We need a thriving industry for any productive development strategy, but the Argentine sector is not just one thing. Behind that label are dissimilar industries, with differences in technology, complexity, dynamism, export capacity, employment generation and links with the State. To design our industrial policy, it is necessary to understand the different sectors that make it up. This series of documents focuses on the manufacturing industry. It offers a diagnosis to identify each branch’s characteristics and project with knowledge of the industrial policy we need.
Illustration: Boomba.inc.
Industrial Policy for the 21st-century
The manufacturing industry has played a key role in developing countries because of its great potential to promote economic growth, the creation of formal and well-paid jobs, technological innovation and national autonomy. This central role led governments to implement various public policies to promote it.
In the 1980s, the belief in the state’s ability to promote industry was replaced by a blind trust in the market. Today, both powerhouses and middle-income countries are returning to industrial policy. In that sense, the direction Javier Milei’s government is taking is going against the grain. National industry is too important for no state policy to guide and stimulate it.
This series of papers analyses the global context and reviews local history to outline the characteristics of an industrial policy for the future.
What do we mean by industrial policy?
We refer to a certain type of public policy that aims to transform the productive structure of a country with social and economic objectives, such as the acceleration of growth, the generation of quality jobs, technological development or national autonomy.
To this end, industrial policy draws on a variety of instruments that alter the “market” incentives of private companies, such as:
- subsidies for exports, investment, research and development, worker training,
- financing of strategic sectors through subsidised loans or credit guarantees,
- trade protection against imported competition,
- production by state-owned enterprises in strategic sectors, public procurement or rules requiring the use of a minimum of domestic inputs,
- the development of infrastructure for technology centres or laboratories, or the regulation of intellectual property,
- education and job training,
- investment in the university and science and technology system.
The renaissance of industrial policy in the world
The number of industrial policies is on the rise globally. This is no coincidence, nor is it a passing phenomenon. We can name five reasons to believe we are witnessing a renaissance of industrial policy worldwide.
China is the world’s leading global exporter and main trading partner. It contends for international leadership in research and development, controls most of the battery and vehicle production chains, and is a key player in AI development. The US has been responding to this development with its initiatives, such as the Inflation Reduction Act and the CHIPS and Science Act. These laws, which allocate substantial resources to industrial policy, are not isolated phenomena. They are part of a broader dispute strategy with the Asian giant.
The COVID-19 pandemic, the Russia-Ukraine war and the growing rivalry between the US and China, among others, made it clear that producing matters. Moreover, the predominant approach since the late 20th century – which undervalued the role of manufacturing at home – conspires against national sovereignty.
Efforts to mitigate the impact of climate change are motivating huge investments in economic powers, to generate technologies to decarbonise production matrices.
The idea that various branches of the manufacturing industry can create jobs of above-average quality was consolidated. This has beneficial effects on social cohesion and stimulates upward social mobility.
Recent solid academic research shows that productive policies have an overall positive impact in various areas such as economic growth, exports, innovation, regional development and employment generation.
What has industrial policy been like in Argentina in the 21st century?
Over the last two decades, Argentina returned to implementing policies to promote industry. However, unlike in the middle of the last century, this time there was no consensus among the main political forces on the role of industry as a promoter of development.
The Peronist governments considered it fundamental and sought to stimulate it through public intervention, particularly in the non-agricultural sectors. In contrast, liberal governments had less confidence in their strategic role.
As a result, most of the policies that sought to promote industry were pendular and inconsistent. As a result, significant differences can be marked between the different stages, according to the ideological sign of the national government.
Five stages of Argentina's industrial policy in the 21st century
2003 - 2007
Under very favourable macroeconomic conditions, industrial policy showed ruptures and continuities with that inherited from the 1990s. Among the continuities, we observe a high level of trade openness (with a more competitive exchange rate), the survival of the main promotion regimes and a policy of incentives for the automotive industry. The most important break was the policy towards the primary sector, with the increase in export duties. High-tech projects also began to take shape in fields such as satellite and nuclear energy.
2007 - 2015
Macroeconomy began to show signs of deterioration and industrial policy tools began to appear more and more, particularly oriented towards non-agricultural manufacturing. One of the most relevant changes of this period was the administration of trade, which went from being largely free trade to increasingly interventionist. Bets on high-tech sectors such as satellites and nuclear reactors matured, but at the same time resources were squandered on promoting low-value-added assembly industries, such as electronics in Tierra del Fuego.
2015 - 2019
Inherited macroeconomic problems were exacerbated and a large part of the previous industrial policy was reformed, with an opening-up of the economy and a readjustment of relative prices from the most protected sectors towards agro-industry. Macroeconomics was the national government’s priority. At the productive level, the focus was on greater specialisation in natural resources, agro-industry and knowledge-based services.
2019 - 2023
With the return of Peronism to government, productive policy regained prominence on the agenda, but it did so in an environment characterised first by the COVID-19 pandemic, and then by the serious deepening of macroeconomic imbalances.
2023 - actualidad
With Milei’s arrival in government, a new phase was inaugurated, which is moving towards abandoning most of the industrial policies of the previous period in a context of seeking greater openness, deregulation and reduction of public spending to eliminate the fiscal deficit.
What lessons can we learn from these stages?
Argentina needs an industrial policy for the 21st century. It is crucial to learn from past experiences, identifying both what worked and what failed. Without such learning, it will be very difficult to change the antagonistic ideas that led to the pendular behaviour of industrial policy. What lessons can we learn from the previous stages?
- Industrial policy can yield positive results and make the productive matrix more complex. It was decisive in building outstanding capacities in high-tech industries, such as satellite, nuclear or biotechnology, where Argentina stands out at the regional level. It was also decisive in consolidating South America’s main pick-up truck export hub.
- It is necessary to reformulate aspects that have not been effective, such as promotion regimes with high fiscal costs and poor results, which are very difficult to get out of once they are created (Tierra del Fuego being the main example).
- The excessive protection of certain uncompetitive sectors and the anti-agro-industrial bias that characterised much of the period should also be reviewed.
- Redesigning and properly implementing industrial policy requires investment in state capacity building and rigorous policy evaluation. Without this, it will be impossible to generate lessons that will allow for a change in the pendulum-like framework of ideas that has characterised industrial policy.
What industry do we have and what industry do we need?
Argentina’s industry accounts for 19% of GDP and more than 2.5 million jobs. It also accounts for 57% of Argentina’s exports and 54% of companies’ research and development expenditure. The quality of employment is higher than average. And the industry’s multiplier effects are among the highest in the economy.
Radiography of national industry: where we are and where to go
Argentina’s industry is highly heterogeneous. It includes sectors with high export potential, such as agro-industry, and medium and highly complex branches, such as the knowledge and metal-mechanic industries. It also includes traditional branches, which require a lot of protection and generate a lot of employment, although of below-average quality. And sectors such as assemblers which, despite being heavily promoted by the state, have had poor results in terms of innovation, competitiveness, employment and added value.
To understand their characteristics and project their future, we divided the local industry into six large blocks.
General characteristics of the main industrial branches
Leader in exports and employment generation, especially in the interior of the country. It represents almost 30% of industrial GDP and has a high percentage of national integration. However, in the last decade, it has experienced slow growth and faces challenges such as the transition to sustainability, on which exports will increasingly depend. Policies should focus on reducing export duties, promoting technologies for higher productivity and sustainability, opening new markets and adding value to raw materials.
They include branches such as petrochemicals, cellulose, steel, liquefied natural gas, lithium active materials and a large part of the chemical industry. They generate little but high-quality employment with high multiplier effects. The high volumes of investment required to start up these industries have not been realised in recent years, as a result of Argentina’s macroeconomic instability. However, they have great potential to grow, adding value to natural resources, such as Vaca Muerta hydrocarbons, lithium mining, or timber. This requires regulatory regimes that promote investments of this calibre.
They include sectors such as textiles, footwear and furniture. They are labour-intensive and present challenges in productivity and formality. Traditional industries have suffered from international competition. To improve their competitiveness, support is needed for financing, technological upgrading and training programmes to improve product quality and design. In addition, it is essential to reduce dependence on import protection.
They have great potential to be suppliers of natural resources. They generate formal employment and have considerable technological developments. While many firms export, imports are even higher. To grow, they require different types of policies, such as supplier development requirements in regimes that promote large investments. They also require public procurement and financing. Meanwhile, the automotive industry must begin its transition to electromobility and sustainable vehicles.
It includes branches such as pharmaceuticals, biotechnology and high-tech niches such as satellite, nuclear and aerospace. They account for 5% of industrial GDP and are the best positioned sector in terms of technological complexity. In addition, employment conditions are among the best in the industry, and demand a high level of skilled employment. To promote this block, it is necessary to finance the science and technology system, and to introduce government incentives for companies that innovate and export.
The emblem of this bloc is Tierra del Fuego’s electronics industry and notebooks. They produce for the domestic market, with a high dependence on imported inputs. They are low-value-added and low-employment industries. However, they have been excessively promoted by public policy, generating extraordinary rents despite the poor results. Industrial policy towards these branches must be completely reformulated, encouraging reconversion towards other sectors with greater potential to generate genuine competitiveness.
Without industrial policy, you can't. With any industrial policy, you can't either.
Both in the world and in our country, industrial policy has played a key role in shaping productive structures. But the Argentine case shows that not just any industrial policy will do. How we make industrial policy is central.
In addition to the general premise that Argentina needs more and better industry to develop, the recommendations are based on two other fundamental ideas.
- We should not be afraid to pick winners. Just as companies have a portfolio of projects with different levels of success, states should do the same and choose strategic industries. It is key to know how to let go when one of these bets does not work out.
- Industrial policy should be much more offensive than defensive. It should promote exports, R&D investment, productivity improvements and the emergence of new technology-intensive sectors, rather than preserving jobs in sectors threatened by foreign competition.
For industrial policy to be successful, four additional conditions are required.
- Incentives must be time-bound, with clear exit mechanisms and real enforcement by the state.
- Policies must be tied to performance targets, which first require that they can be rigorously evaluated in terms of their impact, to transform them according to their results.
- The autonomy of the state from the particular interests of civil society is key to good industrial policy. This does not imply a state that does not engage with the private sector. On the contrary, the state – while preserving its autonomy – must design industrial policy based on dialogue with the private sector, which provides valuable diagnoses and information that public officials often do not have.
- This agenda requires the construction of bureaucratic capacities to design, implement and monitor the production policy proposed here.
