-OpEd-
BUENOS AIRES — People talk a lot about the opportunities that the Chinese market represents for Argentine firms. And there are plenty of articles on the different ways our provinces might trade with Chinese provinces.
Keep in mind, though, that Chinese provincial officials are primarily interested in growth and in the profitability of Chinese firms on their turf, while in Argentina, focus on private-sector growth and profits is precisely what is missing in the agendas of many of our governors.
What kinds of opportunities, therefore, are we really talking about?
International trade, in this context, isn’t just a matter of competing companies. It’s a clash of “systems’ rather, with each system representing a confluence of companies and governments, but also educational structures and the scientific and technological community. And leading these systems is the public sector, which is what defines the incentives involved.
What Argentine business executives ought to understand is that Chinese firms receive the attention of their respective province’s highest officials, and enjoy an ecosystem that provides them internationalization services, soft financing, workforce training, subsidies to recruit talented graduates, help for innovation, help in incorporating telecom, information technologies and AI… and all the while paying 10 percentage points less in taxes on company profits.
There are numerous historical, cultural, institutional and demographic differences between Argentina and China. But there is one that is barely mentioned: Chinese provincial governments receive a percentage of the value added tax in addition to a portion of both corporate and personal incomes taxes.
The money is collected locally, in the provinces themselves, which can then use the capital to finance investments and services for their communities. And if, in the end, there is a surplus, the provinces also have discretionary spending powers. Chinese officials are not chosen by the people, but by higher authorities, and those authorities largely evaluate them on the basis of the province’s economic development.
Most governors realize that their positions depend on money flowing from above and on the votes from below.
People face restrictions on their movements in China, but not firms. This simple equation helps one understand what the provincial Communist Party boss and governor need to do:
First, they try to ensure that there are many and profitable firms based in the province.
Second, they want spending to be tight, but not so tight as to deprive firms of services and prompt them to move to a neighboring province.
Third, they need to show results on the management end to ensure political promotion, and create and retain more and better firms, which will thus enhance their economic and political power.
And fourth, they must compete fiercely with other provinces to attract companies.
Everything, in other words, is geared toward development, though there is certainly corruption in the use of discretionary spending powers and funds.
In federal and democratic countries, on the other hand, votes are the big incentive behind the state’s management and development decisions. Jobs depend on business dynamics, and voters know that.
But in Argentina, this incentive only works in a few provinces. Most governors realize that their positions depend on money flowing from above and on the votes from below. If, for example, they contribute 1% to pooled tax revenues and receive 3%, and bring in only a meager amount in provincial taxes, it is not in their interest to funnel resources toward development and build up more and better businesses. It has little electoral impact, and they need to think of their position in the short term.
What they do need, however, is to divide public-sector jobs and social projects to win the next elections; negotiate their presence in the National Congress and ties with the executive branch to receive funds; and finally, gather as much “discretionary” money as possible to finance their political machines.
The district mayors of Buenos Aires and its suburbs broadly follow a similar logic, though in exacerbated form as people in Argentina can freely move about, and cityward migration due to underdevelopment in the province fuels more poverty in the Buenos Aires conurbation.
When we say governors need this or that, we are not judging Chinese and Argentine governors personally. There are examples of governors who spend money on provincial development despite a lack of incentives. We are referring, rather, to the institutional framework in which they must operate.
The argument here isn’t that we should copy the Chinese system, which is top-down and authoritarian. What we could do, however, is rectify our incentives system, which as it stands now, is essentially an invitation to poverty.
*The author is an economist and member of the Argentine Political Club.
