Report Nº: 108004/08/2024
Increasing competitiveness without devaluing requires structural reforms that are difficult to implement. However, Brazil, in an environment of difficulties similar to Argentina’s, undertook an ambitious labor and tax modernization. This shows that progress in structural reforms is possible.
The IMF’s July 2024 Report on Brazil’s economy highlights the growth in productivity of labor-intensive firms resulting from the 2017 labor reform. The report analyzes the positive impacts achieved thanks to the legal changes that allowed for a substantial reduction in labor litigation. Seen from Argentina’s perspective this is a factor that places local production at a disadvantage, which is highly affected by massive and onerous labor lawsuits.
Another dimension of the Brazilian reform is that it tends to decentralize collective bargaining. It establishes that company bargaining prevails over the sectoral collective agreements and has broad powers to modify the regulatory framework. This includes, for example, the possibility of negotiating wage reductions with job stability, flexible working hours and productivity-based remuneration. In contrast, in Argentina, centralized bargaining prevails at the sector level with no possibility for SMEs to negotiate working conditions and production organization with their own workers.
What impact does centralization have on the content of collective bargaining in Argentina? According to the Ministry of Labor, for the period 2009 – 2022, it is observed that:
These data show that centralized bargaining is strongly focused on defining wages, union financing and the resolution of conflicts between union delegates. On the other hand, issues related to the organization of production to improve productivity or address crises occupy a secondary place. For companies, especially the smaller ones, collective bargaining agreements are a powerful source of rigidity since they impose wage levels and contributions for the unions, without the possibility of better-organizing production to increase productivity or negotiating the best alternatives for dealing with crises.
Brazil, in addition to labor modernization, is also advancing in unifying several sales taxes in the VAT. The logic is to maintain the same tax pressure, replacing bad taxes with a better tax. The same IMF Report highlights that this reform will add a structural growth of 0.5% per year to its GDP due to the efficiency gains produced by this tax simplification. Thus, on the tax side, there are also high and growing disadvantages for Argentine companies.
There is agreement that the genuine way to gain competitiveness is through structural reforms, among the most important are labor and tax reforms. But these changes seem difficult to put into practice. Thus, resignation prevails, leading to a debate with discouraging results. On the one hand, some argue that it is preferable to alleviate competitiveness problems by making the exchange rate policy more flexible, even if this means being less ambitious in lowering inflation. On the other hand, others support the government in the view that devaluation only produces more inflation, therefore, it is necessary to alleviate the exchange rate appreciation and the consequences that this has in terms of delaying the recovery of production and employment.
For Brazil, the transformations are no less challenging than for Argentina. It suffers from similar distortions and difficulties derived from the diversity and dispersion of political alignments in Congress, resistance from trade unions and a federal organization that enhances the complexities. Even so, it is moving forward with the transformations and achieving the expected results. If Argentina does not quickly imitate Brazil –its main trade competitor– it will have to choose between more inflation or more recession and assume that both alternatives imply the continuity of decadence.
