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2019 OECD Economic Surveys: Argentina 2019

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Over many decades, Argentina’s economy has been held back by weak policy settings and productivity has stagnated. Recent and additional reforms will help to raise prosperity for all Argentinians in the medium term. Strengthening competition by reducing barriers to market entry and foreign trade has particularly high payoffs. Tariff barriers have prevented a stronger integration into the world economy, which could raise consumer purchasing power, reduce the cost of firms’ inputs and lead companies in shielded sectors to become more productive. Currently, many jobs are trapped in activities with limited potential for productivity and wage growth. As job reallocation can result in temporary income losses, policies should ease the transition by enhancing training and social protection. Social policies are effective in reducing inequalities and poverty continued its declining trend during 2016 and 2017, until a severe economic crisis pushed the economy into a deep recession in 2018. This has shifted the immediate policy focus to restoring confidence and unwinding significant fiscal and external imbalances. Swift and decisive policy responses were necessary and their implementation will lay the grounds for a return of macroeconomic stability and a recovery from the recession, although significant risks remain.

SPECIAL FEATURE: FOSTERING INTEGRATION INTO THE WORLD ECONOMY

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Fostering the integration into the world economy

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.

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