South Atlantic Council
Commercial Relations between Britain
The conflict in the South Atlantic over the Falkland Islands in 1982 reduced trade between the United Kingdom and Argentina to a trickle, seriously affected existing investment and inhibited new investment, caused financial assets to be temporarily frozen and prevented British banks from participating in the rescheduling of Argentina's foreign debt. This situation persisted almost unchanged until the resumption of diplomatic relations in 1990. The history of this period from the point of view of trade relations has been told in an earlier Occasional Paper. It was then held by some 'that the stalemate is more likely to be broken by mercantile than by political initiatives'. In the event, mercantile initiatives did play a part in bringing the two countries together again. In what manner and with what success is the subject of this paper.
Whilst fisheries and potential oil resources are the economic issues directly identified with the Falklands question, traditional bilateral, visible and invisible, trade between Britain and Argentina, along with British investment in Argentina, merit separate consideration. They affect a wide business community in each country, as well as the large British community of some 150,000 people in Argentina. This paper demonstrates the scale of the transactions that are now taking place and describes the economic and political changes in Argentina, which favour further growth. The resumption of trade and investment has been directly linked to the improvements in diplomatic and political relations between Britain and Argentina since the South Atlantic conflict. The benefits should be safeguarded by continuing to improve political relations.
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After an introduction covering the historical background, the paper describes the structural changes in the Argentine economy, which have made it attractive to trade and foreign investment. The importance of regional integration in Mercosur is discussed. The effects and implications of constitutional change are considered briefly. The sections which follow then examine the growth of bilateral trade and of British investment in Argentina in the light of improved diplomatic, economic, and cultural relations between the two countries. Recent economic measures and political changes are reviewed. The paper concludes that as Argentina and Britain have increasingly integrated into the global economy and hence the economic links between them have strengthened, it becomes increasingly anomalous for a significant latent political dispute between them to remain unresolved.
The Situation Until the End of the 1980s
From the early 19th century, when the emancipation of the Spanish colonies in the River Plate area began, until the Second World War, Great Britain had a marked influence on the economic development of the region. British subjects took an active part in commerce; they directed the construction of railways and later of tramways and urban underground railways, financed by British capital; they bought and administered rural estates; they built ports, silos, meat-packing plants and cold stores; they organised gas and water supply services; they established banks and insurance companies.
In the first half of this century and especially after the First World War, new British investment was directed to manufacturing industry: chemical and pharmaceutical products, glass, paper, tobacco, soap and detergents, textiles, diesel engines and tractors as well as the oil industry. At the same time, 'traditional' investments were reduced; the railways, for example, were sold to the Argentine government in 1948. Nevertheless, British investment at the beginning of the 1980s was estimated to be in excess of £500 million. In 1976, almost 10% of foreign capital registered in Argentina was British, more if the Anglo-Dutch investments of Shell and Unilever are included.
Commercial relations between the two countries were abruptly interrupted soon after the Falklands/Malvinas conflict began. Both countries applied sanctions which affected trade: imports were forbidden; funds were frozen; movement of assets was controlled and restricted; interest payments and repayment of private bank debt were suspended; and measures were taken to forbid direct maritime and air transport. The total visible trade, combining both imports and exports,
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amounted to £300 million at the time. The unfreezing of funds and renewed participation of British banks in the renegotiation of foreign debt were two matters resolved at the end of 1982. The other restrictions endured several years, during which time direct trade between the two countries fell to very low levels, though some trade was conducted via third countries.
Towards the middle of 1985, the British Government lifted the prohibition on imports from Argentina. In April of the following year, restrictions on the Argentine side were lifted informally, only to be restored again in November 1986 in response to fishery conservation measures taken by the United Kingdom. Restrictions were eased again early in 1988 and reimposed soon afterwards, this time because of British military exercises carried out in the Islands. In these circumstances, by the end of 1988 Argentine exports to the United Kingdom amounted to £66 million whilst imports from the United Kingdom were only £13 million.
When democracy was restored in December 1983, Raúl Alfonsín won the first presidential election and led a Radical Party administration for six years. The first attempts to improve Argentine-British relations were made at a meeting in Bern on 18 July 1984 but these talks collapsed through serious misunderstandings and false expectations on each side of how far the other side was willing to make concessions. Throughout President Alfonsín's term of office, each government remained deeply suspicious of the other. Businessmen in both countries tried to persuade their respective governments of the need to restore normal commercial relations but no hint of a political thaw resulted.
The Diplomatic Umbrella and the Resumption of Relations
On 2 August 1989, less than a month after President Carlos Menem had taken office, the Argentine Government announced its intention to allow the import of British goods. At the same time, it signalled its wish to re-establish normal relations with the United Kingdom. This surprise initiative led to a rapid improvement in the political climate. The felicitous formula of the umbrella whereby both parties would set aside the question of sovereignty over the Falkland/Malvinas islands, reserving their respective positions, was quickly agreed by Sir Crispin Tickell and Lucio García del Solar meeting at the United Nations in New York and arrangements were made for diplomatic conversations to take place in Madrid in October 1989.
Even before this scheduled meeting, a group of businessmen and parliamentarians from both countries gathered on 7 September at Canning House, in London, under the chairmanship of Lord Montgomery; the Argentine delegation was led by the President's brother, Senator Eduardo Menem. The subjects of discussion were the Argentine economic situation, measures taken to combat inflation and to decrease the public sector deficit, and the need for investment, especially by countries of the European Community. It was decided that, if the
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Madrid talks were successful, a British trade mission would leave for Buenos Aires very soon afterwards.
In Madrid, both governments accepted that hostilities between them had ceased and proceeded to mend fences. Among other points, it was agreed to re-establish consular relations and to promote trade and financial relations. With this latter object in view, it was arranged that restrictions remaining since 1982 would be lifted and direct air and maritime communications would be resumed.
With the approval of both governments and the support of the British Overseas Trade Board, the first official British trade mission began work in Buenos Aires on 26 November. Led by the indefatigable Lord Montgomery and comprising more than 50 participants, the mission also visited the cities of Córdoba, Mendoza, Rosario and San Nicolás. It was warmly received in the public as well as the private sector. Personal and commercial contacts were renewed and opportunities for investment, transfer of technology, importing and exporting were studied.
The opportunity was taken to hold a plenary session of the Argentine-British Joint Committee for Trade and Investment at the Cámara Argentina de Comercio. A statement after the meeting welcomed the agreement signed in Madrid in October and recommended working towards the restoration of bilateral trade between both countries. The Committee considered that Great Britain could once again have an important role as a provider of equipment, technology and capital for new projects and in the process of privatisation, deregulation and modernisation to which the Argentine Republic was committed. For these purposes, it recommended that lines of finance and export insurance be restored at competitive rates, that further progress be made in Argentine legislation to create favourable conditions for foreign capital investment and that a double taxation agreement be signed as a necessary condition to stimulate investment and trade. The Committee also proposed that the patent protection system be reformed as the existing system discouraged research, transfer of technology and investment by not providing adequate protection. The specific areas in which the Committee thought there were opportunities for strengthening economic ties were agro-industry, mining, tourism, energy, communications, petrochemicals and food industries.
Further conversations between the two governments in Madrid in February of the following year resulted in the Joint Statement of 15 February 1990, whereby diplomatic relations were re-established and agreement reached to abolish entry visa requirements. With regard to commercial relations, it was agreed to negotiate an investment promotion and protection agreement, which was eventually signed in December 1990. The embassies re-opened on 26 February and the ambassadors–––Sir Humphrey Maud and Dr Mario Cámpora–––assumed their posts later in the year. Both embassies were staffed with dynamic and enthusiastic teams, dedicated to strengthening relations between the two countries in every field and especially in commerce.
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After the visit of the British trade mission, there followed missions to the United Kingdom from the provinces of Córdoba and Mendoza and the 'reciprocal' mission at the end of November 1990, headed by the then Under-Secretary of Industry and Commerce, Ing. Jorge Pereyra de Olazábal. The London Chamber of Commerce and Industry, the Cámara Argentina de Comercio and the Cámara Argentino-Británica de Comercio collaborated in the organisation of these missions, together with the embassies.
Economic Restructuring in Argentina
After the return to democracy in 1983, efforts to control inflation resulted in four successive stabilisation programmes, all of which failed because they did not address themselves sufficiently to eliminating the public sector deficit. The situation was aggravated by the debt crisis, when Argentina was unable to borrow abroad. President Menem took over from President Alfonsín six months earlier than the appointed term of office to make a fresh attempt to tackle the dire economic situation, with inflation then at a rate of almost 5,000% per annum. Contrary to the nationalist protectionism of previous Peronist governments, the new administration advocated a programme of liberalisation. The changes, based on deregulation and the privatisation of State-owned enterprises, were outlined in an important speech by President Menem to the Bolsa de Comercio de Buenos Aires (the stock exchange) on 20 July 1989 a few days after taking office:
Economic objectives were set early in the restructuring process:
Bills were submitted to Congress to tackle the economic emergency, the problems of public administration, the restructuring of State enterprises and the crisis in tax collection. In this way, the Executive re-affirmed its commitment to stimulate private enterprise, to transfer state enterprises to the private sector and to reduce the deficit in public expenditure.
Law No. 23,696 on State Reform was passed in August 1989, declaring a state of emergency covering the provisions of public services and the execution of contracts with all public entities. It authorised the partial or total privatisation of State-
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owned companies and determined the manner in which privatisations were to be carried out. It also provided for workers in privatised companies to be protected by existing labour legislation, preserving their social security and welfare fund rights. Tasks to be performed by the public sector were redefined and subsidies to private sector activity were eliminated. The State was to retain those functions which it cannot delegate, such as law and order, defence, foreign relations, public health, social security, preservation of the environment, encouragement of science and technology, regulation of monopolies and encouragement of competition. The production of goods and services was to be transferred to the private sector and the provision of most social and local services to the provinces.
An Economic Emergency Law (No. 23,697) was passed in September 1989 to increase the authority of the Executive to promote rapid changes. These included the suspension of certain subsidies to state entities, the reform of the Central Bank's charter to give it more independence and to prohibit it from financing the national government beyond limits established by law, the suspension of industrial and mining incentive schemes, with reduction of existing incentive benefits by 50%, and suspension of 'buy Argentine' requirements. Other changes included further liberalisation of foreign investment so that permission for investment is only needed for special cases, such as defence, with foreign capital to be treated on the same terms as domestic capital, a new valuation system for oil and gas royalties, a system for settling debts between public sector bodies and between the public sector and the private sector, an immediate stop to all additional expenditure on personnel in the state sector, the sale of state properties surplus to requirement and punishment by imprisonment for those not complying with fiscal and social security obligations.
These radical measures were introduced to begin to shape a new economic programme in which the State would be confined to basic public functions. The way was opened for fully deregulated markets for capital, labour, goods and services, to create a free-market economy.
Deregulation and Reducing the Government's Role in the Economy
A major step towards implementing total deregulation of the Argentine economy was taken in November 1991, when a Presidential decree (No. 2284/91) swept away most of the restrictions affecting domestic trade in goods and services, foreign trade, the meat, grain, wine and sugar industries, and capital markets. Intervention boards were abolished and roadfreight restrictions between provinces were eliminated. There are now no restrictions on business working hours or working days, nor quota restrictions on exports or imports, except for motor vehicles. No 'buy Argentine' preference is to be exercised by the State or by State enterprises, except in the case of locally-manufactured goods whose value does not exceed that of comparable imported goods by more than 10%, including duties. There is no longer a requirement to use Argentine ships or aeroplanes for imports by the State or by State enterprises or for the import of goods subject to preferential
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duties. Numerous taxes aiming at financing intervention boards were eliminated, as were stamp duties on transactions in shares, bonds and commercial papers.
Legislation, which since 1977 had guaranteed equal treatment for both domestic and foreign capital invested in productive activity, was further simplified by eliminating the requirement to obtain prior approval for foreign investment. It became necessary only to register foreign investment, in order to ensure the remittance of dividends and repatriation of capital.
A single social security system was created, controlled by the Ministry of Labour which became the only depository of employers' and employees' social welfare contributions. Consequently, all entities which formerly handled these contributions, such as the National Social Security Institute, were abolished. New labour legislation, aiming to reduce the rigidity of centralised collective bargaining, began with the elimination of compulsory labour agreements covering the whole of an industry, which applied to all business enterprises engaged in that industry. Agreements can now be made for each business enterprise, on the basis of activities, professional skills and other negotiating parameters, so that account can be taken of a firm's productivity to determine salary levels and working conditions.
The process of deregulation also had direct political effects. A number of laws were enacted governing the relationship of the federal government with the provinces, with a view to improving provincial public sector accounts and putting an end to major advances from the National Treasury to the provinces.
Two further stabilisation programmes devised with the help of the private sector were still unable fully to grapple with the fiscal deficit, although a start was made with the privatisation of telecommunications and airways.
Dr Domingo Cavallo was appointed Minister of the Economy in January 1991 and introduced a new fiscal package the following month, comprising a combination of liberal measures (freeing of imports, deregulation and privatisation) and sound public finances. This was followed by the Law of Convertibility in March 1991, whereby the convertibility of the currency was guaranteed at a fixed parity of 10,000 australes to the US dollar from 1 April 1991 and the Central Bank was prevented from issuing currency unless backed by foreign exchange reserves. More specifically, at all times the freely available international reserves (gold plus foreign currency) at the Central Bank should be equivalent to at least 100% of the monetary base, i.e. the financial liabilities of the Central Bank, made up of currency in circulation and deposits of financial institutions with the Central Bank, available on demand. From January 1992 the peso was re-introduced, at a value of 10,000 australes, and it remained pegged at one peso to the dollar.
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A limit was thus placed on the Government, preventing it financing the public deficit through inflation or by direct borrowing from the Central Bank. The charter of the Central Bank was changed in 1992, when it was made independent from the Executive and made responsible for preserving the value of the currency. It may not make temporary advances or purchase government securities. Rediscounts to the financial sector are strictly limited. The potential for the Bank to generate quasi-fiscal deficits (expenditure arising from transactions in the monetary or financial sectors and in the external sector) has been eliminated.
These policies resulted in a substantial reduction of consolidated public expenditure as a percentage of GDP, falling from more than 31% in the period 1984-1988 to around 26% of GDP in 1992 and 1993, which is quite low by international standards. If the Central Bank's quasi-fiscal deficit, referred to above, is added, total public expenditure represents a higher percentage of GDP; in 1988 it was equivalent to 46.4% of GDP. At the same time, the restructuring of public expenditure has permitted greater expenditure, as a proportion of GDP, on social security and welfare, education, science and technology. This did not apply to housing, where 1992 expenditure was below historical averages.
Sixteen years of high inflation, from 1975 to 1990 have been succeeded by years in which there has been a steady fall in the rates at which consumer and wholesale prices rise. The rate for 1989, when consumer prices increased by nearly 5000%, was brought down to 1445% in 1990, 84% for 1991 as a whole and 8½% for the last six months of 1991. The reform programme was so successful that the annual inflation rate in Argentina in 1995 was 1.6%, the lowest since 1944 and among the lowest in the world.
A new social security system was introduced by law at the end of 1994, with options to participate in a government pay-as-you-go scheme or a private sector scheme funded by social security contributions. An increase of domestic saving resulted as a consequence of these compulsory contributions.
Numerous measures have been taken to stabilise the economy and reduce inflation. As to public expenditure, all of the policy measures–––including the privatisations, the sale of State lands, the simplification of the administration by reducing the number of ministries and departments, the reduction in the number of public employees, the elimination of subsidies to the private sector, the centralisation of financial control of State enterprises and the economic autonomy imposed on the Provinces–––have had the overall effect of producing revenue surpluses.
The law pertaining to licensing and transfer of technology provides for minimum State intervention and constraints, with a liberal tax regime, so as to encourage the flow of technology into Argentina. A new law on mining investments enacted in 1993 substantially improves investment conditions,
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particularly by ensuring stable taxation and favourable conditions for capital investment. In the domestic market, price controls of almost all goods and services have been abolished. In foreign trade, the economy has been opened to international competition; in general, import duties do not exceed 20% and average 14%. The import licensing system has been cancelled.
Measures taken by the Government to change taxation policy have generally increased and extended taxation, as in the case of value added tax, and reduced evasion. The taxation system has been simplified and certain distorting taxes, such as bank debit taxes, export withholding taxes and taxes on financial services, have been reduced or eliminated. Exports of goods and services are exempted from value added tax. A new penal law defines taxation criminal offences, prison sentences and fines. The tax revenue department has been re-organised, computers introduced and staff recruited by public competition.
The list of State enterprises which have been privatised comprises a wide range of activities such as electric energy, water utilities, shipping and shipyards, steel mills, hydrocarbons, railways, telecommunications, television, airlines, etc. Several methods for the transfer of ownership have been used: sale of shares, concessions, sale of assets, and management contracts, with or without options to purchase subsequently. Foreign capital and technology have been attracted by this process, not least from the United Kingdom (see below). By the end of March 1993, about US$12,000 million had been realised and flowed into the public sector, permitting the redemption of a significant proportion of the foreign debt.
It should be noted that opportunities for investment are not limited to the privatisations, but extend also to investment in existing private enterprises, as well as in the creation of new ones, for instance in mining and agro-industry, especially if directed towards exporting.
Foreign Exchange Control
Foreign exchange controls were lifted in December 1989. All obligations to sell to the Central Bank foreign exchange earned by persons domiciled in Argentina, including the proceeds from exports, were eliminated. All restrictions were lifted on remittance of profits, repatriation of capital or performing other transactions in foreign currency whether for investment or trade.
Investment promotion and protection agreements have been signed with several countries, including the United Kingdom. These agreements provide for 'most favoured nation' treatment for foreign investors of the signing countries, procedures to remit profits and repatriate capital in the event that foreign exchange controls are reintroduced and access to international arbitration tribunals to resolve disputes.
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Further reassurance for foreign investors is given by Argentina's membership of the World Bank's Multilateral Investments Guarantee Agency (MIGA) since February 1992, thus making it possible for foreign investments in Argentina to be insured by MIGA against political risks.
Argentina's capital markets
As a result of the structural changes in the economy described earlier, Argentina's capital markets have grown significantly in trading volume. Before the introduction of the Convertibility Plan, daily trading averaged $11 million. By 1994, it had risen to $514 million, declining to $234 million in March 1994 after the Mexican devaluation. Trading volume gradually rose again and by September 1996 a daily average of $706 million was being traded. Stock prices have risen, from convertibility on 1 April 1991 to 30 September 1996, by 181% in dollar or peso terms. Privatisation accounted for a large proportion of market capitalisation but there is potential for further growth. In 1990, market capitalisation was only 2.4% of GDP. By the end of September 1996 it had risen to 13.5%, with $40.6 billion capitalisation, covering 149 listed stocks. However, this ratio is low compared with those of Santiago (122.4%), Mexico (43.9%), São Paulo (27.7%), Rio de Janeiro (26.7%) and Medellín (16.8%). By way of further comparison, the ratio for the New York Stock Exchange is 82.7%, for Tokyo 63.5% and for London 129.2%.
The Buenos Aires Stock Exchange (Bolsa de Comercio) and the institutions affiliated with it (Mercado de Valores, Caja de Valores and Banco de Valores), all in the private sector, make up a modern market system regulated by the Comisión Nacional de Valores (National Securities Commission), a Government entity. New instruments for trading are being developed, including a futures and options market.
Foreign investors have contributed to the growth of the Argentine capital market, because of the lack of restrictions on capital inflows, capital repatriation and remittance of profits. There are no exchange controls; the peso is freely convertible into any foreign currency; and foreign investors–––on a par with local investors–––are not liable to capital gains tax on stock exchange transactions nor to income tax on equity dividends or interest on bonds.
The International Response
The success of the stabilisation programme was recognised in March 1992 with the announcement of IMF approval for authorisation of drawings of $2,948 million under the Extended Fund Facility for a period of three years. This led, in the following month, to an agreement with Argentina's 400 creditor commercial banks
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under the Brady Plan. When the agreement was finalised, banks gained secure bonds in exchange for the previous debt instruments, but had to choose between a reduced rate of interest or a reduced face value for their credits. The total external debt was reduced by nearly one sixth. In July 1992 the Paris Club of official debtors followed suit by restructuring Argentina's official debt and placing a ceiling on amortisation payments after March 1995.
On 26 March 1991 the Treaty of Asunción, creating Mercosur, was signed by Argentina, Brazil, Paraguay and Uruguay and on 1 January 1995, a customs union between its members came into effect. These four countries now form a single market of 200 million people and a total GDP of almost $800,000 million. Mercosur has 50% of Latin American GDP, 43% of Latin America's population, 59% of its total area, 50% of its industrial production, 50% of intra-regional trade and 33% of total Latin American foreign trade.
Trade among the four countries reached around $12,000 million in 1994 compared to $3,600 million in 1990. Within Mercosur, tariffs have been reduced to zero in respect of 85% of goods traded. Exports within Mercosur, particularly between Argentina and Brazil, have increased remarkably. Argentina's exports to Mercosur countries rose from $1,833 million in 1990 to $4,740 million in 1993, whilst Brazil's rose from $1,320 million to $5,918 million in the same period.
Further stages of integration are envisaged. Negotiations with the other South American countries may lead to a South American Free Trade Area comprising Mercosur, the Andean Pact countries and Chile. Hemispheric economic integration in the Americas with the creation of an American Free Trade Area by the year 2005 is being suggested as the next objective.
Mercosur signed a Solemn Joint Declaration with the European Union on 22 December 1994 to form a political and economic inter-regional association which would be created on the conclusion of a framework agreement covering economic and trade co-operation and the preparation of a plan for progressive and reciprocal liberalisation of trade.
The strategic importance of Mercosur as a region for trade and investment cannot be overlooked. The United Kingdom, already a considerable investor in the region, is committed to developing stronger links with it. UK exports to Latin America and to the Mercosur countries in particular have steadily increased in the last few years, by 20% or more a year. However, Britain has not substantially increased its share of the Latin American market, which remains at about 2%, well
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below that of its major European competitors. Since 1991 Mercosur imports from the rest of the European Union have risen even more quickly.
There is much that British companies can offer to Mercosur such as experience of successful privatisation, regulation of markets, advanced technology in oil and gas, telecommunications, education and training, financial services and others, all in the fertile context of the open and liberal trading and investment systems obtaining in the Mercosur countries.
British companies wishing to establish themselves in the Mercosur region have to pursue a regional strategy. This has been the case with British Gas. Having opened an office in Buenos Aires in the 1980s, it examined the location of gas fields in the area (including Bolivia) and of the main centres of population, studied the gas industry and market in each country, and then proceeded to develop its interests step by step, in exploration and production of oil and gas, along with gas distribution, gas transmission and power generation. Argentina's gas industry is the most developed in the Southern Cone, with the largest reserves, well regulated and mature. The progress made by British Gas from its Argentine base shows the benefits of a strategic approach to the business opportunities available in the energy industry in the Mercosur region.
The new Constitution
Constitutional changes had been mooted for some time in order, it was said, to adapt the revered 1953 Constitution to modern needs. President Menem's desire to be re-elected was the real reason for change and this was facilitated by the Olivos Pact signed between Menem and the former president, Raúl Alfonsín. A new Constitution was approved by a National Constituent Convention on 22 August 1994 and came into force the following day. Among its provisions are new rights and guarantees for the people, the incorporation of international human rights declarations, equal opportunity, social security and environmental clauses, a People's Ombudsman and an autonomous government for the city of Buenos Aires. Congress is empowered to approve treaties of [regional] integration, as well as to give notice of termination of such treaties. As was expected, it also provides for the reduction of the period of office of the President and the Vice-President to four years with the possibility of standing again for the consecutive period.
In May 1995, President Menem, the candidate of the Partido Justicialista, was re-elected by winning almost 50% of the direct votes cast, most of the remaining votes being split between the two large opposition groups, FREPASO and Union Civica Radical. The Government party also did well in the elections for
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provincial governors and national deputies to Congress held on the same day. However, a higher proportion of votes went to the Partido Justicialista presidential candidate than to the deputies standing for that party. Menem himself was seen as a guarantor of economic stability; voting for Congress, for provincial senators and deputies, for mayors and local councillors followed a different pattern and was less markedly in favour of the Partido Justicialista, though clearly strengthening its dominant position.
Trade with the United Kingdom
Since 1986 trade with the United Kingdom has grown gradually; from 1989 this growth has been more pronounced and the total two-way volume amounted to £617 million for 1996. Figure 1 shows the amounts exported and imported from 1981. Tables in the appendix detail UK exports and imports from Argentina for 1990 to 1996, according to the top ten products exported or imported each year. The figures may be seen in the context of United Kingdom trade with Latin America. Now UK exports to Argentina have overtaken those to Chile and Mexico and are second only to the exports to Brazil.
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It should be noted that these statistics relate to tangible good, i.e. 'visible' trade. It is difficult to quantify trade of non-tangibles, so-called invisible trade, involving banking, insurance, shipping, financial services, travel, communications, education and tourism, as separate statistics for Argentina are not yet available. However, it is safe to presume that invisible trade is much greater than trade in goods, perhaps a total two-way volume of £1,000 million, taking into account services, investment income and transfers. This estimate is reasonable in the context of UK invisible trade with the whole of Latin America in 1995, excluding Mexico, totalling £6,117 million invisible exports from the UK and £4,395 invisible imports by the UK.
The estimate for invisible trade does not include portfolio investment, only the income from such investment. At the time of writing, market capitalisation in Argentina has risen to about $45 billion, of which about 35% is held by foreign investors. Of this, perhaps one quarter can be attributed to British investors, say between $3 - $4 billion. It has built up steadily since 1992, except for the period after the Mexican devaluation of December 1994.
A statistical analysis covering the years 1980 to 1992 carried out by the British Chapter of the Argentine-British Joint Committee for Trade and Investment showed that UK exports to Argentina under the SITC Code headings Power Generating Machinery and Equipment, Specialised Industrial Machinery, General Machinery, Equipment and Parts, Road Vehicles and Other Transport Equipment had fallen both in currency values and as a percentage of total exports to Argentina. A factor in accounting for this fall was the absence of the normal medium-term cover from the Export Credit Guarantee Department (ECGD). After the restoration of diplomatic relations, the resumption of cover for capital goods exports and to support other project work was actively pursued by the business community, particularly by the Joint Committee.
The President of the Board of Trade, Michael Heseltine, announced the resumption of medium-term cover for Argentina by the ECGD, in a speech in Buenos Aires on 4 June 1993. He said that
The cover was available for business which would help Argentina's economic rehabilitation, e.g. by promoting foreign exchange earning or import substitution, and the premium rates were admittedly high, at least twice those charged by many other export credit agencies. Achieving the availability of export credit insurance,
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especially medium and long term cover, has been an important contributory factor in the development of trade between the two countries.
The best prospect of an eventual fall in rates lay in continued economic progress in Argentina and hence improvements in ECGD's perception of the risks involved. There have been six reviews and reductions of the premium rates since 1993, representing a cumulative reduction of around 35%. This still leaves them somewhat higher than those of other countries' agencies, which are not working under a strictly self-financing regime, free of any subsidy, as ECGD does.
An ECGD-covered loan agreement was signed recently for the Clarke Chapman/Siderar contract for the port of San Nicolás (see p.18, below). This was noteworthy because it was the first export contract with Argentina's private sector underwritten by ECGD, since 1982. ECGD is guaranteeing the repayment of a $11.5 million loan by Kleinwort Benson Limited to finance the deal. ECGD continues to give Argentina serious consideration, reviewing premium rates regularly and reducing them when possible. A further review is due in mid-1997.
British Investment in Argentina
Historically, Britain has been a major investor in Argentina and a number of major companies such as ICI, Shell, Unilever, BAT, Reckitt & Coleman and Pilkington have long-established subsidiaries there. There has been a significant increase in British investment in Argentina over the last few years. It is estimated to have reached a total of £1,000 million in 1993 and 1994; a further £600 million was added in 1995 and 1996. An Investment Promotion and Protection Agreement between the United Kingdom and Argentina was signed in December 1990 and came into force in February 1993.
Table 1 Levels of UK Direct Investment in Argentina (£ millions)
Derived from: Overseas Direct Investment, CSO, London.
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Investment takes several forms. Established companies have made additional investments in their Argentine operations. The privatisation programme has drawn other British companies, e.g. British Gas, Anglian Water and Thames Water, into participation. New investments in the private sector have been made by Cadbury Schweppes, Ladbrokes and GKN. Portfolio investments by British fund managers have followed the sharp increase in stock market capitalisation.
Nearly all of the British firms with subsidiaries or associates in Argentina have made new investments in the last five years. Table 1, above, shows the value of new UK investment in each year from 1984 to 1993 and the estimated total UK investment, suggesting that it has risen from £732 million in 1984 to £1,644 million in 1993, since when it has continued to increase. Table 2 shows an estimated sectorial distribution of United Kingdom investment in Argentina for the period 1995-2000.
The largest new investment has been made by British Gas, with a 35% stake, worth $120 million, in a consortium with local companies Asta and Perez Companc, which won control of Metropolitana de Gas, the company which distributes gas to most of Buenos Aires.
British Gas has interests in several oil fields in Argentina. It has a 50% interest in three areas, containing numerous producing oil fields–––Cañadón Minerales, Las Heras and Piedra Clavada–––all in the San Jorge Basin and operated jointly by British Gas and Cadipsa. It has a 90% interest in a 2,092 sq.km. block called Los
Table 2 UK Direct Investment in Argentina (£ millions)
|Retail and Wholesale||1.4%|
|Machinery and Equipment||2.2%|
|Cleaning and Cosmetic Products||8.2%|
|Food and Beverages||25.2%|
Source: Centre for Production Studies, Ministry of Economy, Buenos Aires
[End of p. 16.]
Tordillos Oeste, in the central Cuyo Basin, acquired in 1991. After an initial geological and geophysical evaluation, a seismic programme is now being carried out. It has a 90% interest in a 419 sq.km. block in the southern San Jorge Basin, Barraca Yancowsky, which is currently being re-evaluated. It has also acquired the Lindero La Piedra oilfield, from the now privatised YPF (Yacimientos Petroliferos Fiscales). The net investment by British Gas in these areas was $65 million. In addition, $35 million has been invested in development. YPF and British Gas signed an agreement in November 1995 to co-operate in oil and gas prospecting around the Falklands/Malvinas Islands. However, their bid for a licence was not accepted.
Furthermore, British Gas has invested $44 million to purchase a 45% holding in the Dock Sud power station, with an installed capacity of 211 megawatts. Originally a coal-fired plant, it will be upgraded and converted to a combined-cycle system. The Argentine partners, Polledo, will continue to manage the company and British Gas will supply technical staff. British Gas has established an office in Buenos Aires to co-ordinate its operations in Latin America, where it participates with regional partners in projects such as Gasoducto Transandino, to carry natural gas from Argentina to Chile. Over the next two years, British Gas plans to invest a further $250 million.
Shell has invested $258 million on a new lubricants plant, in new port facilities at Dock Sud and in upgrading its retail network; a further $290 million was to be invested by the end of 1995. The company purchased a 65% interest in two petroleum areas, Meseta Espinosa and Cañadón Seco from Astra, adding 4,500 barrels to its daily production. It also purchased a 67% share of the General Alvear exploration area from Tecpetro and a 50% share in an offshore zone from Salada Marina. Shell's most important oilfield in Argentina is now La Ventana, where it has a 40% share previously owned by Astra. In the second half of the 1990s, the Anglo-Dutch group will have invested one billion dollars in its Argentine operation.
A wide range of British investments have been made.
[End of p. 17.]
[End of p. 18.]
British consulting engineers, are active in Argentina. Sir William Halcrow and Partners were the technical consultants for the privatisation of Obras Sanitarias de la Nacion, the Buenos Aires water and sewerage company. Knight Piésold and Partners have been hired by the governments of Argentina and Paraguay to investigate the viability of developing the Corpus Cristi hydro-electric dam across the Paraná.
British merchant banks have acted as financial consultants or advisers in several privatisations. Kleinwort Benson were the financial consultants for the privatisation of SEGBA and advisers to the Government on privatising Agua y Energia and Hidronor. They also advised, in association with Coopers and Lybrand, on the privatisation of Caja Nacional de Ahorro y Seguros, the savings bank and licensed insurer. Schroder Wagg in association with Sir Alexander Gibb won part of the financial consultancy for Agua y Energia and Hidronor. Rothschilds were the financial consultants for gas distribution in Buenos Aires. Morgan Grenfell are advisers to the new Export Bank (BICE) and to the Argentine Government on the Yaciretá dam.
[End of p. 19.]
Insurance was originally introduced in the early part of the nineteenth century by British firms working on an agency basis. By the end of that century, domestic companies were established and also companies originating in many foreign countries: Italy, France, Germany, Switzerland, USA, Spain. Because of the large flow of premiums abroad, a state re-insurance company, Instituto Nacional de Reaseguros (INdeR), was formed in 1947. All local companies were required to place a large proportion of their risks and premiums with INdeR, which also regulated policy rates and conditions. This protectionist policy created a huge internal market in which more than 300 companies became active, mainly acting as brokers for INdeR, and in which costs were above international levels. In 1992, INdeR was liquidated and the insurance market deregulated. As a consequence, the number of companies in the market has been reduced through mergers, acquisitions and rationalisation of existing operations.
The total estimated premium income is $3,500 million and foreign companies have taken the opportunity to strengthen their positions, not least British insurance companies such as Sun Life and Royal, and insurance brokers such as Sedgwicks. Sun Alliance (Alliance Assurance Co. Ltd) increased its holding in Los Andes Compañía de Seguros S.A. from 27% to 51%; it also has an agency representation through a local trading establishment, Barclay y Cía S.A Comercial y de Representaciones.
Lloyd's gross premium income from Argentina in 1995 amounted to $35 million, (including brokerage and excluding intersyndicate reinsurance). This represents 12% of Lloyd's premiums of $300 million from Latin America in the same year. It is generally accepted that Lloyd's has about 50% of the total
[End of p. 20.]
London reinsurance market although the percentage may vary over the different classes of business.
A 'British Week in Buenos Aires', the first major trade exhibition of its kind since 1982, was inaugurated by President Menem on 26 September 1992, in an opening ceremony also attended by the British Ambassador, Sir Humphrey Maud, and by Viscount Torrington who was leading a trade mission to the Southern Cone countries. This was significant as much for its political implications as it was for its business consequences.
Some 30 British companies participated, taking over the centrally located 'Galerías Pacífico' shopping mall, among them British Airways, Rover Cars, Wedgwood, British Gas, Thames Water Board, Cussons Soap, J&B Whisky and Lloyds Bank. It was estimated that more than 250,000 people visited the various shops and promotions. During the Week, the British Tourist Association also undertook a separate promotion and a week later a high level mission on British trade in invisibles arrived. At the same time, opportunities for British participation in Argentina's privatisation programme were highlighted besides the possibilities of expanding trade.
Since the resumption of diplomatic relations in February 1990, there has been co-operation between the two governments in many fields; fisheries conservation, oil exploration, visa abolition, impeding the trade in illicit drugs, air services, cultural exchanges and investment agreements.
Ministerial visits have taken place in both directions. From Argentina, Dr Domingo Cavallo, until recently the Minister of the Economy, was a frequent visitor to London. So is the Minister for Foreign Affairs and International Trade, Ing. Guido di Tella; in June 1995, he attended the inauguration of the British Argentine Chamber of Commerce in Great Britain, a ceremony which took place at the Argentine Embassy in the presence of the Argentine Ambassador, the Ambassadors of Brazil and Uruguay and high ranking officials of the FCO and the DTI.
Senator Eduardo Menem, President of the Argentine Senate, is also a regular visitor, most recently to attend the fifth Argentine-British Conference (ABC V), held at Keble College, Oxford, from 15 to 17 September 1995.
Mr Douglas Hurd, Secretary of State for Foreign Affairs, visited Buenos Aires in 1993, HRH the Duke of York in 1994 and Mr Michael Heseltine, President of the
[End of p. 21.]
Board of Trade in 1993. The City of London was represented by successive Lord Mayors, in 1992 and 1993. Diana, Princess of Wales, paid a visit to Argentina in November 1995. In the period since 1991, a number of other British ministers have been on official visits to Argentina, in particular the Chancellor of the Exchequer, Mr Kenneth Clarke, visited Argentina in January 1996, when a double taxation agreement was signed.
Perhaps the strongest symbol of renewed friendship between the two countries was the unveiling of a statue of General José de San Martín in Belgrave Square by HRH the Duke of Edinburgh on 2 November 1994.
Ever since convertibility of the Argentine currency was instituted in 1991, there has been concern, not to say speculation, that parity with the US dollar could not be maintained. It was argued that the national currency was overvalued which would affect exports and force the Government to devalue. Argentine enterprises were aware of the need to reduce internal costs, so-called 'Argentine costs', and sought to improve productivity and efficiency to become internationally competitive. Mercosur offered prospects of increasing exports, particularly to Brazil. Whilst the volume of imports rose steeply, much of it consisted of capital equipment needed to modernise industry.
The sudden devaluation of the Mexican currency in December 1994 had an immediate harmful effect on the other Latin American markets and it was thought that an Argentine devaluation would soon follow, whatever the legal constraints. However, the Argentine Government took drastic measures to compensate for the flow of capital out of the country by further reducing Government expenditure, raising taxes, arranging new borrowing both in the domestic market and abroad and programming further privatisations, thus signalling that convertibility would be maintained.
The elections in May 1995 showed public confidence in the Government's economic policy, in spite of an increase in unemployment. The results will also have helped gradually to restore foreign confidence in the market. Exports have continued to increase and the trade deficit has been reversed, in the context of a change in relative prices and constantly decreasing inflation. Prices of stocks and shares have returned to levels obtaining before the Mexican devaluations. In the financial system, deposits have recovered. Most of the outflow of capital, some $8,000 million, has been reversed and international reserves restored. Provincial governments are reorganising their own public sectors, reducing expenditure and privatising banking and public utilities.
[End of p. 22.]
Reported differences at various times between the President and his then Minister of Economy gave grounds for concern regarding the maintenance of convertibility, economic stability and the economic restructuring of the last six or more years. In the event, Dr Cavallo was replaced by Dr Roque Fernández in July 1996. Dr Fernández, who had until then been the President of the Central Bank, said that there would be no changes to the economic programme followed since 1989. He emphasised that the peso/dollar parity would be maintained, adding that the Argentine economy was in good shape.
On a visit to London in November 1996, heading an Argentine financial services mission, Dr Fernández asserted that the framework of the convertibility system provides companies with a series of guarantees that make Argentina one of the safest places in the world in which to invest, namely a fixed exchange rate protecting the value of investments and earnings, full backing with reserves guaranteeing convertibility of pesos to dollars and total exchange freedom allowing remittance of invested capital and earnings at any moment. Dr Fernández added
During the current year, we have shown growth in our second and third quarters, following four recessionary quarters in a row. This does nothing but confirm that we are going in the right direction and that Argentina has begun to reap the fruits of the stability we have achieved with the effort of the entire community and the assistance and confidence of multilateral organisations and foreign investors alike.
Further opportunities for the expansion of trade and investment are to be found in mining, agro-industry, power generation and the privatisation of electrical utilities in the provinces, oil and gas, water pollution control and protection of the environment, tourism and manufacturing. The province of Mendoza, already a centre for heavy industry and wine-making, could become the mining capital of Argentina. The five provinces in the Patagonian region, Rio Negro, Neuquén, Chubut, Santa Cruz and Tierra del Fuego, are sparsely populated but richly endowed in natural resources. They will become increasingly attractive to enterprise: fruit growing, the production and utilisation of wool, oil and gas production, and ample hydro-electric power provide the basis for wealth creation. Mountains for winter resorts, lakes and rivers for fishing and the Atlantic coast for wild life make tourism a growing service industry.
Strong efforts are being made to attract further British participation in the economic growth of Argentina. As mentioned earlier, a British Argentine Chamber of Commerce was founded in London in June 1995 to foster bilateral trade and investments, gather and distribute information, advance the commercial interests of its members and promote the Argentine Republic as a market and tourist destination.
The Department of Trade and Industry (DTI) 'Link into Latin America' programme includes roadshows, seminars and trade missions organised with chambers of commerce and trade associations to promote trade and investment.
[End of p. 23.]
Within that programme, a major conference took place in London on 10 February 1997, hosted by the Foreign and Commonwealth Office and the DTI in association with the Confederation of British Industry (CBI) and Canning House, with sponsorship from leading British companies. Keynote speeches were delivered by the Prime Minister, John Major; the President of Brazil, Fernando Henrique Cardoso; the President of Perú, Alberto Fujimori; the President of Panamá, Dr Ernesto Pérez Balladares; the President of the Board of Trade, Ian Lang; and the Foreign Secretary, Malcolm Rifkind. Papers were read by ministers from Latin American countries, including Dr Alieto Guadagni, Secretary for Industry, Commerce and Mining of the Argentine Republic, as well as the Vice-President of the European Commission, Sir Leon Brittan, the President of the CBI, Sir Colin Marshall, and British and Latin American businessmen.
'Britain's place in Latin America's growing economies' was the theme of another conference the following day, at Lancaster House, hosted by Canning House and the CBI, where once again the economic importance of Latin America to Britain and the opportunities for trade and investment in Mercosur and the other regions were reviewed by an array of ministers, bankers, academics and businessmen, including the President of the British Chamber of Commerce in Argentina, Mr Dennis Taylor.
It may be inferred from the results of recent elections in Argentina and from the interplay of the political parties in the affairs of the country, that the economic stability described in this paper has promoted political stability by providing a better context to sustain democracy.
the stability identified with the continuation of the Convertibility Plan has become the dominant social value. Stability–––the defeat of inflation–––arguably explains by itself Mr Menem's victory in the May 1995 presidential elections, at a time when the aftershocks of the Mexican crisis were being felt and the first signs of recession were appearing.
In Argentina, privatisation is to a significant extent synonymous with demilitarisation. On 23 July 1990, the Executive submitted to Congress a proposal for legislation authorising the privatisation of 23 companies run by the Ministry of Defence through DGFM (Dirección General de Fabricaciones Militares); shares in eight other companies associated with the defence industry and in which the State had a minority holding were also to be sold. The companies in which the Ministry of Defence had an interest used to include chemical and petrochemical plants, steelworks, a forge, naval shipbuilding and naval repairs, military vehicles, weapons, munitions, explosives, missiles, railway equipment, boilers, nuclear
[End of p. 24.]
power station components, etc. Demilitarisation of industry is, one may suggest, a further guarantee of political stability.
The change in the nature of Peronism from advocating nationalism and protectionism to free-market, liberal policies based on consensus also means that a threat to democracy from either Peronism or the opposition recedes. As with Argentina's new foreign policy, the new economic policy gives reality to a closer integration of Argentina into the Western world.
In writing about Argentina, The Times has referred to 'the burgeoning trade relationship' between the two countries. The question of the Falkland Islands does not appear to affect trade relations between the two countries on a day-to-day basis any longer. Co-operation in oil and gas exploration and in the management of fisheries in the South Atlantic continues as a matter of routine. Nevertheless, the long-term benefits to trade of finding a solution to the problem cannot be discounted. Economic and cultural links between the United Kingdom and Argentina have strengthened significantly since 1990 and it is desirable to remove any possible impediments to trade and investment. An agreed solution would provide a substantial boost towards closer political and economic relations.
[End of p. 25.]
Top Ten Products (Standard International Trade Classification)
|33||Petroleum, petroleum products||0.0||0.0||6.4||0.0||0.0||27.1||25.6|
|53||Dyeing, tanning, colouring materials||0.0||2.4||0.0||0.0||0.0||0.0||0.0|
|54||Medicines and pharmaceuticals||2.1||5.8||9.5||17.4||17.3||18.7||21.7|
|57||Plastics in primary forms||0.0||2.5||0.0||0.0||0.0||0.0||0.0|
|59||Chemicals & products NES||1.9||0.0||7.2||11.9||10.8||11.5||13.5|
|67||Iron and steel||2.2||6.2||7.6||0.0||0.0||0.0||0.0|
|71||Power generation machinery||2.8||2.8||7.0||8.2||0.0||9.1||20.8|
|74||General industrial machinery||1.6||4.9||7.3||6.4||11.5||13.9||12.5|
|77||Electrical machinery etc. NES||1.1||2.7||0.0||8.2||8.4||0.0||12.3|
|79||Other transport equipment||3.1||0.0||0.0||0.0||0.0||0.0||0.0|
|87||Professional, scientific, instruments||0.0||0.0||0.0||0.0||10.8||0.0||0.0|
|89||Misc. manufactured articles||3.5||10.1||9.9||13.3||16.7||14.9||15.3|
Key: NES - not elsewhere specified
Source: UK Overseas Trade Statistics, HM Customs and Excise
[End of p. 26.]
Top Ten Products (Standard International Trade Classification)
|01||Meat and meat preparations||50.5||32.9||24.9||27.7||32.7||64.7||47.4|
|03||Fish, etc., preparations thereof||2.7||2.6||0.0||0.0||0.0||0.0||0.0|
|04||Cereals and cereal preparations||9.6||13.1||21.8||18.7||20.9||21.9||38.7|
|05||Vegetables and fruit||8.4||10.7||9.3||6.7||10.6||13.3||18.7|
|07||Coffee, tea, cocoa, spices, etc.||0.0||0.0||0.0||2.3||0.0||0.0||0.0|
|08||Feeding stuffs for animals||0.0||10.2||10.3||30.0||50.3||69.9||83.8|
|12||Tobacco & tobacco mfrs||14.9||19.5||18.3||14.7||7.8||14.0||17.2|
|22||Oil seeds and oleaginous fruits||2.8||6.6||6.2||13.3||11.5||15.2||19.9|
|26||Textile fibres and their wastes||5.4||2.5||0.0||0.0||3.8||4.7||0.0|
|55||Essential oils & perfume matrls||0.0||0.0||3.5||4.0||5.1||4.2||6.6|
|57||Plastics in primary forms||3.5||7.7||0.0||0.0||0.0||0.0||0.0|
|61||Leather and fur skins||0.0||0.0||3.4||2.0||3.2||5.2||4.7|
|66||Non-metallic mineral mfrs||0.0||0.0||2.2||0.0||0.0||0.0||0.0|
|67||Iron and steel||10.1||0.0||5.2||3.8||0.0||0.0||6.4|
|79||Other transport equipment||0.0||0.0||0.0||0.0||0.0||4.3||0.0|
|89||Misc. manufactured articles||4.0||2.8||0.0||0.0||3.0||0.0||0.0|
Source: UK Overseas Trade Statistics/HM Customs and Excise
[End of p. 27.]
Alan Tabbush was born in England, but was brought up and went to school in Argentina, graduating at the University of Buenos Aires in 1953 as an industrial engineer. He returned to England to serve an apprenticeship in electrical engineering, beginning a period of thirty years in British industry. Since April 1987, he has worked independently as an international engineering business consultant and with the London Chamber of Commerce and Industry, initially as an export development adviser and now as a special adviser on Latin America.
Alan Tabbush is Chairman of the British Argentine Chamber of Commerce, Chairman of the Canning Club and a Vice-President of the Anglo-Argentine Society. He is a member of the Executive of the South Atlantic Council, having been Treasurer until recently. His earlier Occasional Paper written for the Council is detailed below.
Series Editor, Dr Peter Willetts.
The Papers are published by the Council, in order to promote public and media discussion of the Falklands/Malvinas question and other issues affecting Argentine-British relations. Any views expressed are those of the respective authors and not of the Council, whose sole aim is to improve communications and understanding between Argentines, British people and the Islanders. The following papers have been published. All except the first are still available.
Copies of the papers may be ordered from Dr Peter Willetts, City University, London EC1V 0HB. Cheques should be payable to the South Atlantic Council. Please add 25p per paper, to cover postage costs.
[Please do not use this postal address now, but e-mail to enquire about hard copies.]
[End of p. 28.]
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This web page was created from a scanned copy of the original Occasional Paper. The text remains unchanged, but some spelling and punctuation errors have been corrected. The original page numbering is indicated, so that correct references for quotes may be given. All the papers are available at www.staff.city.ac.uk/p.willetts/SAC/OCPAPERS.HTM. (The capital letters in this URL must be used).
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