THE PRIORITY IS THE REFORMS OF THE MAY PACT

Controversies among economists about the appreciation of the peso against the dollar are intensifying. The statement of the International Monetary Fund (IMF) advising greater flexibility in the control of the exchange rate, which suggests further devaluations, fuels the discussion. In this heated debate, the fact that what defines the country’s competitiveness is productivity tends to be put on the side. Focusing the attention on the exchange rate and not on the factors that determine productivity leads to the simplism of seeking solutions in the devaluation. 

Productivity depends decisively on the transformations proposed in the May Pact. Until these reforms are implemented, the government’s strategy is to move forward with the approval of the Incentive Regime for Large Investments (RIGI) provided for in the Law of Bases. This involves granting new investments exceeding USD 200 million special tax treatments, freedom to export and import, access to free dollars and fiscal stability. This is questioned because it implies a privilege in comparison to the rest of the sectors.   

A relevant reference to evaluate the RIGI is to compare investment in Argentina in the international context. According to IMF data, in this century (2000 – 2023), it is observed that: 

• Emerging Asian countries (excluding China) had an investment rate of 30% of GDP.
• Chile had an investment rate of 24% of GDP.
• Argentina had an investment rate of only 17% of GDP.  

These data show that Argentina’s investment rate in the last two decades, compared to that observed in other emerging countries, is very low. This is conclusive evidence that it is essential to promote a massive wave of new productive projects. Increasing investment is the way to raise productivity for not depending on devaluations to compensate for the vulnerability of domestic production against external competition. The goal should be to raise the investment rate to 25% to 30% of GDP.

Is RIGI the right instrument to increase investment? As a general principle, it is not advisable to give special treatment to one sector to the detriment of the others, because it implies creating an enclave where some enjoy conditions that are denied to the rest. The government argues that, by including in RIGI projects that have long maturity periods, when their results show up, the more favorable rules of RIGI will be generalized to the entire economy. Although the reasoning could be valid, it is not to oversight that RIGI is, at best, only a palliative.

To reverse the huge investment deficit, it is necessary to build a friendly environment for all types of investments, not only for large projects. This will only be possible with an ambitious institutional change, which is proposed in the May Pact. Among the key points are fiscal balance with lower public spending, a less distortionary tax system, replacing the co-participation system with fiscal correspondence, social security reform, the modernization of labor legislation, the establishment of favorable rules for the sustainable exploitation of natural resources and an intelligent integration with the world. If the political system gave clear signals of support for these transformations, investment would rapidly increase.

It is advisable to weigh priorities in the public policy debate. On the one hand, confidence in exchange rate policy as a tool for preserving competitiveness and in the RIGI as an instrument for attracting investment should be relativized. On the other hand, the importance of the transformations listed in the May Pact must be emphasized. Therefore, the postponement of its signature causes damages that neither the exchange rate policy nor the implementation of the RIGI -nor any other sectoral incentive regime- can compensate for.