Executive summary

Further reforms will have significant pay-offs

Expected GDP gains over ten years in percent
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 http://dx.doi.org/10.1787/888933541605

Following years of unsustainable economic policies, Argentina has recently undertaken bold reforms and a turnaround in policies that has helped to avoid another crisis and stabilise the economy. Reforms such as those already implemented and those currently planned should help lay the foundations to raise the material living standards and well-being of all Argentinians, including the most vulnerable. Continuing the structural reform agenda to deliver better material living standards for all Argentinians will be crucial. Aligning key policy settings with the OECD average could increase GDP per capita by 15% in 10 years. Bringing down inflation and the fiscal deficit is necessary for these pay-offs to materialise.

Raising investment and productivity is the basis for sustainable income gains

Barriers to entrepreneurship are high
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 http://dx.doi.org/10.1787/888933542308

Structural and institutional reforms encompassing regulation on product markets, labour markets, competition, taxes, infrastructure, education, trade policy and financial markets can raise investment and productivity, which is the basis for sustainable income gains. Such reforms will involve adjustment costs as jobs will be lost in some firms and sectors and created in others. But well-designed policies can protect the poor and vulnerable from the burden of adjustment. A current focus on strengthening the social safety net and efforts to improve the quality of education are part of such policies, as is labour market support for affected workers.

Protecting the poor and ensuring that growth is inclusive and sustainable are key priorities

Income inequality is high
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1. 2014 or latest year available, 2016Q2 for Argentina.

 http://dx.doi.org/10.1787/888933541624

The benefits of stronger growth will depend on improving the distribution of income, which is currently very unequal and leaves one third of the population in poverty, and one out of five Argentinians at risk of falling into poverty. Reforms and a recovery of growth are expected to provide better job and income opportunities, although some current jobs may be lost in the transition. Efforts are also underway to reduce inequalities in the access to quality education. Public transfers to reduce inequality and poverty will continue to play an important role, together with stronger efforts to curb labour market informality to improve productivity and job quality for all Argentinians.

MAIN FINDINGS

KEY RECOMMENDATIONS

Macroeconomic policies

The fiscal deficit has increased substantially over the last years. Maintaining access to external finance and debt sustainability will require a credible plan to reduce the deficit.

Ensure fiscal sustainability by continuing to pursue planned fiscal targets but allow temporary deviations in either direction from the targets if growth disappoints or surprises on the upside.

Public expenditures have risen strongly over the years, but not all of this spending has contributed to stronger inclusiveness or growth. Spending efficiency could be improved by reallocating spending while ensuring a strong social safety net.

Phase out energy subsidies.

Rationalise public employment, particularly in the provinces.

Achieve further cost savings in state-owned enterprises and improve their governance.

Undertake an expenditure review.

The tax system is complex and few people pay income taxes. It also contributes comparatively little to reducing inequalities and creates strong incentives for informality.

Undertake a revenue-neutral tax reform, including

  • Lowering the income threshold where taxpayers start paying personal income taxes.

  • Phasing out the provincial turnover tax and financial transaction tax.

  • Broadening the base of value added taxes.

  • Introducing progressivity into social security contributions.

  • Lowering social security contributions temporarily for low-paid workers whose jobs are brought into the formal sector.

Recent setting of multi-year deficit targets constitutes noticeable progress, but is not yet locked into legislation.

Introduce an expenditure rule and consider implementing a debt target over time.

Use an independent fiscal council to assess compliance with the rules.

The central bank lacks formal independence and its mandate lacks clarity. This reduces monetary policy effectiveness.

Limit dismissal of the Central Bank governor to severe misconduct.

Simplify the Central Bank’s mandate, prioritising price stability.

The rule of law has been weakened in the past and corruption has affected the investment climate.

Strengthen the capacities and independence of bodies investigating corruption, reorganise and strengthen courts and enact the corporate liability bill to prosecute bribery.

Strengthening productivity and investment

Barriers to entry and weak enforcement of rules weaken competition on product markets.

Simplify administrative procedures and licensing requirements to start an activity.

Implement a one-stop-shop approach to business regulation.

Ensure that the competition authority has autonomy and adequate resources.

The economy, shielded from international competition, has not been able to reap the full benefits of international trade and global value chains.

Lower import tariffs and further reduce the application of non-automatic import licenses.

Expand labour market support for affected workers.

Rigid labour market regulations hamper job creation, raise labour costs and curb productivity growth.

Protect workers with unemployment insurance and training rather than strict labour regulations.

Introduce out-of-court procedures for labour disputes.

Skill shortages are holding back productivity growth and the creation of high quality jobs.

Develop the vocational education system by increasing the involvement of employers and workplace education.

Better align tertiary curriculums with jobs.

Making growth more inclusive

Educational attainments are low. Grade repetition and drop-out rates are high.

Strengthen mechanisms to identify and support students at risk of dropping out through tutoring and individualised support.

The quality of education and in particular teacher quality is low, related to shortcomings in teacher training.

Merge teacher training institutions and strengthen their quality standards, governance, accounting requirements and transparency.

A lack of skills and incentives is reducing employment. A high share of youths is neither in training, employment nor education.

Scale up training, employment services, and incentives for small business development.

Female employment is low although women are on average better educated than men.

Expand early childhood education, promote flexible working time arrangements and extend paternity leave.

A third of the workforce is in informal employment, with low wages and no job protection.

Enforce formalisation and compliance with more labour inspections, in conjunction with other measures to strengthen incentives for formalisation mentioned above.

Pension spending is high and population aging threatens the long-term sustainability of the pension system.

Index pension benefits to consumer prices.

Align retirement ages for women to those for men.

Social protection programmes reduce poverty and inequality, but are fragmented with substantial overlaps.

Integrate existing social protection programmes and allow them to share registries and targeting tools.