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Business Changes in Argentina Due to the Creation of a Customs Union With Mercosur Essay

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Updated: Sep 15th, 2021

The creation of customs union with Mercosur, and the renewal of capital inflows to Latin America highly changed the structure of Argentina firm’s incentives; one of the most important consequences was due to a higher degree of heterogeneity in the performance of firms and sectors, and as a result, of the privatization process and deregulation of foreign investment, the non-trading sector was a highly privileged recipient of foreign funds.

Tradable goods producers, therefore, faced greater competition as well as new opportunities from Mercosur markets; nonetheless, this was enhanced by the availability of inputs and investment goods at international prices. These changes affected profitability across and within in very complex ways and as a result all firms were obliged to restructure (Fanelli &Medhora 2002: pp. 63-78). As a result, a good number of firms were forced to purely follow defensive restructuring strategies with their aim to ensure survival in a far move challenging environment

In postwar Argentina, productivity, competitiveness, and growth revealed a clear two different periods. In the first mid-1970s, it followed a strategy of import substitution industrialization. The economy grew during the period but the average growth rate was much lower than the ones observed in Latin American countries like Mexico or Brazil that were following the same strategy. In particular, the rate of productivity increase was generally low and as a result, the country systematically lost competitiveness.

This resulted in a recurrent balance of payments crises and stop-and-go cycles determined by the availability of foreign exchange (Weiss 2002: pp. 124-146). In the end, the country suffered a huge macroeconomic crisis which set the economy on the brink of hyperinflation. But this crisis, however, made it clear that the import substitution strategy had been exhausted as a way of increasing productivity and competitiveness.

All the same, the country made fruitless attempts to retain its economy. The recurrent balance of payments crises which led to the major macroeconomic instability and the sharp drop in the demand for domestic financial assets thus gave rise to an unprecedented tightening in the rationing of credit toward productive firms, larger ones were no exception too. It is not a surprise that during this period investment activity collapsed and productivity stagnated.

In this kind of situation, the need to close the current account deficit highly demanded a sharp trade-off between living standards and competitiveness because the only way for it to gain competitiveness in the shortest time possible was by reducing domestic costs through huge devaluations. However, maxi – devaluations of the 1980s, only affected mostly human welfare, competitiveness, and macroeconomic stability (Agarwala 1983: issue no.575; pp.46-51).

A decade later, the situation changed rapidly, structural reforms deepened the process to open the trade and capital accounts and the liberalization of the financial system was completed, at the same time, state-owned firms were privatized as well. In addition price stability was achieved through the implementation of a currency board scheme that pegged the Argentina peso to the US dollar, known as the convertibility plan.

Finally, the greater availability of foreign finance and the fall in international interest rates lessened the external financial constraints significantly, this helped to eliminate the causes of microeconomic disequilibrium at the time of debt crisis; this was actually the most significant achievement which distinguished the 80s from the 90s economic development. As a result, it was now possible to finance the higher trade and current account deficit because of the recovery of the private demand for capital goods (Agarwala 1983: issue no.575; pp.46-62)

If it is only possible for a consensus to exists within the proposition that in order to ensure economic success industries and firms must make development steps towards competitive advantage to shift away from relying on goods with a simple low order advantage that is mainly based on low wages and natural resources; however, one may ask how this can be achieved; it is important for everyone to understand that the problem is linked to the role of government and that of the future industrial policy.

But in this literature, I would like to highlight three broad theory strands of argument; first is that the industrial policy will inevitably produce inferior outcomes when compared to those generated by markets, this can be categorized in the extreme ‘government failure’ case; secondly, the industrial policy will be essential to overcome the obstacles faced by developing counties that aspire to industrialize, known as the extreme ‘market failure’ case; and thirdly, is the one which acknowledges the success of industrial policy at certain times in a given context, but it at the same time recognizes that there can be no universal validity in claims for its importance. In fact, there is no basis either in theory or practice to expect competitiveness to be created based on the firm’s initiative alone.

But the question which needs an answer is what governments are capable to do, putting aside the basic macro-economic fundamentals like inflation and the exchange rate at levels that are sensible (Bairoch 1975: pp. 82-91). But the answer to this question will inevitably depend on the circumstances of the case. For the purposes of this literature I can highlight four main idealized types of industrial policy;

  • A minimalist version, this is where the government has basically a ‘day and night watchman’ role that is the one of protecting property rights of all investors as a whole and by providing basic infrastructure and social services.
  • A ‘market-friendly’ policy, this is where the state intervenes to counterbalance the effects of market failures, for instance by the dissemination of information, and in support of activities with external benefits like education, training, and research and development and if possible with non-discriminatory support for new industrial investment,
  • An intervention policy where the state both picks and attempts to create winners by channeling resources in the form of domestic credit, foreign exchange or technology licenses to particular or specific firms within the sectors and, finally
  • A full command system where the state sets detailed production targets for industrial state-owned enterprises and controls the aggregate level of industrial investment.

The above four mentioned versions of industrial policy run from the extremes of virtual laissez-faire; the position of leaving decisions on industrial competitiveness to firms themselves to that of the central planning system, where firms have no independent role and in between the extremes there exists more plausible alternatives, like the market-friendly and intervention versions. But specifically the most important in relation to the industrial upgrading that is necessary for export diversification is the argument that diversification can be achieved primarily through the information that is provided by markets and by the discipline imposed on the competition of firms (Balassa 1977: issue no 256:pp.31).

That is to say that the market provides the command system for enterprises and this leaves us to take commercial decisions in a competitive market environment that is faced with price signals that reflect relative economic scarcities; therefore, firms will themselves seek out export opportunities, form alliances and the necessary organizational change to enable them to establish relevant links along the value chain (Blomstrom, Lipsey & Zejan 1994: pp. 34-49). This will ensure a level playing field between firms, however, extends to the role of policy which will ensure that the pitch has a smooth playing surface where all of the players’ skills can thrive.

For example, Asian countries like Indian had an active state-led industrial policy where public enterprises were the leading force for a time; however, it is important to stress this range of applications since there is no simple blueprint version or design for such a policy and even with East Asia which activated it, there were significant institutional differences in the way the policy was practiced (Amsden, Tschang & Goto 2001: issue no.14; pp.24-27), but central to all versions of industrial policy has been major the use of subsidized and directed credit targeted at particular branches and firms within those branches.

By concept, this can be seen as a form of compensation because developing countries at early stages in their developments, capital markets for finance are not available as a result firms cannot attract external finance by share issues.

And therefore all finances for investment will come from retained earnings and loans of the firm. In cases where the policy has worked best, it is important to note that the relationship between the state and the private sector has been mainly based on a well-recognized notion of reciprocity; and this is where government supports firms, which compete for its favors and recognizes them that they have an obligation to fulfill various performance targets (Balassa 1982: pp.65-72): for example, Japan, Korea, and Taiwan are the countries that can be cited as examples of an interventionist industrial policy (Chang 1993: Vol.17, issue no.2).

Work cited

Agarwala, R. (1983) ‘Price Distortions and Growth in Developing Countries’, World Bank Staff Working Paper, no. 575, World Bank, Washington, DC; 46-62.

Amsden, A., Tschang, T. and Goto, A. (2001) ‘Do Foreign Companies Conduct R and D in Developing countries?’ Asian Development Bank Institute, Working Paper no. 14, ADBI, Tokyo; 24-27.

Bairoch, P. (1975).The Economic Development of the Third World since 1900. Methuen; London; 84-91.

Balassa, B. (1977) ‘A Stages Approach to Comparative Advantage’, World Bank Staff Working Paper, no. 256, World Bank, Washington, DC; 31.

Balassa, B. (1982). Development Strategies in Semi-Industrialized Economies; John Hopkins for the World Bank, Baltimore; 65-72.

Blomstrom, M., Lipsey, R. and Zejan, M. (1994) ‘What Explains Growth in Developing Countries?’, in W. Baumol, R. Nelson and E. Wolff (eds) Convergence of Productivity: Cross-National Studies and Historical Evidence, Oxford University Press, New York; 34-49.

Chang, H.-J. (1993) ‘The Political Economy of Industrial Policy in Korea’, Cambridge Journal of Economics, vol. 17, no. 2.

Fanelli, J. and Medhora, R. (2002).Finance and Competitiveness in Developing Countries. Routledge press: London; 63-78.

Weiss, J. (2002). Industrialization and Globalization: Theory and Evidence from Developing Countries. Contributors: Routledge press: London; 124-146.

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