TRADE: Tug-of-War Between State Governors in Argentina, Brazil

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Mar 16 2000 (IPS) - Governors of provinces in Argentina called on Brazilian President Fernando Henrique Cardoso Thursday to keep state governments in his country from drawing companies away from Argentina.

“We don’t need Cardoso crying at our side,” said Governor Carlos Ruckauf of the province of Buenos Aires – Argentina’s largest – in reference to the Brazilian president’s expression of “horror” at the virtual exodus of companies from Argentina to neighbouring Brazil, attracted by tax breaks and the low cost of the local currency, the Brazilian real.

“What we need is for him to govern Brazil, and not to allow governors to set the tone of bilateral relations,” said Ruckauf, who met Wednesday with Governor José Manuel de la Sota of the province of Córdoba, and Governor Carlos Reutemann of Santa Fe.

The Brazilian government should negotiate with “cordiality and resolution” to correct assymetries that “are hurting us terribly,” said De la Sota, whose northcentral province has been hit especially hard by the flow of companies to Brazil.

Reutemann, who has seen his central province lose its machine industry to certain Brazilian states, enticed by juicy incentives, charged that Brazil had “broken the Mercosur” trade bloc with the January 1999 devaluation of the real, which seriously affected the competiveness of Argentine goods.

Tension between Brazil and Argentina – the two biggest partners of the Southern Common Market (Mercosur), also made up of Uruguay and Paraguay – began to grow in 1998 when the two economies experienced a slump.

The problems were compounded when Brazil devalued the real in early 1999, which led to a reduction of imports by Brazil and a crash in the competitiveness of Argentine products.

States in Brazil began to offer even bigger tax breaks and extremely cheap land and leases to entice companies in Argentina to move across the border.

The states are even fighting among themselves to see who can offer the most attractive benefits.

Through the Brazilian embassy in Buenos Aires, Brazil’s Foreign Ministry also did its bit to draw companies over the border, by handing out information to interested parties.

The Brazilian Embassy published an “investor’s guide” written in a very clear and didactic manner in Spanish, which outlined the requisites for setting up shop in Brazil.

That drew fire from Ruckauf, who said the Foreign Ministry did not appear to share the “horror” expressed by Cardoso over the way governors in his country were behaving.

“We must take a steadfast stance and explain to Brazil that certain policies followed by its governors cannot be tolerated, and that it is not enough for the president to feel bad: he has to collaborate by controlling the states,” said the governor.

Ruckauf’s criticism particularly targeted former Brazilian president Itamar Franco, governor of the eastern state of Minas Gerais.

“He was a bad president and is a terrible governor, and with his irresponsible policies is generating a complicated situation in which he is basically ‘de-financing’ his own state,” charged Ruckauf.

The stance taken by Franco and by the governors of other Brazilian states “unleashed the crisis that led to the devaluation of the real” in the first place, he maintained.

Since the depreciation of the real, wages in Brazil, previously similar to those paid in Argentina, fell to around half of the average wages paid here. That has hit labour-intensive sectors like footwear, presently in the grip of a serious crisis, especially hard in Argentina.

According to data provided by the Argentine Industrial Union business association, 52 companies have already pulled out of the country to head to Brazil, 30 of them auto-part companies, most of which had been operating in Córdoba.

That province is now offering the German carmaker Volkswagen a number of benefits to entice it to install a factory that would manufacture gearboxes.

Despite Argentina’s budget difficulties, the government of Córdoba has offered Volkswagen tax breaks, infrastructure – like roads, sewerage and stoplights – subsidies and exoneration from paying social benefits for employees hired with a four-year contract.

Ruckauf, meanwhile, said he would retaliate against companies that left the province of Buenos Aires for Brazil by excluding them from public tendering in the province.

This week, the government of the province of Buenos Aires decided by decree to purchase syringes manufactured by a local company that had threatened to leave for Brazil, instead of buying cheaper syringes from Taiwan.

Brazil “has a complicated internal situation, with governors who disobey the president and follow a totally aggressive policy of stealing investment” from their Mercosur partner, said Ruckauf.

In Argentina, meanwhile, there is an agreement between the national and provincial governments, even if they are in the hands of different parties, he pointed out.

“The head of Argentina’s foreign policy is President Fernando De la Rúa, and no governor here tries to follow policies that haven’t been previously agreed on, as occurs in Brazil,” said the governor.

Ruckauf said he was “convinced” that De la Rúa, the Foreign Ministry and the Secretariat of Industry “have a calling for following a policy defending” the local productive sector.

But the De la Rúa administration took office in December with a bulky fiscal deficit, and almost all of its measures have focused on reducing spending and increasing revenues, rather than offering tax breaks and credit to the productive sector, explained Secretary of Industry Débora Giorgi.

But “we do not have any more time to lose,” Ruckauf warned the De la Rúa administration.

Negotiations between Argentina and Brazil have already begun. But the Argentine government has taken a cautious stance, compared to the more vehement demands put forth by several provincial governors and, as could be expected, the private sector.

On Wednesday, the Argentine Industrial Union complained that measures were not being taken to correct the assymetries, despite the continuing flow of companies to Brazil. It echoed Ruckauf’s recommendation that the government demand compensation from Brazil – without violating World Trade Organisation (WTO) rules, however.