 44,928 930,125 20.3% 22.9%from 51 to 100 23,063 431,128 10.4% 10.6%from 11 to 50 33,605 635,536 15.2% 15.7%from 6 to 10 8,815 134,433 4.0% 3.3%from 1 to 6 11,141 148,439 5.0% 3.7%

Total 220,872 4,059,989 100.0% 100.0%

Source: Same as Table 3.5

3.12 In sum, evidence suggests that from 1973 to 1984, the level ofconcentration of an important "core" of the Argentinian industry increaseddramatically, while this core, at the same time, gained a much larger shareof gross industrial product. During the same period, the level oftechnical concentration of an increasingly important number of sectors atthe lower end of the concentration scale did not change, while theirindividual shares of production declined or stagnated.

3.13 While a heavily concentrated group of large firms gainedimportance over the period, and presumably enjoyed increasing market power,the large number of small firms operating at the fringe had shrinkingaverage output and became mc- a fragmented. Thus, the Argentinemanufacturing industry presents a dualistic structure, in which leadingoligopolists coexist with a small, competitive, "free-entry" fringe..6

16/ See Kirkpatrick, Lee and Nixson (1984) for a survey of similar casestudies in other developing countries.

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III. Assessment of Competition

A. Determinants of Competition

3.14 Traditionally, the structural characteristics of an industry areregarded as a prime determinant of the degree of competition-or, con-versely of cooperation--among firms in that industry. However, modernindustrial organization theory also relates the extent of competition to:(a) the ease of entry into and exit from industry, and (b) the specificcompetitive strategy undertaken by management of leading producers.Measuring the quantitative characteristics of industrial structure there-fore is only one element in assessing the degree of competition of anindustry; furthermore, quantifiable structural characteristics should beregarded as indicators rather than determinants of competitive behavior.

3.15 As Chapter I noted, the macroeconomic environment facingArgentine entrepreneurs, particularly during the last fifteen years, hasbeen characterized by pronounced instability. The resulting uncertainty infactors affecting firms' decision-making has had a profound impact on theattitudes of entrepreneurs toward risk-taking, and has generated conserva-tive and anti-competitive behavior patterns. In this environment, managersoften have tried to hedge against perceived risks by financial manipula-tions, which offered opportunities for large non-operational gains.Investment decisions, on the other hand, were frequently postponed due tolower profitability and considerably higher risk. In interviews, firmsrepeatedly stressed their conservative investment stance, which isreflected in the country's overall low investment levels.

3.16 The instability of the economic environment and the policy regimealso encouraged increased vertical and horizontal integration, which raisedthe level of industrial concentration (Chapter II). The growing emphasison financial, rather than manufacturing and other directly productiveactivities, combined with firms' access to subsidized capital and fiscalconcessions, encouraged mergers and acquisitions (consolidations alsofollowed the bankruptcies of the early 1980s). With increased integration,firms could insulate themselves more effectively against policy shocks andthe instability of the economic environment; integration has also enabledfirms to diversify their exposure, further reducing risk and uncertainty.A number of groups, particularly financial concerns controlling some of thelarge banks and important industrial firms, were able to extend theirmarket power by buying out competitors and increasing control over outputand/or input prices. Vertical integration also #as an attractive means ofbypassing regulatory constraints, including pric3 controls.

3.17 Mobility and Competition among Firms. Two indicators of mobilitywere developed to assess the extent of barriers to entry and expansion.The first aims at measuring the frequency and, hence, ease of entry. Thismeasure, computed over the 1965-84 period, provides the average annualpercentage of entrants into an industry relative to the number of incum-bents. Table 3.8 presents the distribution of subsectors by ease of entryaccording to the broad use category classes of goods. The sectors whereentry is more difficult are non-durable goods and intermediate goods,whereas capital goods and durable consumer goods denote lower entrybarriers.

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Table 3.8: EASE OF ENTRY BY TYPE OF GOODS(Percentage of Number of Sectors)

Intermediate Capital Durables Non-durables

High Entry 13 44 16 16

Moderate 32 24 63 32

Low Entry 55 32 21 52

Total 100 100 100 100

Source: INDEC, Preliminary Tabulations of 1985 Industrial Census; ownestimates.

3.18 The second indicator measures the stability, or variability ofmarket shares of the firms within one subsector. Variability in the rank-ing of firms' market shares is interpreted here as an indicator of theextent of competition among the firms in that subsector. This indicator isimperfect since the data for market shares cannot be aggregated ade-quately. However, it still reveals one essential sign of weak exteut ofcompetition: a large part of manufacturing industry displays high stabi-lity, and few subsectors are characterized by high mobility. The moremobile subsectors are autoparts, for which uarket shares have been disputedbitterly; shipbuilding, especially in the early 1980s, when entrantsmnaged to gain large shares of the market; tractor manufacturing; andpetrochemical industry where, however, entry has generally involved justthe introduction of new products.

B. Domestic Competition

3.19 A "domestic competition matrix" was built, based on the aggregateindices described in Section II, on certain structural indicators and oninformation about actual behavior. This matrix gives, for each of the 172subsectors of the manufacturing industry: (i) the ISIC code for the sectorand its description; (ii) the four-plant concentration ratio and thecorresponding aggregate assessment of concentration; (iii) the indicator ofentry; (iv) the indicator of mobility; (v) in some cases, an assessment ofdomestic competition provided by the Direc-torate of Price Controls, sometimes consistent with the preceding indicators, otherwise providing infor-mation on exogenous factors which modify the conclusions drawn from theindicators; and (vi) a final assessment of domestic competition. A summaryis presented in Table 3.9; the entire matrix is shown in A3.3.

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Table 3.9: DISTRIBUTION OF SECTORS IN THE ECONOMYBY DEGREE OF DOMESTIC COMPETITION

Number of Percentage of Percentage of GrossSubsectors Subsectors Industrial Production

Entire Industry

Competitive 30 17.4 18.3Rather Uncompetitive 68 39.5 36.8Very Uncompetitive 74 43.0 44.9

Total 172 100.0 100.0

Intermediate Goods

Competitive 6 12.8 15.5Rather Uncompetitive 17 36.2 28.0Very Uncompetitive 24 51.1 56.5

Total 47 100.0 100.0

Capital Goods

Competitive 6 24.0 26.9Rather Uncompetitive 11 44.0 43.0Very Uncompetitive 8 32.0 30.1

Total 25 100.0 100.0

Durable Goods

Competitive 10 26.3 18.6Rather Uncompetitive 19 50.0 35.5Very Uncompetitive 9 24.7 45.9

Total 38 100.0 100.0

Non-Durable Goods

Competitive 8 12.9 19.9Rather Uncompetitive 21 33.9 46.3Very Uncompetitive 33 53.2 33.8

Total 62 100.0 100.0

Source: Own estimates.

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3.20 The first major conclusion is that most subsectors in Argentinemanufacturing industry are moderately to highly uncompetitive. Of 172 ISICclassified subsectors, only 30 (17.4%) are deemed competitive. Of theremaining 142 subsectors, 68 or 39.5% are moderately uncompetitive, and 74subsectors or 43X are very uncompetitive. The competitive subsectorsproduce 18.3% of gross industrial product (GIP); the moderately uncompeti-tive produce 36.8% and the very uncompetitive subsectors produce 44.9% ofGIP. Table 3.9 also points to the heterogeneity of manufacturing industrywith respect to the extent of competition. The intermediate goods sub-sector is strikingly less competitive than the rest of industry. In fact,only five ISIC intermediate goods subsectors (or 12.8% of the intermediategoods-producing subsectors) are competitive; these produce only 15.5% ofthe total gross value of intermediate goods output.

3.21 Thus, even prior to assessing the impact of the trade policyregime, the intermediate goods sector stands out as highly uncompetitive.Within an economy notable for its low degree of competition, intermediategoods producers are particularly sheltered and immobile. The capital goodsand non-durable goods sectors are marginally more competitive. The "veryuncompetitive" segments of capital goods account for 30.1% of capital goodsproduction overall vs. 56.5% in intermediate goods and 44.9% in manufactur-ing industry as a whole.

3.22 Key Submatrices. Table 3.10 presents intermediate goods sub-sectors of high or moderate importance (as a percentage of gross value ofproduction) which are assessed as very uncompetitive. It shows that 17 outof 20 intermediate goods subsectors are uncompetitive, covering nearly allof the most essential industrial inputs. These subsectors include, inorder of importance: oil refineries; iron and steel; non-ferrous metals;wheat meal; artificial and synthetic fibers; cement; other chemicals;fertilizers and pesticides; tin cans; paper paste; lime and tanningproducts. Each of these segments is characterized by a high degree ofconcentration, low entry and low mobility over the past decade*17/ Alsostate participation is often extremely important in these concentrated,uncompetitive segments; for example, Fabricaciones Militares dominates insteel and petrochemicals.

17/ Except for wheat milling, where the economic concentration is muchlarger than the technical concentration because the industry isdominated by Molinos del Rio de la Plata, a large agro-businessconcern with many plants.

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Table 3.10: 1YUN M NM M1OA¶E GOMXS MJSRE13 WilH UIW DC MlMCC MKCEEITJAII

ismC Fou-firm Getrt &tzyuIbbt etitiaSibsector 04. I neentationIV

Wihat M31l 31161 17.3 M L L LOther Mals 31162 68.1 112 M L LWool VhshiAg 32113 61.8 HI L L LPaper Paste 34111 99.3 H1 M L LAloiDDl DistillatLai 35111 98.9 HI L L LTamnng Products 35113 61.3 Hl L L LFrwizers, PesEticides 35120 56.8 H2 M L LSynthetic Fibers 35132 63.9 112 M M LIks and Dyes 35291 51.5 H2 L L LOther Chemiculs 35299 32.6 E12 M L LOil Refirniss 35300 79.7 H1 L L L(aunt 36M1 43.2 HI L L LLiin 36922 40.3 112 L L Llro and Steel 37100 77.4 112 L L LNor-ferrousm tals 37200 62.2 H2 L L LmTn Cns 38192 42.9 H2 L M LE1actriealLopandsa1Wmb 38392 96.2 El L L L

a/ El - High, f firas; H2 - High any firn; M Mxbbrate; L Low.b/ H- Hig; M - MNxrate; L - Low.

Soures: Om estimtes.

3.23 The capital goods gector presents a different picture (Table3.11). Only five important uibsectors are classified as very uncompeti-tive. In two of them, shipbuilding and railroad equipment, the publicsector accounts for over 50% of the output. Government procurementprocedures tend to favor incambent firms and seem to be an importantbarrier to entry into a relatively small market. There has been some entryinto shipbuilding; all entrants had significant state involvement.

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Table 3.11: MAIN CAPITAL GOODS SUBSECTORS WMTH LOW DEGREE OF COMPETITION

ISIC Concentration Entry Mobility CompetitionSubeector CODE 4-Firm a/ 5a

Stem Generators 38133 53.5 H2 L N Lqglnes and turbines 38210 84.5 H2 L M LComimication

EquiPment 38322 75.4 H2 H L LShipbzilding 38410 68.6 H2 H H LRailroad

Equipment 38420 55.4 H2 L L L

See Table 3.10.

Source: Own estimates.

3.24 Degree of Domestic Competition by Input-Output Blocks. Thedegree of domestic competition also can be examined in terms of input-output blocks.81 Blocks are defined as sets of subsectors with a highlevel of internal input-output linkages. Each input-output block iscentered around one major industry. The extent of competition in the mostImportant blocks is shown in Table 3.12.

18/ Input-output blocks are sets of subsectvirs which realize among them-selves a high proportion of their purchases and sales, so that theportion of the purchases and sales of each subsector in a given block,to subsectors or from subsectors outside the block only represents anunsignificant amount of its purchases and sales. See EdgardoLifechitz, Bloques Sectoriales: Particion de los Quadros de Insumo-Producto, Secretaria de Planificacion, Buenos-Aires, June 1986.

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Table 3.12: DCIXnC M =l BY 1S

Blodk1 Blodc 2 Block7 Blodk8Stee snd Mataa Cm /Pec Jbod/Aodinal PrOduts Wood sad Pamer

of Z of % of Z ofProd- Prod- Prod- Prd-

Sectors uctin Sectors uction Setors uctio Sectors uctio

aipetitive 18 30.9 1 0.1 4 15.4 2 16.1

MxdertelyUnooupetitive 23 23.3 4 21.2 5 79.7 10 73.4

VeryIkucouupetitive 23 45.8 5 78.7 8 4.9 4 10.5

Souce: Eiardo Lfskhitz, op.cit, DMEC and owti estlvates.

3.25 The differences in degree of domestic competition appear to belinked to the nature of the goods produced within the blocks. Nearly 78%of the output of Block 2, Petrochemicals/Chemicals, is comprised of inter-mediate goods. Predictably, Block 2 has the highest percentage of uncom-petitive segments; the "very uncompetitive" subsectors produce 78.7% oftotal Block production. In Block 1, steel and metal goods, the percentageof very uncompetitive subsector and their share of the Block's productionalso are high. On the other hand, Blocks 7 and 8, agroindustries andwood-based industries, are composed of more competitive subsectors.

C. Barriers to Import Competition and Export Rivalry

3.26 Domestic producers are protected from Import competition by advalorem tariffs and non-tariff barriers (Chapter I). An assessment ofimport competition in 172 subsectors is presented in Annex A3 (TableA3.5). It is derived from two indices. The first index evaluates theheight of non-tariff barriers from the proportion of tariff positions ineach subsector where imports have been in fact barred. The second indexmeasures import penetration as a percentage of total domestic demandsupplied by imports. Table 3.13 summarizes the assessment of importcompetition. Of 160 subsectors producing tradeable goods, only 43, or26.9% show a high degree of import competition. In 68 or 42.5% of thesubsectors, import competition is moderate, and in 49 subsectors or 30.6%,it is low. The reasons for low import competition vary, since bothnon-tariff barriers and import penetration are taken into account. In somecases, such as food processing, the low degree of import competitionrelates to Argentina's natural comparative advantages; more often, thelimited degree of import competition is due to trade restrictions.

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Table 3*13: DISTRIBUTION OF TRADEABLE GOODS SUBSECTORSIN THE ECONOMY BY DEGREE OF IMPORT COMPETITIVENESS

Number of Percentage ofSubsectors Subsectors

Whole Industry

Competitive 47 29.4Rather Uncompetitive 68 42.5Very Uncompetitive 45 28.1

Total 160 100.0

Intermediate Goods

Competitive 14 29.8Rather Uncompetitive 21 44.7Very Uncompetitive 12 25.5

Total 47 100.0

Capital Goods

Competitive 12 54.5Rather Uncompetitive 8 36.4Very Uncompetitive 2 9.1

Total 22 100.0

Durable Goods

Competitive 11 30.6Rather Uncompetitive 20 55.5Very Uncompetitive 5 13.9

Total 36 100.0

Non-Durable Goods

Competitive 10 18.2Rather Uncompetitive 19 34.5Very Uncompetitive 26 47.3

Total 55 100.0

Source: Own estimates.

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3.27 In Argentina, overall import competition, while moderately low,appears to be higher than domestic competition. This is misleading.First, some key subsectors are precisely those with the lowest degree ofimport competition. This is the case for iron and steel and non-ferrousmetals in which the actual extent of import competition for locallyproduced goods is extremely small. Secondly, it takes a significant degreeof import competition to force domestic producers into competitive marketbehavior.

3.28 Sivilarly, only substantial and sustained export rivalry canaffect domestic competition positively. In Argentina this has prevailed inonly three cases: washing of wool, leather and fur clothes, and prepara-tion and dying of pelts. A full assessment of export rivalry is presentedin Annex A3 (Table A3.6); it indicates a low degree of export rivalry.

3.29 Some important subsectors for exports are listed in Table 3.14.The ratio of exports to output are particularly low in fabricating indus-tries. This is the case even for industries such as agricultural machi-nery, where Argentina could be expected to perform well. Also, very highlevels of concentration of export shares of leading firms seem to be therule. In goods of agricultural origin, on the other hand, where theexport-output ratios are often much higher, concentration of export marketshares also are lower.

D. Assessment of Competition

3.30 In the absence of effective import competition-and with limitedexport rivalry-domestic prices in Argentina are not constrained by inter-national prices; instead prices are determined by domestic market forces.The patterns of trade protection, moreover, often match the sectoral dis-tribution of domestic market power. As a result, many firms are able toabsorb the rents allowed by promotional and protective policies while mak-ing only marginal efforts to improve productive or managerial efficiency.

3.31 The final assessment of competition in manufacturing industry forthe 172 5-digit ISIC subsectors is presented in Table A3.7. This assess-ment takes account of the extent of import competition and export rivalryin modifying the pattern of domestic competition. It is assumed that ahigh degree of import competition or intense export rivalry constrains anindustry with low domestic competition to behave in a moderately competi-tive fashion. At the same time, low or moderate trade competition isassumed to have a limited effect on domestic competition. With the limiteddegree of import competition and export rivalry in Argentina, the extent ofcompetition in industry is similar to the levels of competition describedearlier in the assessment of domestic competition. Only 30 of 172 sub-sectors in Argentine manufacturing industry are competitive and 50 are veryuncompetitive; the remaining 92 are moderately uncompetitive. Intermediategoods again emerge as the least competitive sector (Table 3.15).

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Table 3*14: EXPORT PERFORMANCE AND RIVALRY1984

Value of Export/ 3-FirmISIC Exports Output Export

Subsector Code in US$ Ratio Concentration

Meat Slaughter, Prepara-tion, Preservation 31111 426,464 16.0% 29.4

Vegetable Oils 31151 1,552,194 85.51 29.3

Animal Feedstuff 31220 899 0.3% 86.2

Textile Fabrics 32116 12,670 0.7% 65.8

Leather and Fur Clothes 32203 18,760 91.5% 66.3

Leather Shoes 32401 1,893 0.4% 38.5

Fertilizers andPesticides 35120 2,534 0.8% 62.1

Petrochemicals 35400 23,823 6.1% 79.4

Basic Iron and Steel 37100 184,198 5.7% 88.2

Nono-ferrous Metals 37200 91,338 11.8% 83.4

Agricultural Cachineryand Equipment 38221 4,175 0.8% 47.9

Office Machines 38251 84,412 55.7% 99.4

Radio, Television, ,sound Industry 38321 457 0.1% 39.3

Automobile Manufacturing 38431 53,601 2.2% 66.3

Autoparts Manufacturing 38432 44,998 2.4% 57.9

Source: CEPAL.

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Table 3o15: DISTRIBUTION OF SECTORS IN TH ECONOMYBY DEGREE OF GLOBAL COMPETITION

Number of Percentage of Percentage of GrossSubsectors Subsectors Industrial Production

Entire Industry

Competitive 30 17.4 18.3Rather Uncompetitive 89 51.7 43.5Very Uncompetitive 53 30.8 38.2

Total 172 100.0 100.0

Intermediate Goods

Competitive 6 12.8 15.5Rather Unconpetitive 25 53.2 34.0Very Uncompetitive 16 44.0 50.5

Total 47 100.0 100.0

Capital Goods

Competitive 6 24.0 26.9Rather Uncompetitive 17 68.0 66.1Very Uncompetitive 2 8.0 7.0

Total 25 100.0 100.0

Durable Goods

Competitive 10 26.3 18.6Rather Uncompetitive 21 55.3 42.5Very Uncompetitive 7 23.7 39.0

Total 38 100.0 100.0

Non-Durable Goods

Competitive 8 12.9 19.9Rather Uncompetitive 26 41.9 50.6Very Uncompetitive 28 45.2 29.5

Total 62 100.0 100.0

Source: Own estimates,

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3.32 The implications for the Argentine economy are many. Littlepressure exists to increase productivity through innovation and investmentin new areas exist. The process of reallocating resources from industrialsegments with poe: productive performance to those with greater potentialis distorted. Uneconomic firms can continue to operate since the policyregime actually supports an uncompetitive environment. As a result,incumbents in the least competitive sectors are guaranteed high profitmargins, while entry is often thwarted. The managerial and allocativeinefficiencies what the policy environment generates ultimately arereflected in the s'vw rate of growth and structural change which character-ize Argentine industry, and in a growing export performance gap betweenArgentine and other developing countries.

IV. Impat of the Policy Regime on Industrial Performance

3.33 Linkages between policies and performance usually are notdirectly observable. Most often, connections are mediated by the impact ofpolicies on the structure of industry and the extent of competition. Inthis Section, the impact of the policy regime will be analyzed first, inrelation to manufacturing growth and changes in the structure of GDP.Argentina's manufacturing sector has had low growth rates and itscontribution to GDP has been falling steadily. Second, the extent ofeconomic inefficiency will be measured on the basis of deviations fromoptimal production scales and using international price comparisons.T1hird, poor export performance will be taken as a proxy for internationalcompetitiveness. High prices in combination with limited incentives toexport have led to declining export shares for a large number ofmanufacturing segments and for industry as a whole.

A. Industrial Growth and Structural Change

3.34 The poor performance of Argentine manufacturing industry over thelast twenty years is illustrated in Table 1.1. Of all comparator countries(except Chile), Argentina shows the lowest average rate of growth ofmanufacturing value added over the 1966 to 1984 period. This trend, inpart, reflects the economic instability and deterioration of industryduring the poorly managed liberalization period (1976 to 1981). At thesame time, the poor performance is related fundamentally to structuralrigidities and a policy regime which failed to stimulate competition andexploitation of growth opportunities.

3.35 Thus, even during the period from 1966 to 1973, the Argentinegrowth rate of manufacturing (4.25% p.a.) was below that of Colombia(7.5%), Brazil (8.3%), Turkey (9.0%), Mexico (9.4%) and Korea (19.8%).During the same period, manufacturing share in GDP in all these countriesincreased, while in Argentina, originally the highest, it decreased from33.3% in 1966 to 28.4% in 1973, and to 23.2% in 1985 (Table 3.16). Suchcontraction, in an environment of overall slow economic growth, is a strongindication of secular stagnation in A:gentine industry. It appears thatthis process has deepened since the mid-1970s. Manufacturing value-addeddeclined from 1973 to 1983, and employment dropped by nearly 60%.

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Table 3.16: ARGENTINA: SHARE OF MANUFACTURING VALUE ADDED IN GDP

1966 1973 1984

Argentina 33.3 28.4 23.2 a/Brazil 27.2 29.3 27.2Chile 22.8 27.1 20.6Colombia 18.0 19.6 17.7Japan 32.3 35.1 29.6Korea 18.6 24.7 27.4Mexico 21.2 23.7 21.1Turkey 16.2 17.4 23.8

a/ For Argentina, 1985.

Source: IENIN Industrial Data Base.

3.36 These changes were not felt equally by all firms. Depending ontheir initial condition, some survived relatively unharmed. Others managedto expand. Many, however, were pushed to the brink of bankruptcy.Generally the successful firms were those which had a relatively strongposition in local markets, low leverage, financial skills, high protection,major benefits from the fiscal incentives, and/or large and steady publicsector demand. Flgure 3.1 suggests that these firms were strongly concen-trated in the production of intermediate goods, the only manufacturingbranch which failed to decline in output terms during the period.

Figure 3.1: TRENDS IN MANUFACTURING VALUE-ADDED BY TYPE OF GOODS

I10124

122

Ila-

114

112

110

100

1970 19O1 197 197 197417 190 17 190197 11IU

* owz GOD flTRI3ITS O CA?ITAL GOODS

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3.37 Producers of relatively high value-added ant skill-intensiveproducts appear to have been the most affected (Table 3,17). With theexception of office machinery, all other industrial segments had negativegrowth rates in output and exports between 1977 and 1983, and e'perienced adecrease in share of manufactured value-added. As noted these segments haddifficulty in extracting rents from trade protection and industrial promo-tion, and were unable to cope with continuous policy shocks and macro-economic instability.

Table 3.17: INDICATORS OF PERFORMANCE FOR SOME SKILL-INTENSIVEHIGH VALUE-ADDED SUBSECTORS

Ratio Export/ Ratio Annual AverageShare VA 1984/ Output Ratio Exports 1983/ Growth Rate ofShare VA 1973 (1983) Exports 1977 Output 1977-83

Engines andTurbines 0.86 4.03 0.97 -0.5

AgriculturalMachinery 0.75 0.59 0.09 -33.1

Office Machinery 1.41 58.03 1.68 9.0Other Non-elec-

trical Machinery 0.55 9.51 0.48 -11.5Electrical

Machinery 0.88 6.69 0.58 -8.7Other Electrical

Products 0.86 1.22 0.71 -5.6Automotive Vehicles

and Parts 0.65 2.66 0.43 -13.1Scientific

Equipment 0.82 6.82 0.42 -13.7

Source: CEPAL, INDEC, BCRA.

B. 'he Policy Regime and Economic Efficiency

3.38 The Argentine policy regime has had an adverse impact ontechnical, allocative and managerial (or x-)efficiency. First, technicalefficiency has been affected by excessive fragmentation and insufficientspecialization. These structural deficiencies have precluded firms fromreaping economies of scale and accumulating significant technologicalcapabilities. Second, policy barriers to mobility have slowed downstructural change, with an adverse impact on allocative efficiency. Third,the quality of management has suffered in an environment characterized byprotection and captive markets. Technical, allocative and x-inefficienciesare diffictlt to disentangle. Their joint effect may be observed in thedecline of total factor productivity grgwth and high price structures, withthe consequent loss of international competitiveness.

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3.39 Production Scales. Scale tends to be a pre-condition oftechnical efficiency in activities subject to increasing returns. Severalfactors have led to suboptimal production scales in Argentine manufacturingindustry. Import-substitution policies have induced excessive entry.Given the limited size of the domestic market and in view of the inabilityof Argentine producers to penetrate the international market, productionactivities became fragmented.

3.40 In addition to the trade regime, regional investment incentiveschemes have contributed to production fragmentation, with firms keepingcentral units in Buenos Aires while moving some productive activities to aprovince to reap regional incentive benefits (Chapter II). Also,Argentina's unstable economic environment led management to follow a con-servative strategy, expanding operations through horizontal integration.Take-overs of competitors' plants took place without integration with thebuyer's plants. This risk-minimizing strategy, adding capacity at themargin with suboptimal plants, restricted competition and failed to improveefficiency.

3.41 As a result, the scales of production are, in many industrialsegments, well below international norms; production costs often aresubstantially higher than those of potential foreign competitors. TablesT5 and T6 illustrate this fact. Table T5 compares production scales forsome consumer durables and capital goods in Argentina and the U.S. Inautomobiles, Argentina produces between 25 and 100 times fewer units of onemodel than the U.S. does. In spite of far lower labor costs, the ex-factory price in Argentina is 18% higher than in the U.S. and 67% higherthan the same model in Brazil, since economies of scales are exploited withlarger markets, fewer models and substantial exports.

3.42 Table T6 presents the estimates of some Argentine firms on theoptimal scale of productive activity versus actual scales. Most firmsestimated that their scale of production was well below the optimum. Insome cases (e.g., the automobile industry), firms' estimates were farbelow international norms. The sectors of Argentine industry whichapproached or even exceeded the optimal international scale were those inwhich Argentina has had a traditional comparative advantage and where thepressure to gain access to export markets has not been crucial. Such isthe case with some food processing industries (dairy products and meatprocessing), paper paste, and some segments of petrochemical industriesbased on natural gas.

3.43 According to most of the industrialists surveyed (Table 3.18),additional costs incurred because of scale diseconomies were between 10%and 20%, indicating how crucial access to export markets is for a largeportion of Argentine manufacturing industry.

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Table 3.18: ESTIMATES OF COSTS INCURRED DUE TO SCALEDISECONOMIES (TO FIRMS SURVEYED;

IN % OF ACTUAL COSTS)

Estimate of Extra Costs Percentage of Total Number of Firms

Less than 5% 11%Between 5% and 10% 19%Between 10% and 20% 65%Between 20% and 40% 5%More than 40% -

Source: Ministry of Industry, ibid. op. cit.

3.44. Factor Productivity Growth. Available data only permits measure-ments of changes in partial factor productivity, namely, average producti-vity per employee and average productivity per horsepower (used here as aproxy for capital). It is suggestive that most key subsectors with belowaverage factor productivity growth relative to the rest of Argentine manu-facturlng industry iu the 1973-84 period are also characterized by a lowdegree of competition. In particular, this is the case for intermediatessuch as iron and steel, cement, paper and cardboard, cotton fibers andsynthetic fibers (Table 3.19). Three uncompetitive subsectors show,however, above average rates of factor growth: paper paste; non-ferrousmetals; and sugar refining.

3.45 In the Argentine case, where total factor productivity (TFP) hassuffered a significant decline since 1974 (Figure 3.2), below averageratios of partial factor productivity growth for both labor and capital (asshown in Table 3.19) point, per force, to negative TFP growth. Thereappears, in sum, to be a linkage between absence of competition and lossesin total and partial factor productivity.

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Table 3.19: RELATIVE CHANGES IN FACTOR PRODUCTIVITY FOR SUBSECTORSWITH A LOW DEGREE OF COMPETITION

1973-84

Subsector ISIC Code P(L) at P(HP) a/

Elevators 38291 -0.52 -0.41Sewing/Weaving Machines 38294 -0.5 -0.60Cotton Fibers 32111 -0.46 -0.15Cement 36921 -0.43 -0.42Railroad Equipment 38420 -0.25 -0.28Synthetic Fibers 35132 -0.23 -0.50Automobile 38431 -0.20 -0.72Tractors Manufacturing 38435 -0.14 -0.30Lime 36922 -0.11 -0.35Wheat Heal 31161 -0.11 -0.41Iron and Steel 37100 -0.04 -0.77Paper 34112 -0.03 -0.42Petrochemicals 35400 0.0 -0.24

Paper Paste 34111 0.55 0.28Nonferrous Metals 37200 1.14 0.32Sugar Refining 31180 1.59 0.15

Source: INDEC; own estimates.

a/ The rate of change in factor f productivity for an individual subsectori relative to the whole of manufacturing industry- A Pi(f) -is defined as:

6Pi(f).NAPi(f)u -1 where

6 Pi(f)

6 Pi(f) VAi (1984)/fi (1984)

VAi (1973)/fi (1973)

VAi(t) is value-added of subsector i in year t (1984 or 1973, in thiscase); f are the factors of production-capital (proxied by the quality ofhorsepower used in a given year) and labor (given by the number of peopleemployed); N the total number of subsectors; Pi is an 'undeflated' andabsolute growth rate in factor productivity.

-.71-

Figure 3.2: TRENDS IN lFP AND LABOR PRODUCTIVITY, 1970-85

l.40 *

1.10~~~.

0.70

Iwo 1975 INO .0 lFP + LPOUCW

C. International Competitiveness and Export Performance

3.46 It has been shown that the intermediate goods sector is highlvconcentrated, presents large barriers to mobility, and is protected largelyfrom import competition. As a result, it is not surprising that prices ofthese goods have been markedly higher than the international price levels.Not only has the performance of intermediate products been poor, but theintermediate goods subsectors have been those with the highest adverseprice linkages to the rebt of the manufacturing industry, 19/ adverselyaffecting the competitiveness of downstream user industries.

3.47 Table 3.20 provides an example of an intermediate good, aluminum,produced by a highly uncompetitive subsector (37200, non-ferrous metals).The cost of this input has been considerably higher in Argentina than incomparator countries, and yet in 1986 none was imported.ZU/

l9/ See Chapter IV.

20/ This fact suggests non-transparent means of protection, since importsof aluminum are not reetricted and the price differential is largerthan the tariff.

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Table 3.20: COMPARISONS OF THE PRICE OF ALUMINUM(in 99.5% bars, dollars per kg.)

1986/87

Country

Month Argentina Brazil Chile US Italy

March 1986 1.82 1.20 1.29 1.13 1.53April 1.82 1.20 1.47 1.17 1.57May 1.78 1.20 1.36 1.20 1.56June 1.73 1.20 1.45 1.20 1.57July 1.73 1.20 1.59 1.22 1.58August 1.70 1.20 1.49 1.15 1.60September 1.67 1.20 1.53 1.14 1.66October 1.64 1.18 1.53 1.18 1.62November 1.60 1.17 1.53 1.19 1.57December 1.58 1.11 1.53 1.17 1.54January 1987 1.55 1.05 na 1.20 1.63February 1.46 na na 1.27 1.65

Source: Fundacion Mediterranea.

3.48 Table 3.21 compares the prices of other intermediate goods ofArgentina and Brazil. Steel products have tended to be much more expensivein Argentina than in Brazil, a reflection of very low domestic competi-tion. That condition is a consequence of the very restrictive regulationsand high barriers to imports resulting from the discretionary power of theGovernment's DGFM, a major shareholder in SOMISA, to deny import licensesfor steel and steel products.

3.49 High input costs and small production scales have had an adverseimpact on cost structures of Argentine firms. High levels of concentra-tion--evidence of high barriers to entry, exit and mobility-suggestsubstantial market power for incumbents in many subsectors of Argentinemanufacturing. Through exercise of market power, firms have passed onhigh production costs to the prices of goods. The impact of these factorsof industrial prices has been significant, resulting in a large differen-tial with international Prices (Tables T7 and T8).

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Table 3.21: COMPARISON OF PRICES OF INTERMEDIATE GOODS,ARGENTINA AND BRAZIL

1987

Excess Price, Argentina/BrazilGoods (%)

Flat Steel Products 100Non-flat Steel 18Cast Iron 0Cast Aluminum 33Internal Combustion Engines 33Mechanical Components 33Electrical Engines 67Other Electrical Components 0

Source: Secretaria de Comercio Interior. From Enrique Scala,"Politicas Economicas, Estructura y Comportamiento en laIndustria Metalmecanica Argentina," Buenos Aires, June 1987.

3.50 With the large price differentials between Argentina's domesticand international markets, the country's industrial exports are mainly inintermediate, low value-added goods in segments in which oligopolisticfirms can cross-subsidize their t.ternal sales with rents reaped in thedomestic market. Export performance of consumer and capital goods has beendismal except in a few food processing subsectors in which Argentina'snatural comparative advantages compensate for productive inefficiencies andhigh inpt't costs. Except for meat processing, a subsector producing partconsumer goods, part intermediate, the ten most important export revenuegenerating segments are all in intermediate good (Table 3.22).

3.51 Argentina's deteriorating export performance is reflectea infalling export shares in world markets. Table 3.23 presents export sharesfor Argentina and three comparator countries, in 1966 and 1983. The shareof China, Brazil, South Korea, and all developing countries rose between1966 and 1983. Argentina's share in total world exports declined from 0.9%to 0.5%, whereas the share of manufacturing exports fell from 0.8% to0.4%. Most of the decline occurred between 1966 and 1973, with traditionalsectors (as food and textiles) receding sharply, and newer areas (metalproducts, for example) unable to fully offset the contraction. Between1973 and 1983, the mature sectors continued to recede, whereas even therelatively small gains made by other industries in the previous period werepartially lost (with the exception of chemicals).

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Table 3.22: LEADING EXPORT MANUFACTURING SUBSECTORS(Thousands of US$ and Percentage of Total Exports)

PercentageSubsector ISIC Code Value of Exports

Manufacture of vegetable andanimal oils and fats 3115 1,552,455 33.95

Slaughtering, preparing andpreserving meat 3111 461,684 9.87

Oil refineries O53O 312,219 6.82Tanneries and leather finishing 3231 291,802 6.38Manufacture of textiles not

elsewhere classified 3219 196,159 4.29Manufacture of basic industrial

chemicals, except fertilizers 3511 185,285 4.05Iron and steel basic industries 3710 184,197 4.02Canning, preserving and processing

of fish, crustaceuas andsimilar foods 3114 150,093 3.28

Grain mill products 3116 122,772 2.68Sugar factories and refineries 3118 102,264 2.23

Total 3,548,935 77.62

Source: CEPAL, Exportation de Manufacturas y Desarrollo Industrial; DosEstudios Sobre el Caso Arsentino (1973"1984). Buenos Aires, 1986.

3.52 In view of Argentina's limited domestic market, the failure toopen up to export markets is both a symptom and a cause of poor productiveperformance in the manufacturing sector. It hinders productive efficiencybecause firms fail to reap benefits of increased scales and are not subjectto the disciplinary pressures from export rivalry. Ultimately, poorperformance reflects a p licy environment that promoted and.sheltered fromcompetition producers t &t made only marginal technology developmentefforts, while failing t- improve productive efficienwy significantly orexploit new opportunities in world markets.

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Table 3.23: EMU SURM, 1966-W3NATMIWL EaDOX1S AS A PEIWZlG F MEN D EDnU

Atmotm ChQina Brazil S. KoreaProdlut 1966 1973 1983 1966 1983 1966 1983 1966 1983 1966 1983

Pbod 4.3 2.3 2.4 2.0 1.8 4.9 6.7 0.0 0.4 35.6 33.0Teailes 0.9 0.7 0.4 3.4 7.3 0.0 1.8 0.4 6.3 30.7 42.0Wxood 0.0 0.0 0.0 0.6 0.1 2.2 1.3 0.8 0.8 17.6 21.5hper 0.2 0.3 0.1 0.7 0.5 0.0 1.3 0.0 0.3 4.7 8.4Qmealsca 0.3 0.2 0.4 0.7 1.6 0.1 1.2 0.0 0.7 11.8 15.9N-. Iner 0.0 0.1 0.0 1.7 1.2 0.1 0.4 0.0 12 24.8 23.7Bsic !bt 0.1 0.3 0.2 0.8 0.4 0.1 2.0 0.1 1.8 24.8 25.0mItal Pro 0.0 0.2 0.1 0.2 0.3 0.1 0.6 0.0 1.6 2.5 8.5Ml8c. 0.0 0.0 0.0 2.7 3.4 0.0 0.3 0.5 2.3 15.1 23.0

tofawing 0.8 0.5 0.4 1.1 1.4 0.9 1.5 0.1 1.7 15.9 17.5

$odaoulture 3.3 2.8 3.4 4.6 3.0 1.1 1.6 0.2 0.7 43.8 35.0IndnjIiuls 0.0 0.0 0.0 0.9 0.2 1.0 0.6 0.2 0.0 38.3 37.1Services 0.4 0.4 0.4 0.4 0.7 0.3 0.5 0.4 1.7 18.4 22.3

Tad Exoway 0.9 0.6 0.5 1.3 1.2 0.8 1.2 0.2 1.5 20.3 21.8

S:rme: MDM data be (EFD).

V. Conclusions

3.53 This chapter was an attempt to establish the impact of theArgentine policy regime on industrial performance. Only infrequentlyis performance directly affected by trade and industrial policies. Moreoften, the impact is indirect, affec '.ng the organization of markets andthe extent of competition within them. A major objective of this reporthas been to identify those intermediate links, and assess the structuraland behavioral changes brought about by the policy regime.

3.54 Policy-induced constraints on firm mobility, competition andexpansion explain, in large measure, why Argentine industry has been unableto adjust to a shifting technological frontier and exploit opportunitiesfor growth Promotional policies contributed to solidify highly concentratedstructures within uncompetitive domestic markets. The trade regime hasreinforced the impact of those policies by protecting industry from importcompetition and failing to stimulate export rivalry. Both failed tostimulate producers to exploit new areas of comparative advantage. Asubstantial improvement in industrial performance will be predicated uponremoval of these policy restrictions. A discussion of this process is theobject of the final chapter of this report.

(D-254p)

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CHAPTER IV

AN APPROACH TO POLICY REFORM

I. Introduction

4.01 The previous chapters suggested that the poor performance of theArgentine industrial sector is related first, to the sharp macro-policyinstability that has characterized the Argentine economy. Second, it isexplained by a policy regime that failed to adapt to changing economicconditions. Progressively, this regime came to favor established producersin less competitive sectors, more mature (or even declining) industriescentered in the production of certain assembly and intermediate goods, andactivities characterized by low value-added and high capital intensity.

4.02 The specific biases of the industrial and trade policy regime,combined with an unstable macroeconomic environment, led to excessivelyrisk-averse managerial behavior. Firms refrained from making substantialinvestments, except to consolidate their market position; there was asignificant decrease in technical change and productivity growth; and theflow of resources to areas of emerging competitive advantage slowedconsiderably.

4.03 The damage the policy regime has done to the industrial sectorcannot be reversed in the very short term. Producers need time to readapttheir expectations concerning the economic and policy environment inArgentina and to change their conduct. Nonetheless, it is reasonable toexpect that with a more stable macroeconomic environment, moderate interestrates and a less biased and protective policy regime, Argentine producerswill respond by expanding investment and directing resources toward moreproductive activities.

4.04 The Constitutional Government has already taken a number ofimportant steps to provide greater macroeconomic stability, a more open andtransparent trade regime, and a less distorted incentive structure. Tosome degree, however, the limited nature of many of these steps has con-strained the response of industrial firms. It is now essential to movedecisively with a trade and industrial strategy that stimulates competitionas a means of bringing the modernization and the regional/internationalintegration of the industrial sector.

4.05 This chapter suggests some specific measures to help attain thesestrategic objectives. They are not to the exclusion of the Government mov-ing decisively in other areas of industrial policy, such as improving theadministration of the public sector (particularly the operational effi-ciency of its enterprises) or strengthening credit and capital markets.Section II briefly discusses the direction, scope and coordination ofindustrial and trade policy reforms. Section III focuses on reform of thetrade regime and on the concurrent phasing out of price controls. SectionIV discusses a set of measures and procedures to make the system of invest-taent incentives less costly, more effective and pro-competitive. Section Voffers some concluding remarks.

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II. The Direction, Scope and Coordination of Industrial Policy Reform

4.06 A reformed policy regime would be the core of a strategy toimprove the efficiency and to modernize the Argentine industrial sector.Policy reform should signal the Government's commitment to a more competi-tive economic environment and a progressive integration of Argentineindustry into the regional economy and world markets. To accelerate firms'supply response, the Government may also want to support entry of newentrepreneurs and development of industrial technology through limited andtargeted (at the "point of distortion") functional intervention. Thus,certain gaps in financial markets, for example, might call for the provi-sion of seed and innovation finance (through risk-sharing arrangements,such as conditional loans and other quasi-equity instruments).

4.07 The Scope of Policy Reform. Changes need to be introduced in theway the Government regulates and promotes industrial activities and how itmanages international trade. The technical, allocational and managerialinefficiencies resulting from policy-determined barriers to competition andgrowth need to be dealt with first, by lowering these barriers, stimulatingexport rivalry and introducing a greater measure of import competition; andsecond, by supporting entrants and innovators in areas of actual oremerging comparative advantage.

4.08 An improvement in industrial performance ultimately will be pre-dicated on a change in behavior by Argentine entrepreneurs. Sustainedindustrial recovery and a move towards a more modern, technologicallydynamic industrial sector will require from entrepreneurs a less parochialview of markets when making investment and production decisions, and anaggressive, forward-looking technological conduct.

4.09 To create a competitive, growth-inducing environment, it isessential that the Government change not only its policies, but also itspractices In a number of areas. It is of particular importance thatentrants be able to threaten and penetrate stable markets dominated by fewlarge firms, including public sector enterprises, which currently areshielded from competition by existing regulations. Although this reportfocuses on the trade regime and the system of investment incentives, thescope for policy reform is considerably larger. Regulatory controls onentry, such as those found in the sectoral programs, for example, should beabolished; such controls are anti-competitive devices that protect andtransfer rents to incumbents.

4.10 The public sector procurement system is another area that needsto be part of a comprehensive package of policy reform. First, the biddingand evaluation procedures are not sufficiently clear and transparent toensure that the most competitive bidder will be awarded the contract.Collusion, agreements on market sharing, price rigging and other non-competitive strategies are stimulated by the system. Most firms regardprofitability on public contracts as superior to what prevails in thedomestic market. The second aspect stems from the fact that, since theearly 1960s, excessive preference has been given to national suppliers(even in case of monopolies), providing an additional shield from externalcompetition. There is, in sum, considerable szope for the Government tomove forcefully with an entry-inducing, pro-competitive, policy inprocurement.

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4.11 Coordination of policy reform. To ease the transition and mini-mize the possibility of creating new distortions, changes in industrialpolicies need to be coordinated with adjustments in the trade regime.Rapid import liberalization in an environment where producers are con-strained by regulatory barriers to entry and growth, including pricecontrols, would limit economic gains and could result in costs that ulti-mately might lead to a reversal in trade reform. For import competition tobe a progressive instrument of industrial development, domestic producershave to be free to allocate resources and price output in response tomarket signals, provide an equal basis for competition with imports.

4.12 On the other hand, if prices are freed from controls in a marketwhere entry and expansion are precluded or hindered by regulatory fiat, orcompeting imports are blocked through binding trade barriers. the exerciseof market power by incumbents could lead to the gouging of consumers.Producers would not face the threat of actual or potential competition;they could extract from buyers the rents generated by protection.

4.13 As part of a coordinated strategy of industrial and trade reform,the lowering of trade and regulatory barriers to competition should betimed to be implemented pari-passu with the decontrol of industrialprices. The process of reform presumes that rents will be competed awayprogressively by lowering policy-induced barriers to competition andreducing, or eliminating, a substantial part of investment incentives. Atthe same time, freedom of pricing in a more competitive environment willensure that producers are rewarded by the market for their efforts inengaging efficiently and innovatively in the business of production.

4.14 Finally, trade and industrial policy reform can play an importantrole in the management of inflation. An effective anti-inflationarystrategy would require, inter alia, minimizing the scope for the inter-mediate goods subsectors (which are often characterized by increasingreturns and monopolistic organization) to amplify price increases.(Section III and Table 4.1.)

4.15 When scale economies are large relative to the domestic market,the predominance of "natural" monopolies or oligopolies is economicallyjustified, and technical efficiency losses from their break-up may not beoffset by the gains from having more actors in the market. In thesecircumstances and unless it is assumed that markets are contestable, tradecompetition becomes the only feasible means to drive producers to efficientprice-output combinations (short of regulatory controls).

4.16 Thus, in an environment characterized by limited domestic com-petition and high natural entry barriers, the ability to decontrol priceswithout rekindling inflation is predicated on increasing the extent ofimport competition. The process of import liberalization tends, however,to have only a gradual impact on the comp2titive behavior of domesticproducers. There are informational lags (buyers' knowledge of the expandedset of opportunities is initially limited) and, more important, marketfrictions, that preclude imports from immediately driving domestic pricesto border levels. New importers are often unable to establish, at least in

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the short term, effective distribution channels, provide technical assis-tance, etc. Commonly, dominant producers becoue dominant importers. Thishas been observed in Argentina and other countries in the initial phases oftrade liberalization. To the extent that these lags and frictions aresignificant, price liberalization in the least competitive sectors could becomplemented by transitional controls to ensure that domestic prices do notexceed the cif prices of competing imports.

4.17 In conclusion, for the Government to carry out a process ofpolicy reform which stimulates competition and growth while preservingprice stability, it would need to move on a number of fronts simulta-neously, providing a greater extent of trade competition, reforming thesystem of price controls, changing the system of investment incentives, andlowering or eliminating regulatory barriers to mobility. The discussionbelow suggests an approach to policy reform and the means of implementingit.

III. A Unified Strategy of Reform of the Trade Regime and the System ofPrice Controls

A. Trade Reform

4.18 Two critical dimensions of competition are associated with traderegime reform: import competition and export rivalry. Both need to bestirmulated in Argentina. Reform of the import regime is needed both toInject discipline in markets dominated by few firms, and to promote intra-industry specialization. Through pre-announced changes in the traderegime, domestic zad border prices should be brought into line progres-sively with border prices guiding domestic producers to a more efficientallocation of resources.

4.19 Recently, the Argentine Government has initiated a number ofreforms designed to stimulate exports and to gradually reduce the restric-tiveness of the current import regime.21/ In December 1985, the Govern-ment transferred all tariff positions from the prohibited list to the priorconsultations list. In January 1986, prior documentation requirements were

21/ The Government has introduced an autom&tic duty-free temporary admis-sion regime with broad coverage that includes indirect exporters. Ithas increased the effective exchange rate for exporters throughreimbursement of indirect taxes and elimination of taxes on manufac-tured and agro-based products. Import and export procedures have beensimplified to take less time and involve less paperwork. Bankers'acceptances have been reintroduced and the information system forexporters has been strengthened. Imports of capital goods notproduced in the country, or which are produced in Argentina but cannotbe delivered on a timely basis, have been freed from most restric-tions. The government has also freed bilateral trade with Brazil on alarge number of capital goods and has allowed the automatic duty-freeimport of all inputs for exports to Brazil.

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eliminated for most products on the automatic list.22/ In March 1987,about 500 tiriff positions were transferred from the prior consultationlist to the fully automatic list. The Argentine Government has alsoannounced Its intention to eliminate the prior consultation list by early1988, transferring all products from this list to the "automatic" cate-gory. Those measurea directly bear on the degree of import competition andexnort rivalry. They are expected to lead to an improvement in firmbehavior and, ultimately,in Industrial performance.

4.20 Trade policy reform should now focus on phasing out the remainingquantitative restrictions by (i) implementing the present flovernment propo-sals of eliminating the prior consultation list, (ii) ending non-tariffrestrictions established by sectoral programs, and (iii) further simplify-ing import documentation requirements. This process should be supported bya stable exchange rate policy which would effectively channel resourcestoward the production of exportubles and efficient import-competing activi-ties. The transition period could be facilitated by tempo. ,- tariffsurcharges with a clearly detined time schedule of short duration, a coursethat the Government is presently considering.

4.21 The Government should alsu strive to reduce and eventually elimi-nate the widespread use of tariff exemptions and special tariff surcharges.They tend to undermine the validity of the tariff system, while reducingIts transparency, introducing discretionary elements and increasing thedispersion of effective protection. The tariff system should, instead, bemade to fully bear the weight of protection.

B. Phasing out the System of Price Controls

4.22 Since 1955, Argentina has experienced alternating periods ofstrong and weak price controls. Price controls were very rigid in thefifties, mid-sixties, and early seventies, and weaker at other times.Prices were liberalized from 1975 to 1979. Thereafter, prices wereformally liberalized but the control on the exchange rates led to strongand pervasive price rigidities. Thereafter, price controls were reimposedon almost all items to maintain real wages in the context of stronginflationary pressures.

4.23 In June 1985, a price freeze was imposed, as part of the PlanAustral, covering almost all commodities. In April 1986, it was relaxedand a more flexible system instituted. Yet, following the resurgence ofinflation in mid-1986, rigid price controls again were reinstituted.During 1986, a series of price adjustments was allowed for the more rigidlycontrolled firms, usually in increments of 3%. In February and again in

22/ In addition, a set of new rules were instituted to facilitate thelicensing procedures: the processing time for import requests wasreduced to 15 days, the onus of providing supporting evidence wasshifted to the producers' associations, and, once an import requesthas been granted, a precedent is established that will rule out anyfurther intervention of producers' associations for that tariffposition.

- e2 -

October 1987, prices were frozen, except for specifically authorizedincreases.

4.24 Price Control Methodology and its Impact. Prices are establishedeither for firms or for specific products, on the basis of their coststructures. Producers are required to submit cost estimates to justify thesolicited price increases. The reviewing Government agency then analyzesthe validity of these estimates, and imputes marketing margins to arrive atthe final price.

4.25 The evidence for Argentina and for other countries indicates thatprice controls may lower the rate of price increases temporarily by break-ing inflationary expections. Yet, the imposition of controls (and theirmethod of implementation) tends to affect economic performance adversely.First, the rate of investment seems to be inverscly correlated with thedegree of rigidity of price controls. Second, price-setting, using methcdscentered on cost analysis may favor and reinforce the position of leadingincumbents.23/ Finally, price controls, as with other regulatory meas-ures, lead to market activities outside the controller's realm. Producersin marktets where price competition is inhibited respond by utilizing non-price strategies as competitive weapons.

4.26 Measures for Price Decontrol. For competitive subsectors, fullprice decontrol should be introduced immediately. In uncompetitivemarkets, progressive removal of barriers to mobility and competition,including substantial reduction in trade barriers, should accompany thedecontrol of industrial prices. The transition period to a decontrolledsystem should be short (not more than, say, six months to a year).

4.27 For those subsectors in which price decontrol will be gradual andcoordinated with an increase in import competition and a lowering ofbarriers to mobility, their prices should be fixed at import price levels.This should be regarded as a transitional policy, until import competitionbecomes fully binding and regulatory barriers to entry are phased out.Prices should be liberalized completely, except in the few cases ofnon-contestable monopolies producing non-tradeable goods and services.

C. Coordinating Price Decontrol and Trade Liberalization

4.28 A staggered removal of price controls and a progressive thoughrapid reduction of the extent of protection is recommended. Were thereneither transaction costs nor institutional constraints, a once-and-for-all

23/ Thus, a methodology which constrains the extent to which depreciationand interest costs can be adequately incorporated into cost structuretends to benefit producers with older capital sto-. and that dependmore on retained profits for investment financing. Similarly, methodswhich formally identifies price leaders, whose cost structures willserve as the standard for the industry, facilitates oligopolisticcoordination.

- 83 -

removal of distortionary policies would be preferred. However, with signi-ficant sunk costs, considerable friction in factor mobility, and imper-fectly cotRpetitive markets, a more gradual approach may be indicated. Astrategy of graduated, yet decisive elimination of barriers to competitionmay also help build support and thus achieve sustainable progress ofreforms.

4.29 One possible approach is discussed here. It is based on therectangular matrix shown in Table 4.1 which classifies industries accordingto extent of competition and price linkage.24/ Each cell is labeled asCrc, where r stands for the row in which thiecell is situated and c for thecolumn (Figure 4.1). The columns classify industries by their degree ofprice linkage in the economy, the rows by their extent of competition.Thus, the industries within cell C1l are the least competitive and have thehighest price linkage in the economy. Conversely, the industries in C34are the most competitive and have the lowest price linkage.

Figure 4.1: PRICE AND IMPORT LIBERALIZATION MATRIX REPRESENTATION

Degree of price linkages

very high high moderate low

C1 1 C12 C13 C14 1 lowI I I extent of

C ' C21 C22 C23 C24 moderate competition

31 C32 C33 C34 J high

4.30 In the absence of knowledge about effective rates of protection,one cannot argue for a specific sequence in the process of import liberali-zation. Nonetheless it is particularly important to subject the least com-petitive industries to the discipline brought about by import competition.Among the least competitive industries, intermediate goods (characterizedby very high price linkages) have the largest economic Impact. Liberaliz-ing imports (and tightening investment 'ncentives) on these industrieswould erode the rents being transferred to them, while providing economy-wide benefits in the form of lower prices. Consistent with this approach,the government is removing import restrictions starting with subsectorsgrouped in C11.

4.31 A number of countries that have been able to sustain reforms inthe trade regime have initiated them with intermediate goods, primarilybecause this first stage of liberalization raised the ERPs of users, whichhad often been negative, and prorated a large interest group backing

24/ Price linkage is computed using the formula described in Annex A3,Section VI. The level of competition is established in thecompetition matrix Table A3.7.

- 04 .

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- 85 -

reform. However, if thia process raises already high levels of effectiveprotection among final users, steps must be taken to simultaneously lowereffective protection to those producers. An initial focus on intermediateswould also generate support because they tend to have the highest pricelinkage to the rest of the economy. As such, they become a critical linkin the mechanism which propagates inflationary pressures. Import competi-tion would help severe this link.

4.32 Price decontrol should be pursued simultaneously, immediatelyintroduced in competitive industries which have low price linkages, namely,subsectors within cell C34, followed by C23 and C24. Price liberalizatioufor subsectors in C1 1, C21 and C12 should go in tandem with lowered re-strictions on firm mobility, and binding import competition, measured bythe degree of import penetration and by the domestic/border price differen-tials.

IV. Reform of the Investment Incentive Regime

4.33 The investment incentive system has generated a heavy fiscalburden: its estimated fiscal cost (in terms of revenue foregone) in 1986was 1.9% of GDP or 53% of the public sector deficit. The investmentincentive regime has also been very costly in economic terms by favoringactivities characterized by high capital intensity and low value added.The system also seems to promote industries with high concertration andhelped foster oligopolistic practices among leading incumbent.. In termsof the regional allocation of incentives, the system has favored a fewselect Provinces. While achieving only limited regional deconcentration ofindustrial activities, it has resulted in very large economic efficiencylosses.

4.34 Currently the Government is attempting to rationalize investmentincentives. It should aim at reducing the amount of fiscal incentives andthe period of their application, making them available to all industries inall Provinces. The project selection criteria should be improved, with anemphasis on export-oriented investments. The bias against entrants andhigher value-added or more labor-intensive activities should be elimi-nated. A new investment incentive Law, under discussion in Congress, couldconstitute a major step in helping modernize Argeutina's industry if basedon these considerations.

A. Bias Toward High Capital Intensity

4.35 The bias toward capital-intensive activities would be partiallyoffset (a) by substantially reducing the length of time (from 15 to say 5years) during which investors may avail of tax deferments and profit taxexemptions; (b) by subjecting tax deferments to interest payments; and(s) by removing the value added tax exemptions from purchases.

4.36 SICE's new procedures in ranking projects have already reducedthis bias, since the fiscal costs per employment generated (the variableused to rank projects) tend to be higher for more capital intensive activi-ties, giving them the lowest priority. Since changing this rankingcriteria, labor intensive activities have moved up the scale relative to

- 86 -

capital-intensive goods. 2 5 / Among the projects selected according to thisnew ranking procedure, 39.3% were in food products (mostly seafood), 16% intextiles, and 10% in metalmechanics. Textiles accounted for 42% of thefiscal costs incurred.

4.37 Further reduction of tax deferments to investors and of exemp-tions from taxable profits gould make the system more neutral. Tax defer-ments, for instance, should be payable within not more than five years;they should be fully and immediately reimbursed if projects are not carriedout within 2-3 years of approval. Exemptiowr from taxable proflts shouldbe more limited, and be given for at most five years.

4.38 Reducing the tariff exemptions from imported capital equipmentand from all imported inputs would also lessen the ircentives toward capi-tal use. It is recommended that tariff exemptions from imported capitalequipment be granced only once and at the initial stage of the project, andthat firms in Tierra del Fuego be exempt only from tariffs on capitalequipment imports, and not on inputs.

B. Bias Toward Low Value-added Activities

4.39 Reducing the time horizon of value-added tax exemptions wouldpartially offset the bias favoring low value-added activities. To elimi-nate it, value-added tax exemptions should be phased out altogether. Sincemany promoted firms already avail of these incentives, to merely eliminatethem would signify that such firms would have an unfair advantage overentrants. Incumbents, therefore, should also be denied access to this taxincentive. This is possibly the only way to effectively deal with the verysubstantial economic and fiscal distortions arising out of value-added taxexemptions (and deferrals), while preserving horizontal interfirm equity(by not penalizing entrants and discouraging their investment). Sinceeliminating these exemptions to incumbents may be difficult, a program ofphased reductions in incentives may have to be 'eonsidered.

25/ Cellulose paste, synthetic resins and plastics, and iron and steelaccounted for the bulk of the promoted investments between 1974 and1983 (Chapter II). Between 1984 and 1987, the major part of thepromoted investments (including those with special sectoral programs)were in food processing (seafood) and basic industrial chemicals. Thefigures for the latter period, however, exclude the investmentspromoted by special provincial programs (Catamarca, San Luis, etc.),for which data are not available. Textiles and electronics arecurrently minor recipients of the national program (Law 21.608/77),but they receive a major part of the special regional incentives.

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C. Sectoral Biases

4.40 The same set of intermediate goods which have been most favoredin the past-petrochemicals and chemicals, ferrous metals, and cellulose-remain under special sectoral incentives. Since these industries takeextensive advantage of provincial incentives, the set of proceduresdeveloped by SICE, by reducing the importance of these industries in theallocation of provincial i.icentives will, In part, reduce this bias.

4.41 Phasing out sectoral programs is essential. Since many of theseindustries are declining, the Government may want to consider Interimmeasures to facilitate adjustment to new technological and demand condi-tions, rather than merely continuing to stimulate growth. Sectoral incen-tives should be replaced by horizontal policies promoting entry of newentrepreneurs (through the provision of seed finance, technical assistanceand training), and modernization and technology development of industry.Promotion should be moderate, well-focused and time-bound.

D. Bias Toward Provincial Concentration of Incentives

4.42 Investment incentives are especially generous to a Palected setof Provinces with special programs and to the National Territory of Tierradel Fuego. Firms responded accordingly by relocating their plants to theseareas. Provinces with lower per capita incomes had no access to similarpromotional instruments. It is quite critical to avoid undue concentrationof incentives among few Provinces and Tierra del Fuego. To carry out theobjective of economic deconcentration more effectively, the Governmentshould eliminate the special programs for Catamarca, San Luis, San Juan, LaRioja and Tierra del Fuego and replace it with a program of strengtheningprovincial infrastructure which would address distortions of past policiesin this respect.

K. Excessive Fiscal Costs

4.43 The incentives of the Industrial Promotion Law need to be down-sized significantly, in order to make the associateu fiscal costs compati-ble with the requirements of fiscal balance in public sector accounts andto lower the economic efficiency losses associated with regional disloca-tion of industrial activities. When, in 1983, authority was shifted to theProvinces, the number of promoted projects rose five times and the fiscalcost of the system doubled (Chapter II). Moreover, there is no evidencethat the promoted relocations enbanced commensurably industrialproductivity.

4.44 An improved Industrial Promotion Law could require substitutingpresent tax exemptions, notably the value-added tax, by a system of taxcredits. Generally, and within a declining ceiling of fiscal incentives,industrial promotion should be accessible to industries in all Provinces,preferably under equal conditions, on the basis of realistic evaluations oftax revenues foregone. Therefore, maximum amounts would have to be set notonly for individual Provinces but also individual investment activities.

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F. Investment Incentives As An Element of Competition Policy

4.45 The reform of the system of investment incentives is essential topromote competition in Argentina's industry. It was shown thbt the invest-ment incentives have benefitted mainly the leading incumbents of highlyconcentrated industries, which used them to solidify their control duringthe period of declining demand (Chapter II). Thus, one of the paramountgoals in revising the system of investment incentives is to encourage com-petition and to reduce the transfer of rents to selected industries. Bothare consistent with flscal moderation and heightened efficiency.

4.46 The :elationship between the distribution of incentives acrossindustries and the industries' competitive levels is showa in Table 4.2.The columns classify industries according to the extent of competition(defined in Chapter III), while the rows group industries by the amount ofpromoted investments. According to this matrix, many of the uncompetitiveindustries have received the bulk of the promoted investments that aregenerally undertaken by leading incumbents (as in the case of cement, wherethe four dominant firms were responsible for most of the promotedinvestment).

4.47 Among the top 10 recipients of the promoted investments (theindustries in row I)--cement, ferrous metals, basic industrial chemicals,and woven textile fibers-are classified as very uncompetitive, whereaspaper paste, fertilizers, plastics and resins, spinning mills, paper andcarton and seafood products are moderately uncompetitive. None of theheavily promoted industries is classified as competitive. Among the nextten industries supported by investment incentives (in row 2), only three--sawmills, other plastics and autoparts-are classified as competitive.Doors and windows, biscuits, and tiles are very uncompetitive, while glassand crystals, and liquid gas are moderately uncompetitive.

4.48 The proposed reforms in both sectoral and provincial programswould reduce the bias cf the system in favor of subsectors which are thelargest recipients of incentives and also the most uncompetitive. Thepresum9tion is that the profits normally absorbed by these subsectors arequite sufficient to finance their investment needs.

4.49 SICE's new ranking procedure already lessens the bias towardhighly concentrated subsectors by de-emphasizing heavy process activities.Many of the features of the evaluation methodology being developed at SICEcould serve as useful starting points for developing provincial criteriafor project approval. Making the system of screening automatic and moretransparent, and removing extensive consultations ("consulta previa")between major producers and Government officials, would also lessen theselection bias toward leading incumbents. By phasing out sectoral programsand removing their entry-restrictive provisions, reforms would also addressthe pro-incumbent bias of the system. Government permits for steel andcellulose production are still necessary, and so are plant scale requlre-ments for petrochemicals, etc. Entry is also deterred by the cost advan-tage to incumbents benefitting from fiscal incentives for extended periodswhich should be accordingly reduced quite drastically.

-89-

Table 4st 1N6 - NUW u s AxD gmBllr W a nTto

lap lest. lonendsteae l 371a0 sTR" ad _e i bioek 18,912 Taintino prodmcts 35113 Tin ca 3819236921 Other u etabla sel 31162 Oil rf ieries 3580 ot 33191

TaUs tfbris 32116 oapand cojetio 35232 Cerpes cAd vrs 32140 Swon olic 1ers 31340dr heba d_dela 35119 480orts wmd 33114 Rope 32150 Paster 36923dEt .4 Vetble pree_e 31132 ser nd aIt UT"r" 31330 SMeP ad cenentat 311:2

RIce prpeion 31163 Ui (for Muitmctien) 36922PrWatie ot tobco 31401 eto i snefatrig 31Diotill.t witig 31312 06tff., toe 6 ase cooenr. 31212Oter tobco products 31403 11kng4d reidr of prses 32122stem pdetors 3813 abri oes 32402Tratoss esonSfatrg 38435 Hbst gel 31161J_. leUte .d setu 31131 Cider 31322bloo" 32204 Cig-ete 31402sedwiweaving thise 3294 the 3M92rat illitg 31164 _bepe 38293ed sheet an tsble coth 32121 lak aid dyes 35291

Meatita 31172 lb wapae d pseae 36201Rb floeut 31152 bIankt .4 p_o 32124NVof'erome astal 37200 mm"g of meol 321UOthet tetle sartitles 32129 lonoftur of pe 4 penils 3991_nsbed kitted fabrt 32132 bptr Volang 31180

*Odstag mortiliamsr e ad sttedde 35120 Cls SW set l 36201 Pprtion. ing of pelts 32320 Mishing of wol 32113hwpet ae nerd 3112 ltwtted cloth d article 32133 Other lasther prodete 3239 Viva 31321PMe p s 36111 that ela*ter, prepettoe 31111 COsott. i epdert of esg. 38210 B eey prd. (exrl. biscot) 31171Prep. of tsh ad hllfih 31140 Ocher WWI" taetile 32190 Piating od binding 34202 Cotfifi 3192

Vegetbl oils 31151 Sodts 32131 1Is tanks VW container 38131Papa d Crdbosr cotierw 3S120 hofacturs of jowls 39010 Other foods unclaified 31219Cettat tib r 32111 Artiels of ewas 32123 Aceesories atfor 32209Coapressed A liTifid 33112 Artifieil ZA synthettie 33132 lfawcturig of gsig 39093

(at. d rpair of mdch. 38230 lectrdcl aca_mator 3391Dstetes and leoloag 35231 lertticel appliantc 3S330144h1ne tools 38240 b MA uttce 32331Eslsives and untites 35293 Voodea contaiur 33120(tfice amemohe 32921 D pest 31174hhbber tire ud tubes 3511 ectratyping othr prdat 34203

Scl"e 38252 sbb sd grnt tt-s 36993Cer s c hina 36100 Neasafstore of maienl oast. 39020Slovat 38291 Vonu-mtaflic odfrsl prod. 36999Vegeable fiber 32112 saf. of weteb and 3S5clot 3330

terigertors, wsuddrns 38292 sttindi allis 32114Other peper item 34190 Plastics .4 synthetic 35131Other unlA . wveing prd. 32119 tannery 32312

dnet. o tticl & phtog. 31520 Pints d vatrnit 35210Klctr. 1M Dd tbse 38392 ttbat eatting *n saltiS 32311hef bh. mode hosing 33113 Coffee roating & prep. 31213Ocher n-eletrted smch. 38299 Other md prodts 33199Otber tubbt prodoete 33590 Scientific equp 3g510Costru. else. mod. 38311 lttrssa 33202Ddsuy prod. iee erv 31120 Ibod apentry (door indow) 33112Repair elect. td. inohi. 38312 Tool les"ee 31214Pharmaceuticals 35221 Other caical9 35299PAdio, TV, sand 38321 Aedo (except lit) 32115llrrorn and stain-glass 36202 Ptrodwlml Indstry 3540

1nsfctere of othr tran. 39S90 Manufacture of ratilra 38420Dtistatio of alchol 35111 bofacturs of aircraft 380S

c ticatio eqtdpi_nt 38322 1ats ad bolts 39191Dstillation rf Alcohol 31311 IhafAtctur Of etoroycle 38440Iathe and ftr clthe 32203 StphAldingA rept irng 39810

Noa4 cc 'A cuts 31113Ste & atdiato (not alec.) 38193

eo olats .d cocs 31190lIre VtA 31819Piarectory steril 36913lMctrictl cable & wire 38393

114h Other clot 32202 roh pest 31173s.Lla 33111 eit 31211lasther sboe 324o01 deie tfeedatuff 31220Other platic 35600 Nits (not for jek) 32201

Vclcen' pwe 32332Pdrito. exap etdN ) 33201Veterinr prodcts 35222lre repair 35512

Coen bridke 38911ant .d tibrocareet 36991I"eOLe 36992COtlery sad Iron termr 18110

Al turniture 38120metal structures for ee. 38132Ibtal carpentry 38134OCr eetal (gslv .) 38199

e4itural d chin 38221lapat of sgde. se Viry 38222

Other tlsctZeol apparatus 3g399Attopart, sem soturng 38632

Sody, etor veMcle, suf. 38433Reboing of engtie 38434Repair of trcttra 31436UNuf. Of Spotn goods 3903016 . of bust 39092Ocher mufctureng 390599

/ ~i llble tselMee epeelfic prejects tit Sw fell er t~enel presetios, for ditch inforsetion ab isentive levle li not available. Van it advalable, a seetwr lII petrebosel(35406) e4bt e elesaid_ed as 'seat p ed"_ me the ihoottes a aba te lo Patre ic hias wet em "licitly taa ito a mt.

)ug

- 90 -

C. Legal and Administrative Complexity

4.50 The current system maintain several laws and decrees, each oooutlining different provisions for each sectoral program. With the auto-nomy granted to promoted provinces, each province has also set up Its ownregulations and criteria. It is suggested, therefore, that the Laws beintegrated and simplified (possibly within the scope of a single Law),whereas the criteria for screening should also be made transparent andconsistent with overall Industrial policy objectives.

4.31 In a truly automatic regime, both stages of the screening processshould be changed or the consultation stage eliminated and the remainingone refined. If both stages are retained, the first-stage criteria shouldbe made consistent with the overall objective of relating the proposedinvestments benefits with their fiscal costs. The current changes In thecriteria for ranking projects as developed by SICE are a significant stepin the right direction; they could be improved further by giving moreemphasis to the export content of the product.

V. Concluding Remarks

4.52 Since the mid-1970s, a combination of macropolicy shocks andregressive trade and industrial policies have led to a decline inArgentina's industrial performance and international competitiveness.Tho key proposition of this study is that the Argentine policy regime,which succeeded to promotet rapid industrialization in the post-war period,has progressively become a barrier to competition, efficiency and themodernization of industry.

4.53 This report focuses on two key aspects of Import substitutionpolicies: the trade regime and the system of investment incentives.Industrial stagnation in Argentina cannot be understood without referenceto their biases or dual nature. While initially inducing entry, thesepolicies have come to favor: established incumbents over potentialentrants, once subsectors were consolidated; certain assembly and processactivities (particularly of intermediate goods), the latter characterizedby high capital intensity, to the detriment of more skill-intensive andhigher value-added production; and mature and declining industries againstinnovative and high-growth sectors.

4.54 The economic cost of these dual policies has been high. Largedynamic efficiency losses resulted from dominant producers in the moremature sectors absorbing rents from import protection and industrial promo-tion. Entry into new areas of comparative advantage by innovative "downs-tream" firms, involving the intensive use of skilled labor, was thwarted bythe biases of the policy regime. The relative position of the Argentinemanufacturing in world trade has worsened significantly.

4.55 It is critical that Argentina pursue a new industrial strategy toregain its competitive position and achieve a sustainable growth path.

- 91 -

This strategy would be based on a new competition and growth policy,stimulating the modernization of industry, and its regional and inter-national Integration. It would focus on reducing the biases of the tradeand Investment incentive regimes, phasing out protective measures andpromotional programs that have hindered competition and dynamic efficiencygains, while promoting technology development, innovation andentrepreneurship.

(D-254m)

93 -

BIBLIOGRAPHY

Azpiazu, Daniel, 1987, Caracteristicas y Impacto de la PromocionIndustrial en Argentina, mimeo, Buenos-Aires.

Azpiazu, Daniel and M. Khavisse, 1984, La Concentracion en la IndustriaArgentina en 1973, CET, Buenos-Aires.

Kosakoff, B. and E. Lifschitz, 1987, Intercensal Comparijons for theArgentine Manufacturing Industry, 1973-1984, mimeo, Buenos-Aires.

Berlinski, J., 1977, La Proteccion Efectiva de Actividades Seleccionadas dela Industria Manufacturera, Buenos-Aires.

Berlinski, J. and D. Schydlowski, 1982, Argentina, in Bela Balassa andAssociates, Development Strategies in Semi-Industrial Countries, JohnsHopkins University Press, Baltimore.

Cardozo, Javier, 198/, Situacion Actual de la Industria del Calzado deCuero en la Argentina, Mimeo, Buenos-Aires.

CEPAL, 1986, Exportacion de Manufacturas y Desarroll, Industrial: DosEstudios Sobre el Caso Argentino (1973-1984), CEPAL,i Documento deTrabajo 22.

Corbo, Vittorio and Jaime de Melo, eds., 1985, Scrambling for Survival:How Firms Adjusted to the Recent Reforms in Argentina, Chile andUruguay. World Bank Staff Working Paper, 764.

Diaz-Alejandro, Carlos F., 1970, Essays on the Economic History of theArgentine Republic, Yale University Press, New Haven.

Gutman, Craciela E. and Fernando E. Porta, 1987, Situacion de la IndustriaLactea en Argentina, Mimeo, Buenos-Aires.

Jacquemin, Alexis and Henry W. de Jong, 1977, European IndustrialOrganization, John Wiley & Sons, New York.

Kirkpatrick, C.H., N. Lee, and F.I. Nixson, 1984, Industrial Structure andPolicy in Less Developed Countries, George Allen & Unwin, London.

Leff, N.H., 1979, "Monopoly Capitalism and Public Policy in DevelopingCountries,' KXklos, 32, 718-738.

Lifschitz, Edgardo, June 1986, Bloques Sectoriales: Particion de losQuadros de Insumo - Producto, Secretaria de Planificacion, Buenos-Aires.

- 94 -

Mallon, R.D., and J.V. Sourrouille, 1975, Economic Policy Making In aConflict Society: the Ar8entine Case, Harvard University Press,Cambridge.

Melo, Jaime de and Shujiro Urata, 1986, "The Influence of Increased ForeignCompetition on Industrial Concentration and Profitability,"International Journal of Industrial Organization, 4 287-304.

Nochteff, Hugo, 1987, La Industria de BIenes de Consumo Electronico y elRegimen de Promocion Fueguino, Mimeo, Buenos-Aires.

Nogues, Julio, "Proteccion Nominal y Efectiva: Impacto de las ReformasArancelarias Durante 1976 y 1977," Ensayos Economicos, No. 8, December1978.

Sanchez-Ugarte, F., 1983, Tax Incentives to Investment for the Promotion ofIndustry: The Mexican Experience, doctoral dissertation, Chicago:University of Chicago.

Scala, Enrique, 1987, Politicas Economicas. Estructura y Comportaniento enla Industria Metalmecanica Argentina, Mimeo, Buenos-Aires.

Scherer, F.M., 1980, Industrial Market Structure and Economic Performance,2nd ed., Houghton Mifflin, Boston.

Tekeli, Ichan, Selin Ilkin, Ataman Aksoy, and Yakup Kepenek, n.d., Turkiyetde Sanayi Kesiminde Yogunslama.

(D-254p)

- 95 -

Table TI ARIWTI&N - MAJOR URCIPIENTS O PROMOTED INIVRSTBNMTS(5-digSit level, 1974-87)

Authorized Number ofC.I.V. Invotoent S Projectc S saploymet

Top 10, 1974-1983

36921 Cement 962,597 21 9 5 1,92534111 Pate for paper 850,567 19 5 3 1,09833119 Sasie lad. Cheomcals 518,122 11 21 12 1,598335120 Fertilizers 514,112 11 2 1 42837100 frous metals 476,513 10 13 7 2,93035131 Plastices and

synthetic Reasn. 409,860 9 7 4 1,00732114 Spun Textile fibers 293,103 6 50 29 4,04232116 Woven Textile Fibers 210,126 5 40 23 2,26134112 Paper and Cartons 182,776 4 4 2 47133111 Wood Products 149,337 3 23 13 1,703

Total 4,567,113 100 174 100 17,458

Top 10, 1983-March 1987

35119 Basic nad. Cheaicls 393,493 49 3 8 27631140 Seafood Products 112,429 14 4 11 86135120 Fertilisers 80,000 10 1 3 19935112 Liquid Gas Products 51,383 6 1 3 4138432 Autoparts 43,449 5 5 14 44735131 Plastics and

Synthetic Resins 38,121 5 2 6 2435600 Plastic Products 33,664 4 9 25 27738291 Zlevators 27,419 3 6 17 2,53433114 Slanted Wood Products 11,252 1 3 8 14531151 Vegetable Oil Products 11,193 1 2 6 95

Total 802,403 100 36 100 4,899

Top 10, 1974-*arch 1987

36921 Cement 962,597 19 11 5 1,92535119 Basic Ind. Chemicals 911,615 18 24 12 1,86934111 Paste for Paper 850,567 17 5 2 1,09835120 Fertilizers 594,112 12 3 1 62737100 ferrous Metals 476,513 9 13 6 2,93035131 Plastics an

Synthetic Resins 447,981 9 9 4 1,03132114 Spun Textile Fibers 304,033 6 59 29 4,11832116 Woven Textile Fibers 216,076 4 64 32 2,32134112 Paper and Cartons 182,776 4 4 2 47131140 Seafood Products 180,624 4 11 5 1,739

Total 5,126,894 100 203 100 18,129

Source: Azpiaxu (1987).

(D-2541)

vmas A: - - mam a w D "ew now=mzni ~ M4Am zw oom

PoeiaIn wan= Po tlm -m a O Q d psj. I oft~~~~~ ?mjscb at~~~~~~~~~4 t*la prdoJm lhda1e tmmodc alW 2 t Sm s

llt~~~~~~(aid Pn datw tau oneaIM do" t

Andwcl=d doduad __wdo

IIinIL SC= Qintiy RoUpm Xmmag qinft1 20bom T=st Quoy bol8q Inon 193 1ism 193 1m *PM*d inSm 9

a8 Im95 945.597 3 62 3V7,452 37.5 3.6 3.0 77.4 2.6 99.2 1060 S 3

cad1a 2a 1,01 911,61S U GM1 168814 4.8 34 18.i4.3 44 0 671 4 3

1A p,nt 5 1,0 860,S 3 55S 30,514 0 5066 5.9 9LA 10.0 95. IOLO 2 2

FortIWiffn 3 42 51.112 1 4 23t 33.3 0.6 3.9 666 746 40 77.s I I

9, ua metai 13 2,930 476,513 7 2,473 2,431 8. 64A m01 71.0 74i3 91 2 2

?Iibtlm 1 tZ3 9 1,031 447,981 2 301 115,991 224. 29.2 g9 52A4 #L 563 86.2 6 1

-3I. WdSud fls) 44 4.118 3%t.,033 23 2,0S 159,2 23 49.7 52.4 28 33 259 3.7 6 4

2it_m (MM fts) 27 2.321 216.W16 8 1.014 5,912 29.6 43.7 41.2 3L4 39L 3L7 4L.4 6 3

Pq ar 6 nl 4 4t1 18.1,6 2 414 168,M 500 87.9 903 59.7 47.6 86.7 I 3 1

11 1.739 10.62" 5 318 21.175 45M5 153 11.7 XL* 45.2 35.4 49.7 5 2

PAD ma0d 14 1.419 149,54 4 312 5,530 236 7L3 2t.7 9.9 I0 57.9 77.2 7 4

162 IS 5,26D45874 1.6%.J 46 41

imm 25,7 3.88 75.0

jf U~~~t-4~~1t a~~m1 ml. . .

A W * C amoomaim nu* cc IsmA.AMYV d 3t.

8 weE gmt

Table 23: rD - ca3l3ZSTZC orTA up 5 so a TM3 Cy am(1974-1967 M

Houbw of goods padecto~~~~- ~u .2pmec.2 I_o ect I _un 0cqate

$5000,O0 p1 uta1 - &3q.2 per vbta1 a* iym5me 00 NM mm 1. *t S naety 2 $'000,000 S Qmtlty 2 pmjf 100 poet 100 000,000

T1ta0 so a uoei 12 5o 100.0 0 j.0 13.53A 100.0 101.670 10.0 7 M1.0 2.-6

DM 2 2 2 U 22.0 429.W 5.4 3.22 23.2 39.02B 36.4 347 123.0 8.ao

road 2 1 - 6 12.0 23,8368 4.7 1.881 13.9 39,906 39.1 314 115.9 ?.87

I&WIm . s ~od - 1 1 4 8L0 160,918 3.1 1,604 11.6 40,230 39.6 401 148.0 9.97

Otle - - 1 1 2.0 29,550 0.6 337 2.5 29,550 29.1 337 124.4 11.40

32 10 2 2 39 76.0 44.215 91.6 9.710 71.8 119339 117.4 249 91.9 2.09

Cbadcw ol md mofe mdada2 4 1 - 17 34.0 1,90,654 37.5 2,629 19.4 112,226 110.4 153 57.2 L38

Pap,er 1 1 - 4 Q.0 1.009,363 19.9 k,358 10.0 252.36 248.2 340 £25.5 1.35

Cement 1 - - 8 16.0 962,597 18.9 1,925 14.2 120,325 18.3 241 18.9 2.00

leuam rAta3 I - - 3 6.0 434,021 6.5 1,858 13.7 144,674 142.3 465 171A 4.26

Oth0 3 - 2 7 14.0 340,360 6,7 1,940 14J3 46,6? 47.6 m7 102.2 5.70

30 - - - - - - - - - - _ _ _ _

_ 3 a -d-oable camw goods; RI L_tarmIata 9 ; : drbl amm gO";.CS .ptu godW3t- dtd _

C8-2SUL

- 98 -

Table T4: DISTRIBUTION OF THE TOP 50 PROMOTED PROJECTSBETWEEN 1974 AND 1987 BY TYPE 0F OWNERSHIP

No. of Projects Promoted Investment AverageType of Project Size !Proprietor Qty. X of total Milllon $ % of total Million $

Economic Group 20 40.0 2,739 50.7 129Conglomerete

IndependentLocal Companies 5 10.0 552 10.9 110

Multinationals 4 8.0 431 8.5 108

StateParastatals 1 2.0 80 1.6 80

Economic group/multinational 5 10.0 378 7.4 76

Economic group/Parastatal 6 12.0 498 9.8 83

Economic group/Multinational/Parastatal 2 4.0 120 2.4 60

Independent local/Multinational 1 2.0 143 2.8 143

Withoutinformation 6 12.0 304 6.0 51

Total 50 100.0 5,084 100.0 102

Source: SICE; Industry reports; interview.

a/ The number of employees per million $ of promoted investmentaverages only 2.7, and has a general range of about 4.4 to 1.9.

(D-254b)

- 99 -

Table T5 COMPARISON OF SCALES OF PRODUCTION, ARGENTINA AND U8,IN METAL MECHANICAL INDUSTRIES

Scale of LeadingType of Production Firms' Sales

Argentina US Argentina Us

Automobile Small series - Large series - 40,000 1-4 millionvarious models; size determinedsmall market. by optimal

economy.

Agricultural Small batches Large series 1,000 Tens ofMachinery thousands

Hbusehold Small series Large series 80,000 1 millionArticles

Machine Tools Order or Flexible 50-100 400-5,000small batches manufacturing

system

Source: Fernandez-Pol and Llach, "Las Industrias Metal-mecanicas ySiderurgica en la Argentina," Buenos Aires, 1984.

(D-254k)

- 100 -

Table T6: OPTIMAL AND ACTUAL SCALES ACCORDING TO FIRMSSURVEYED IN VARIOUS SECTORS

Industry Subsector Optimal Scale Firm Surveyed

Chemical/Petrochemical LDPE: 100,000 tpy 20,000 tpySulfuric Acid: 300,000 tpy 80,000 tpy

Food

Firm # 001 50,000 tons 43,000 tonsFirm 1 003 10,000 tons/month 7,500 tons/monthFirm # 018 3,000 tons/day (US) 500 tons/day

Metallurgy

Firm # 040 50,000 tpy 25,000 tpyFirm 1 045 120-140,000 tpy 140,000 tpyFirm 1 080 900,000 units 347,000 units

Automobiles 88,000 units/year 42,000 units/year

Autoparts 5,000 tons/month 1,800 tons/month

Pharmaceutical 45,000,000 units 31,000,000 units

Shipyards 100% capacity utilization 50% capacity andand series of 4 trawlers average series of

2 trawlers

Textiles Volume = 100 Volume 65

Source: Productivity Survey, Secretary of Industry, 1981.

(D-254k)

- 101 -

Table T7: PRICE COMPARISONS (EX-FACTORY, 1983)

Product Price Price RatioIndustry Characteristics Argentina US (in S)

Steel 1. Cold RolledSP-0 Sheets 581 623 -6.7

Coil 557 598 -6.9

2. Cold RolledSP-EDD Sheets 719 636 13.1

Coil 690 612 12.7

3. Cold RolledSP-SSEDD Sheets 728 656 11.0

Coil 701 632 10.9

Automobile 1. 1,400-1,600 cc. 6,843 5,793 18.1(4 cylinders)

2. 2,000-2,200 cc. 9,783 7,078 38.2(4 cylinders)

Agric. Machinery 1. Combined Harvester 44,508 45,768 -2.8

Household Items 1. Freezer 511 434 17.7

2. Stove 191 186 2.7

Source: Jorge Pernandez-Pol, and Juan J. Llach, op. cit.

(D-254k)

- 102 -

Table T8: COMPARISON OF INDUSTRY AVERAGE EX-FACTORY PRICESBETWEEN ARGENTINA, BRAZIL AND THE US

1983

Price Argentina/ Price Argentina/Product Price US Price Brazil

(X) (2)

Steel (cold rolled sheets) +6 +104Automobile (1,200-1,400 cc.) +18 +67Combined Harvester -3 +50Freezer +18 +41Stove +3 +13Lathe +12 +41Press (excentric) -73 +42Folding Press -61 +57

Source: Fernandez-Pol and Llach, op.cit.

(D-254k)

- 103 -

nsuu n

DISTRIBUTION OF GROSS INDSTRI& PRODUCTBY StZE OF FIRMS

(a)(b)

Stze O o In wood Indus" Size StbUUon In f@@ mwonforlng

_ j1 j ffi g g ; _i g m m j

(c) (d)

Size WoMtuf4on hi Chermical Induet Suy OlW on h TO"

da~~~~~~~~~~~~~'

ez- 69 - e-I- s

1 oer 300 employees 2 101 to 300 3 51 to 100 11 to 505 6 to 10 £. 5 or less

- 104 -

PIG1IRE F1

D2STRIUUTION OF GROSS INDUSTRIAL PRODUCTBy siZE 0f FIRM

(e) (f)size Db*tuot in Four InduE S12e Obtr tn IJv¢w1ng Industry

Sze OItr. n ieChanPd Industy Sze Ostr In m Other Industri

-~~~~~~-M

1 ov*r 300 pwloyoes 2 e101 to 300 3 51 to lOO 4 11 to 50S 6 to 10 6 a S or less

- 105 -

!IGUB. P1

DISTRBUTION OF GROSS INDUSTRIAL PRODUCTBY SIZE OF FIRMS

(I) (a)Sizs Dbtrlbutton in Mtal Indus" SiZe Dist.lh Non-Feoue MStal lndutsy

1 over 300 exployees 2 101 to 300 3 51 to 100 4 11 tO 505 6 tO 10 6 - S or less

- 106 - ANNEX A2Page 1 of 2

METHODOLOGY FOR ESTIMATION OF THE EFFECTIVE SUBSIDY

1. This Annex describes the methodology used in Chapter 1I todetermine the value of the subsidy granted to investment projects inrelation to their value added and technological characteristics. Thismethodology is based on the work of F. Sanchez-Ugarte (1983).

2. The Effective Rate of Subsidy (ERS) for a given project isdefined as:

Present Value with Subsidy - Present Value Without

Present Value of Value Added Flow

The present value of any project can be written as follows:

PV - [(FQ - WL - P3M - R) (I - tg) - tcKR D1 -K(1+I D2tv) -1D3

PQ represents sales, VL costs of labor, PmM costs of variable inputs and Kdeductible depreciation of capital; t is the tax on profits, tc is a taxan capital, DI is a discount factor hat depends on total life of theproject (to obtain discounted present value of profit flows). tv is thevalue-added tax rate on capital goods, returnable after three years, whichalso helps explaining the discount factor D2. K is the value of theproject at the end of its life (since all depreciation allowances areassumed to be fully reinvested), KD3 is thus the present value of capitalat the end ce the project, if D3 is a discount factor such as:

I

(1 + r) n + 1

where r is the investor's discount rate and n is the life of the project.

3. The subsidy has a double impact: it reduces the cost of theinvested capital and decrease taxes on profits, thereby increasing theproject's net profit flow. The first effect can be decomposed in: exemp-tion of import duty on invested capital; partial exemption of VAT; and taxpayment deferral. MTus the incremental present value of a subsidizedproject, measured by VP6 - VP, is equal to

VPs - Vp - IF1 + RF2 + [(PQ - WL - PvM)teg - Stege + ted + PQtevl D1I

4. F1 is the present benefit per unit of capital invested, derivedfrom tariff exemption and partial VAT exemption. F2 is the present benefitobtaining from tax deferral (on 75% of total value), tegs tect and tev, are"effective tax rates" corresponding to the impact on t , t , and tv of thedeclining tax exemption schedules. As a result, the Efective Rate ofSubsidy, S, is defined as:

-107 - AMNU APap 2 of 2

VPS - VP

S -VA x DI

then

8 D (PI + F2 + D1 teg + DI tecd + tev

where P is the gross rate of return to capital.

VAIhe parameter a is an index of integration of the project and equals to: -

PQ

(We thus have

VA - PQ - Pn M - (P +4) K + WL );

where B is defined as an index of capital intensity

WLB - 1-_

VA

5. In final instance, S is obtained for each sector by computing theaverage a and $ for the particular sector. The empirical values obtainedfor the respective coefficients of U and B are derived from the data inTable 2.2.

(D-254L)

-108 - ANNEX A3Page 1 of 27

ME7HODOLOGY, DATA SOURCES AND RESULTS

I. Definition of the Indicators Used

1. Measure of Concentration. There are different measures of con-centration, each with its own advantages and drawbacks. The choice dependson the objective of analysis. Here the objective is to establish thedegree of market power. The most adequate measure for these purposes isthat of economic concentration, defined as the share of production by agiven number of firms in a specific subsector. The opposite of marketpower is "competition."

2. Because most of the data used in this study were collected at theplant level, the measure of concentration used was that of technical con-centration. In most cases, technical concentration is a close approxima-tion of economic concentration. However, if, in any given industry, manyfirms are multi-plant, economic concentration will be much higher thantechnical concentration. That is, technical concentration is in fact a"lower bound" for economic concentration, since, in the case of single-plant firms, the two indices are equal, and the existence of multi-plantfirms will make the economic index larger than the technical index. Thus,concentration when measured at the plant level tends to understate thedegree of market power as reflected by economic concentration.

3. In their 1983 work, "La Concentracion en la Industria Argentinaen 1974," Miguel Khavisse and Daniel Azpiazu give both the economic andtechnical indices. Azpiazu (1987) subsequently computed the same indicesfor some 5-digit ISIC subsectors where it was felt the ratio of economic totechnical concentration might have changed significantly in the period 1974to 1984. Table A3.1 shows the subsectors where the ratio of economic totechnical concentration was greater than or equal to 1.3 in Khavisse andAzpiazu's 1974 study. There were only 10 such subsectors, and only in 4cases was the ratio higher than 1.5. The subsectors where significantchanges in the ratio occurred between 1974 and 1984 are cement (36921) andmanufacturing of textile fabrics (32116), which respectively went from 1.28to 1.38 and from 1.04 to 1.18. Thus, the picture provided by the technicalconcentration indices in 1984 does not differ markedly from that producedby economic concentration.

4. A common Index of concentration is that of relative concentra-tion, namely, what percentage of the total number of firms (plants)produces a given share, say, 50% of the total gross value of production ina given subsector. Note, however, that this indicator can be misleading.Suppose one subsector consists of 500 firms, with 50X of productionaccounted for by 20% of the firms; in a second subsector, there are only 20firms, with 50% of production also produced by 20% of the firms. Therelative indices seem comparable but the sectors are really very differentwhereas in the first sector 100 firms produce 50% of total output, in thesecond sector this share is distributed among only four firms. The impli-cation for possible collusive behavior, I.e., the impact of the respectivestructures on firm conduct, are very distinct.

- 109 - ANNEX A3Page 2 of 27

Table A3.1: DIFFERECS IN TEC CAL AND ECONMU%: tJONCENTRATION 1973-84(Four-firm and four-plant ra.ios in percentage)

Technical EconomicConcentration Concentration

Description Subsector 1973 1973 Ratio '73 Ratio '84

Jam,, jellies and desserts 31131 66.9 68.8 1.03 1.00Biscuits 31172 86.8 87.7 1.01 1.06Textile fabrics 32116 31.3 32.7 1.04 1.18Leather shoes 32401 14.5 15.7 1.08 1.12Paper paste 34111 94.3 96.0 1.02 1.00Fertilizers and pesticides 35120 66.2 74.0 1.12 1.04Plstics and synthetic resins 35131 52.8 56.3 1.07 1.07Soaps and cometics 35232 42.4 42.4 1.00 1.05Ceramics, china 36100 68.2 73.4 1.08 1.05cement 36921 77.2 99.2 1.28 1.38Basic iron and steel 37100 71.4 74.3 1.04 1.03

Dairy products, ice cream 31120 26.5 39.4 1.49Fruit and vegetable preserves 31132 23.7 33.0 1.39Wheat meal 3;161 28.6 60.0 2.10Sugar refining 31180 57.7 74.5 1.29Animal feedatuff 31220 59.8 81.2 1.36Nonalcoholic beverages 31340 27.7 68.8 2.48Cotton fibers 32111 31.0 39.8 1.28Compressed and liquefied gas 35112 69.9 86.7 1.24cement 36921 77.2 99.2 1.28Cement and fibro-cement items 36991 44.7 55.5 1.24Mlanufacture of railroad equip. 38420 50.1 100.0 2.00

Source: Daniel Azpiazu and M. Khavisse, "La Concentracion en la Industria Argentinaen 1973," Buenos Aires, 1984.

5. Rather than using relative measures of concentration, the firstmeasure used in this study--one that is more directly relevant to anassessment of competition in an industry-is absolute concen;ration.Absolute concentration is an index that measures the share o, the totalgross value of production accounted for by a given (small) number of firms(plants). This study uses two such indices: the eight-plant concentrationratio, equal to the share of the total value of production produced by theeight largest plants in the sector; and a similar four-plant concentrationratio.

ANN A3- 110 - Page 3 of 37

6. This measure of absolute concentration also has drawhacks. Inparticular, it identifies only the shares of the eight (four) largestfirms. It does not describe or give an indication of the size distributionof firms. The Herfindahl-Hirschman index captures this distributionalaspect and is defined as:

aH- E (si)2

1

where si is the ith firm's share of the total value of production in thesubsector. In case of a monopoly, the Herfindahl index equals 1; in caseof pure competition (very large number of firms with equal market shares),it is approximately equal to 0.

7. Another possible index is that of entropy, defined as :

nE * si. log (sj)

where log ('i) is the logarithm of the share of the ith firm. Entropy isequal to 0 in the monopoly case (where, if firm k is tie monopolistic firm,then sk - I and thus log [(sk)] - 0). In the perfectly competitive case,entropy tends toward - s .

8. The four indices mentioned above (two of absolute concentra-tion-4-plant and 8-plant-and the Herfindahl and Entropy indices) show anextremely high level of correlation (Table A3.2). Thus, they function asclose substitutes. The analysis in Chapter III uses most often the eightplant concentration ratio and the Herfindahl index, the latter, because itreflects more fully the plant-size distribution and due to its closerelationship with industry unit price-cost margins.j/

9. To classify subsectors into structurally homogenous groups, fourdifferent levels of concentration were considered:

1. High with few plants - Hi2. High with many plants - H23. Moderate - N4. Not concentrated - L.

Category HI corresponds to subsectors where the eight-plant concentrationratio is larger than 50X and the number of firms is less than 40. CategoryH2 indicates a concentration higher than 502 but a number of firms equal toor greater than 40. Category M indicates a concentration lower than 502but more than 252, while category L implies a concentration of less than252.

1/ See Section VI on this Annex.

- 111 - ANNEX A3

Page 4 of 27

Table A3.2: MATRIX OF ODRRELATION COEFFICIENTS

4-Plant 8-Plant Herfindahl Entropy

4-Plant 1.00

8-Plant 0.96 1.00

Herfindahl 0.80 0.67 1.00

Entropy -0.86 -0.87 -0.69 1.00

Source: Own computation from INDEC census of manufacturingindustry, 1984.

10. The concentration categories could have been established on thebasis of the Herfindahl index and an equivalent arbitrary partition.However, this approach does not produce a significant difference in out-come, since the two indices are highly correlated (their Spearman rankorder correlation is even higher at 0.97).

iI. Measures of Mobility. The indicators quantify two distinctaspects: frequency of entry and extent of internal mobility. The firstone measures the frequency of entry into the subsector over the last 20years. It is based upon the following formula,

TK- E ((nt/nt-i ) -1) /nt-1 T

where at is the number of plants still operating in period T that werealready in operation in period t.

12. The indicator of internal mobility is based on changes in themarket shares of the different firms in a subsector. It is computed asfollows:

Let St - sej, the vector of market shares of firms 1 thru n,

-8n

and Ct - Corr(St,St+4).)

1 T-4Then Mobility n -. z Ct

T-4 1

- 112 - ANNEX A3

Page 5 of 27

That is, mobility is the average correlation between the market sharevector at year t and the market share vector at year t + 4. Mobility thusgoes from 1 (no mobility at all) to -1 (extreme mobility). Instability inmarket shares is interpreted as a sign of a very competitive market.

13. The quantitative index of frequency of entry leads to anotheraggregate index, the "entry" index. It divides the whole industry intothree categories: 'high" entry, where indicator of frequency of entry has avalue of more than 0.0725; "moderate," from 0.005 to 0.0725; and "low,"below 0.055. Mobility was similarly qualified as "low' if the quantitativeindex was above 0.66, "moderate," between 0.5 and 0.66, and "high," lessthan 0.5 or negative.

14. The indices of concentration were provided by INDEC. And so werethe data used to compute the entry index. They give, for all plantssurveyed in the 1984 National Industry Survey, the date of entry intoproduction (between 1965 and 1985). The mobility index was based on theyearly sales figures for the 400 leading Argentine industrial firms, aspublished each year by "Prensa Economica." These figures posed a problemin terms of translating each firm into the corresponding 5-digit ISICsubsector, however, as most of the time, the correspondence could only beestablished at the 4- or 3-digit level. Even then, the choice was unclearbecause of the multi-sectoral activities of the largest firms.

II. Assessment of Domestic Competition

15. The assessment of domestic competition is based on indicators ofstructure and mobility. The indicator of structure focus on the degree oftechnical concentration (as discussed above), while the indicators ofmobility are the frequency of entry into a subsector and the stability (orvariability) of the market shares of leading firms within it. Variabilityin the rankings of firms' market shares is interpreted as an indicator ofcompetition in that subsector. The analysis is performed for all ofmanufacturing industry on the basis of the 5-digit ISIC classification forsubsectors 31111 through 39099 (172 subsectors).

16. The index of domestic competition is a composite one, based froma numerical index. To build this index, here denominated Dn, four inter-mediate numerical indices were used: Cn, En, Mn and Mi, defined asfollows:

Cn C Cn (concentration),

whereif concentration - (high concentration and few firms), Cn (conc.) - 1if concentration - (high concentration and many firms), Cn (conc.) = 2if concentration - (moderate concentration), Cn (conc.) - 3if concentration a (low concentration), Ca (conc.) - 4;

En 3 En(entry),

- 113 - ~~~~ANNEX A3- 113-~Page 6 of 27

whereif entry - (low), En (entry) - 1if -uury - (moderate), En (entry) - 2if entry - (high), En (entry) - 3;

Mn = Mn (mobility),where

if mobility - (low), Mn (mobility) -1if mobility - (moderate), Mn (mobility) - 2if mobility - (high), Mn (mobility) - 3;

Mi 3 Mi (Mn),where

if Mn is missing, then Mi (Mn) - 0;if Mn is not missing, then Mi (Mn) - 1;

Finally, Dn - (Cn + En + Mn)/(2 + Mi).

Thus, Dn varies between the values of 0.75 (lowest degree of competitive-ness) and 3 (highest degree). From 0.75 to 1.33 competition is deemed low;from 1.34 to 2.33 it is assessed as moderate; and high otherwise.

17. The final assessment was nuanced and occasionally modified byinformation collected in Argentina from various reliable sources. The"domestic competition matrix" is presented in Table A3.3.

18. Assessment of domestic competition: How robust? The twocriteria that have the most important impact on the determination of thelevel of domestic conception are entry and concentration. Concentrationcarries the most weight in this determination, because of the broader rangeof values this index takes: 0.5 (most concentrated) - 1 - 2 - 3 (leastconcentrated). Entry only takes the values 1 (lowest occurrence of entry)2, and 3 (highest occurrence). Mobility carries less weight than eitherentry or concentration, partly because it is missing for many subsectors(33 out of 172), and also because the standard deviation of this indicator(0.60) is smaller than either that of concentration (0.82) or of entry(0.77).

19. It is justified, however, to examine the robustness of the con-clusions reached in the preceding analysis, as to the level of competitionin Argentine industry. Two tests of robustness are performed here. Thefirst consists in altering the entry indicator. To do so, the thresholdsfor the quantitative values of the underlying continuous index are modi-fied, determining for a number of subsectors, new values of the discreteentry indicator. The threshold for "High" entry is lowered from 0.0725 to0.0675, that for 'Moderate" entry from 0.055 to 0.05. This causes 19subsectors to go from the "moderate entry" category to "High entry" and 18to go from the "low entry' into the "moderate" category. This assumptioncauses only 4 sectors to be upgraded: musical instruments (39020), frommoderate to high competition; and steam generators (38133), wire nets(38194), and non-ferrous metals (37200) from low to moderate. In fact, ifinstead of moving the lower threshold of entry from 5.5X to 5.0X it wasmoved to 5.2%, non-ferrous metals would not be affected. Thus, the finalassessment of domestic competition is fairly robust to significant changesin the definition of the entry criterion.

114 ANNK A3Page 7 of 27

Table A3.3s MESSLEi?r OP DOMESTIC CMPETITION IN ARGENTINE NAJUFACI'URING InIJSTRY- ~~~~~~~~~1986/87

AssessiuntSubsector ISIC of Domestic

Code Concentration j/ Entry M Mabllty k Coapetition b/

Other unclassified textiles 32190 x M L MShirts (not for work) 32201 M H L HOther clothing 32202 L H L HLeather and fur clothes 32203 M M L LRaincoats 32204 H2 M L LAccessories and uniforms 32209 M H L Mlesther cutting and salting 32311 H2 M M MTannery 32312 M L M MPreparation and dying of pelts 32320 H1 H M LBags and suitcases 32331 H2 M M HWomen's purses 32332 M H M HOther leather products (exc shoes/cloth.) 32339 H2 4 M MLeather shoes 32401 L H HFabric shoes 32402 H2 H LSawmills 33111 L H L HWood carpentry (doors, windows, etc.) 33112 L M L MPrefabr. wooden housing 33113 H2 H L MAgglomerated wood 33114 H2 M L LWooden containers 33120 N M L MCork 33191 HI L L LCoffins 33192 M M L MOther wood products 33199 L M L MFurniture (except metallic) 33201 L H HMattresses 33202 H2 M MPaper paste 34111 H1 M L LPaper and cardboard 34112 H2 L L MPaper and cardboard containers 34120 M M L MOther paper item 34190 M M L MNbwspapers and mgazines 34201 H2 L L LPrinting and binding 34202 L M L MElectrotyping other printing services 34203 M H L MDistillation of alcohol (non-ethylic 35111 Hi L L LCompressed and liquefied gasses 35112 H2 L L MTanning products 35113 HI L L LOther basic chemicals 35119 M L L LFertilizers and pesticides 35120 H2 M L LPlastics and synthetic resins 35131 H2 H M MArtificial and synthetic fibers 35132 H2 M M LPaints and varnish 35210 H2 M NPharuaceuticals 35221 L L L MVeterinary products 35222 H2 H L HDetergents and cleaning products 35231 H2 H M MSoaps and coseties 35232 M M M LInk and dyes 35291 H2 L L LMatches 35292 H1 L L LExplosives and munitions 35293 R1 L L LOther chemicals 35299 H2 H L LOil refineries 35300 H1 L L LPetrochemical industry, carboch. 35400 H2 L H MRubber tires and tubes 35511 HI M L MTire repair 35512 M H L N

-11 - AM A3Page 8 of 27

Stble h3.3: _ F N DOSC CMM=M IN AtN IWl MIE MODU1986W87

AsesmmntSubectr IC of Dometlc

Code Cnetration / Etry .tbility Competition W

Oth4r uclasified texties 32190 1 11 L tlguru (not for wrk) 32201 tl a L 1Other clothing 32202 L H L Hlether d fur clothes 32203 N M L LRaicoats 32204 12 N L LAccoories and mforn 32209 N H L 1lleatbh cutting *ad salting 32311 N2 N N Mramury 32312 M L x MPwulton and dying of pelts 32320 Hi H M Lulp and uticates 32331 82 H M MWomen's purse 32332 N H M HOtbhr leather products (en shoes/cloth.) 32339 U2 M M NL"ether Shoes 32401 L H HPlastic shoes 32402 U2 H L

SeAiUS 33111 L a L aWood carpentry (doors, windows, etc.) 33112 L 1 L HPrefabre wooden housing 33113 H2 H L MDoorm, ndows, etc* 33114 U2 x L LAaglorated wood 33120 H N L HWooden containers 33191 H1 L L LOak 33192 M N L HOtber wood products 33199 L H L NFurnitur (except metallc) 33201 L H Hlkttresses 33202 U2 M MPape paots 34111 1 H L LPar and cardboard 34112 Ua L L MPapr and cardboad contatns 34120 M x L MOtbr paper tem 34190 1 M L MNIbsMpperS ad mgmsp zws 34201 82 L L LPrinting and bdIxUng 34202 L M L MElecfttoyping other printing servlce 34203 N H L MDiatiulation of alchl (nou-ethylc 35111 R1 L L LComressed sod llquefied gesse 35112 U2 L L HTurning products 35113 R1 L L LOcher besic chemicals 35119 N L L LFertilizers and pesticides 35120 N2 N L LPlastics and synthetic resins 35131 U2 H H MArtificia and synthetic fiber 35132 H2 N 1 LPaits and varnish 35210 U2 t tTharmcauticala 35221 L L L MVeterinary products 35222 12 H L HDetergnts and claig products 35231 U12 H M HSo ap d cosmetics 35232 t M M LI ao ddyes 35291 U2 L L L1Mtchs 35292 Hi L L Lxaplosives and munitions 35293 HI L L L

Other cbicala 35299 2 M L LOil ref ineries 35300 RI L L LPttroheidal Industry, carboch. 35400 H2 L H N

bbaer tires ad tube 35511 H1 1 L NTir repair 35512 N H L H

M A3- 116 - Page 9 of 27

Table A3.3: ASSESSMENT OF DOMESTIC (OMPETlTION IN ARGENTINE MANUFACIURING INDUSTRY1986/87

AssessmentSubsector ISIC of Domestic

Code COncentration a/ Entry b/ Mobility / Competition k/

Other rubber products 35590 M M L LOther plastics 35600 L H HCeramics, china 36100 H2 M M MGlass and crystals 36201 H2 L L LMirrors and stain-glasses 36202 M M L MCommon bricks 36911 L H L HTiles and mechanical bricks 36912 H2 M L LRefractory material 36913 H2 M L LCement 36921 Hi L L LLime (for construction) 36922 H2 L L LPlaster 36923 H1 L L LCement and fibro-cement item 36991 M H H RMosaics 36992 L M H HMarble and granite items 36993 M L H MNon-metallic mineral products (other) 36999 M M MBasic iron and steel 37100 H2 L L LNon-ferrous etals 37200 M L L LCutlery and iron hardware 38110 M L M HMetal furniture 38120 L M M HMetal tanks and containers 38131 H2 M H MMetal structures for construction 38132 M H M HSteam generators and connexed equipment 38133 H2 L M LMetal carpentry 38134 L H M HNuts and bolts 38191 M M M MTin car-k 38192 H2 L M LStoves and radiators (not electric) 38193 H2 L M HWire nets 38194 H2 L H LOther metal (galvaniz., etc.) 38199 L M M HConstr. and repair of engines and turbine 38210 H2 L M LAgricultural machinery and equipment 38221 L L M HRepair of ag. machinery and equipm. 38222 L H M HConst.and repair of machine to work metal 38230 H L M MMachine tools 38240 L L M MOffice machines 38251 H1 H M MScales 38252 H2 L M LElevators 38291 H2 M M LRefrigerators, wash machines, air cond. 38292 N M M MWeapons 38293 HI L M LSewing/weaving machines, for home/semi-i 38294 H1 L M LOther non-electrical machinery 38299 M M M HConstruc. electrical industrial mach. 38311 M L L MRepair elect. ind. machinery 38312 H2 H L MRadio, television, sound industry 38321 M M L MCoiumnication equipments 38322 H2 H L LElectrical appliances and houseware 38330 H2 M L MElectrical accunulators 38391 H2 H L MElectrical lamps and tubes 38392 H1 L L LElectrical cables and wires 38393 H2 H MOther electrical apparatus 38399 M H HShipbuilding and repairing 38410 H2 H H LManufacture of railroad equipment 38420 H2 L L L

m117m Page 10 of 27

Table A3.3: _01ai! DCOF IIC OM 0U IN ARMU ID S I W DIISrV1986/87

Ahsssamatubetor. ISIC of Dolstic

code Conetratioa , try f )bbLty , Competition.

haatzomobil ainufacturiug 38431 R1 L L LAntoparto innufaeturizig 38432 L L H HBody, er Vhle, ifactuuG 38433 M x H Ulboigmof eO iw 38434 L tl E

Taetors imnufactu-g38435 R1 L H LRepair of tractors 38436 N a UMniufacture of aDtorcye2as end bicycle 38440 3 x 3Manufaeture of aircraft 38450 H2 I xManufacture of other tranep. equip. 38490 H2 M 3ScIentific equiplnt 38510 12 3 3Manuf. of optical and pbotograpbic equip 38520 H2 x 3Mbnuf. of *atches and clocks 38530 E1 U XMond. of jwels and rolated artlels 39010 4 L 4Haoof. of umical ustnrouwts 39020 M 4 HManufacture of sporting goodb 39030 x a Hbmaufacture of paM and Pencils 39091 Hi L L

Manufacture of brusles and. Worln 39092 L tl UManufacturing of slg ; 39093 34 H 34Otber sanufacturlag 39099 -4 U U

Sources: Own estimtes, from INDC National Caeus of Industry, 1985; for Ibbillty Index, from.RCADO and P35 ICOIICL rankIs of Argentine firms (1975-1986).

H IE - light-plant concentration greater than 502; few fit. (lea8 than 40).H2 - Sight-plant cona ntration greater than SO; inny f£ee.3 - Moderate concentration (Eight-plant ratio greater than 251 and loss than 0X).I - Lo -r tion (light-plant ratio losw tha 252).

)f UHi"Bgh--oeate

L -LW

(A-254h)

ANNEX A3- 118 - Page 11 of 27

20. The second test of robustness consists in modifying the weightsattributed to concentration in determining the composite indicator ofdomestic competition. This weight was 1, and in the test it is changedto 2. The composite indicator Dn thus becomes

2Cn + En + MnDn -

(3 + MI)

This change in the definition of the indicator results in 12 shifts incategory. One subsector (vegetable fibers, 32112) is downgraded frommoderate to low. Four subsectors (cotton fibers, 32111; o;1er weavings,32119; other basic chemicals 35119; non-ferrous metals, 37200) are upgradedfrom low to moderate. Seven others (cold cuts, 31113; biscuits, 31172;knitted cloth, 32133; wood carpentry, 33112; other wood products, 33199;printing and binding, 34202; and machine tools, 38240) would go frommoderate to high.

21. It can be considered from the results of these two tests that theanalysis is quite robust to significant changes in the definition of theentry and concentration indices.

III. Assessment of Import Competition

22. Two indicators are used to build the composite index of importcompetition. The first is derived from the percentage of individual tariffpositions in each 5-digit level subsector that are in a totally restrictedcategory (no imports during 1985). If this percentage is less than 25X,the indicator, called "height of non-tariff barriers," will be "low." Ifthe percentage is between 25 and 50, then it is "oderate." If it is morethan 50%, then the value is "high." Similarly, the indicator, "importpenetration," is "high" if the percentage of import penetration (equal toimports divided by the sum of imports and domestic production) is greaterthan 50%; "moderate" if it is between 25% and 50%, and "low" if it is lessthan 25%. The value of the composite index is determined according to the

Table A3.4: ASSESSMENT OF IMPORT COMPETITION

Non-Tariff Barriers Import Penetration Import Competition

High High ModerateHigh Moderate or Low Low

Moderate High, Moderate or Low ModerateLow High HighLow Moderate or Low Moderate.

- 119 - ANNIA A3Page 12 of 27

Table A3.5s ABSSSSHURT or IMPORT COHPMTITION IN AhMNTINE NUFACTURING INDUSTRY *11986-1987

Neight of Assessment AssessmentSubsector ' ISIC Son-Tariff of Import of Import

Code Barriers Penetration Competition

Meat slaughter, preparation, preserv. 31111 N L LSoup and concentrates 31112 N L LRme and cold cuts 31113 N L LDairy prod lce cream 31120 a L LJam, jellies and desserts 31131 a L LFruit and vegetable preserves 31132 N N LPrep. of fish and shellfish 31140 H H MVegetable oils 31151 1 L LFish flour 31152 L L MUheat meal 31161 u L LOther vegetable meale 31162 a L LRice preparation 31163 H L LKate milling 31164 L L MBakery prod (acx. biscuits) 31171 L L MBiscuits 31172 N L LFresh pasta 31173 NT NT NTDry pasta 31174 H L LSugar reflaing 31180 H L LChocolate and cocoa 31190 L N HItce 31211 NT NT NTCoffee, tea and sete concentrates 31212 H M LCoffee, roastiAg and prep. 31213 L H NTea leaves 31214 H L LOther foods unclassified elsewhere 31219 N N MAnimal feedetuff 31220 L 1 1Distillation of alcohol 31311 R L LDistill., mixing end rectif. of alcohol 31312 H H MVine 31321 H L LCider 31322 H L LDeer and smlt beverages 31330 L L MNon-alcoholic beverages 31340 R L LPreparation of tobecco leaves 31401 1 L LCigarettes 31402 L L MOther tobacco products 31403. L H HCotton fibers 3211 L H NVegetable fibers (except cotton) 32112 L H UWashing of wool 32113 L L MSpirning mills 32114 H L LAcahedo (except knit) 32115 NT NT NTTextie fabrics 32116 U M LOther unclass. weaving prod. 32119 L U Hled shete and table clothe 32121 L L 1Making and repair of purses 32122 L L HActicles of canvas 32123 U L Lblankets and ponchos 32124 M L LOther artleles made with textile fiber 32129 M L LSocks 32131 U L LAcabado of knitted fabric 32132 NT NT NTKnitted cloth and articles 32133 U L LCarpets and rugs 32140 N L LRopes 32150 H H M

ANNEX A3- 120 - Page 13 of 27

Table A3.5: ASSESSMENT OF IMPORT COMPETITION IN ARGENTINE MANUFACTURING INDUSTRY al

Height of Assessment AssessmentSubsector ISIC Non-Tariff of Import of Import

Code Barriers Penetration Competition

Other unclassified textiles 32190 L M MShirts (not for work) 32201 L M MOther clothing 32202 L L HLeather and fur clothes 32203 L M MRaincoats 32204 NT NT NTAccessories and uniforms 32209 M L LLeather cutting and salting 32311 M H MTannery 32312 H L LPreparation and dying of pelts 32320 L L MBags and suitcases 32331 L L MWomen's purses 32332 L L MOther leather products (exc shoes/cloth.) 32339 L L MLeather shoes 32401 H L LFabric shoes 32402 H L LSawmills 33111 L H HWood carpentry (doors, windows, etc.) 33112 L L MPrefabr. wooden housing 33113 L M MAgglomerated wood 33114 M L LWooden containers 33120 M L LCork 33191 L M MCoffins 33192 L L MOther wood products 33199 H L LFurniture (except metallic) 33201 M L LMattresses 33202 L L MPaper paste 34111 L H HPaper and cardboard 34112 M H MPaper and cardboard containers 34120 L L MOther paper items 34190 L H HNewspapers and magazines 34201 M L LPrinting and binding 34202 L M MElectrotyping other printing services 34203 NT NT NTDistillation of alcohol (non-ethylic 35111 L H HCompressed and liquefied gasses 35112 L L MTanning products 35113 L M MOther basic chemicals 35119 M H MFertilizers and pesticides 35120 L H HPlastics and synthetic resins 35131 L H HArtificial and synthetic fibers 35132 L H HPaints and varnish 35210 L M HPharmaceuticals 35221 M H MVeterinary products 35222 L H HDetergents and cleaning products 35231 L H HSoaps and cosmetics 35232 L L MInk and dyes 35291 L M MMatches 35292 L M MExplosives and munitions 35293 L H HOther chemicals 35299 L H HOil refineries 35300 L L MPetrochemical industry, carboch. 35400 L H HRubber tires and tubes 35511 L M MTire repair 35512 NT NT NT

- 121 - ANNEX A3Page 14 of 27

Table A3.5: ASSESSMENT OF IMPORT COMPETITION IN ARGENTINE MANUFACTURING INDUSTRY a/

Height of Assessment AssessmentSubsector ISIC Non-Tariff of Import of Import

Code Barriers Penetration Competition

Other rubber products 35590 L H HOther plastics 35600 L H HCeramics, china 36100 L M MGlass and crystals 36201 L H HMirrors and stain-glasses 36202 L M MCommon bricks 36911 L L MTiles and mechanical bricks 36912 L M MRefractory material 36913 L H HCement 36921 L L MLime (for construction) 36922 H L LPlaster 36923 H L LCement and fibro-cement items 36991 M L LMosaics 36992 NT NT NTMarble and granite items 36993 L L MNon-metallic mineral products (other) 36999 L H HBasic iron and steel 37100 L H HNon-ferrous metals 37200 L H HCutlery and iron hardware 38110 L H HMetal furniture 38120 H L LMetal tanks and containers 38131 L M NMetal structures for construction 38132 L L MSteam generators and connexed equipment 38133 L L MMetal carpentry 38134 H L LNuts and bolts 38191 L H HTin cans 38192 L L MStoves and radiators (not electric) 38193 L L MWire nets 38194 L H HOther metal (galvaniz., etc.) 38199 L M MConstr. and repair of engines and turbine 38210 L H HAgricultural machinery and equipment 38221 L M MRepair of ag. machinery and equipm. 38222 NT NT NTConst.and repair of machine to work metal 38230 M H MMachine tools 38240 M H MOffice machines 38251 L H HScales 38252 L H HElevators 38291 L H HRefrigerators, wash machines, air cond. 38292 M H MWeapons 38293 M L LSewing/weaving machines, for home/semi-i 38294 M H MOther non-electrical machinery 38299 L H HConstruc. electrical industrial mach. 38311 L H HRepair elect. ind. machinery 38312 NT NT NTRadio, television, sound industry 38321 L H HCommunication equipments 38322 L H HElectrical appliances and houseware 38330 L H HElectrical accumulators 38391 L H HElectrical lamps and tubes 38392 L H HElectrical cables and wires 38393 L M MOther electrical apparatus 38399 L H HShipbuilding and repairing 38410 L H HManufacture of railroad equipment 38420 L H H

-122 -Pape 15 of 27

Table A3.5: ASSESSNENT OF IMPORT COMPETITION IN ARGENTINE HANUIACTURINo INDUSTRY 1

Uei2ht of Assessment AssessmaentSubsector ISIC Non-Tariff of Import of Import

Code Barriers Penetration Competitlon

Automobile manufacturing 38431 M H Autoparts manufacturing 38432 L H HBody, motor vehicle, manufacturing 38433 L M NRaboring of onglnes 38434 NT NT NTTrectors manufacturing 38435 N M MRepair of tractors 38436 NT NT NTManufacture of otorcycles and bicycles 38440 L N NManufacture of aircraft 38450 N H NManufacture of other trans. equipment 38490 M H NScientlflc equlpment 38510 L a HManuf. of optical and photographic equip 38520 L H HManuf. of watches and clocks 38530 N H NNanuf. of jewels and related articles 39010 L H HManuf. of musical Instruments 39020 L H HManufacture of sporting goods 39030 L H HManufacture of peas and pencils 39091 L M Manufacture of brushes and brooms 39092 L M NManufacturing of signs 39093 L M NOther manufacturing 39099 L R U

/ H - High; M - Moderate; L - Low; NT - Non-tradable.

Sources Own estimates.

(D-254h)

-2 3~3 -ANNEX A3

Page 16 of 27

rule shown in Table A3.4. The only exception to this rule is the case ofsubsector 37100, iron and steel, where the value of the final indicator ischanged from 'high' to 'moderate" on the basis of exogenous informationavailable. The matrix of import competition is presented in Table A3.5.

IV. Assessment of Exnort Rivalry

23. The degree of export rivalry is the outcome of two separatecharacteristics of a subsector: Its export performance (as measured by theratio of export to output) and the absolute concentration of exports (the3-firm concentration ratio of exports). The final assessment is determinedIn the following fashion. If the export/output ratio is larger than 30%and the three-firm concentration ratio is less than 70%, then exportrivalry is "high." If export/output ratio is larger than 30% and concen-tration is above 70X, then export rivalry is 'moderate." Rivalry Is alsodeemed "moderate" If the ratio is between 10 and 30% and concentration isless than 70%. Otherwise, export rivalry is deemed "low" (Table A3.6).

V. Assessment of Global Competition

24. The final indicator of competition is derived from the domesticand the import competition indicators. The final indicator of competitionequals that of the domestic competition except in the cases where the valueof Import competition is "high." In those cases, the degree of domesticcompetition is changed from 'low" to "moderate" or from "moderate" to'high." The matrix of competition for the 172 subsectors of manufacturingIndustry is presented in Table A3.7.

VI. Price Linkage Coefficients

25. Price linkage coefficients are derived from the input-outputmatrix. They measure the input-output linkages of each subsector of thematrix with all the other ones. Lifschitz 2/ uses the following formulato compute this coefficient:

1 Ci Vi I Nc NvC - . x + . x -

2 Pi Pi 2 N N

where Ci is the total value of purchases from other subsectorsVi is the total value of sales to other oubsentorsPi is the total amount of intermediate production in the

input-output matrixNc is the number of purchases from other subsectorsNv is the number of sales from other subsectorsN is the total number of inter-subsectoral transactions

#f See B. Lifschitz, op.cit., 1986.

- 124 - ANNEX A3Page 17 of 27

This coefficient combines two factors; the first factors measures theamount of intermediate transactions the particular subsector participatesin, while the second is an indication of the number of these transactions.The linkage coefficient meaaure the "amplifying" or 'absorbing" power ofthe subsector in transmitting price variations.

VII. A Note on the Linkage Between the Herfindahl Index and Industry PriceCost Margins.

26. Consider a simple model where there are N sellers of a singlehomogenous good, with a selling price p, sold in a competitive market withno possibility of entry. Total demand for the product can be written as:

p - F(Q) t

where Q is the sum of all individual outputs of each of the N producers.

NQ ~~Qi

Each firm in the market has a profit function:

7Ir - p (q) . qi - Ci (qi) i = 1,t .*, N (1)

Ci (qi) being firm i's cost function.

The conditions for profit maximization are:

d i i d P d Q_ 3p + qi - Ci ' o (2)

d qi d Q dqi

and

6 2-i- < 0 for all i

^ qi 2

The term XQ is the effect of the ith firm's output on total industryoutput. This term can be expanded into:

8Q 8 qi 6 Qi* I -- = 1 - hi (3)

6 qi 6 qi dqi

where Qi is the output of all the other firms. The term hi is theconjecture that firm i makes about the impact on industry output that itsown variation in output will cause. Different oligopoly behaviors can,thus, be characterized by different values of the conjectural variationparameter.

-125 - ANNEX A3Page 18 of 27

27. Assuming that all firms have identical cost functions and makethe same conjectural variation assumptions, implies that, at equilibrium,all firms will be identical in size for the very reason that theiroptimization equation (2) are the same for each firm.

Rearranging slightly:

p - C' qi Q 6 p Si (1 h)-. - - . - . - (1 + h) - (4)

p Q p TQ

qiwhere n is the price elasticity of demand and si = - is the share of the

Qith firm. But, since all firms are identical, si - 1/N and equation (4)can be rewritten as:

P - Ce 1 + h- - (5)

p N.

A more general version of (4) would be to allow different marginal costsacross firms, as well as different conjectural variations:

P - Ci si (1 + hi)-- - (6)

p

28. We cannot observe individual firms but only the industry.Therefore, aggregating (6) across firms, we have

* ii- p(Q).qi - C'i (qi)qi - Fi where Fi are fixed costs, sothat

Xi+' Ji' p(Q)qi - qi.C'i(qi) (7)

Summing for the entire industry.

i+ F - £p(9)qi*- : qiCi(qi) )

From (6) we obtain

P * qi- C'i * qi [Si(I + hi)qiJ

p n

Then dividing by Q and rearranging:

P * qi ~ C'i * qi Si(I + hi)

PQ ni

ANNE A3- 126 - Pase 19 of 27

or

lr+ I S12(1+h1)

- -~~~~ - - (1 +1i)PQ n n

where 1 - -i Si2 ( 1 ) is a weighted sum of the conjectural

variations and a - :E Si2 is the Herfindahl index.

Here, structure of the industry (as characterized by the Herfindahl index Hand the elasticity ri ), through conduct ( h , the conjectural variation),determines performance, the profitelrevenue ratio.

(D-254e)

ANNEX A3-127- Page 20 of 27

Table A3.6t EXPORT PERFORMWACE AND RIVALRY1983

Export/ 3-FirmIS8C Value of Output Export Degree

Subsector Code Exports Ratio Concentration of(US$) (X) Rivalry ai/

Neat slaughter, preparation, preserv. 31111 426,464 16.0 29.37 mSoup and concentrates 31112 36 0.1 100 LHass and cold cuts 31113 244 0.0 90.5 LDairy prod iee cream 31124Q 17,366 1.0 61 LJam, jellies and desserts 31131 75 0.1 66.7 Lfruit and vegetable preserves 31132 72,542 13.1 15.8 tPrep. of fish and shellfish 31140 130,025 53.5 27.3 NVegetable oils 31151 1,532,194 85.5 29.3 Fish flour 31152 8,599 5.3 75.6 LUheat meal 31161 73,694 11.4 32.21 MOther vegetable mals 31162 11,677 15.7 82.3 LRies preparation 31163 42,425 23.6 77.9 LMate milling 31164 5,933 3.1 82.6 LBakery prod (exc. biscuits) 31171 160 0.0 39.4 LBiscuits 31172 1,037 0.3 82.9 LFresh pasta 31173 0.0 0 KrDry pasta 31174 190 0.2 56.4 LSugar refining 31180 102,248 6.1 44.1 LChocolate and cocoa 31190 5,436 1.0 86.9 Ltce 31211 0.0 0 NTCoffee, tea and mate concentrates 31212 2 0.0 lQ0 LCoffee, roasting and prep. 31213 57 0.0 91.1 LTea leaves 31214 56,552 57.0 44.7 NOther foods unclassified elsewhere 31219 14,885 3.0 58.4 LAnimal feeastuff 31220 899 0.3 86.2 LDistillation of alcohol 31311 17,358 13.0 37.33 MDistill., mixing and rectif. of alcohol 31312 117 0.0 52.2 LWine 31321 8,025 1.3 63.9 LCider 31322 110 0.1 54.5 LBeer aud salt beverages 31330 1 0.0 100 LNon-alcoholic beverages 31340 3 0.0 66.7 LPreparation of tobacco leaves 31401 0.0 0 NTCigarettes 31402 345 0.0 65.8 LOther tobacco products 31403 0.0 0 NTCotton fibers 32111 65,703 23.0 45.9 MVegetable fibers (except cotton) 32112 0.0 0 NTWashing of wool 32113 68,768 106.9 36.6 HSpinning mills 32114 48,711 4.0 53.8 LAcabado (except knit) 32115 0.0 0 NTTextile fabrics 32116 12,670 0.7 65.8 LOther unclass. weaving prod. 32119 1,929 3.2 65.4 LBed sheets and table cloths 32121 204 0.1 82.4 LMaking and repair of purses 32122 2,333 3.7 99.2 LArticles of canvas 32123 0.0 0 NTBlankets and ponchos 32124 47 0.1 95.8 LOther articles made with textile fiber 32129 835 9.3 91.2 LSocks 32131 4 0.0 too LAcabado of knitted fabric 32132 0.0 0 NTInitted cloth and articles 32133 1,092 0.2 68.9 LCarpets and rugs 32140 16 0.0 93.8 LRopes 32150 28 0.3 85.7 L

- 128 - ANNEX A3

Page 21 of 27

Table A3.6: EXPORT PERFORMANCE AND RIVALRY1985

Export/ 3-FirmISIC Value of Output Export Degree

Subsector Code Exports Ratio Concentration of(US$) (%) Rivalry

Other unclassified textiles 32190 191 0.1 87.4 LShirts (not for work) 32201 34 0.0 88.3 LOther clothing 32202 1,184 0.1 77.7 LLeather and fur clothes 32203 18,760 91.5 66.3 HiRaincoats 32204 0.0 0 NTAccessories and uniforms 32209 808 0.9 79.2 LLeather cutting and salting 32311 16,867 84.4 46.8 HTannery 32312 293,430 39.6 31.1 HPreparation and dying of pelts 32320 4,628 68.2 25.2 HBags and suitcases 32331 153 0.5 71.9 LWomen's purses 32332 227 0.7 48.1 LOther leather products (exc shoes/cloth.) 32339 1,006 3.5 66.1 LLeather shoes 32401 1,893 0.4 38.5 LFabric shoes 32402 457 0.2 34.5 LSawmills 33111 3,424 1.2 91.9 LWood carpentry (doors, windows, etc.) 33112 23 0.0 95.6 LPrefabr. wooden housing 33113 0.0 0 NTAgglomerated wood 33114 14 0.0 42.9 LWooden containers 33120 2 0.0 99 LCork 33191 11 0.0 72.7 LCoffins 33192 0.0 0 NTOther wood products 33199 10 0.0 60 LFurniture (except metallic) 33201 727 0.2 41.6 LMattresses 33202 45 0.0 100 LPaper paste 34111 ;7,572 12.3 99.9 LPaper and cardboard 34112 7,186 0.7 83.9 LPaper and cardboard containers 34120 145 0.0 61.4 LOther paper items 34190 112 0.1 43.8 LNewspapers and magazines 34201 1,700 0.3 53.1 LPrinting and binding 34202 14,646 1.6 35.4 LElectrotyping other printing services 34203 0.0 0 NTDistillation of alcohol (non-ethylic 35111 6,209 9.2 99.3 LCompressed and liquefied gasses 35112 175 0.1 99.9 LTanning products 35113 41,425 44.7 92.2 MOther basic chemicals 35119 158,876 21.8 49.4 MFertilizers and pesticides 35120 2,534 0.8 62.1 LPlastics and synthetic resins 35131 65,455 8.7 83 LArtificial and synthetic fibers 35132 2,032 0.4 97.3 LPaints and varnish 35210 1,829 0.4 34.9 LPharmaceuticals 35221 26,952 1.7 65.5 LVeterinary products 35222 143 0.0 58.8 LDetergents and cleaning products 35231 2,672 0.7 85 LSoaps and cosmetics 35232 2,378 0.4 68.7 LInk and dyes 35291 68 0.1 75 LMatches 35292 8 0.0 100 LExplosives and munitions 35293 1,418 3.7 91.7 LOther chemicals 35299 27,044 7.1 73.5 LOil refineries 35300 322,794 4.5 83.1 LPetrochemical industry, carboch. 35400 23,823 6.1 79.4 LRubber tires and tubes 35511 12,085 2.4 95.1 LTire repair 35512 0.0 0 NT

- 129 - NEX 43Page 22 of 27

Table A3,6: EXPORT PERFORMANCE AND RIVALRY1985

Export/ 3-FirmISIC Value of Output Export Degree

Subsector Code Exports Ratio Concentration of(US1$) (Z) Rivalry

Other rubber products 35590 5,169 1.7 60.4 LOther plastics 35600 2,964 0.2 53.5 LCeramics, china 36100 420 0.1 75.5 LGlass and crystals 36201 5,413 1.2 76.9 LMirrors and stain-glasses 36202 44 0.3 77.3 LCommon bricks 36911 4 0.0 100 LTiles and mechanical bricks 36912 1,452 1.1 96.9 LRefractory material 36913 85 0.1 71.8 LCement 36921 3,408 0.9 92.6 LLime (for construction) 36922 57 0.1 62 LPlaster 36923 43 0.5 48.8 LCement and fibro-cement items 36991 457 0.2 22.1 LMosaics 36992 0.0 0 NTMarble and granite items 36993 962 2.0 89.4 LNon-metallic mineral products (other) 36999 1,006 0.3 70.7 LBasic iron and steel 37100 184,198 5.7 88.2 LNon-ferrous metals 37200 91,338 11.8 83.4 LCutlery and iron hardware 38110 3,642 1.0 75.7 LMetal furniture 38120 217 0.2 67.7 LMetal tanks and containers 38131 565 0.5 88.5 LMetal structures for construction 38132 3,876 1.2 89.5 LSteam generators and connexed equipment 38133 7 0.0 100 LMetal carpentry 38134 15 0.0 60 LNuts and bolts 38191 3,125 2.0 70.2 LTin caus 38192 356 0.1 100 LStoves and radiators (not electric) 38193 346 0.1 0 NTWire nets 38194 885 3.5 95.8 LOther metal (galvaniz., etc.) 38199 12,870 0.7 48.5 LConstr. and repair of engines and turbine 38210 3,242 0.9 85.2 LAgricultural machinery and equipment 38221 4,175 0.8 47.9 LRepair of ag. machinery and equipm. 38222 0.0 0 NTConst.and repair of machine to work metal 38230 4,279 5.6 40.3 LMachine tools 38240 46,404 5.2 41.6 LOffice machines 38251 84,412 55.7 99.4 MScales 38252 237 1.6 68.8 LElevators 38291 58 0.3 72.4 LRefrigerators, wash machines, air cond. 38292 2,102 0.5 46.3 LWeapons 38293 312 0.5 96.1 LSewing/weaving machines, for home/semi-i 38294 3 0.0 100 LOther non-electrical machinery 38299 29,487 14.5 33.2 MConstruc. electrical industrial mach. 3&311 6,419 2.1 43.5 LRepair elect. ind. machinery 38312 0.0 0 NTRadio, television, sound industry 38321 457 0.1 39.3 LCommunication equipments 38322 1,475 0.9 83.1 LElectrical appliances and houseware 38330 1,824 0.9 96.7 LElectrical accumulators 3839i 1,420 0.9 90.8 LElectrical lamps and tubes 38392 121 0.1 76 LElectrical cables and wires 38393 11,152 3.6 86.6 LOther electrical apparatus 38399 10,602 3.8 75.3 LShipbuilding and repairing 38410 73,588 20.2 95.9 LManufacture of railroad equipment 38420 2,678 1.3 80.3 L

ANNEX A3- 130 Page 23 of 27

Table A3.6: EXPORT PERFORMANCE AND RIVALRY1985

Export/ 3-FirmISIC Value of Output Export Degree

Subsector Code Exports Ratio Concentration of(US$) (X) Rivalry

Automobile manufacturing 38431 53,601 2.2 66.3 LAutoparts manufacturing 38432 44,998 2.4 57.9 LBody, motor vehicle, manufacturing 38433 954 0.4 99.6 LReboring of engines 38434 0.0 0 NTTractors manufacturing 38435 59 0.0 50 LRepair of tractors 38436 0.0 0 NTManufacture of motorcycles and bicycles 38440 65 0.1 73.9 LManufacture of aircraft 38450 152 1.4 100 LManufacture of other transp. equip. 38490 33 0.7 87.9 LScientific equipment 38510 7,814 4.5 49.8 LManuf. of optical and photographic equip 38520 544 1.7 55 LManuf. of watches and clocks 38530 130 0.6 68.5 LManuf. of jewels and related articles 39010 74 0.6 95.9 LManuf. of musical instruments 39020 16 0.3 93.7 LManufacture of sporting goods 39030 341 1.2 80.7 LManufacture of pens and pencils 39091 289 0.6 96.9 LManufacture of brushes and brooms 39092 187 0.6 95.7 LManufacturing of signs 39093 6 0.0 66.7 LOther manufacturing 39099 692 1.1 42.3 L

a/ H - High, M - Moderate, L - Low, NT - Non-Tradable.

Source: CEPAC, own estimates.

(D-254h)

-131- ANNEX IIIPage 24 of 27

Table A3.7: ASSESSMENT OF GLOBAL C0MPETITION IN ARGENTINE MANUFACTURING INDUSTRY1986/87

Assessment Assessment Assessment AssessmentSubsector ISIC of Import of Export of Domfstic of

Code Competition Rivalry Competitiou Competition

Meat Slaughter, Preparation 31111 L M M MSoup and Concentrates 31112 L L L LHan and Cold Cuts 31113 L L M MDairy Prod. Ice Cream 31120 L L M MJam, Jellies and Desserts 31131 L L L LFruit and Vegetable Preserves 31132 L M L LPrep. of Fish and Shellfish 31140 M H M MVegetable Oils 31151 L H M MFish Flour 31152 M L L LWheat Meal 31161 L M L LOther Vegetable Meals 31162 L L L LRice Preparation 31163 L L L LHate Milling 31164 M L L LBakery Products 31171 M L M MBiscuits 31172 L L L LFresh Pasta 31173 NT NT H HDry Pasta 31174 L L M MSugar Refining 31180 L L L LChocolate and Cocoa 31190 H L L MIce 31211 NT NT H HCoffee, Tea and Mate Concentrates 31212 L L L LCoffee, Roasting and Preparation 31213 H L L MTea Leaves 31214 L H M MOther Foods Unclassified Elsewhere 31219 M L M MAniml Feedstuff 31220 M L H HDistillation of Alcohol 31311 L L M MDistill., Mixing and Rectif. of Alcohol 31312 M H L LWine 31321 L L M MCider 31322 L L L LBeer and Malt Beverages 31330 M L L LNon-alcoholic Beverages 31340 L L L LPreparation of Tobacco Leaves 31401 L L L LCigarettes 31402 M L L LOther Tobacco Products 31403 H L L LCotton Fibers 32111 H M L MVegetable Fibers (except cotton) 32112 H L M MWashing of Wool 32113 M H L MSpinning Hills 32!1'4 L L M MAcabado (except knit) 32115 NT NT M MTextile Fabrics 32116 L L L LOther Unclass. Weaving Products 32119 H L L MBed Sheets and Table Clothes 32121 M L L LHaking and Repair of Purses 32122 H L L LArticles of Canvas 32123 L L H MBlankets and Ponchos 32124 L L L LOther Articles Made with Textile Fiber 32129 L L L LSocks 32131 L L M MAcabado of Knitted Fabric 32132 NT NT L LKnitted Cloth and Articles 32133 L L M MCarpets and Rigs 32140 L L L LRopes 32150 M L L L

-132- ANNEX IIIPage 25 of 27

Table A3.7: ASSESSMENT OF GLOBAL COKPETITION IN ARGENTINE MANUFACIURING INDUSTRY1986/87

Assessment Assessment Assessment AssefsmentSubsector ISIC of Import of Export of Domestic 4:

Code Competition Riv.lry Competition Competition

Other Unclassified Textiles 32190 M L M HShirts (not for work) 32201 M L H HOther Clothing 32202 M L H HLeather and Fur Clothes 32203 M H L MRaincoats 32204 NT NT L LAccessories and Uniforms 32209 L L M MLeather Cutting and Salting 32311 M H M MTannery 32312 L H M MPreparation and Dying of Pelts 32320 M H L MBags and Suitcases 32331 H L H MWomen's Purses 32332 M L H HOther Leather Products (exc shoes/cloth.) 32339 M L K MLeather Shoes 32401 L L H HFabric Shoes 32402 L L L LSawmills 33111 H L H HWood Carpentry (doors, windows, etc.) 33112 M L M MPrefabr. Wooden Housing 33113 M L M MAgglomerated Wood 33114 L L L LWooden Containers 33120 L L M MCork 33191 M L L LCoffins 33192 M L M MOther Wood Products 33199 L L M MFurniture (except metallic) 33201 L L H HMattresses 33202 K L H MPaper Paste 34111 H L L MPaper and Cardboard 34112 M L M MPaper and Cardboard Containers 34120 M L M MOther Paper Ttems 34190 H L M MNewspapers and Magazines 34201 L L L LPrinting and Binding 34202 M L M MElectrotyping Other Printing Services 34203 NT NT M MDistillation of Alcohol (non-ethylic) 35111 H L L NCompressed and Liquefied Gasses 35112 M L M MTanning Products 35113 M M L LOther Basic Chemicals 35119 M M L LFertilizers and Pesticides 35120 H L L MPlastics and Synthetic Resins 35131 H L M MArtificial and Synthetic Fibers 35132 H L L HPaints and Varnish 35210 M L M MPharmaceuticals 35221 M L M MVeterinary Products 35222 H L H HDetergents and Cleaning Products 35231 H L M MSoaps and Cosmetics 35232 M L L LInk and Dyes 35291 M L L LMatches 35292 H L L LExplosives and Munitions 35293 H L L MOther Chemicals 35299 H L L MOil Refineries 35300 H L L LPetrochemical Industry, Carboch. 35400 H L M MRubber Tires and Tubes 35511 M L M MTire Repair 35512 NT NT H H

- 133 - AN-4iE 1iPage 26 of 27

Table A3.7: ASSESSMENT OF GLOBAL COMPETITION IN ARGENTINE YANUFACTUUlNG INDUSTRY1986/87

Assessment Assessment Assesamen" AssessmentSubsector ISIC of Import ol Export of Domestic of

Code Competition Rivalry Competition Competition

Other Rubber Products 35590 H L L MOther Plastics 35600 H L H HCeramics, %-hina 36100 M L M MGlass and Crystals 36201 H L L MMirrors and Stain-Glasses 36202 M L M MCommon Bricks 36911 M L H HTiles and Mechanical Bricks 36912 M L L LRefractory Material 36913 H L L MCement 36921 M L L LLime (for construction) 36922 L L L LPlaster 36923 L L L LCement and Fibro-Cement Itens 36991 L L H HMosaics 36992 NT NT H HMarble and Granite Items 36993 M L MMNon-Metallic Mineral Products (other) 36999 H L M MBasic Iron and Steel 37100 H L L LNon-Ferrous Metals 37200 H L L LCutlery and Iron Hardware 38110 H L H HMetal Furniture 38120 L L H HMetal Tanks and Containers 38131 M L M MMetal Structures for Construction 38132 M L H HSteam Generators and Connexed Equipment 38133 M L L LMetal Carpentry 38134 L L H HNuts and Bolts 38191 H L M MTin Cans 38192 M L L LStoves and Radiators (not electric) 38193 M L M MWire Nets 38194 H L L MOther Metal (galvaniz., etc.) 38199 M L H HConstr. and Repair of Engines and Turbine 38210 H L L MAgricultural Machinery and Equipment 38221 M L H HRepair of Ag. Machinery and Equipm. 38222 NT NT H HConst.and Repair of Machine to Work Metal 38230 M L M MMachine Tools 38240 1 L M MOffice Machines 38251 H M N MScales 38252 H L L MElevators 38291 H L L MRefrigerators, Wash machines, Air cond. 38292 M L M MWeapons 38293 L L L LSewing/Weaving Machines, for Home/Semi-i 38294 M L L LOther Non-Electrical Machinery 38299 H M M MConstruc. Electrical Industrial Mach. 38311 H L M MRepair Elect. Ind. Machinery 38312 NT NT M MRadio, Television, Sound Industry 38321 H L M MCommunication Equipments 38322 H L L MElectrical Appliances and Houseware 38330 H L M MElectrical Accumulators 38391 H L M MElectrical Lamps and Tubes 38392 H L L MElectrical Cables and Wires 38393 M L M MOther Electrical Apparatus 38399 H L H HShipbuilding and Repairing 38410 H L L MManufacture of Railroad Equipmnit 38420 H L L M

-134- ANNEX IIIPage 27 of 27

Table A3.7: ASSESSMENT OF GLOBAL COMPETITION IN ARGENTINE MANUFACTURING INDUSTRY1986/87

Assessment Assessment Assessment AssessmentSubsector ISIC of Import of Export of Domestic of

Code Competition Rivalry Competition Competition

Automobile Manufacturing 38431 N L L LAutoparts Manufacturing 38432 H L H HBody, Motor Vehicle, Manufacturing 38433 M L H HReboring of Engines 38434 NT NT H HTractors Manufacturing 38435 M L L LRepair of Tractors 38436 NT NT H HManufacture of Motorcycles and Bicycles 38440 M L M MManufacture of Aircraft 38450 M L M MManufacture of Other Transp. Equip. 38490 M L M MScientific Equipment 38510 H L M MManuf. of Optical and Photographic Equip 38520 H L M HManuf. of Watches and Clocks 38530 M L M MManuf. of Jewels and Related Articles 39010 H L M MManuf. of Musical Instruments 39020 H L M MManufacture of Sporting Goods 39030 H L H HManufacture of Pens and Pencils 39091 M L L LManufacture of Brushes and Brooms 39092 M L H HManufacturing of Signs 39093 M L M MOther Manufacturing 39099 H L H H

Source: Own estimates.

(D-254h)