Feb 5, 2018 | 09:00 GMT

7 mins read

Argentina and Brazil Race the Clock on Reform

The window of opportunity for Argentina and Brazil to move forward with trade and economic liberalization policies is fast closing amid the prospect of political change in both countries.
(iStock/Getty Images/Stratfor)
  • Argentina's government will prioritize economic and trade liberalization reforms this year with an eye to reducing the cost of doing business in the country.
  • Brazilian President Michel Temer will use his remaining time in office to conclude trade negotiations and push through economic proposals such as a major privatization plan and pension reform.
  • The leaders in both countries must move fast to implement their respective visions for liberalization because of upcoming elections.

For the economic powerhouses of the southern cone of the Americas, there's no time like the present. Argentine President Mauricio Macri's ruling coalition, Let's Change, made gains in legislative elections late last year, strengthening his hand in the pursuit of economic and trade liberalization that will allow Argentina to attract more foreign investment and benefit from possible transatlantic trade deals. And while Macri's counterpart in Brazil, Michel Temer, might not boast as strong a hand, the latter is also seeking to implement reforms that will open South America's largest country to more business. For Macri and Temer, however, looming elections oblige both to redouble their efforts on economic reforms before the clock strikes zero.

The Argentine President's To-Do List

Argentina has moved quickly on the economic reform front. After the success of Let's Change in the October 2017 polls, Macri's administration succeeded in persuading Argentina's Congress to approve tax and pension reforms before launching negotiations on comprehensive labor reform. Macri's ruling coalition does not wield a majority in either house of Congress, but his party's positive electoral performance in the elections was an indicator that his reforms to liberalize the economy and trade continue to resonate with a significant portion of Argentina's population. At the same time, Let's Change's impressive performance strengthened Macri's hand in securing opposition cooperation to pass some major economic reforms.

Macri offered more federal funds to opposition-controlled provinces and, in exchange, opposition governors agreed to pressure members of Congress from their parties to aid the government in passing important reforms on issues such as pensions and taxes. Faced with a deficit that ran more than 4 percent of the country's total gross domestic product last year, the Argentine government moved to enact the pension reform, which includes reductions in annual raises in payments to retirees, as part of the measures to save the country more than $3.5 billion a year and prepare the way for another major policy plank, taxation reform. Thanks to his tacit agreement with opposition governors, Macri secured approval in Congress in December to pass a reform that will reduce taxes from 35 percent to 25 percent over the next four years for any company that reinvests its profit in the country.

Since Macri came to power in December 2015, Argentina has imposed a series of austerity measures in an effort to reduce the country's growing fiscal deficit and dampen inflation. In his two years in power, Macri has achieved a modicum of success in tackling inflation: Last year's inflation rate ran above 24 percent — higher than the government's target of 17 percent — but the figure was still far below the 40 percent inflation rate of 2016. The government's pension reform proposal prompted some violent protests by labor and social movements, but the demonstrations failed to prevent congressional approval for the motion.

Labor reform, in fact, remains high on the government's list of priorities. Foreign investors have frequently complained about Argentina's rigid labor laws, as well as the power of its labor unions. The government, however, has solicited the views of labor unions in an effort to find some common ground on labor reform. Already, Macri's administration has reached some basic agreements with a section of the labor movement. Among other proposals, the reforms will include more flexible rules for outsourcing activities, limit the amount of monetary compensation paid to workers in labor lawsuits and grant a one-year amnesty to companies that have yet to comply with current labor laws. Over the next four months, the government is also planning to sit down with the General Confederation of Labor to evaluate a proposal to permit small companies to hire independent contractors.

Ultimately, the prospects of securing approval for the labor reforms do not appear as bright as they were for the tax and pension reforms. Accordingly, the government is already pursuing a Plan B on labor reform that includes negotiations with specific industry sectors and labor unions to increase labor flexibility. Such a plan would not require the passage of a broad labor reform package through Congress but would include more limited measures involving specific industry sectors.

Macri Cuts Through the Red Tape

Macri's administration, however, is not only pursuing macrostructural reforms in the economy. The government is also seeking to implement 170 microeconomic reforms with the goal of reducing not only the cost of doing business in Argentina, but also the amount of time companies must spend navigating the country's labyrinthine bureaucracy. In the end, the government hopes such measures will make Argentina more attractive to foreign businesses by simplifying legal procedures for investment.

In all his pursuits, time is of the essence for Argentine President Mauricio Macri.

The government already has accomplished some of its microeconomic targets, including a measure to cut the price of docking and undocking services at Rosario, one of Argentina's largest ports, by up to 40 percent. Although a relatively small measure, the move was significant because port-docking services constitute 30 percent of the total transportation costs of Argentina's agricultural exports. Macri managed to reduce the price of docking prices at Rosario because the government succeeded in breaking a monopoly that a single company had held over the port, which handles more than 80 percent of Argentina's total agricultural exports. Additionally, the government lifted a clause that required businesses to obtain government approval for import licenses for over 300 products, including televisions, cell phones, air conditioners and other consumer products. Now, companies will automatically obtain import licenses for these products.

In all his pursuits, time is of the essence for Macri. The president is expected to run for re-election next year, but because the campaign will demand most of his time in 2019 — particularly in the face of a populist revival that could capitalize on discontent with his austerity policies — he must accelerate his push for liberalization this year.

Temer's Race Against Time

To the north, Brazil is also considering similar moves, but the window of opportunity to enact liberalization reforms is even shorter than in Argentina. While Macri contends with a possible leftist reaction to his policies, Brazil's traditional parties have suffered through a corruption probe that has greatly increased the chances that an outsider will win general elections in October because of the record-low approval ratings for Temer. Still, Temer's administration approved labor reform last year and has implemented plans to gradually reduce the trade barriers on some maritime transportation services starting in 2020. The European Union has long demanded that Brasilia end protectionist measures on maritime transportation services before the signing of any free trade agreement with the Common Market of the South (Mercosur) — a deal is possible by the end of this year — while Brazil's National Confederation of Industries has openly backed Mercosur's efforts to sign a free trade agreement with Brussels.

In terms of workplace reform in Brazil, Temer already has made labor rules much more flexible, permitting more companies to hire contractors more easily. In what remains of his term, Temer will likely focus on facilitating an agreement on some key trade negotiations, such as the one between Mercosur and the European Union, and pushing through economic measures such as pension reform and a broad privatization plan. In terms of the latter measures, Temer aims to reduce an annual $50 billion deficit in the pension system and sell off 75 state-owned companies, including Latin America's largest power company, Eletrobras. The government plans to submit its pension reform bill to Congress next month, but the proposal remains unpopular, leaving the government struggling to secure enough support from lawmakers to pass the measure. By contrast, members of Congress are expected to approve the privatization plan, which has generated less controversy.

Argentina and Brazil's parallel steps toward economic and trade liberalization are of paramount importance if Mercosur intends to make progress on free trade deals, as the two countries wield the power to veto the bloc's trade agreements. Although the manufacturing industries in the two countries have frequently adopted a protectionist stance in Mercosur's trade negotiations, macroeconomic and microeconomic reforms to reduce the cost of doing business in both Argentina and Brazil have helped mitigate the reluctance of domestic industries to open the bloc's doors to trade. The challenge, however, is time: The window of opportunity to move forward with trade and economic liberalization policies is fast closing amid the prospect of political change in both countries. If the winds of change blow through Buenos Aires and Brasilia, all the efforts by the incumbent administrators are unlikely to reach fruition.

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