Does it make sense to produce laptops and cell phones on an island 3,000 kilometers away from consumers if someone 12,000 kilometers away can do it more cheaply? At least in Latin America, how people answer that question probably depends on whether they think politics or economics is more important.

The current Argentine government's decision to try to do for the far southern island of Tierra del Fuego (which is shared with Chile) the same that Brazil has done in the Amazon region city of Manaos has everything to do with the first of the two options: politics.

Still, the decision has major implications both for importers and local manufacturers of these products. Backers of the policy are also hoping it will help prevent the reappearance of the traditional "double deficits' so common in Argentina throughout the second half of the 20^th century.

Last month, Argentine President Cristina Fernández de Kirchner inaugurated four manufacturing plants all in the same day. What made the event especially novel was that she did it all by videoconference, from the new factory owned by Banghó, an Argentine laptop manufacturer based in Buenos Aires' "Technology District."

Right now the country's laptop computer market is booming. In 2010, Argentines bought up roughly 1.6 million laptops. That number is expected to nearly double this year, and laptop sales could reach 3.7 million units by 2012. But computer importers aren't as happy as you might expect. That's because in mid-2010, the government altered the tariff regime and imposed new taxes with an eye toward ensuring that a big portion of the surging demand for laptops is satisfied "locally" – specifically by manufacturers in Tierra del Fuego. The same policy goes for cell phones.

At this time of high demand, Argentina's carrot approach, combined with the stick of tariffs and taxes, has proven to be successful. Industry Minister Débora Giorgi, who joined the president in last month's big multi-factory launch, noted that by 2012, 50% of the laptops purchased in Argentina will be produced locally. The country's almost there. "Argentina has already quadrupled domestic laptop production, from 289,000 units made in 2010 to 1.3 million expected for this year," said Giorgi.

The situation has generated a flurry of activity on Tierra del Fuego. Right now at least 17 different companies have either set up shop there or announced plans to do so. The list includes BlackBerry, HP, Motorola and the Argentine firm Banghó, whose brand name is PC Arts.

"We have plans to set up a new production plant Tierra del Fuego province. As opposed to other companies that go into partnerships with assembly plants already operating there, Banghó will set up its own independent facility," says Omar Nieves, the company's marketing chief.

PC Arts, which recently opened a new plant in Buenos Aires, currently has a production capacity of 960,000 units. With its Tierra del Fuego plant, the company is expected to expand production by an additional 300,000.

Ulterior motives

Special tax breaks have given the island a real advantage over the continent when it comes to attracting production. Critics, however, say the policy amounts to a subsidy that is being paid for by Argentine consumers, forced to spend more for computers than in other countries that import with low tariffs. The beneficiaries, they point out, are companies that do little more than assemble foreign-made parts.

But Banghó"s Omar Nieves disputes this description, noting that the company is currently producing RAM memory under the brand Mangum Tech, another branch of PC Arts Argentina. "This memory is being manufactured to meet international quality standards," Nieves said. "Our current RAM production is 20,000 units, all of which go into our own computers."

Critics also complain that there is little in the way of economic integration occurring in Tierra del Fuego. "Unlike in Manaos, there's been no effort in Tierra del Fuego to improve quality, to invest in R&D," says economist Mauricio Claverí, an international trade analyst with the consulting firm Abeceb.

In order to better emulate Brazil's efforts in Manaos, he adds, Argentine "should form clusters and focal points for interaction among companies in order to lower logistical and production costs. Otherwise, the boom remains very much dependent on current circumstances. If the government changes its political leanings tomorrow, all of this could quickly disappear."

But Argentina's interest in Tierra del Fuego, some analysts point out, isn't purely economic. To reinforce its claim on the isolated island, Argentina needs to better integrate Tierra del Fuego with the rest of the country, and that means making sure people are living and working there.

"The issue with Tierra de Fuego isn't so much about industrial policy as it is about capturing territory," says Carlos Schwartzer, a specialist in industrial economics. "The island is like a big Lego. It's not generating innovation, nor a transfer of technology, but it did need to be inhabited."

Either way, the decision to promote production on the island has its costs. Transportation to and from the far southern island, is a particular problem. One solution, according to Mauricio Claverí, would be for the state – like in Brazil – to guarantee low transportation costs.

For now, the Argentine government thinks the extra sacrifices are worth it. Determined to diversify the economy, the country's leaders are desperate to avoid a return to the "double deficits' – deficits in both trade and fiscal payments – that haunted the economy for decades, pushed Argentina into deep debt and later triggered a serious economic crisis.

"The truth is that this policy is more than anything about avoiding the volatility that can come about as a result of fiscal restraint," says Claverí. "That's why the industrial promotion policy is all about large-scale production, and focused on things like computers that are commercially relevant."

Read the original article in Spanish

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