Countries of the World/COUNTRYS.BIN/dp/0016/00162.txt

Text File | 1991-06-24 | 36KB | 557 lines

$Unique_ID{COW00162}
$Pretitle{273}
$Title{Argentina
Chapter 3B.   Industry}
$Subtitle{}
$Author{Robert S. North}
$Affiliation{HQ, Department of the Army}
$Subject{percent
production
tons
million
increased
industrial
government
steel
reserves
gas}
$Date{1987}
$Log{}
Country:     Argentina
Book:        Argentina, A Country Study
Author:      Robert S. North
Affiliation: HQ, Department of the Army
Date:        1987

Chapter 3B.   Industry

Public Industrial Policies

     The unstable world economic climate that emerged in the post-World War II
period turned economic development efforts inward. Industry became the primary
engine of growth, and the agricultural sector provided the financial resources
to fuel its development. Industrial production was geared toward the domestic
market. Industry largely developed behind high protective tariff and quota
walls that insulated the sector from international competition. At the same
time, the government promoted industrial development through the allocation of
generous amounts of subsidized credit, which led to the wasteful use of
investment capital. This inward-looking industrialization strategy provided an
institutional foundation for a modern industrial sector, which in turn led to
the development of a relatively skilled labor force (see Peron's First
Presidency, 1946-51, ch. 1).

     As a result, the productive structure of the economy was transformed
between 1958 and 1963. The production of automobiles, steel, petrochemicals,
and capital goods largely replaced agriculture and textiles as the dominant
force in the economy. Concurrently, multinational companies from the United
States and Britain gained an important foothold in industrial activity.

     The period between 1963 and 1974 was characterized by a low rate of
inflation, economic stability, modest restrictions on foreign capital, and the
progressive shift from the production of nondurable consumer goods to
intermediate and capital goods. During the period, industrial output grew 125
percent, equivalent to 8 percent annually. At the same time, both employment
in the industrial sector and labor productivity increased by approximately 3.7
percent annually.

     Despite these achievements, however, the 1945-74 period of import
substitution industrialization also gave rise to a serious underutilization
of the factors of production. The agricultural sector was particularly
affected by the inward orientation of the development strategy as the urban
bias of government policies resulted in low prices for farm products.
Furthermore, indirect taxes on the export of agricultural commodities
restrained exports and raised production costs, and exchange rate vagaries
raised the cost of vital inputs so that land remained idle and production
could not take advantage of such yield-increasing technologies as fertilizers
and herbicides. Generous allotments of subsidized credit encouraged
capital-intensive production and discriminated against the use of labor. The
expansion of employment was restrained by organized labor, which sought to
maximize the benefits of those that were already in the labor force.

     In the mid-1970s the industrial sector was paralyzed by hyperinflation,
recession, and an increased disequilibrium in the external sector that was
aggravated by political instability. By 1975 the real exchange rate had fallen
11 percent below its 1970 level, industrial output had fallen 2.5 percent, and
exports of manufactured goods had contracted by 40 percent. In March 1976 the
Argentine military took control of the government and introduced an economic
model that was based on the free market mechanisms of supply and demand. The
new model completely overhauled the economic policies that had been in effect
since the 1930s. The new economic managers abandoned the industrial strategy
of import substitution industrialization that had focused on the domestic
production of import-competing goods. The promotion of industrialization was
supplanted by the overriding concern to contain inflation.

     To promote efficient industrial development, the economy was
progressively opened to international competition. Import tariffs were reduced
in 1976 and 1977, international capital movements and interest rates were
liberalized, and nominal wages were frozen in the midst of an inflationary
upsurge. Between 1978 and 1980, however, the Argentine peso became overvalued
in relation to the United States dollar, which had the effect of contracting
exports and flooding the domestic market with inexpensive imports. Foreign
competition thus forced domestic prices to decline in order to compete with
those of imported goods.

     At first these measures encouraged capital investment and the
modernization of plants as a means of expanding efficiency and productivity.
The ready access to foreign credit and the discrimination against tradable
goods that arose from the overvalued peso caused Argentina's external debt to
increase to almost two-thirds of GDP. The rising debt adversely affected the
industrial sector, undermined public confidence, and caused the government to
fail in its efforts to stabilize and restructure the economy. Many firms
adopted conservative policies in anticipation that the military government's
economic policies would need to be modified. The series of significant peso
devaluations in 1981 discouraged competitive imports and led to a modest
expansion of exports, but policies to compensate for the drop in domestic
demand failed to be enacted. At the same time, the devaluations greatly
increased the peso cost of the industrial sector's foreign currency debts.
Consequently, many firms were acquired by investors, merged with local
companies, or went bankrupt. The large number of business closures also caused
employment in the industrial sector to drop. By 1981 it had become evident
that the administration's economic policies had failed. The deterioration of
the economic situation contributed to the political crisis that enveloped the
military government in 1982. In a desperate attempt to regain public support,
the government was driven into the disastrous South Atlantic War in 1982 and
was later forced to give up the reins of power.

     The contraction of domestic demand caused by the economic recession was
exacerbated by a restrictive monetary policy introduced in the first half of
1982. The persistent cutbacks in credit for operating expenses and the
deterioration of the balance of payments accounts limited the use of
expansive monetary policies to stimulate manufacturing and forced the
government to impose import controls. During the second half of the year, a
modest improvement in domestic demand occurred. Industry responded by drawing
down inventories, while some firms expanded output.

     During the second half of 1982 and 1983 the government reversed most of
the policies that had plagued the industrial sector since 1976. The major
factors accounting for the improvement of industrial output in 1983 were the
reimposition of import controls, realistic exchange rate adjustments, and
stimulative fiscal policies. The pace of recovery slowed during the last
quarter of 1984 owing to the scarcity of foreign exchange to purchase needed
foreign industrial inputs, the continued shortage of credit, and price
controls that squeezed profit margins. Moreover, hyperinflation retarded
consumer spending despite salary hikes. The downward trend in the industrial
recovery that began in 1984 was expected to continue into 1985.

Energy

     In the mid-1980s Argentina was endowed with bountiful energy resources.
The country became self-sufficient in the production of petroleum in 1981,
possessed vast untapped reserves of natural gas, and had substantial deposits
of uranium and low-quality coal. In addition, alternative energy sources such
as hydroelectricity and nuclear power were actively being developed.

     Petroleum reserves fell from a total of 2.46 billion barrels in 1970 to
about 2.4 billion barrels in 1984. Rese