Introduction to the series: Towards a possible productive transformation in Tierra del Fuego

The year 2022 marked the 50th anniversary of the Tierra del Fuego Regime. Its original objective of populating the island and promoting the local economy was successfully achieved. However, no exit strategy was ever envisioned for the regime. The so-called “industrial sub-regime” now requires an annual fiscal sacrifice of $1.07 billion dollars to maintain a system that has failed to promote provincial autonomy or the creation of local value. Thus, it has become imperative to revise it. The series of documents Towards a possible productive transformation in Tierra del Fuego depicts the current situation in order to analyze the feasibility of its transformation. It puts forward several public policy proposals to reformulate it, as well as different ways to reduce fiscal costs and promote innovation and value creation.

Where We Stand: 50 years after the creation of the Tierra del Fuego Regime

In 2022, the Tierra del Fuego Regime celebrated its 50th anniversary. The geopolitical objective that led to the adoption of Law 19,640 has been more than achieved. It has become an effective tool for promoting population growth and economic expansion, mainly through industrial employment. The law has played a crucial role in this process, operating in a “virtually empty” territory which was, until then, less dynamic than other regions in the country, and managed to level the playing field considerably.

Despite these accomplishments, the promotion scheme has failed to build the economic autonomy that Tierra del Fuego needs to stop relying on the whims of the national government. Its annual fiscal cost amounts to $1.07 billion dollars, equivalent to 0.22% of the national GDP, which is more than double CONICET´s budget for 2021, or 39.3% of the annual public spending on the Universal Child Allowance (AUH) and the Pregnancy Allowance (AUE). Due to its inherent design, it prioritizes total sales over the creation of local value. Furthermore, it fails to encourage innovation or exports.

A long-term reformulation of the industrial sub-regime and the launching of a process of diversification and productive transformation would allow Tierra del Fuego to overcome the uncertainty created by those that are constantly questioning the worth and future of the province from the central provinces of the country. Nevertheless, the sub-regime lacks an exit strategy, and Tierra del Fuego’s production matrix will not be transformed automatically. Instead, the development of Tierra del Fuego’s prosperity while reducing dependence on national governments requires a consensual, well-defined roadmap that lays out a predictable long-term path, which is supported by a broad coalition.

A possible path towards a productive transformation in Tierra del Fuego in 3 papers

Fundar aimed to contribute to the debate by producing a series of three working documents that provide evidence to inform both society and state actors regarding the necessary agreements for this process.

This document analyzes the structure and effectiveness of the industrial sub-regime. The Tierra del Fuego Regime had a clear goal: to significantly increase the population through industrial employment. Despite originally being devised to foster the island’s value creation, the existing regulatory framework and incentives do not encourage innovation or exports. Rather, over time two dominant features have prevailed: the reliance on imported inputs and the relatively minimal contribution of local value.

This paper develops a Proposal for the Reformulation of the industrial sub-regime and evaluates its expected impact on production, prices, employment and fiscal costs using a simulation model. It presents a feasible approach to gradually but substantially reduce the fiscal cost of this promotion scheme over a period of 11 years and to redirect economic incentives towards innovation. Its core concept is to shift from rewarding company turnover to rewarding domestic value creation. While this proposal is not the only option, it is feasible and capable of generating the necessary resources to stimulate new economic ventures and to guarantee social security, as well as job conversion for those affected by the transition.

This paper presents a two-fold analysis of the feasibility of productive transformation. First, it reviews the potential for industrial diversification and estimates the public and private investments required to broaden the productive base. With its existing resources and capabilities, Tierra del Fuego could potentially break from the constraints imposed by its economy dependent on a limited number of industries over an 11-year period. Second, this paper explores guidelines for developing a social protection and job conversion program to aid workers while between jobs, i.e., during the time needed to secure new employment.

This series of papers does not aim to present a water-tight package of solutions but rather to present different alternatives and scenarios. In a vibrant democracy like Argentina’s, solutions to these types of problems must be found through politics. Success depends largely on a clear strategy addressing the interests of stakeholders in the region—government, business, unions, and workers—and engaging them in the decision-making process. The availability of evidence does not imply that decisions are self-evident; conflicting interests must be addressed through politics. Accordingly, this publication provides crucial insights to shed light on diverse dilemmas and formulate comprehensive solutions.

Envisioning a possible transformation

This series of papers outlines a viable roadmap towards a productive transformation in Tierra del Fuego, with an emphasis on diversification and sustainability. Going down this road requires significant investments, both public and private. Reinvesting resources in Argentina´s southernmost province is a strategic decision, which would not only help find an exit strategy to alleviate the fiscal costs arising from the sub-regime but also to foster development in this key geographic territory near Antarctica that connects the Atlantic and the Pacific Oceans.

The potential tax savings from the proposed reformulation would be more than sufficient to finance the needs to promote productive diversification. Additionally, it would have a neutral or even positive impact on employment and economic activity because, while some industries —most notably electronics— would see a decline in size, the growth of others —most notably tourism, knowledge-based economies, and resource-based industries— would make up for the sectoral impact.

Although important, the investment required to support a social protection and job conversion program for this sectoral employment shift would be minor compared to tax savings and the investment for new dynamic activities. Residual fiscal savings could be directed towards measures promoting productive development in other non-metropolitan provinces even after investments for productive conversion.

A consensual reformulation

Only by forging wide political coalitions can such transformations be brought about. Due to the federal structure of Argentina, the National Congress serves as the primary forum for discussing and reaching consensus. In this regard, only a law of congress may guarantee that the committed fiscal savings are in fact directed to a fund (or some other institutional vehicle) to support productive transformation in Tierra del Fuego over an 11-year period, undoubtedly a difficult objective. The process should begin by creating a coalition comprising national, provincial and local authorities, businesses and unions sufficiently. This coalition should be comprehensive enough to reach and maintain over time a series of core agreements. These agreements should lay down the objectives, the process for reinvesting the savings obtained by the province and the institutional mechanisms to secure fulfillment of these commitments throughout the specified term.

While national politics should play a significant role in these agreements, their success is highly dependent on the region’s development. The government and people of Tierra del Fuego should therefore take the lead right away. Without a jointly created roadmap and the engagement of provincial authorities, production transformation is not feasible. For a successful outcome, the federal and provincial governments must enhance their state capacities to effectively manage this challenging journey. Coordination between the different agents involved in this transformation is a major challenge for the nation. Additionally, it is imperative for Tierra del Fuego’s government and society to assume leadership roles in defining the province’s future.

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