OECD Economic Surveys: Argentina 2019

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OECD Economic Surveys

27 March 2019

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Chapter 1. Fostering the integration into the world economy

Abstract

Ever since the early 20th century, Argentina has failed to fully reap the benefits that integrating into the world economy can offer. With exports and imports accounting for less than 30% of GDP, Argentina is significantly less integrated into the world economy than other emerging market economies. Many tariff lines remain at the maximum level of 35%, while non-tariff barriers persist in many sectors. Related to this, the level of competition is low in many sectors, and consumer prices are high in international comparison. The stock of foreign direct investment is also significantly lower than that of other Latin American countries. Consequently, productivity performance has been weak and Argentina is missing out on many opportunities to create more productive and better-paying jobs. A stronger international integration would improve the ability of Argentinian firms to compete in foreign markets through greater access to intermediate inputs, capital goods and technology at internationally competitive conditions. This would boost investment and productivity and allow them to create more and better paying jobs. Lower trade barriers would also increase purchasing power of consumers, with particularly strong effects among low-income households. However, the opening up of the economy will bring about reallocations of jobs across industries and firms, which will be challenging for affected workers. Improving training opportunities and access to high quality education will be crucial for workers to move into new jobs. Moreover, the current system of labour market protection is centred on high severance payments, leaves informal employees without protection and adds to disincentives to formal job creation. An economy-wide extension of the current unemployment protection scheme of the construction sector, which is based on individual accounts, could be more effective to protect workers against temporary income losses.

International trade has been an important driver for economic growth. It has significantly contributed to raising living standards across countries, reducing poverty and enabling emerging economies to catch up with advanced economies.

Both consumers and producers can benefit from stronger integration into the global economy and the opportunities it creates. For producers, the access to cheaper and higher quality inputs and capital goods leads to significant productivity gains and stronger competitiveness, which is the basis for improvements in real wages (Amiti and Konings, 2007[1]; Goldberg et al., 2009[2]). For consumers, trade has potential to reduce prices and enlarge the variety and quality of available goods, which improves particularly the purchasing power of low-income households.

Ever since the early 20^th century, Argentina has failed to fully reap the benefits that integrating into the world economy can offer. With exports and imports only accounting for less than 30% of GDP, Argentina is significantly less integrated into the world economy than other emerging market economies of similar size (Figure 1.1). This reflects several decades of inward oriented policies including a strategy of industrialisation through import substitution. Trading little, Argentina has also remained on the sidelines of global value chains, all of which represents significant lost opportunities for growth and well-being.

Embracing the global economy is a significant step and brings important structural changes to an economy. To ensure that Argentinians benefit from the positive effects of integration, open trade needs to be complemented by a set of structural policies that facilitate the structural transformation and mitigate the adjustment costs it creates for workers (Winters, Mcculloch and Mckay, 2004[3]; Goldberg and Pavcnik, 2007[4]). Adjustment costs for workers can arise particularly in import-competing sectors, as jobs are shed in low productivity firms and shift towards new or high productivity firms or even new sectors. This calls for supporting workers with targeted education and training programmes to address future skill needs, as well as effective social protection for all, including those who currently work in the informal sector.

The adjustment challenges are no reason to lock in the status quo in which many jobs are trapped in low-productivity activities. The only way for incomes to rise in a sustainable manner is that firms and workers find new ways to become more productive. In Argentina, tapping into the unexploited potential of international trade presents probably the best opportunity to do so.

Well-designed policies can go a long way to support this transformation by reducing frictions on labour markets, improving infrastructure, especially transport infrastructure, and encouraging innovation. Moreover, further reducing barriers to competition on product markets is crucial, as Argentina still has the highest barriers to entrepreneurship among countries covered by the latest revision of the OECD Product Market Regulation (PMR) Indicators. This chapter evaluates the opportunities and consequences of an increasing integration into the world economy for Argentina and discusses important policy options to support this trajectory.

Argentina has not shared in the benefits of international trade

Ever since the early 20th century, Argentina’s inward focus has prevented it from performing at its best on global markets. During the last decade, trade has been steadily falling and at less than 30% of GDP, it is even lower than in much larger economies that typically show smaller trade to GDP ratios due to more intensive internal trade. Export performance, which measures how exports have grown relative to the overall growth of Argentina’s export markets, has been worsening persistently since 2005 (Figure 1.2).

Figure 1.2. Export performance has declined

Regarding the participation in global value chains, Argentina is one of the least integrated economies (Figure 1.3). A small share of domestic value added is exported, i.e. its forward integration into global chains is low. In addition, the low value of the backward integration index shows that firms make little use of foreign intermediate goods and services as well as foreign capital goods, likely one of the main reasons for the low export performance of firms. Argentina’s only discernible value chain link is with neighbouring Brazil, while many Asian and European economies are tightly intertwined through their trade relationships, both among themselves and with other advanced economies (Figure 1.4). Remoteness with respect to international manufacturing hubs, weak transport infrastructure and low regional trade integration in Latin America can help to explain the low integration of Latin American economies into global value chains (Cadestin, Gourdon and Kowalski, 2016[5]).

Figure 1.3. Argentina’s’ integration into global value chains is low

Figure 1.4. Argentina has remained on the sidelines of global value chains

A map of global value chains

The export structure is dominated by agricultural commodities, which account for around 48% of all merchandise exports, and processed food products which account for around 17%. Argentina is the world’s largest exporter of soybean meal and soybean oil, which together with soybeans account for 27% of total Argentinian exports (Table 1.1). Other important agricultural export products are corn and wheat (11% of exports), bovine meat (2.2%), crustaceans (2.1%), and wine (1.3%). Major manufacturing exports include motor vehicles (8% of exports), which are predominantly exported to neighbouring Brazil, although exports to other Latin American markets have increased in recent years. Main imports comprise motor vehicles and parts, petroleum oil and gases, electrical and office equipment, machinery and parts, and pharmaceuticals.

Exports (in % of total merchandise exports)		Imports (in % of total merchandise imports)
Soybean meal	15.6	Motor cars and other motor vehicles	9.4
Corn	6.7	Parts and accessories for motor vehicles	4.2
Soybean oil	6.4	Electrical apparatus for line telephony or line telegraphy	3.4s
Motor vehicles for the transport of goods	5.6	Petroleum gases and other gaseous hydrocarbons	3.3
Soybeans	4.7	Motor vehicles for the transport of goods	3.1
Wheat	4.0	Petroleum oils, other than crude petroleum	3.0
Gold	3.9	Automatic data processing machines and parts thereof	2.0
Motor cars and other motor vehicles	2.6	Medicaments	1.9
Prepared binders for foundry moulds or cores	2.2	Parts for machinery	1.9
Crustaceans	2.1	Other aircraft (for example, helicopters, aeroplanes); spacecraft	1.6

Source: OECD calculations based on WITS data for merchandise exports and imports.

Overall, the diversification of merchandise exports has fallen during the last decade (Figure 1.5). This partly reflects rising exports of soybeans, soybean oil and meal, a trend that has been more pronounced than in other Latin American economies. Main export destinations are Brazil, the EU, China and the U.S., which are also the four main import partners (Figure 1.6). Besides Brazil, Argentina trades relatively little with other Latin American countries, reflecting both a lack of bilateral agreements beyond Mercosur and infrastructure weaknesses.

Figure 1.5. Export diversification has fallen

Number of exported products

Figure 1.6. Argentina’s main trading partners

Beyond merchandise exports, exports of knowledge-based services have increased from the late 1990s until 2017 (Gayá, 2017[7]). They account for almost 9% of total exports in goods and services and comprise mostly business, professional and technical services as well as software and computer services (including audio-visual services). Main services export destinations are the US with 41% and the European Union with 26%, but also other Latin American countries (Gayá, 2017[7]). Imports of knowledge based services have also risen, mostly as intermediate inputs into the production of goods and services, amounting to around 8% of imports in goods and services.

Import protection is high in international comparison

The main reason for Argentina’s low integration into the world economy and global value chains are high tariffs and non-tariff trade barriers, which increase the costs of imports substantially.

Tariffs are high

Tariffs are not only high on average, but they also affect intermediate inputs and capital goods, raising production costs across the economy (Figure 1.7). In other words, tariff protection not only raises consumer prices, it also hurts the competitiveness and productivity of firms and their ability to create jobs.

Figure 1.7. Tariff protection is high, especially for capital goods and intermediate inputs

Average applied tariffs by product class for the year 2017 (in %)

Behind high average tariffs lies a strong heterogeneity in tariff rates across different industries (Figure 1.8). Wearing apparel, textile products and footwear, motor vehicles and furniture are highly protected by average tariffs larger than 20%. Also sectors that produce mainly intermediate and capital goods are protected by tariffs of around 15%, e.g. fabricated metal products, rubber and plastic products or machinery and equipment. Although tariffs on computers, tablets and notebooks were eliminated in 2017, the average tariff for other office, accounting and computing machinery is still at around 11%. By contrast, tariffs for petroleum, gas, mineral products and other raw materials are low, consistent with being a net importer of oil and gas.

Figure 1.8. Many industries are protected through high import tariffs

Average tariffs by industry for the year 2018 (in %)

Non-tariff barriers add substantially to levels of protection

Beyond tariffs, non-tariff measures also add to import costs in Argentina. Non-automatic import licenses have effectively also added to protection from foreign competition in certain industries (Figure 1.9). In sectors like textiles and wearing apparel, footwear, leather products and furniture, more than 70% of imports are still subject to non-automatic import licenses. More than 30% of all imports of machinery and electronic equipment, optical and medical instruments as well as toys, instruments and games are still subject to non-automatic import licenses.

While countries around the world increasingly use non-tariff measures to protect domestic industries, it is important to acknowledge that many non-tariff measures result from legitimate policy objectives and are not necessarily motivated by protectionist motives (Baldwin and Evenett, 2009[8]; WTO, 2012[9]; Bown and Crowley, 2013[10]). For example, product standards and technical regulations are mainly imposed to overcome market failures and protect the health of domestic consumers.

Recent evidence shows that countries can use product standards and their enforcement to protect domestic industries (Grundke and Moser, 2019[11]). Non-tariff measures such as requirements to obtain a non-automatic import license can impose considerable costs on importers. Argentina has made considerable progress in reducing the number of items subject to non-automatic import licenses.

Figure 1.9. Non-automatic import licenses are required in many industries

Share of imports requiring a non-automatic import license in 2018 (in % of total industry imports)

Figure 1.10. Domestic producers play a dominant role in many tradable sectors

Share of domestic production in total final demand by industry (in %)

Many markets are dominated by domestic producers and prices are high

As a result of the effect of tariff and non-tariff barriers, key tradable sectors are dominated by domestic producers (Figure 1.10). Bearing in mind that Argentina’s population is only 45 million inhabitants, the strong role of domestic producers is surprising. For comparison, only 75%, 74% and 80% of tradable goods are domestically produced in Chile, Mexico and Colombia, respectively.

This is one factor behind the significantly higher prices that Argentinian consumers pay for a wide range of goods, ranging from basic foodstuff items like milk to cars (Figure 1.11). High prices are consistent with evidence of rents that have resulted from shielding domestic producers from foreign competition. This has also reduced the incentives and discipline for undertaking constant improvements and innovation (Martínez Licetti et al., 2018[12]).

Figure 1.11. Prices are high in international comparison

Prices of selected goods and services in current USD for the year 2017

Lowering trade barriers can create jobs and boost growth

Lowering trade barriers can bring substantial benefits through a number of channels, which will be discussed in this section. Consumers can expect lower prices, higher quality and more variety. For domestic producers, the situation is slightly more complex as they are affected in several ways on input and output markets, but the newly created opportunities clearly outweigh the associated challenges.

Trade can reduce consumer prices, benefitting particularly poorer households

The most evident and immediate effects of lower trade barriers are falling import prices for consumers. Estimates suggest that Argentinian consumers could see their purchasing power increase by 25% on average under the ambitious scenario of a full removal of trade barriers (Figure 1.12).

Figure 1.12. Potential consumer benefits from lower trade barriers are progressive

Increases in real purchasing power (relative to total expenditures) due to a reduction of tariffs and/or non-tariff measures (NTMs) by 100% for each household income decile (in %)

Moreover, these benefits are progressive as lower income households spend larger shares of their incomes on tradable goods such as food, home appliances, furniture and clothing. A detailed analysis of reducing trade protection, taking into account differences in the consumption basket across households, suggests that the lowest-income decile could gain as much as 27% in terms of additional purchasing power, compared to 22% for the top decile (Arnold and Grundke, 2019). Lower tariffs and non-tariff measures would therefore bring particular benefits to poor consumers, which is in line with evidence found for other countries (Fajgelbaum and Khandelwal, 2016[14]; Porto, 2006[15]).

Besides price reductions, a stronger integration would give consumers access to a larger variety and higher quality of products and services (Broda and Weinstein, 2006[16]). Non-tariff measures seem to play a particularly important role in the import protection for basic consumption goods and reducing only tariffs would have about half the effect of full liberalisation. Non-tariff measures also include legitimate technical regulations or product standards, so that a realistic reduction of trade barriers might not include a full elimination of non-tariff measures (WTO, 2012[9]). At the same time, non-tariff measures that are not motivated by trade protection are less likely to have large effects on trade flows.

In the specific case of passenger vehicles, the falling prices that are likely to result from a reduction of trade protection might also bring environmental benefits if they encourage a shift towards newer cars. As nearly 50% of vehicles are older than 10 years and 22% older than 20 years, a fleet renovation has significant potential to reduce emission levels (World Bank, 2016[17]). The use of old vehicles without modern pollution filters is one factor behind high PM2.5 pollution levels of six times the WHO recommended threshold of 10 µg/m3 in Buenos Aires, three times in Córdoba and twice in Mendoza.

For producers, trade improves access to intermediate inputs and capital goods

With respect to companies and employment, the effects of lowering trade barriers generally combine medium-term benefits with short-term adjustment costs. Just like consumers, firms gain improved access to intermediate inputs and capital goods. Simultaneously, they also face fiercer competition on their output markets, an issue that will be discussed in the next section.

When firms are constrained in their choice of using imported inputs, they are likely to pay higher prices and may even have to source lower quality inputs. The same applies to capital goods used in the production process. Lower trade barriers will bring down prices and raise the quality of these inputs. This may be the result of rising imports, but also of the reaction of domestic producers to rising competition. Many domestic producers of intermediate goods would react to the stronger foreign competition by upgrading their production processes and improving their products, and only the least productive ones would lose market share (Amiti and Khandelwal, 2013[18]; Topalova and Khandelwal, 2011[19]; Pavcnik, 2002[20]). Hence increased import competition will not necessarily imply a strong substitution of domestic intermediate inputs and capital goods by imports.

Improved sourcing options for intermediate inputs and capital goods lowers production costs and may allow domestic firms to upgrade their production processes through technology embedded in new machinery (Amiti and Konings, 2007[1]). Moreover, there is evidence that increased importing activities of firms can help building foreign networks and acquiring knowledge about foreign markets, which is crucial for increasing export activities (He and Dai, 2017[21]; Blalock and Veloso, 2007[22]).

Due to high tariffs and non-tariff measures on intermediate inputs, Argentinian firms import –on average– a much lower share of their intermediate inputs than producers in other countries (Figure 1.13). Looking across firms, evidence for Argentina suggests strong links between the use of imported inputs, productivity and export propensity (Brambilla, Depetris Chauvin and Porto, 2017[23]; Bas, 2012[24]). Firm-level analysis conducted for this report also finds a significant positive relationship between the use of imported intermediate inputs and total factor productivity of Argentinian firms (Annex 1.A2). Moreover, firms that use technology licensed by a foreign company have a 2.3% higher total factor productivity, emphasising the importance of reducing import barriers for facilitating technology diffusion.

Figure 1.13. Firms use few imported intermediate inputs

Share of imported intermediate inputs over total inputs (in %)

Looking across sectors and exploiting variation in input tariffs over the past 20 years in Argentina, evidence suggests that whenever a sector experienced a reduction in input prices, this came along with higher employment, production and value added (Box 1.1, Annex 1.A1). Using these estimated relationships for simulation analysis suggests that a reduction of input tariffs by 50% is associated with an average 7% increase in sectoral employment, whereas production and value added increase by 5% and 7%, respectively (Figure 1.14). Furthermore, the increased access to cheaper and higher quality foreign inputs is associated with an even larger increase of gross exports as well as exports in value added terms by 18% and 19%, respectively. These results are in line with existing firm level evidence for Argentina (Bas, 2012[24]). Output or value added per worker, however, is not affected much, as sectoral employment increases about the same amount as production or value added.

Box 1.1. A brief description of the industry-level analysis

To investigate how sectoral economic activity and exports have reacted to changes in input tariffs, this chapter uses a balanced industry panel dataset from 1996 until 2016, which provides information on sectoral input tariffs, employment, production and value added as well as several indicators for the integration into global value chains. The data set is based on the OECD Trade in Value Added (TiVA) database and does not only include natural resource and manufacturing sectors (18), but also 18 services sectors (34 in total). Average intermediate input tariffs for each of the 34 sectors are calculated using data from the OECD on import tariffs for intermediate products as well as detailed data on input use by sector.

For further analysis investigating the effects of output tariffs on economic activity, the data are combined with data on average output tariffs by sector. These only exist for the natural resource and manufacturing industries and are taken from the OECD database for the years 1996 until 2016. For a more detailed description of the data and the methodology, see Annex 1.A1.

Figure 1.14. Reducing input tariffs boosts economic activity and exports

Increase of economic activity and exports (in %) when average input tariffs are cut by 50%

These results draw only on variation within industries across time and are not driven by any unobserved industry specific characteristics. Additional analysis using tariff variation across industries supports these results and suggests that industries facing lower average input tariffs have higher labour productivity and pay higher wages. This is in line with earlier work using firm level data, which finds that Argentinian exporters are around 40% more productive and pay 31% higher wages than non-exporters (Brambilla, Depetris Chauvin and Porto, 2017[23]).

The link between lower input tariffs and higher output and exports is significant across economic sectors, but tends to be higher in those sectors that make more use of imported inputs (Figure 1.15). For example, motor vehicles, electrical machinery as well as computer, electronic and optical equipment use more imported intermediate inputs and stand to gain more from a reduction in input tariffs than other sectors.

Figure 1.15. The use of imported inputs varies across sectors

Share of imported intermediate inputs in total sectoral production (in %)

Trade can stimulate competition and raise productivity

Besides the productivity enhancing effects through the input side, the disciplining effect of import competition in the same sector would force companies to reduce inefficiencies, upgrade their production processes through more advanced technologies, increase product quality and reduce high prices that result from low domestic competition (Amiti and Khandelwal, 2013[18]; De Loecker et al., 2016[25]). This could lead to substantial gains in productivity, and it does not necessarily imply a massive substitution towards imports. It rather leads to a revitalising effect on the more productive domestic firms, while some low-productivity firms would leave the market, freeing resources for the more productive ones to grow (Melitz, 2003[26]; Pavcnik, 2002[20]).

Just as some firms lose domestic market share in the face of stronger integration and may eventually leave the market, others seize newly arising export opportunities, expand and hire new workers. It is precisely this reallocation process that will allow capital and labour to flow to more productive sectors or firms where new and better-paying jobs can be created (Brandt, Van Biesebroeck and Zhang, 2012[27]; Criscuolo, Gal and Menon, 2014[28]; Criscuolo and Timmis, 2018[29]). A significant share of productivity growth in advanced economies can be attributed to these reallocation effects (Hsieh and Klenow, 2009[30]). For Argentina, estimates suggest potential productivity gains on the order of 50-60% (Busso, Madrigal and Pagés, 2013[31]).

Evidence based on the variation of trade protection for different industries over the past 20 years confirms the negative link between productivity and protection for Argentina, (Box 1.1, Annex 1.A1). Simulations based on these estimations suggest that on average, a reduction of output tariffs by 50% would be associated with a 10% increase in sectoral labour productivity (Figure 1.16). This productivity increase translates into 7% higher output and value added. Unless the demand curve has changed, this would suggest that prices have dropped or quality has improved.

In a few industries like textiles, wearing apparel, footwear and other transport equipment, employment has contracted as trade protection lessened. Although all other industries slightly increase sectoral employment in reaction to lower import protection, this explains a small average employment decrease of around 3%.

Figure 1.16. Decreasing output tariffs boosts productivity, but can reduce employment in a few sectors

Average increase of economic activity and exports (in %) when output tariffs are cut by 50%

Evidence from firm-level data is also consistent with the international evidence that shielding domestic producers from foreign competition tends to cement existing industry structures and hampers the reallocation of resources towards their most productive uses, both across sectors and across firms within sectors (Box 1.2). First, total factor productivity (TFP) of firms is lower in industries that are protected by higher tariffs (Figure 1.17).

Figure 1.17. Productivity is low in sectors with high trade protection

Box 1.2. A brief description of the firm-level analysis

Firm-level data for Argentina and the years 2006, 2010 and 2017 from the World Bank Enterprise Survey is used to estimate the total factor productivity (TFP) of firms. Sector-specific production functions are estimated using information on revenue, employment, capital and intermediate input use, and employing the estimator suggested by Levinsohn and Petrin (2003). The residuals of the estimated production functions are taken as a measure for total factor productivity (TFP). To make the TFP estimates comparable across industries, they are standardised by the industry mean. The TFP estimation was only feasible for five aggregated industries, as the sample does not include sufficient information on firms in other industries (Annex 1.A2.).

Moreover, sectors with higher trade protection are also characterised by a larger dispersion of total factor productivity across firms (Figure 1.18). For example, in the textile, leather and footwear industry, where tariffs and NTMs have a combined level of protection of around 60%, many low-productivity firms co-exist with more productive ones. The sector is also characterised by a low allocative efficiency.

A quantitative measure of how much the allocation of resources across firms contributes to aggregate productivity is the decomposition suggested by Olley and Pakes (1996). In this decomposition, the covariance term measures allocative efficiency, or the extent to which firms with greater efficiency have a greater market share. In the textile, leather and footwear industry, the allocation of resources across firms only explains 4% of average sectoral productivity, which is much lower than in metals where it is 24%. This indicates that in the textile, leather and footwear industries resources are trapped in low-productivity firms, while they should move to more productive usage in higher productivity firms.

This analysis suggests several things. For one, exposing this sector to stronger external competition would not affect all firms in the same way. Stronger competition would likely drive some low-productivity textile firms out of the market, but at the same time, the high productivity dispersion suggests that there are also firms in the sector that could probably withstand foreign competition. External competition would lead these to reduce inefficiencies, upgrade their production processes through more advanced technologies, increase product quality and create new job opportunities (Pavcnik, 2002[20]; Melitz, 2003[26]).

Figure 1.18. Protected sectors have dispersed productivity and low allocative efficiency

Hence, if the sector were to face stronger competition from imports, the first expected reaction would be a movement of labour and capital towards more productive firms in the same sector. The disciplining effect of import competition could even provide opportunities for the most productive textile firms to start exporting to niche markets in advanced economies. As the high informality in the upper segment of the supply chain has so far complicated the establishment of a modern supply chain management, increasing external pressure to introduce quality control and certification systems could be key to open new export markets. This could end up providing new employment opportunities within the sector.

All this said, it is still possible that some textile workers may have to seek employment in other sectors, which may require new skills and appropriate income support. This calls for comprehensive education and training programmes for displaced workers, which should be closely coordinated with the private sector and focus on future skill needs. Moreover, effective income support and social protection for displaced workers, including those in the informal sector, are crucial for the success of the re-training programmes. However, given the strong heterogeneity of Argentinian textile firms, often cited fears of a complete shutdown of the sector with massive employment losses are not at all supported by the empirical evidence.

The general equilibrium effects of stronger integration are positive

The effects of trade policy changes tend to affect almost all parameters of an economy due to numerous feedback effects. One attempt to capture these effects is to undertake simulations in a computable general equilibrium model. Such models can capture the input linkages between economic sectors and also model markets for production factors, which are mobile across sectors. Thus, tariff changes affecting output in one sector also have repercussions on other sectors by changing the demand and prices for inputs and production factors. Moreover, these models also capture the feedback effects of changing income of workers and relative prices of goods and services on private consumption as well as the interlinkages of disaggregated sectoral trade flows.

To analyse the economy wide effects of a reduction in import protection for Argentina, simulations have been undertaken using the OECD METRO model, which links 61 countries and 57 economic sectors (Annex 1.A5). Simulations suggest that lowering currently applied tariffs to the lowest levels among G20 countries would reduce input costs, increase production and exports and lead to rising real wages for workers. Total exports would increase by 4.7%, while total imports rise by 3.5%, indicating that the competitive pressure on domestic producers reduces prices, but does not lead to a strong substitution towards imported inputs and final goods. Total domestic production increases by 0.5% and real GDP by 0.3%.

Importantly, as the tariff cuts lead to increases in total production and labour demand, real incomes increase for workers of all skill categories. In particular, unskilled workers benefit from lower trade barriers, as their real incomes rise by 1%, largely on the basis of nominal wage improvements. The real labour income of clerks, service assistants, technical professionals, professionals and managers rises by around 0.5%.

However, there is considerable heterogeneity in how the tariff reductions affect different economic sectors (Table 1.2). The model simulations suggest strong benefits for the motor vehicles and the non-ferrous metals industries, largely due to lower intermediate input costs (Annex Table 1.A5). Automobile production could increase by around 10% and exports by almost 15%. Other expanding sectors are agricultural and natural resource sectors and food processing. Demand for services would also rise, allowing expansion in transportation and professional business services, for example. All expanding sectors increase their labour demand for workers of all skill types and absorb the jobs shed in the shrinking sectors (Annex Table 1.A6). The sectors that may see moderate contractions are the textile and wearing apparel, the metal products, electronic equipment and the machinery and equipment industries.

Sector	Percentage change (in %)
Cereal grains	2.3
Other agriculture	0.6
Oil seeds	1.8
Dairy	1.0
Natural resources	0.9
Meats	0.5
Food and beverage	1.7
Textile and wearing apparel	-1.4
Mineral products	-0.3
Ferrous metals	1.2
Nonferrous metals	7.8
Metal products	-1.9
Motor vehicles and parts	9.6
Transport equipment	-0.3
Electronic equipment	-0.9
Machinery and equipment	-2.0
Other manufacturing	0.5
Transportation	1.4
Communication	0.6
Financial services	0.5
Insurance	0.8
Business services	0.9
Other services	-0.3

Note: The results show the percentage change in sectoral production in reaction to a tariff cut in all sectors to the lowest levels among G20 countries.

Source: OECD calculations based on the OECD Metro model.

Trade can generate new export opportunities

As the economy integrates better into global trade, new export opportunities can emerge in sectors where Argentina has so far not had a strong export performance. A more competitive level of the currency and better access to inputs in the context of a potential trade reform should support these opportunities. Argentina’s comparative advantage is obviously strong in products that are intensive in natural resources, e.g. agricultural and food products, but it is far from confined to low-value-added activities. A detailed look at the economy’s revealed comparative advantage (RCA), which measures how much a country exports of a given good relative to an average country, shows that at the product level, Argentina has revealed comparative advantages across many different industries (Figure 1.19). This applies to chemicals, pharmaceuticals and basic metals, but also machinery, rubber and plastics. Building on existing industrial clusters, and in particular the accumulated knowledge and skills, there are many opportunities for further diversifying the production system.

Figure 1.19. Argentina has high potential in many products

Number of HS 6 digit products with revealed and latent comparative advantage by industry

Two of the recent success stories of the Argentinian economy have been evolving without strong protection or large industry subsidies. Argentinian wine makers have seized the opportunities of a stable macro-economic environment and low import protection in the 1990s to invest in new production methods and machinery and diversify their product lines (Artopoulos, Friel and Hallak, 2013[34]). Adapting to changing tastes in the major export markets and building on the strong comparative advantage of Argentinian soils, they increased their exports from 1993 to 2008 from USD 25 million to USD 650 million.

The second example concerns the impressive success of the Argentinian knowledge based services sector, whose exports grew from USD 151 million in 1996 to USD 6.5 billion in 2015 (Gayá, 2017[7]). The sector is dominated by small and medium size firms, which due to a good digital infrastructure are relatively spread out over the country (58% are in the greater Buenos Aires area), and have the potential to reduce regional disparities. Although there have been some stimulating incentives for parts of the sector through tax deductions (ley de software), the impressive dynamic is not explained by these incentives (Gayá, 2017[7]; Oliveira, 2018[35]). Firms in this sector have built on the comparative advantages of Argentina in high skilled labour with good knowledge of English and a similar time zone with the United States.

More integration will attract export-oriented foreign direct investment

Foreign direct investment is an important source of external financing, but also key to increase the integration of the economy into global value chains. In many emerging markets, supplying the domestic subsidiaries of foreign multi-national enterprises is one of the most promising ways for many small and medium size enterprises to increase their forward integration into global value chains (López González, 2017[36]). This can act as a conduit for knowledge transfer and learning, enable domestic firms to adapt new technologies, production methods or better management practices and contributes to stronger productivity performance (Arnold, Javorcik and Mattoo, 2011[37]; Blalock and Gertler, 2009[38]). On the other hand, foreign direct investment also increases the use of foreign intermediate inputs in the domestic economy which stimulates knowledge and technology spill-overs raising productivity and exports of domestic firms (Lopez Gonzalez, 2016[39]).

In contrast to its high tariff and non-tariff barriers, Argentina has low restrictions on foreign direct investment (FDI) and ranks far below the OECD average according to the OECD FDI regulatory restrictiveness index. Nevertheless, during the last decade it has attracted far less foreign direct investment inflows than other Latin American countries such as Mexico or Brazil (Figure 1.20). The main reasons are macroeconomic and political instability, low infrastructure quality and high trade barriers. Other key factors that influence the stock of foreign direct investment are labour costs, institutional quality (corruption, the rule of law), skills or intellectual property protection (Cadestin, Gourdon and Kowalski, 2016[5]).

Figure 1.20. Argentina attracts little foreign direct investment

Stock of foreign direct investment as a share of GDP for the year 2017 (in %)

The objective behind incoming foreign direct investment influences its effects on the domestic economy. Foreign firms that conduct market-seeking investments are mainly focused on supplying the domestic market, often enticed by comparatively high prices, as has been the case of Argentina. In contrast, when foreign firms undertake efficiency-seeking investments, they benefit from the comparative advantage of a country, e.g. its natural resources, the supply of high skilled labour, or its institutional arrangements, which enables them to be more competitive and export to international markets. Because competition is higher in international markets, firms undertaking efficiency-seeking foreign direct investment have a strong incentive to use high quality inputs and capital goods as well as the most advanced technologies for their production. This explains why knowledge and technology spill-overs as well as productivity, employment and trade effects on the domestic economy are much higher for efficiency-seeking investments than for market-seeking investments (Barrientos, Gereffi and Rossi, 2011[40]).

As market-seeking foreign direct investment focuses exclusively on the domestic market, it is attracted by protection of domestic markets which increases domestic prices and the economic rents for producers. In contrast, efficiency-seeking investments, which heavily depend on imported intermediate inputs and capital goods, are sensitive to high import barriers. When analysing the sectoral composition of the stock of foreign direct investment in Argentina for the year 2017, it appears that foreign direct investment flows in the last decade have been mostly targeting sectors with relatively high import protection, e.g. motor vehicles, pharmaceuticals, chemical and metal production (Figure 1.21). However, Argentina has also attracted foreign direct investments in sectors where it has a relative comparative advantage, such as food and beverage, the mining industries including oil and gas extraction as well as refined petroleum products.

Empirical analysis conducted for this chapter suggests that FDI inflows into specific sectors in Argentina since 2005 have tended to increase in reaction to higher import protection (Annex 1.A4). This indicates that foreign direct investment flows to Argentina are mainly oriented to the domestic market, possibly because they exploit the economic rents that are created through high import protection. As this type of foreign direct investment provides lower potential for technology and knowledge spill-overs to the domestic economy compared to efficiency-seeking investments, a reduction in import barriers might allow Argentina to attract more export-oriented foreign direct investments, which would have strong positive effects for productivity and employment (Barrientos, Gereffi and Rossi, 2011[40]).

Argentina has the potential to become an attractive destination for efficiency-seeking foreign direct investment. A convenient time zone with respect to US or Europe, which is crucial for companies requiring real time communications with customers or headquarters, and good English language skills among tertiary graduates are strategic advantages not fully exploited by international companies so far. Especially, the professional business services, IT and software services are attractive sectors that are already booming in Argentina, but do not receive large amounts of foreign direct investment. Other promising sectors for further foreign direct investment are the mining and energy sector including oil and gas extraction and renewable energies, the petrochemical industries as well as agriculture and the food and beverage industries.

Moreover, some of the industries that have been growing due to high import protection might also start being attractive for efficiency-seeking foreign direct investment. For example, the pharmaceutical and medical instruments industry has been growing strongly and is already exporting to many other Latin American countries. However, for these protected industries as for other industries to flourish in the future and to attract efficiency-seeking investments, it is key to reduce import protection and enable the access to a larger variety of cheaper and higher quality inputs.

Figure 1.21. Stock of foreign direct investment by sector in 2017 (in Million USD)

Furthermore, to attract more and higher quality foreign direct investments, it is crucial to ensure longer-term macro-economic and political stability. It is also important that the 2017 tax reform will be implemented over the next five years, as the current distortive and unfair tax system continues to be one of the main obstacles for doing business in Argentina (Schwab, 2018[41]). A strong and decisive commitment to strengthen the rule of law and fight corruption would help to increase the trust in government institutions, especially as in recent months the public procurement and infrastructure planning system of the previous government has been exposed to large scale corruption accusations. Moreover, improvements in the efficiency of the legal and judicial systems to settle disputes are necessary, as this continues to be signalled by investors as an important impediment to do business in Argentina (Schwab, 2018[41]).

Finally, the recent real depreciation of the Argentinian peso has considerably increased the international competitiveness and attractiveness of Argentina for foreign direct investment and may present a good opportunity for attracting more and new forms of investments (Figure 1.23).

Trade policy options for fostering stronger integration into the global economy

Defining a concrete policy agenda for integration requires a reflection on the different options for trade policy reform, given Argentina’s current agreements and obligations. It will also require thinking about the role of international trade negotiations. Finally, finding the right sequencing can matter significantly to maximise the benefits of trade.

Space for lowering trade protection with and without Mercosur partners

Argentina is a member of the MERCOSUR trade bloc, which has helped to strengthen trade linkages with the other members, in particular Brazil. At the same time, the exchange of goods and services with the rest of the region is weak (IMF, 2017[42]). Bilateral trade negotiations between MERCOSUR and external trading partners would be an obvious way forward as they allow achieving better market access in return. Tariffs faced by Argentinian exports average at 4.12%, but this number hides substantial heterogeneity. Some promising export markets for Argentinian agricultural and food products like China and India levy average applied tariffs on food and beverages of 12% and 65%, respectively. Besides tariffs, Argentinian exports also face particularly high non-tariff measures with an average ad-valorem equivalent of around 20% (Cadot, Gourdon and van Tongeren, 2018[13]).

Historically, the MERCOSUR has not pursued an active strategy of seeking new trade agreements with other countries. It has only signed bilateral agreements covering about 10% of world GDP. For comparison, Peru and Chile have already signed trade agreements covering about 70-80% of world GDP. The traditionally passive stance of the MERCOSUR has changed recently, with trade negotiations ongoing or planned with the European Union, the Andean Community, the Pacific Alliance, South Korea and Canada. A successful trade agreement with the European Union, in particular, could make a big difference as it would imply integration with a large and competitive economic space, but an agreement is not yet in sight, not least due to European resistance in agriculture.

Argentina should play a leading role in these initiatives, as lower trade barriers in current and potential export destinations could provide a significant boost to Argentina’s exports. In particular, efforts should also focus on reducing non-tariff measures in export markets, as these are especially burdensome for agricultural and food products as well as other main export products from Argentina (Box 1.3). Items of interest to Argentina include quantitative import restrictions, the harmonisation of product standards between countries or the mutual recognition of certification systems for product quality assessment (Maskus and Wilson, 2001[43]).

Negotiations should also include services sectors. IT, software and other professional business services account for 10% of total exports in goods and services and face significant service trade restrictions in major export markets as well as potential markets (Figure 1.22).

Figure 1.22. Argentina’s services exports face high barriers in its main current and potential export markets

At the same time, the sometimes glacial pace of trade negotiations and the risk that they may not lead to a significant agreement at all implies that pursuing only bilateral negotiations could be a risky bet. Argentina cannot afford to hold its breath for the conclusion of a major bilateral trade agreement. Given how closed the economy is and how large the potential benefits of stronger integration into the global economy are, efforts to lower trade barriers should go beyond bilateral negotiations. Many Asian countries as well as Chile pursued a strategy of liberalising unilaterally in addition to regional and bilateral agreements, with tariffs often reduced for the purpose of attracting investment (Baldwin, 2006[44]).

In the short term, Argentina has several main avenues for reducing its own trade barriers. First, Argentina could use its margin for tariff adjustment within the current MERCOSUR agreement. Member countries have the right to undertake unilateral changes to common tariffs in about 30% of tariff lines, which –if chosen strategically– could have a major impact (Olarreaga and Soloaga, 1998[45]). Second, the MERCOSUR agreement does not preclude member countries from changing its non-tariff measures (Bown and Tovar, 2016[46]). Third, Argentina could work together with MERCOSUR trading partners to evaluate the scope of consensus for specific unilateral reductions of the bloc’s common external tariff.

Finding the best sequencing

A quick materialisation of positive effects and the minimisation of adjustment costs depend crucially on finding the best sequencing of policy reforms. However, while some trade reforms may not be part of a possible first set of measures, these should not be pushed into the far future as the current macro-economic environment provides a unique opportunity for a reduction in import barriers. The real depreciation of the currency has increased the international competiveness of Argentinian firms, which mitigates substantially the adjustment costs that some sectors and firms would face due to increasing import competition (Figure 1.23).

Figure 1.23. The real devaluation has increased competitiveness

In light of the strong empirical evidence underpinning the benefits of better access to inputs, sectors providing key intermediate inputs to other parts of the economy, but also capital goods, should be a first priority. This would benefit all sectors of the economy and in turn help to boost exports, as with expanded access to modern technology embodied in foreign inputs local companies can become more productive and competitive in global markets (Amiti and Konings, 2007[1])

Scaling back non-tariff measures such as non-automatic import licenses could also be frontloaded, as these measures are particularly non-transparent and the effective protection resulting from such measures sometimes even exceeds tariff rates. Moreover, Argentina has the power to remove non-tariff measures without delay and without consulting with its partners. This opens space for a thorough revision of non-automatic import licenses with a view towards limiting them to a minimum, for example to areas where public health concerns exist.

Reducing tariffs in intermediate sectors and eliminating most non-tariff measures would be an obvious first step, and could happen immediately. In the current fiscal context, it is important to bear in mind that this would not result in significant fiscal losses as total tariff revenues currently amount to around 0.7% of GDP and the productivity effects of better integration would likely lead to an expansion of activity and additional tax revenues. Estimations conducted for this report indicate that reducing current trade barriers to the average levels of the regional peers Chile, Colombia and Mexico, would lead to a yearly increase of GDP per capita by around 1.3% over the next ten years (Table 1 in Key Policy Insights).

Furthermore, some intermediate inputs and capital goods that are not produced in Argentina are subject to import protection. For example, the government has recently reduced tariffs for some selected intermediate and capital goods with high technology content and no domestic production to about 2%. For these type of products, the adjustment costs of fully eliminating import barriers would be minimal. The temporary admission regime, which allows firms to import inputs without paying tariffs in case the final product is exported, is a step into the right direction, but should be extended to firms producing for the domestic market.

Sectors that do not provide major inputs into other activities, including the textile sector which employs a large fraction of the low-skilled workforce often in informal work conditions, could instead be subjected to a gradual, pre-announced and steady reduction of protection. That would encourage firms to upgrade their technologies and become more competitive. Communicating a clear and credible time line for phasing out trade barriers could be a useful instrument, although it may be hard for policy makers to make credible commitments to lower protection. To the extent possible, international commitments, for example in the context of bilateral negotiations, could be leveraged for this purpose.

In the meantime, policies should be put in place to mitigate the social impact of lower trade barriers in the remaining sectors, particularly those where overall employment may decline and workers may need to move to other sectors. This may require new skills, and training policies geared towards workers in sensitive sectors hold large potential to smooth the transition. Putting in place such active training policies may have a high pay-off independently of trade policy reforms, as some sectors where employment losses are conceivable, such as textiles and apparel, have a high share of informal employment. Better training could allow some of those employed there to find formal employment in other parts of the economy.

After some transition period, a gradual and pre-announced elimination of tariffs and NTMs for final consumption goods can do much to raise productivity and real wages in Argentina, both through the emergence of new job opportunities and through declining consumer prices, with particularly visible benefits for poorer households.

Increasing market access for Argentinian exports

Parallel to these unilateral reductions in import barriers, Argentina could bilaterally negotiate lower barriers in its export markets due to non-tariff measures, e.g. product standard regulations and enforcement (Box 1.3). Recent successful negotiations with China about the market access of Argentinian meat show that there is large scope for such bilateral negotiations (Clarin, 2018[47]). Further opening the Chinese market for Argentinian food products would strengthen exports, employment and value added creation in the Argentinian food processing industry.

Another good example is the end of a 16-year long ban of Argentinian lemons and lemon products in the U.S. which was negotiated by the Argentinian government in 2017 (Polansek, 2017[48]; Jouanjean, 2012[49]). This is a major opportunity for the production of lemon and lemon juice in the Northern provinces of Argentina supporting regional employment.

Additional firm-level analysis conducted for this report finds that Argentinian firms with an internationally recognised quality certification for their products have on average a 2.1% higher total factor productivity compared to firms without such a certification (Annex 1.A2). This emphasises the potential benefits from improving the domestic quality testing system and obtaining international recognition for the quality assessment certifications issued by the Argentinian authorities.

Box 1.3. Product standards and their enforcement might pose significant barriers to Argentina’s exports to advanced economies

Non-tariff measures (NTMs) like product standards and technical regulations have increased in importance in advanced countries compared to tariffs that are at historical lows (Baldwin and Evenett, 2009[8]). Although product standards are imposed to overcome market failures and protect the health of domestic consumers, they can act as significant import barriers, in particular for exports from emerging markets (Maskus and Wilson, 2001[43]). Recent empirical research suggests that product standards and their enforcement have also been used to protect industries in advanced economies (Trefler, 1993[50]; Essaji, 2008[51]; Grundke and Moser, 2019[11]).

Argentina’s exports have also been subject to refusal of market entry due to non-compliance with product standards in the U.S. and the EU (Figure 1.24). Although the number of refused shipments per se does not inform about the refused trade volume, the negative reputation effects of import refusals on other firms in the same export sector are substantial and lead to reduced market access and decreasing exports (Jouanjean, Maur and Shepherd, 2012[52]; Grundke and Moser, 2019[11]). This particularly affects exporters from emerging markets highlighting the necessity of a comprehensive approach to upgrading product standards systems and building compliance capacity, focusing on sectors rather than individual products. This also entails establishing a system of product quality assessment, which provides certificates that are recognised by the enforcement authorities in export markets.

Figure 1.24. Argentina’s products face issues with product standard regulations in its main export markets

Number of Argentina’s product shipments refused entry into important export markets due to non-compliance with product standard regulations

In the U.S., Argentina mainly faces market access issues for its exports of pharmaceuticals and medical devices (Table 1.3). The main reasons for these import refusals are issues related to certification requirements or product labelling. Thus, it seems that no fundamental problems in the production structure exist that would impede Argentina to produce the necessary product quality for U.S. markets. A comprehensive initiative of the Argentinian government to support domestic producers of pharmaceuticals and medical devices should comprise a close cooperation of the Argentinian authorities for product quality assessment with the U.S. Food and Drug Administration. This should aim at reducing information and compliance costs for domestic producers, concerning certification, listing and labelling requirements. This would be a much more cost efficient and effective support for this industry than the high import barriers that still exists for medicaments and medical instruments (which hurt domestic consumers and increase the costs of the public health system in Argentina).

Five most refused product categories	Number of shipments refused (products)	Five most frequent reasons	Number of shipments refused (reasons)
Other medicaments, except antibiotics and hormones	201	It appears the drug or device is not included in a list as required by the FDA.	220
Medical instruments, machines and other medical device	128	The article appears to be a new drug without an approved new drug application.	188
Fresh and dried fruits, fruit and vegetable juices	119	It appears that the manufacturer has not filed information on its scheduled process as required.	135
Skin care and make up	41	Required label or labelling appears to not be in English	127
Hormones and insulin	29	The article appears to consist in whole or in part of a filthy, putrid, or decomposed substance or be otherwise unfit for food.	92

Note: The US FDA database includes information on import refusals of food products, pharmaceuticals, cosmetics, medical devices and a wider range of electronic products.

Source: US FDA IRR database.

In the EU, nuts, meat and animal feed products from Argentina have particular issues entering the EU market (Table 1.4). Policy efforts to increase market access to the EU should mainly focus on improving the sector specific systems for product quality controls. Non-compliance of one exporting firm can hurt the reputation of the whole sector and have significant negative effects on exports to the EU.

Five most refused product categories	Number of shipments refused (products)	Five most frequent reasons	Number of shipments refused (reasons)
Nuts, nut products and seeds	499	Aflatoxin content too high	502
Meat and meat products	164	Salmonella in product	146
Animal feed materials	134	Shigatoxin content too high	63
Fish and fish products	88	Bad temperature control	41
Fruits and vegetables	78	Substance not authorised by EU authorities (mostly genetically modified)	35

Note: The EU RASFF database only publishes EU import refusals and notifications for food and animal feed products. Thus, any other manufacturing products are not included in the database.

Source: EU-RASFF database.

Since 2016, the government has worked closely with the private sector to identify priority products and destinations, generate information about potential barriers and define a strategy to negotiate foreign market access. Since January 2016, market access for 160 products has improved in more than 40 countries. These efforts have recently been complemented by a national export strategy (“Argentina Exporta”), which among other areas features a newly created national product quality system to ensure compliance of products with product standards in export markets. Other items in the agenda include access to finance, infrastructure, trade facilitation, export promotion and the dissemination of best practices through corporate networks.

In this context, Argentina should try to make further advances in trade facilitation, which could reduce costs for exporting firms significantly (Figure 1.25). Administrative burdens on exports and imports are higher than in Brazil, Chile or Mexico and the efficiency of customs and border clearance in Argentina has strongly decreased during the last decade, according to World Bank’s Logistics Performance Index. Harmonising procedures into a single electronic document and consolidating information and certifications from various authorities, such as customs or health and agriculture, can significantly increase efficiency in customs and reduce associated costs (Sarmiento, Lucenti and Garcia, 2010[53]).

Figure 1.25. Trade facilitation can be improved

Index scale from 0 to 2 (best performance)

Argentina has already made an important step into this direction by lancing the first implementation phase of an online one-stop shop mechanism for exporting (VUCE), which already includes more than 280 administrative procedures and reduces time spent on these procedures by 65 percent. The full implementation is planned for 2020 (Iglesias, 2018[54]). Continuing to modernise and simplify customs procedures is crucial to improve export performance (Moïsé and Sorescu, 2013[55]). This would also help to reduce the scope for corruption, especially through the establishment of online procedures that eliminate personal interactions. For small firms (with exports up to USD 600 000 per year), the government has also established a program to simplify export logistics (“Exporta Simple”).

Beyond simplifying customs procedures, a cost-effective way for trade facilitation is through more cooperation, both among various agencies of the country as well as with neighbouring and third countries (Figure 1.25). Increasing cooperation with border agencies of other countries and engaging in mutual recognition agreements concerning certifications for product quality assessment would significantly facilitate imports and exports (Box 1.3). Moreover, a systematic sharing of inspection results of product standard enforcement agencies among neighbouring countries would improve the risk analysis as well as the efficiency of border controls and would facilitate intra-regional trade. The Rapid Alert System for Food and Feed (RASFF) established by EU member countries could serve as a good example. Argentina could also benefit from a harmonisation of data requirements and documentary controls among domestic agencies involved in the management of cross border trade, as established in other countries in the region such as Peru and Mexico.

Easing the transition: Policies to support the structural transformation

It is important to acknowledge that trade opening typically combines strong medium-term benefits, such as more and better jobs, with short-run adjustment costs as jobs will be lost in some firms, sectors and regions, and created in others. Policies can go a long way to reduce the burden of adjustment for poor and vulnerable households and ensure that all Argentinians benefit from trade. In particular, it is crucial that those that may initially struggle with the transition get adequate support so that they can find new employment opportunities. This is also of particular relevance to gain political support for a stronger integration into the global economy.

Policies to ease the transition can have several dimensions. The most urgent one is to protect workers in the transition by ensuring that adequate social protection, but also adequate training opportunities are put in place. These policies also need to consider the regional dimension of the structural transformation, as certain highly protected industries are concentrated in specific regions, e.g. the electronics industry in the province of Tierra del Fuego or the textile industry in the greater Buenos Aires area. The central government should closely coordinate the necessary policies with provincial governments, in particular because provincial governments hold the main authority on education and training policies and hence play a key role in the structural transformation.

Beyond this, structural policies can reduce frictions and facilitate the structural transformation of the economy (Box 1.4). Reducing import protection will entail a significant reallocation of resources, i.e. labour and capital, across sectors and within sectors across firms. Allowing this to happen is a precondition for reaping the benefits of stronger integration. Well-functioning product and labour markets play a key role in this context. Finally, innovation is one of the pillars of long-run productivity and competitiveness, with well-designed policies playing a key role in strengthening the incentives to innovate. The successful implementation of these complementary structural reforms will have a bearing on the magnitude of the adjustment costs that workers in import competing sectors and less productive firms will face in the short run (Winters, Mcculloch and Mckay, 2004[3]).

Box 1.4. Successful examples of policies to complement the structural transformation

Episodes of structural transformation across OECD countries can offer valuable insights about how policies can facilitate adjustments to changes in economic structure. The cases of the Basque Country in Spain and the Ruhr area in Germany exemplify how a coherent and stable policy package can facilitate transformation and lead to jobs and opportunities in new areas.

In the 1970s and 1980s, the Basque Country underwent a significant restructuring of its economy following the decline of traditional sectors such as steel, shipbuilding and machine tools, which led to high unemployment. Regional policies put the focus on technological upgrading as a way to restore the international competitiveness of the manufacturing sector. This included strengthening the existing but weak technology infrastructure, promoting R&D activities by firms, creating technology parks and developing training programmes for workers and researchers (OECD, 2011[56]). This strategy, pursued with stability and continuity over time, paid off in the end. The Basque Country now has a strong business-oriented innovation system and has technological strengths in machinery and equipment. Business R&D is double the national average and is also in the top 25% of OECD regions and countries (OECD, 2014[57]). The export performance of the region has improved markedly, driven by goods with a higher technological content (such as aeronautics or telecommunications) and also due to the innovation carried out in traditional industries such as automobile and tool‐machinery. Knowledge-intensive services sectors have also gained weight, particularly in areas linked to manufacturing (e.g. engineering and consultancy). The Basque Country is now the region with the lowest unemployment rate in Spain and GDP per capita is 25% above the European Union average.

The Ruhr region used to be one of the most important industrial regions of Europe, with strong coal mining and steel industries. With a shrinking global demand and a loss of international competiveness, the Ruhr area faced the challenge to restructure its economy. To respond to that challenge, regional policies changed the focus towards environmental technology. Enterprises shifted away from coal and steel and invested in plant engineering, control services and environmental technology. The move into the field of environmental technology has its root in the search for new ways to reduce pollution undertaken by traditional coal and steel industries (Galgóczi, 2014[58]). As these industries required significant energy resources and produced a lot of waste, the region benefited from an existing comparative advantage in energy production and waste disposal. Building on that comparative advantage, the focus was on stimulating R&D in the fields of renewable energy resources, recycling and waste combustion. Nowadays, the Ruhr area is the centre of environmental technology research in Germany, underpinned by local universities, research centres and local firms. Labour market policies were also part of the strategy, as agencies specialized in job counselling and training took care of facilitating labour market transitions of affected workers. The change in the employment structure of the area was large; manufacturing and services sectors accounted for 60% and 36% of employment, respectively, at the beginning of the 1960s. By 2000, manufacturing employed 33% and services 65% of the total workforce.

Improving training and social protection

Opening up to the world economy tends to have pro-poor effects in emerging market economies (Porto, 2006[15]). In the medium run, workers stand to gain from new job opportunities, as jobs created in exporting firms are more likely to be formal and to pay better. Argentinian exporters pay 31% higher wages than non-exporters (Brambilla, Depetris Chauvin and Porto, 2017[23]). However, for some workers, reallocations will involve the need to search for a new job. Argentina has high job turnover rates with more than 18% of employees changing jobs within one year (Pieczynski, 2016[59]). Hence, more firm turnover in the adjustment period is probably a manageable burden for those who find new employment in the same sector. However, when entire sectors contract and workers have to learn new skills or move geographically, the adjustment costs may be more substantial.

Scaling up active labour market policies and providing training opportunities is a key policy lever in this context. Training can help workers to get ready for new jobs in expanding sectors, and even enhance their chances of accessing better paying jobs. While Argentina spends only slightly less than the average OECD country on active labour market policies, spending is roughly half of the OECD average for training measures (Figure 1.26). Expanding the offer of training opportunities, which should also aim at including adults currently outside of the labour market, may require a need to spend more on adult training. Space for this may be found by reallocating some resources from public works schemes, which make up almost 80% of Argentina’s expenditures on active labour market policies (ILO, 2016[60]).

Training policies may have a durable impact on employability by improving the beneficiaries’ income-generating potential. Benefits can be significant especially for women (Bergemann and Van Den Berg, 2006[61]). Possible training measures include formal education courses to upgrade general cognitive skills through general education training programmes for adults, as for many low skilled workers the move to other jobs and occupations would require a higher level of cognitive skills (Bechichi et al., 2018[62]). On the other hand, it also entails upgrading and learning new task- and job-specific skills, with the content and the implementation of the necessary training to be closely coordinated with the private sector to address current and future skill needs.

Several Latin American countries, including Chile, managed to make labour market policies more effective by adding an active labour market component, such as training and education, to existing conditional cash transfer programmes (Cecchini and Madariaga, 2011[63]). Cash transfers provide income support in times of need but they can become more effective if supplemented by a training component that improves participants’ chances to find more autonomous and sustainable income generation opportunities.

The experience of Argentina with these types of programmes is positive. Empirical evaluations suggest that participation in a scheme combining a cash transfer with training is associated with better wages and higher chances of accessing formal employment (Lopez Mourelo and Escudero, 2017[64]). Thus, expanding such schemes can be an effective way to provide support to those more affected by the reallocation process that the Argentinian economy has started and, at the same time, empower participants to benefit from the new jobs that Argentina will be creating. Recently established cash transfers to adults who return to school or acquire professional training are a step in this direction and have been taken up by 260 000 adults.

Figure 1.26. Spending on active labour market policies is below the OECD average

Another recent government programme (“Programa de Transformación Productiva”) focuses directly on the consequences of the structural transformation and supports the re-training of displaced workers in cooperation with the private sector and its changing skill needs (Box 1.5). However, this re-training program is so far only financed by the public sector and still has a very low scale.

Box 1.5. Re-skilling trade-displaced workers

The “Programa de Transformacion Productiva” and the reduction in import tariffs for computers and notebooks

In November 2016, Argentina announced a strong reduction of its tariffs on computers, notebooks and parts, which was implemented in February 2017. This measure increased competitive pressures on the domestic industry and decreased prices by 28% over a few months. Product quality improved due to the imports of higher quality inputs and domestic demand expanded. The move also benefitted the downstream software, IT and professional service sectors.

However, the increased import competition was a major challenge for domestic firms, which employed 4 489 workers in November 2016. The “Programa de Transformación Productiva” played a key role in mitigating the negative employment effects of tariff reductions. Through re-training measures coordinated with six of the most important computer and notebook-producing firms, the workers were prepared for a re-orientation of the companies towards complementary service activities, e.g. technical support, sales and technical assessment. This ensured that none of these firms suffered major employment losses.

Since 2016, the “Programa de Transformación Productiva” has been dealing with 102 companies that work towards a technological upgrade of their production structure (providing financial support as well as training for the work force). It has also supported 1582 displaced workers with a special benefit of 50% of their last salary, labour market search assistance and retraining courses in collaboration with potential future employers. Future employers would also receive employment subsidies equivalent to the minimum wage over the first six month of the contract.

So far, of the 1 582 workers included in the programme around 50% have found a new job. This relatively low rate of re-employment is related to the low level of skills of the mostly older workers in the affected sectors, which indicates challenges related to skills. About nine million workers or around 50% of the total formal and informal workforce have not finished secondary education, and five million have not even finished primary education.

A unilateral tariff reduction would lead to moderate contractions and employment losses in textile and wearing apparel, the metal products, electronic equipment and the machinery and equipment industries (Table 1.2 and Table 1.A.6). For displaced workers, the cost of relocating to other sectors -where production and employment expand following tariff cuts- depends on whether the skill requirements differ between the new and the old job.

Previous OECD work has measured skill distances between occupations and sectors in terms of general cognitive and task-specific skills (Bechichi et al., 2018[62]). This allows an assessment of the amount of retraining required for movements to expanding sectors (Table 1.5). This work suggests that many job changes that would likely occur in Argentina would be towards sectors that require a similar level of cognitive skills and would therefore not require an additional training in cognitive skills. An exception to this are workers currently employed in the textile, footwear and leather industry, which may require retraining equivalent to around half a year of schooling (or about 4 PIAAC skill scores) (Bechichi et al., 2018[62]). As a large part of the workforce in the Argentinian textile, footwear and leather industries is informal and very low skilled, these estimates, which are based on industry averages across OECD and two non-OECD countries, might be too optimistic about the retraining needs for displaced workers.

Re-training of workers in the other three shrinking sectors would be limited mostly to job- and task-specific skills, requiring close coordination with the private sector. The expanding sectors closest to the shrinking sectors in terms of skill distances are agriculture and other manufacturing sectors. Services sectors would also create more jobs in a more internationally integrated economy, but skill requirements for moving towards services would be higher (Table 1.A.6, Table 1.5). As the analysis does not include detailed measures for the knowledge areas of jobs, the true re-training efforts required for job-changes might be underestimated (OECD, 2018[65]).

Sectors with likely job losses due to a tariff cut	Three closest expanding sectors in terms of skills	Type of skills needed for the transition
Textiles, textile products, leather and footwear	Agriculture, hunting, forestry and fishing	Self-organisation skills, accountancy and selling skills
	Food products, beverages and tobacco	Cognitive skills: literacy, numeracy and problem solving (distance equivalent to about half a school year); Management and communication skills
	Construction	Numeracy skills (distance equivalent to about half a school year) Accountancy and selling, management and communication, self-organisation skills
Fabricated metal products	Agriculture, hunting, forestry and fishing	Self-organisation skills, accountancy and selling skills
	Food products, beverages and tobacco	Accountancy and selling skills
	Transport and Storage Services, Post and Telecommunications	Accountancy and selling, management and communication skills, readiness to learn
Electrical and Optical Equipment	Agriculture, hunting, forestry and fishing	Self-organisation skills, accountancy and selling skills
	Food products, beverages and tobacco	No major retraining needs expected
	Chemicals and non-metallic mineral products	No major retraining needs expected
Machinery and equipment	Food products, beverages and tobacco	No major retraining needs expected
	Wood, paper, paper products, printing and publishing	Accountancy and selling skills, readiness to learn
	Chemicals and non-metallic mineral products	No major retraining needs expected

Note: The four sectors in the left column are the sectors with expected job losses from a cut in tariffs to the lowest levels of G20 countries (see Table 1.2 and Table A.1.6). The middle column shows the three job-creating sectors with the lowest skill distance in terms of cognitive and task-specific skills. Measures for cognitive and task-based skills are based on the OECD Survey of Adult Skills (PIAAC) (Grundke et al., 2017[66]). Cognitive skills include literacy, numeracy and problem solving in technology rich environments. Task-specific skills include ICT skills, managing and communication, accountancy and selling, self-organisation, advanced numeracy as well as readiness to learn. The average skill distances by sector are computed for the whole set of 31 OECD and Non-OECD countries included in PIAAC (Bechichi et al., 2018[62]). The skill distances may underestimate the true re-training effort required for job changes as skill indicators cannot measure all dimensions of skills and knowledge areas required for jobs.

Source: OECD calculations based on skill indicators constructed using the OECD Survey of Adult Skills (PIAAC) (Bechichi et al., 2018[62]; Grundke et al., 2017[66]).

The above analysis uses information on the skill requirements of occupations and sectors from the OECD Survey of Adult Skills (PIAAC). As Argentina does not participate in the PIAAC survey, cross-country averages have been used instead. The analysis could be further improved if Argentina were to participate in the next round of this OECD survey.

Industries that are exposed to an increasing penetration of digital technologies require workers to combine good cognitive skills with an increasing ability to self-organise, to work in teams across interdisciplinary and cultural borders and to communicate using new ICT technologies (Grundke et al., 2018[67]). Especially the booming IT, software and professional business services sectors, will require a large amount of workers that can master the challenges of the digital transformation. To address these needs the government has launched an ambitious plan to educate 100 000 new software programmers, 10 000 software professionals and 1 000 software entrepreneurs in 4 years (Plan 111 mil). The plan was closely coordinated with the Argentinian software business association and is adapted to the skill needs of the private sector (recently a new plan to educate 500 000 until 2030 was presented). Such a cooperation with the private sector could be a model for other sectors, where firms have issues to find workers with the right skill mix they need (Figure 1.27). However, as the technological frontier is shifting fast in many sectors, the provision of continuous adult training is also key to master the challenges of the digital transformation (OECD, 2016[68]).

Figure 1.27. Firms face difficulties finding the skills they need

Share of firms with difficulties finding qualified staff, 2017

Vocational education and training (VET) remains underutilised, below average levels observed in OECD countries or in Chile or Mexico (Figure 1.28), and is of low quality. At the same time, survey results suggest that employers are finding it particularly hard to find technicians, skilled trades and engineers (INET, 2016[69]). Thus, expanding and enhancing the effectiveness of VET can be particularly useful to address these skill mismatches and to raise workers employability. This would also benefit firms, as equipping workers with the right skills goes along with higher productivity. Additional analysis conducted for this report finds that formal training programmes for workers are associated with a 1.9% higher total factor productivity of Argentinian firms (Annex 1.A2). In addition, offering VET as a less academic option in secondary education can reduce the high-dropout rates in secondary education.

International experience suggests that workplace training and involving employers in the design and delivery of the training are key elements for a successful development of VET (O’Connell et al., 2017[70]). Currently training institutions are the dominant players of the VET system without much engagement of the private sector, and there is little coordination between the large numbers of regional institutions. Increasing coordination between the different training institutions across and within provinces and giving employers a more central role, both in the design of courses and in the delivery of workplace training, would bring the VET system closer to international standards. A recently established programme for young adults (18-24 years) who return to school and in parallel acquire professional training is a first step in this direction.

As in many OECD countries, there is also scope for a better alignment of tertiary education curriculums to the type of occupations prevailing in the labour market (OECD, 2017[71]). Skill shortages are particularly concentrated among engineers and technical degrees and reflect a tertiary education system that produces too few graduates in science, technology, engineering or mathematics (Figure 1.28) (OECD, 2016[68]). To facilitate the alignment of curriculums to the skills required in different occupations, the authorities should consider an update of the outdated Argentinian classification of occupational titles in a joint multi-stakeholder effort including the private sector and worker organisations.

Figure 1.28. Few students follow technical courses and careers

A well-functioning social safety net can protect incomes during temporary unemployment spells. Argentina has well-targeted family benefits that support low-income families with children. While these have a significant impact for relieving poverty among families with children, they are insufficient to protect adults against the income losses from temporary income spells.

Unemployment benefits have a limited coverage due to stringent eligibility conditions, with only approximately one in ten unemployed persons receiving unemployment benefits. Benefit levels are capped at EUR 90 per month, around 40% of the minimum wage, and are paid for up to 12 months, or 18 months for those aged above 45. A more potent protection against temporary income losses from dismissals are high severance payments. However, these create disincentives for formal hiring, as the costs of dismissal can be high for employers. Moreover, there is discretionary room for the judiciary to determine the magnitude of these severance payments in each single case, creating uncertainty for employers.

Current reform plans include replacing the severance payment regime by an unemployment insurance system with individual accounts, to which both employers and employees would contribute over time, similar to the one currently used in the construction sector. Chile, for example, has established such a system. This would reduce the financial burden of dismissals as employer contributions are paid over time and could lead to lower disincentives for formal hiring, if only by reducing uncertainty. If account balances could be carried over to a new job, such a system would be an effective way to protect people rather than protecting individual work relationships.

The currently 30% of the workforce that is in informal employment lacks any income support in case of job loss. Therefore, improving incentives for formal employment, both by reducing the costs of formalisation and through more enforcement, is essential for reducing the social impact of future job reallocations.

Improving the functioning of product markets

In the context of opening up to foreign competition, it is also important to eliminate policy distortions caused by domestic regulations, to allow new firms to enter and thrive on the domestic market before they potentially export. Regulations of product markets serve a variety of legitimate objectives, but if ill-designed they can impose unnecessary restrictions on competition. Competition, which induces firms to become efficient or exit, has been traditionally weak and poor domestic policies have held back competitiveness of producers, thus impeding them from exploiting their full productivity potential. Regulations can also have downstream effects on non-regulated sectors of the economy that use the output of the regulated sectors as intermediate inputs (Arnold et al., 2016[72]). For example, inadequate regulation of the electricity sector will have effects on other sectors such as manufacturing where electricity is an important input.

The OECD Product Market Regulation (PMR) Indicator and its sub-indicators measure the competition-restrictiveness of product market regulations across a wide range of countries. A recent update of the indicator suggests that Argentina tops the list of countries with respect to the restrictiveness of product market regulations (Figure 1.29). Improving product market regulation fosters competition, which in turn can raise productivity and hence the ability of firms to pay higher wages. By reducing entry barriers, product market reforms can facilitate the emergence of new firms, boosting investment and job creation relatively fast (OECD, 2016[73]).

Figure 1.29. There is room to reduce the restrictiveness of product market regulations

OECD Product Market Regulation Indicator 2018 (Preliminary version)

Argentina has still the highest barriers to domestic entry in Latin America, well above those in Brazil, Mexico or Chile. This is mainly due to high entry barriers in network and services sectors (Figure 1.30). Regarding administrative burdens for start-ups, Argentina has considerably improved and moved five ranks upward in the cross-country comparison. The new entrepreneurship law (ley de emprendedores) has been an important step into the right direction, as it facilitates firms’ start-up by creating a new type of firm, which can be set up in one day. It also comprises setting-up single contact points for issuing or accepting notifications as well as online one stop-shop services, including filing tax declarations online.

Argentina has also considerably improved the procedures for design and assessment of regulation. The complexity of regulatory procedures has been reduced, especially those related to obtaining licences and permits. Regarding the involvement of stakeholders in the regulatory process, Argentina is close to the median in the sample. However, the overall index for simplification and evaluation of regulation shows Argentina at a low rank, because the assessment of regulations regarding their impact on competition leaves still much room for improvement (Figure 1.30). It should be a priority to complement the recent advances in competition enforcement, where the establishment of a new competition authority with greater personal and financial independence and an improved legal framework have been a major step, with a thorough evaluation of existing and future regulations about their impact on competition. More generally, the OECD’s Competition Assessment Toolkit (OECD, 2017[74]) can provide guidance not only for identifying but also for revising policies that unduly restrict competition. It also provides interesting examples and case studies from Greece, Mexico, Portugal and Romania.

Argentina still performs weakly on the indicator on state involvement in business operations, owing to price controls as well as command and control regulation that interfere in the functioning of markets (Figure 1.30). For example, price controls remain in place in the retail and the energy sectors and professional services face much stricter regulations than in the average OECD country. The government should continue moving away from coercive to more incentive-based regulation.

However, the new regulations on public procurement have been successful (Figure 1.30). Public procurement of goods and services as well as for public works is organised in transparent public tenders that do not discriminate much more against foreign suppliers than the average OECD country. For example, the elimination of intermediaries for the public purchase of medicaments will likely increase competition among suppliers and lead to significant price reductions. However, recent changes to the law on public procurement introduce local content rules of 20% favouring Argentinian SMEs and improve their chances in public tenders leading to a stronger discrimination of foreign suppliers. The current economic downturn with high interest rates and the recent spikes in utility prices might justify some additional support for SMEs in the short run. However, this support should be temporary as it is likely to raise costs for the government and shields SMEs from the positive effects of domestic and foreign competition.

Figure 1.30. Product market regulations could allow more room for competition

OECD Product Market Regulation Indicator (Preliminary version)

Furthermore, the existing regulatory framework still fragments the domestic market, as regional and local authorities often impose extra requirements on companies from other parts of the country. This results in weak competition at the local level (Figure 1.31), contributing to a loss of competitiveness abroad and higher prices domestically. By reducing the scale of production, these barriers also hamper productivity and real wages. At the national level, a comprehensive initiative of the Argentinian government aims at strengthening the wider use of online tools and sharing of information across government agencies to reduce administrative burden and identify regulations that act as impediments to entrepreneurship. Argentina would strongly benefit from including regional and local governments into this initiative, and assess the impact of regulations on domestic and foreign competition. Recent coordination initiatives to promote such dialogue between different levels of governments in federal councils are so far voluntarily and should be made obligatory for provinces and municipalities (OECD, 2019[75]).

Similar programmes have been set up in some OECD countries such as Australia, Canada and Spain. In Spain, all legal texts enacted by local, regional and central governments are checked for inconsistencies. If they are found to create internal barriers to trade, they need to be amended in the subsequent six months (González Pandiella, 2014[76]). The Council of Australian Governments, established in 1992, has focused on in-depth harmonisation of legislation, standards and regulations among the states. Canada also faces challenges with internal barriers to trade and investment arising from overlapping federal, provincial and territorial regulatory responsibilities regarding many economic policy areas. It established the so-called Agreement on Internal Trade in 1995, an intergovernmental trade agreement according to which parties commit to a set of general rules to prevent governments from establishing new trade barriers and to reduce existing ones.

High barriers to entrepreneurship, and in particularly those deterring entry, can hamper significantly the creation of new firms. In turn, the absence of the disciplining effect of competition from new entrants, firms tend to grow less, remain small and be less productive (Klapper et al., 2006[77]). Some of these features are noticeable in Argentina’s manufacturing sector, characterised by a small number of young firms (Figure 1.32). The average Argentinian firm is 27 years old, well above average ages observed in Latin America (21 years) and OECD economies (17 years) (according to the World Bank Enterprise Survey). OECD work based on cross-country firm level data indicates that young firms create more jobs (Criscuolo, Gal and Menon, 2014[28]). Over the last decade and across all countries analysed, 42% of all jobs were created by enterprises less than 5 years old. In Argentina, only 6% of firms are younger than 5 years.

Figure 1.32. There are few young firms in Argentina

Percentage of firms by age group for the year 2017 (in %)

Effective insolvency regimes can also play an important role to foster entrepreneurship and productivity (Adalet McGowan, Andrews and Millot, 2017[78]). Argentina’s insolvency procedures are in line with the Latin America average but are less efficient than in some regional peers such as Colombia or Chile, or than those found in OECD countries (World Bank, 2018[79]). Improving insolvency procedures, by making them more agile and less costly, would boost entrepreneurship by providing second chance opportunities to entrepreneurs. They can also help to boost productivity and competition by increasing firm creation (Cumming, 2012[80]) and by facilitating the reallocation of capital and financing to new young firms boosting job-creation.

Some measures associated to industrial policies can also curb domestic competition. Industrial policies have had a long history of protecting and subsidising specific industries in Argentina. Such policies can easily stand in the way of structural transformation. By favouring established incumbents over entrants or drawing resources into specific sectors, they often act as impediments to the creation of new innovative young firms, which disproportionally contribute to productivity growth and job creation (Criscuolo, Gal and Menon, 2014[28]; Eric Bartelsman et al., 2013[81]).

Rather than betting on specific sectors and adding to existing distortions, cost-efficient and effective industrial policies can help to reduce information and coordination problems, e.g. by providing detailed sector specific information on export markets provided by successful exporting firms (Artopoulos, Friel and Hallak, 2013[34]). In addition, horizontal structural reforms that improve the business climate without favouring specific sectors, such as tax reforms or improvements in infrastructure, can help the transition towards a more integrated economy without curbing competition.

Such horizontal policies include further efforts to improve the tax system. A tax reform decided in 2017 will reduce some existing distortions and lower the overall tax burden on businesses over a period of 5 years, to stimulate investment and formal employment. For businesses, the reform focuses on reducing statutory corporate income tax rates while raising the taxation of distributed profits and on the gradual phase-out of the most distortive taxes such as the provincial turnover tax. This tax has a cascading effect and creates an artificial incentive for vertical integration, as there is no deduction for the tax paid at earlier production stages (as there would be in a VAT). It hurts competitiveness and acts as an interprovincial tariff barrier, as different tax rates are applied depending on the domestic origin of goods. As part of the accelerated fiscal adjustment, the gradual phase-out schedule of this tax has been revised and partly postponed upon request from the provinces, for which this tax is a major source of revenues. In the medium run, it will be important to continue the process of phasing out the turnover tax.

A financial transaction tax on every transaction in checking and saving accounts creates incentives to settle payments in cash, acting as a barrier for financial inclusion and formalisation. Plans to make this tax fully deductible from corporate income taxes have also been postponed in light of its significant revenues amounting to 1% of GDP. Looking ahead, the financial transaction tax should be abolished once the fiscal situation permits it. Broadening the tax base, for example in the area of VAT or personal income taxes, would create scope for lowering tax rates and accelerate the phase-out of particularly distortive taxes (see chapter “Key policy insights”).

Strengthening innovation

Innovation and investment in knowledge-based capital are important engines of growth and productivity (Foster et al., 2018[82]). Based on standard innovation indicators, such as patents applications, Argentina’s performance is relatively low, below regional peers such as Chile and OECD standards. This general weak performance contrasts with remarkable success cases. For example, Argentina is a top performer in the aerospace sector, being at the vanguard in the satellite industry and in drone development. The agriculture sector is also at the innovation frontier in terms of farming techniques and use of biotechnology with INTA (Instituto Nacional de Tecnología Agropecuaria, National Agricultural Technology Institute) playing a key role in generating and promoting the diffusion of technologies (OECD, 2019[83]). These examples are suggestive of the high potential to become a top innovation performer.

Total spending on research and innovation is relatively low, amounting to 0.6 % of GDP, which is about half of Brazil and one fourth of the OECD average of 2.4%. The bulk of funds come from public sources, 96% of the total in 2011-2015, compared to only 3.5% from the private sector and 0.5% from international sources. In terms of implementation, decentralised public institutions such as the Consejo Nacional de Investigaciones Científicas y Técnicas (CONICET), the Instituto Nacional de Technología Industrial (INTI), or the Instituto Nacional de Tecnología Agropecuaria (INTA) represent almost 50% of the total spending, while public universities represent around 30% (MINCYT, 2015[84]). Expenditure on personnel represented 70% of total expenditure on R&D activities. Almost half of all resources were directed to applied research, compared to 40% for basic research.

“Agricultural production and technology” represents the largest reported focus area for public R&D investments in 2015 (Figure 1.33). Agriculture-related R&D objectives are also included in “non-oriented research” (basic research), “control and protection of the environment” and “land exploration and exploitation”. The share of total investments going into research related to industrial production and technology is relatively low with 13%. To support the structural transformation of the economy, the government might evaluate the possibility of increasing public funds for research and development (possibly through reallocation of resources) to further support innovation clusters for promising industries and services, which are already close to the global technology frontier. These innovation clusters can have significant technological and knowledge spill-overs to the private sector (Baer, 2018[85]; Cabrer-Borrás and Serrano-Domingo, 2007[86]).

Figure 1.33. Public R&D investments by objective, 2015

However, the main bottleneck in terms of expenditure for research and development is the private sector, which spends only 0.1% of GDP for research and development activities, versus 0.5% in Brazil or 1.1% in the average OECD country (Figure 1.34). Acknowledging that innovation is a key pillar for the new economic model, the authorities aim at improving incentives for raising business investment in research and development, but also plan to increase public expenditures for R&D. However, the recent macro-economic turbulences and the necessary fiscal adjustment will pose limits on reaching this goal, in particular for public investments in R&D.

Figure 1.34. Business innovation is low

Business enterprise expenditure in research and development, 2016 or latest year available

Firm-level analysis conducted for this report emphasises the need to raise private innovation activities. An increase in expenditure for research and development by one million Pesos is associated with a 1.6% higher total factor productivity of Argentinian firms (Annex 1.A2). Moreover, firms using technology licensed by a foreign company have a 2.3% higher total factor productivity, indicating the importance of reducing import barriers to facilitate technology diffusion. Providing access to digital technologies is also crucial, as firms that have a website show a 2.4% higher total factor productivity.

However, the lack of competitive pressure on product markets curtails incentives for engaging in innovation activities and adopting new technologies and practices. Entry or the threat of entry have been found to stimulate innovation by incumbent firms (Aghion et al., 2005[87]). When the incentive to get a competitive edge over others is missing because competitive pressures are low, firms do not consider innovation a priority. Moreover, where competition does not drive less efficient firms out of the market to free their resources, much of the public support for research and development may be absorbed in prices and wages rather than in the quantity of R&D (Acemoglu et al., 2013[88]). Therefore, progress to strengthen domestic and foreign competition, as discussed above, would likely lead to more innovation (Bustos, 2011[89]).

There is also room to improve specific innovation policies. A key tool to foster innovation in firms is the R&D tax credit, which aims at alleviating difficulties faced by firms to fully appropriate the returns to their R&D investment and to find external finance, in particular for small or young firms (Appelt et al., 2016[90]). Argentina has an R&D tax credit based on a competitive allocation system with a budget of 0.002 % of GDP. The tax credit is applicable against tax obligations in the provincial gross turnover tax, which is an unusual design that puts young innovative firms at a disadvantage. Instead, in other countries, R&D tax credits can reduce corporate income tax liabilities, in some cases even with the possibility of refunds or extended loss carry-forward provisions. More innovative start-ups, focused on developing new products and technologies, usually have little sales initially, as the first commercialised forms of new innovations tend to fail (Agarwal and Bayus, 2002[91]). Hence, the more innovative young firms are less likely to benefit from the tax credit under its current design. International evidence shows that to support these type of firms, the tax credit should include provisions such as the possibility to be converted into cash refunds or into reductions in social security and payroll taxes or include carry forward provisions (Appelt et al., 2016[90]).

Moving into that direction would optimise the support given to young and innovative firms, although it would reduce public revenues. Thus, the competitive allocation system of the tax credit together with the limited fiscal space of the government introduce a strong degree of uncertainty about the eventual availability of the credit, and thus the tax credit does not significantly alleviate the difficulties that firms face to finance innovation activities.

Strengthening the protection of intellectual property rights could also help Argentina to attract more foreign direct investment in some knowledge-intensive areas, such as biotechnology, for which it may have a natural advantage. According to some of its main trading partners, Argentina has considerable scope to strengthen its intellectual property rights protection, including by broadening its patentability criteria (European Commission, 2018[92]; USTR, 2018[93]). Existing international measures of intellectual property rights protection suggest that Argentina ranks below all OECD countries in this area (Levy-Carciente and Montanari, 2018[94]). Empirical evidence suggests that where rights are strong, foreign companies are not only more likely to invest but are also more willing to share technologies with local partners and more likely to engage in local research and development (OECD, 2015[95]). Intellectual property rights also provide an incentive to invest in research and development, fostering the creation of innovative products and processes and they give their holders the confidence to share new technologies through joint ventures and licensing agreements. In this way, successful innovations can be diffused within and across economies, bringing higher productivity and growth.

Box 1.6. Recommendations to foster integration into the world economy

Key recommendations

Reduce tariffs and non-tariff barriers, starting with capital goods and intermediate inputs.
Bolster adult training programmes and vocational education and training (VET) to ease the transition.
Extend the unemployment insurance scheme with individual accounts currently used in the construction sector economy-wide, while reducing severance payments.
Reduce domestic regulatory barriers to entrepreneurship and market entry, including at the level of provincial and local governments.

Other recommendations

Take an active role in seeking more trade agreements between MERCOSUR and large markets. Take unilateral measures to reduce trade barriers, especially non-automatic import licenses.
Further reduce administrative requirements for importing and exporting, including by fully implementing the online one-stop mechanism nationwide.
Implement mandatory competition assessments of existing and future regulations.
Continue improving the tax system by letting export taxes expire as planned in 2020 and phasing out provincial turnover taxes and financial transaction taxes.
Simplify insolvency procedures and increase their effectiveness to reduce costs for entrepreneurs.
Improve the quality of lifelong learning institutions for adults through better coordination between the different existing institutions across and within provinces.
Promote a multi-stakeholder dialogue to anticipate skills needs, update the current classification of occupational titles and identify skills mismatches and shortages.
Consider participating in the OECD Survey of Adult Skills (PIAAC) to inform education and training policies on skill needs.
Improve the certification system for work competences to enhance employability, in particular for informal workers.

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Annex 1.A

Annex 1.A1. Analysis of industry level effects of trade protection

To investigate how sectoral economic activity and exports have reacted to changes in input tariffs over the past 20 years, this report uses an industry panel dataset for Argentina from 1995 until 2016, which provides information on sectoral input and output tariffs, employment, production and value added as well as several indicators for the integration into global value chains. Data on production, value added and various measures for industry specific integration into the world economy are available for 1995-2011 and 33 sectors (including 2 natural resource, 16 manufacturing and 17 services sectors) and come from the OECD Trade in Value Added (TiVA) database (Dec 2016). Data on sector level formal employment comes from the Argentinian national statistics institute (INDEC) for the years 1996-2016 and 32 industries (data for public administration and defence is missing). Additional preliminary data provided by the TiVA team for the years 1995-2015 is used in robustness checks.

To measure protection at the industry level, this report uses data on average tariffs by 34 TiVA industries and enduse categories (capital goods, intermediate inputs, final consumption goods) for the years 1995-2016 from an OECD TAD database. Average tariffs by industry are calculated through computing the weighted average of product level tariffs within the industry, whereby import values are used as weights. Product level tariffs are applied tariff rates (AHS) at the HS 8 digit level, if these are not available preferential rates or most-favoured nation (MFN) rates are taken instead. To measure average input tariffs by industry, this report uses the technical input-output coefficients for Argentina for the year 2011 from the TiVA data (based on the IO matrix of 2004 with 34 industries) to weight input tariffs by the importance of the input for each industry.

The final dataset is a balanced industry level panel data set for the years 1995-2011, 1996-2016 for the employment regressions and 1995-2015 for additional robustness checks using preliminary TiVA data. Regressions using output tariffs as variable of interest only include 18 natural resource and manufacturing industries, as tariffs are not available for service sectors (average input tariffs can be calculated for all industries). To analyse the effects of protection on industry employment, production, value added and exports, OLS regressions are estimated for each of these dependent variables (in logs) which include as independent variables the tariff measures as well as time and industry fixed effects and use robust standard errors. In the baseline, each tariff measure is included in a single specification, but specifications where input and output tariffs enter simultaneously are also estimated.

To address possible endogeneity issues due to simultaneity of industry tariffs and the error term (leading to a downward bias of the coefficient estimate for tariffs), lagged tariff measures are used as instruments for current tariffs. In another robustness check, changes in Argentinian industry tariffs are instrumented using output shocks from the same industry in Brazil. This instrument is relevant because Brazil and Argentina are part of Mercosur and tariff changes are often jointly decided, whereby Brazil has a strong weight in these decisions in the Mercosur. The instrument is unlikely to be correlated with the error term because output shocks are not strongly correlated across the border. For example, in 2017/2018 a drought has strongly affected the whole agro-industrial value chain in Argentina, whereas Brazil has experienced a record harvest. Both instrumentation strategies give similar results than in the baseline estimations.

The following two tables A1 and A2 show the results for the preferred specification that underlies the presented figures in the chapter. As regressions control for industry fixed effects, i.e. identification only uses variation within industries across time, time constant industry specific characteristics do not confound the results. To increase power for the regressions, the baseline includes the maximal available sample size for each dependent variable. However, regressions restricting the sample size to be equal across dependent variables show similar results. Further regressions using variation across industries (and excluding the fixed effects for industries) show similar results and are presented in Arnold and Grundke (2019).

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
Dependent Variables:	Log of employment	Log of production	Log of value added	Log of output per worker	Log of value added per worker	Log of exports	Log of value added exports	Log of wages
Average tariffs for Inputs	-0.023***	-0.018**	-0.024**	0.003	-0.004	-0.062**	-0.064**	0.007*
Average tariffs for Inputs	(0.007)	(0.009)	(0.011)	(0.011)	(0.012)	(0.029)	(0.028)	(0.004)
Industry FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Observations	672	561	561	512	512	548	555	672
R-squared	0.986	0.980	0.979	0.936	0.906	0.962	0.970	0.996
Adjusted R-squared	0.985	0.978	0.976	0.930	0.896	0.958	0.967	0.996

Note: Robust standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1.

Source: OECD calculations based on data from OECD TiVA and INDEC.

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
Dependent Variables:	Log of employment	Log of production	Log of value added	Log of output per worker	Log of value added per worker	Log of exports	Log of value added exports	Log of wages
Average output tariffs	0.007***	-0.018***	-0.018***	-0.026***	-0.026***	-0.005	-0.005	0.002
	(0.003)	(0.005)	(0.006)	(0.006)	(0.006)	(0.012)	(0.011)	(0.001)
Industry FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Observations	378	306	306	288	288	306	306	378
R-squared	0.991	0.994	0.988	0.981	0.965	0.950	0.951	0.997
Adjusted R-squared	0.990	0.993	0.987	0.979	0.960	0.943	0.945	0.997

Note: Robust standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1.

Source: OECD calculations based on data from OECD TiVA and INDEC.

Annex 1.A2. The firm level analysis

This report uses firm-level data for Argentina and the years 2006, 2010 and 2017 from the World Bank Enterprise Survey to estimate the total factor productivity (TFP) of firms in several industries in Argentina. To infer the TFP at the firm level, sector specific production functions are estimated for the pooled sample of firms across all years using information on revenue, employment, capital and intermediate input use. To compute real values for all firm specific monetary variables, the CPI is used as deflator (as used in the Economic Survey for Argentina). In robustness checks, additional data from INDEC on industry specific producer prices (excluding taxes and distribution margins) are used as industry specific deflators, and our results do not change.

The sector-specific production functions are estimated using the Levinsohn and Petrin (2003) estimator, which requires information for the same firm in at least two time periods. This is why the estimation was only feasible for five aggregated industries, as the sample does not include sufficient information on firms in other industries. The residual of the estimated production functions is taken as a measure for firms’ total factor productivity (TFP). To make the TFP estimates comparable across industries, they are standardised by the industry mean. The resulting sample of firms for which the TFP estimation was feasible includes 1010 firm-year spells. In robustness checks, another measure for firms’ TFP is computed by using the method of Caves et al. (1982). The main results are robust to using this measure.

To compute the part of average industry TFP that is explained by resource allocation across firms within the sector for a given year, this study uses the decomposition of Oley-Pakes (1996). Thereby, aggregate sector productivity is decomposed into two terms. The first one is the unweighted average of firm-level total factor productivity (TFP). The second one is a cross term that captures allocative efficiency since it reflects the extent to which firms with greater efficiency have a greater market share. The final measure for allocative efficiency in an industry is the share of industry TFP that is explained by the resource allocation in the industry.

To investigate the correlates of firms’ productivity in Argentina, simple OLS regressions of firms’ TFP on covariates are conducted on the pooled sample of firms using robust SE. The following covariates are included: dummies for the firm being a subsidiary, partly foreign owned, partly government owned, dummies for the economic region the firm is located, the age of the firm, three dummies for firm size (based on employment, using 5, 20 and 100 as thresholds), dummies for the year of the observation as well as industry dummies. FE regressions were also estimated, but often give insignificant results due to low sample size. Selected results are shown in Table A3.

Independent Variable	Association with firm level TFP	Percentage increase/decrease of TFP
Skills
Percentage of workers that completed high school	+	0.02%
Firm has formal training programs for workers	++	1.9%
Trade
Share of direct exports in total sales	+++	0.1%
Share of imported intermediate inputs	++	0.03%
Firm has internationally recognized quality certification for its products	++	2.1%
Innovation
R&D expenditure (in Million Pesos)	++	1.6%
Using technology licensed by a foreign company	++	2.3%
Firm has its own website	++	2.4%
Access to Credit
Access to finance is an issue for the firm	---	-0.7%
Firm has a line of credit from a financial institution	++	1.8%
Infrastructure
Transport infrastructure is an issue for the firm	--	-0.6%
Number of electricity outages per month	---	-0.3%
Regulatory Environment
Labour regulation are an issue for the firm	---	-1.0%
Competitors from the informal sector are an issue for the firm	---	-0.9%

Note: Results are based on OLS regressions on the pooled sample of firms using robust SE. The dependent variable is log of firm productivity (TFP). All regressions control for dummies for the firm being a subsidiary, partly foreign owned, partly government owned, dummies for the economic region the firm is located, the age of the firm, three dummies for firm size (based on employment, using 5, 20 and 100 as thresholds), dummies for the year of the observation as well as industry dummies. The sign “+” stands for a positive correlation and the sign “-” for a negative correlation of the independent variable with firms TFP. “+++”/”---” stands for significant at the 1% level, “++”/”--” stands for significant at the 5% level and “+”/”-” stands for significant at the 10% level

Source: OECD calculations based on the World Bank Enterprise Survey 2006. 2010 and 2017.

References:

Caves, D.W., L, R.Christensen, and W. E, Diewert (1982), “The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity”, Econometrica, Vol. 50, No. 6 (Nov., 1982), pp. 1393-1414.

Levinsohn, J. and A. Petrin (2003), “Estimating Production Functions Using Inputs to Control for Unobservables”, The Review of Economic Studies, Vol. 70, No. 2 (Apr., 2003), pp. 317-341.

Olley, S and A. Pakes (1996), “The Dynamics of Productivity in the Telecommunications Equipment Industry,” Econometrica, 64, pp. 1263-1298.

Annex 1.A3. The consumption side analysis

The data set used for this analysis is the household survey “Encuesta Nacional de Gastos de los Hogares (ENGH)” from the year 2013 for Argentina. The analysis follows the methodology used in Porto (2006) and simulates the effects of a 50% (100%) cut in tariffs and non-tariff measures (NTMs) on household welfare. To evaluate the welfare effects of a tariff or NTM cut, relative price changes induced by these tariff and NTM cuts are computed and used to construct the resulting total compensating variation (across all products in the consumption bundle) for each single household in the data set. The total compensating variation divided by the total expenditure is equivalent to the share of the total purchasing power that would need to be taken away from the HH so that it reaches the same utility level as before the price decreases. Then the information is aggregated within each decile of the household income (per capita) distribution by averaging the share of the compensating variation in total expenditure for each HH across all households within each decile.

To compute the price changes induced by a cut in tariffs, this study uses tariffs for the year 2018 from the Ministry of Production and Employment (at the ISIC rev 3 digit level) as well as more detailed tariff data from the WB WITS database for the year 2017 (at the SITC 3 digit as well as HS 4 digit level). To measure ad valorem equivalents (AVE) of NTMs for Argentina, data comes from recent OECD work that computes AVE for NTMs by end use category for ISIC Rev 3 sectors (Cadot, Gourdon and van Tongeren, 2018[13]). In this analysis, the data for the category final consumption goods is used to capture the effects of a decrease of NTMs on the prices of consumption goods. To simulate the welfare effects of the price changes, it was necessary to match the data on tariffs and NTMs to the product classification used in the ENGH, which is completely different from standard trade classifications.

Annex 1.A4. The FDI regressions

To further investigate the nature of FDI flows in Argentina, regression analysis conducted for this report investigates how changes in sectoral import tariffs have been affecting FDI inflows in Argentina from 2005 until 2017. To this end, OLS regressions are estimated for sectoral FDI flows on the independent variables sectoral output tariffs in the current or last period, time and industry fixed effects. Through only using variation of FDI flows and tariffs within industries, the analysis controls for differences in FDI flows that are due to different relative comparative advantages across industries or other time invariant industry-specific characteristics.

The results show that FDI inflows increase in reaction to an increase in import protection, when only variation within industries is used (Table A4). This indicates that FDI flows to Argentina are mainly oriented to the domestic market, because they exploit the economic rents that are created through high import protection. When variation across industries is used, results are not significant indicating that FDI flows are also high for some sectors with low import protection.

	(1)	(2)	(3)	(4)
	Dependent variable is Inflows of foreign direct investment (in Million USD)
Average applied sectoral tariffs (t-1)	4.883		74.416**
	(9.748)		(29.107)
Average applied sectoral tariffs (t)		2.788		68.195**
		(10.483)		(28.649)
Year Fixed Effects	Yes	Yes	Yes	Yes
Industry Fixed Effects	No	No	Yes	Yes
Observations	216	216	216	216
R-squared	0.145	0.144	0.188	0.182

Note: Robust standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1.

Source: OECD calculations based on tariff data from OECD and data on FDI inflows from BCRA.

Annex 1.A5. The OECD METRO model

To analyse the economy wide effects of trade policy changes, computable general equilibrium models (CGE) combine the supply and the demand side of an economy. The OECD METRO model is a CGE model linking 61 countries and 57 economic sectors. It has been used widely in trade analysis to simulate the effects of domestic trade policy reforms in an international environment (OECD 2015). The simulations represent medium-term shocks where production factors are mobile, but there is no capital accumulation.

CGE models rely on a comprehensive specification of all economic activity within and between countries (and the different inter-linkages that tie these together) and are suitable for examining the impact of a wide range of different trade shocks. The METRO model builds on the GLOBE model developed by McDonald and Thierfelder (2013). The novelty and strength of the METRO model lies in the detailed trade structure and the differentiation of commodities by end use. Specifically, commodities and thus trade flows, are distinguished by end use category, as those designed for intermediate use, for use by households, for government consumption, and as investment commodities.

The underlying framework of METRO consists of a series of individually specified economies interlinked through trade relationships. As is common in CGE models, the price system in the model is linearly homogeneous, with a focus on relative, not absolute, price changes. Each region has its own numéraire, typically the consumer price index, and a nominal exchange rate (an exchange rate index of reference regions serves as model numéraire). Prices between regions change relative to the reference region.

The database of the model relies on the GTAP v9 database (Aguiar et al 2016) in combination with the OECD Trade in Value Added data. Policy information combines tariff and tax information from GTAP with OECD estimates of non-tariff measures on goods, trade facilitation and export restricting measures. The dataset contains 61 countries and regional aggregates and 57 commodities.

The model is firmly rooted in microeconomic theory, with firms maximising profits and creating output from primary inputs (i.e. land, natural resources, labour and capital), which are combined using constant elasticity of substitution (CES) technology, and intermediate inputs in fixed shares (Leontief technology). Households are assumed to maximise utility subject to a Stone-Geary utility function, which allows for the inclusion of a subsistence level of consumption. All commodity and activity taxes are expressed as ad valorem tax rates, and taxes are the only income source of the government. In this study, the government is assumed to maintain an internal balance by adjusting its expenditure. At the same time, the trade balance is fixed, and the nominal exchange rate is flexible in the simulations. Wages and the remuneration rates of all other factors (land, capital, natural resources) are assumed to adjust to equilibrate the factor markets.

For this survey, the OECD Metro model is used to simulate a unilateral decrease of Argentina’s currently applied tariffs to the lowest levels among G20 countries.

	Total Intermediate Input Cost	Intermediates Import Price
Cereal grains	-0.1	1.7
Other agriculture	0.4	0.2
Oil seeds	-0.3	0.8
Dairy	0.3	-3.1
Natural resources	0.0	1.0
Meats	0.9	0.5
Food and beverage	0.4	-4.1
Textile and wearing apparel	-4.2	-10.7
Mineral products	0.0	-3.8
Ferrous metals	-0.6	-3.8
Nonferrous metals	-0.4	-2.5
Metal products	-0.8	-6.5
Motor vehicles and parts	-3.7	-8.9
Transport equipment	-2.6	4.0
Electronic equipment	-2.3	-1.1
Machinery and equipment	-1.2	-4.1
Other manufacturing	-0.4	-2.9
Transportation	-0.5	1.7
Communication	0.3	1.7
Financial services	0.2	1.6
Insurance	0.3	1.7
Business services	-0.1	1.6
Other services	-0.1	1.6

Note: The results show the percentage change in sectoral input costs and import prices in reaction to a tariff cut in all natural resource and manufacturing sectors to the lowest levels among G20 countries.

Source: OECD calculations based on the OECD Metro model.

	Technical and assistant professionals	Clerks	Service and shop assistants	Office managers and professionals	Agricultural and other low skilled workers
Cereal grains	2.8	2.3	2.8	3.2	2.6
Other agriculture	1.1	0.8	1.1	1.0	0.8
Oil seeds	1.9	1.6	2.3	2.2	2.0
Dairy	1.4	1.2	1.5	1.0	1.3
Natural resources	1.3	1.2	1.6	1.3	1.2
Meats	0.8	0.6	0.9	1.0	0.7
Food and beverage	1.8	1.6	1.9	1.8	1.6
Textile and wearing apparel	-3.3	-3.5	-3.2	-3.1	-3.5
Mineral products	-0.3	-0.5	-0.2	-0.3	-0.5
Ferrous metals	0.7	0.6	0.9	0.7	0.6
Nonferrous metals	7.4	7.2	7.6	7.5	7.3
Metal products	-2.3	-2.5	-2.2	-2.3	-2.4
Motor vehicles and parts	7.7	7.5	7.9	7.6	7.5
Transport equipment	-1.3	-1.6	-1.2	-1.4	-1.5
Electronic equipment	-2.3	-2.6	-2.0	-1.8	-2.4
Machinery and equipment	-2.6	-2.8	-2.4	-2.6	-2.7
Other manufacturing	0.2	0.0	0.3	0.2	0.0
Transportation	1.2	0.9	1.3	1.1	1.0
Communication	0.8	0.6	0.9	0.8	0.6
Financial services	0.7	0.5	0.8	0.7	0.7
Insurance	0.7	0.7	0.9	0.8	0.0
Business services	1.0	0.7	1.1	1.0	0.8
Other services	-0.3	-0.5	-0.2	-0.3	-0.5

Note: The results show the percentage change in sectoral employment by occupation group in reaction to a tariff cut in all natural resource and manufacturing sectors to the lowest levels among G20 countries.

Source: OECD calculations based on the OECD Metro model.

References

Aguiar, A., B. Narayanan and R. McDougall (2016), “An Overview of the GTAP 9 Data Base”, Journal of Global Economic Analysis, No. 1, pages 181-208, June.

McDonald, S. and K.E. Thierfelder (2013), Globe v2: A SAM Based Global CGE Model using GTAP Data, Model documentation. Available at: http://www.cgemod.org.uk/

OECD (2015), “METRO v1 Model Documentation”, TAD/TC/WP(2014)24/FINAL.

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