ARGENTINA: IMPACT OF PERONIST ECONOMIC POLICIES ON US INVESTORS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00608R000500180011-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: December 12, 2016
• Document Release Date: March 5, 1999
• Sequence Number: 11
• Publication Date: June 1, 1975
• Content Type: IM

-e
r,r:~ ~~ r~~fi i r~ r.
r~c~c;,t ~f .P,ronis~t , cc~~or~ic:. Policies
 Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180011-7
Confidential
No ~orclgn Dlsscrn+
Intelligence Memorandum
ArgesZtina: Im~ct of Peroni.rt Economic
Policies on STS Invertarr
Confidential
ER IM 75-11
June 1975
caPr N? 84
Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180011-7
 Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180011-7
NATIONAL SECURITY INFORMATION
Unauthorized Disclosure Subject to Crininal Sanctions
Clauiffed by O1S~19
Exempt from Gennal Declaaefficatfon Schedule
of E.O. 1id34, exemption catepory~
? SB(1)i (Z), and (9)
Automatfcall y ectaul fed om
date (mpm~yble to dehrmtm
Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180011-7
 Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180011-7
Confidential
No I%nrciKn l.)(sswr~
ArgCll tlltia:
Imps+ct of Peronist Economic
Policies on US Investors
Populist and nationalist economic policies during the two years of renewed
Peronist rule have undermined the financial position of US subsidiaries in Argentina,
contributed to nationalization of a few, and dried up the flow of US direct
investment.
? lliscriminatory price and wage policies have slashed profits of large firms,
including me St US subsidiaries.
? Two US oi~ con+par;ies have been forced out of domestic oil marketing,
and the pro;~erti~s of six US-owned banks have been nationalized.
? A new forei~,,+ investment code has limited profit remittances and capital
repatriation and has restricted tlie scope of activities open to foreign
firms.
The financial problems ~: iJS subsidiaries stem from the Peronist commitment
to increase labor's share of the national income. This commitment was initiated
by President Hector Campora - Peron's stand-in, elected in May 1973. It was
continued by Peron following his September 1973 election and, since his death
in July 1974, by Mrs. Peron.
Argentine wage and price policies since mid-1973 have cut heavily into business
profits. Earnings of larger businesses in particular, including most US subsidiaries,
dwindled under the pressure of higher costs, and many had to turn to their parent
firms for operating capital.
Soaring wage bills have been accompanied by growing public sector deficits,
higher consumer demand, and record imports. Balance-of-payments problems were
Note: Comments and queries regarding this memorandum are welcomed. They may
be directed to- of the Office of Economic Research, Code 143, Extension
5741.
Confidential June 1976
Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180011-7
 Conf(dontia)
Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180011-7
postponed, however, as good grain harvests and brigh world prices generated record
exports and re~:ored foreign exchange reserves. Real GDF growth climbed from
3% in 1972 to. a peak of more than 6% last year.
The world commodity boom that had bolstered Argentina's export earnings
during ,973 and tl~e early part of 1974 ended almost as quickly as it began, arrd
the nation's reserves began a steady decline after mid-1974. Continuing neg~ect
of agricultural policy and disincentives to private ca~~ital formation further slowed
economic acitivity.
While labor and consurners enjoyed significant gains during the booming first
18 months of Peronist rule, business and foreign investors had been under steady
:,train. As overall economic conditions have deteriorated, iTS subsidiaries face even
more serious liroblems. Profits are again under pressure from strict import and
price controls and rising wage bills. Organized labor is showing renewed v;tality
~.~rd r-:.litancy under stress, and increasing political and economic demands are likely
:;r the moo,,+.hs ahead. Widening shortages and growing consumer unrest will also
make prociuc~ers, particularly foreign-owned subsidiaries, prime targets far
nationalistic attacks, and demands for nationalization of additional US firms are
likely to increase.
Most US firms will continue to absorb their losses as best they can while
gradually liquidating their equities. This gradua], passive liquidation will continuf
so long as cash flow exceeds current outlays ~n the hope that the Argentine:
investment climate will improve. iolitical and economic conditions in Argentir~ra
can be expected to continue to deteriorate. This could force firms to aband~:rn
facilities and trigger government expropriations.
Approved For Release 2001/08~~fid~IllR-iRDP86T00608R000500180011-7
 Approved For Release 2001/08/2~9?"~ui~bP86T00608R000500180011-7
1. Government promotion of import substitution in manufacturing, a
substantial domestic market, and a plentiful s?apply of skilled labor ha~?e attracted
sizable inflows of direct foreign investment into Argentina. At present, dirP~t foreign
investment totals more than $3 billion, including some $1.4 billion held by US
firms (see Figure 1). While this is about three tim?s the $472 million in US equity
Argentina: US Direct Private Investment at Year-end ~''. ' ~I~u,e: ~
1 I i?,_ _I I I I I I ~""~"
teao ies2 '~,' iesa ;. less isee' ~ 'i~~o ,
~
eeiUiiete8:
present in 1960, investment in Argentina has grown more slowly than for Latin
America as a whole. Roughly 60% of US in ?~stment is concentrated in
manu:acturing. Foreign firms currently domina~., the automotive, pharmaceutical,
and electrical equipment industries and, together with state enterprises, have
significant equities in other heavy industries and oil refming.
2. Although the conservative military government that preceded Peron
maintained a generally favorable political environment for foreign investors, the
economic situation of US subsidiaries deteriorated after 1969. Economic growth
slowed after 1969 as bad harvests drastically cut agricultural income. While output
Approved For Release 2001/'Id@~P~-RDP86T00608R000500180011-7
 Approved For Release 2001/08/~Pnf~fi~t~~DP86T00608R000500180011-7
of manufactures continued to grow about 7?I? annually with the aid of government
subsidies, earnings declined as spiraling inflation stimulated exhorbitant wage
demands and triggered frequent work stoi~pages. As a result, earnings of US
subsidiaries fell from a peak of $140 million in 1969 to $89 million in 1972.
The return of Peronism then brought further declines (see Figure 2).
The Peronist Economic Program
Nb ~FOR61Gf~V'? bJS~i`~~~;j
3. The labor-based government of Juan Peron returned to power after an
18-year hiatus with a commitment to redistribute income is favor of urban workers,
bring inflation und~;r control, spur economic growth end employment, and increase
Argentina's share of the benefits from foreign investment. The keystone to this
policy has been the Social Pact, wo;xed out by Peronist supporters in business
and labor during the campaign preceding the May 1973 election. Under the pact,
Approved For Release 2001/08~dAf~rf~+RDP86T00608R000500180011-7
 Approved For Release 2001/08/21on~.'elan-~bP86T00608R000500180011-7
small and medium-size business leas grudgingly supported price controls, minimum
wage increases, and fiscal policies aimed at increasing lalhor's share of the national
income from an estimsitcd 36?Io in 1972 to 48% in 1977. Business furnished this
support in exchange for atwo-year r*~aratorium on collective bargaining, wliiclt
was to end the wage-price spiral and curb wurk stoppages.
4. The government's policy of fighting inflation while stimulating growth
and redistributing ~ncarne leas come into serious conflict. 7'he main instrument for
combating inflation quickly emerged in the form of widespread price controls,
which stimulated black markets and distorted production and distribution. While
halfhearted attempts were made to hold down government spending and increase
revenues, these policy objectives were quickly sacrificed for ,:yore socially oriel~ted
and politically appealv~g goals. A sweeping tax reform introduced in 1973 did little
to increase revenues but diet strengthe.r~ tax enforcement and boost taxes on
corporations and wealthy individuals. Public utility rates were hiked to cover higher
energy costs and make public utilities more nearly self-supporting. The increases,
however, led to higher wage settlements while industrial consumers of energy were
forced to absorb most of the increased costs. Income redistribution and real wage
policies have almost always taken precedence over combating intlatio;: and
stimulating sound economic growth.
S. The government expanded public sector investment and increased outlays
for social programs in order to increa~P employment a.nd accelerate economic
growth. Buenos Aires also attempted to boost exports of manufactures by increasing
subsidies to producers and establishing special lines of credit for foreign customers.
Most striking of the latter was asix-year, $1.2 billion credit extended to Cuba
in August 1973 for the purchase of automobiles, industrial equipment, and other
manufactures. While all these measures stimulated demand, government threats
against recalcitrant producers were needed to induce increased output because
earnings continued to decline as higher costs and fixed prices ate up profits.
6. Despite the drive for accelerating economic growth, the Peron adminis-
tration stepped up pressures against foreign-owned. corporations in an attempt to
increase local control of foreign investment and to appease Argentine nationalist
sentiments. Shortly after taking of.ice, the government initiated steps to natio~talize
tb.e properties of six US banking subsidiaries. In September 1974 it turned over
domestic o~.l distribution and retailing networks belonging to foreig~~ firms, inci:lding
subsidiaries of Exxon and Cities Service, to the state %il company, YPF. At present,
Standard Electric of Argentina, ?he local ITT subsidiary, and Siemens of ~.:.ermany
are under threat of expropriation unless the f"ums reimburse the state
Approved For Release 2001/08/24~+t1~i?Nl~bP86T00608R000500180011-7
 Confidontial
Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180011-7
telecommunications entity for alleged fraud and overcharges on contracts totaling
$230 million, The two firms have an investment of only $240 million.
7. The major measure against Argentine subsidiaries of foreign-owned
corporations, however, has been the foreis;n investment law enacted in February
1974. The law limits profit remittances to 12.5% of registered capital, compared
wi1:h a rate of 14% for much of Latin America, and further restricts capital
repatriation. The law requires that Argentines own at least 80% of new ventures;
exceptions are granted only with executive or congressional approval. )/xisting
subsidiaries must gradually sell their shares to Argentine citizens until they achieve
majerty control. Subsidiaries are given the option -thus far exercised by all 1,500
foreign subsidiaries - of avoiding the latter provision by paying a heavy surtax
on profits.
Accomplishments and Failures
8. The Peron government has achieved relatively little of its ambitious
economic program. Thanks to a large increase in export prices and a temporary
recovery in agricultural production in 1973 and 1974, government revenues and
foreign reserves increased greatly, economic growth accelerated, and unemployment
was sharply reduced. Nevertheless, labor's s1?~are of national income gained little,
and the inflation rate is now running at a 132% annual pace -significantly ahead
of the May 1973 rate. Measures to increase domestic benefits from foreign
ir-vestment, rather than accomplishing their objectives, have combined vrith price
and wage measures to seriously undermine the financial position of foreign
subsidiaries. Part of the failure stems from the leadership drift following Peron's
death and Mrs. Peron's succession to the presidency in July 1974. The government's
main difficulties, however, stemmed from its hoary reliance on rigid price controls
to accomplish its wage and income objectives at a time of rapidly rising world
market prices for the imported raw materials, fuels, and intermediate products
required to sustain Argentine industrial production.
Wages, Pries, and tl~e Supply of Goods
9. The new govemment moved quickly upon taking office to make good
its income redistribution promises by cutting sharply into business profits. In June
1973 it instituted a combination of sweeping price freezes, selected price rollbacks,
and a 20% across-the-board wage increase. These measures cut the inflation rate
from an arr~ual pace of 95% to 16% for the remainder of the year and also increased
real wages more than 10% during the same period (see Figure 3). This dramatic
Approved For Release 2001/0~/?1`rlf'a~liQ~ RDP86T00608R000500180011-7
 Conf(donifal
Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180011-7
1970 `,,1971 1972 1973 ,.1974 1976'
"projected C':
Approved For Release 2001/08/t~R"f'~.17Z'9~DP86T00608R000500180011-7
 Approved For Release 2001/08/21~0~`~?~~P86T00608R000500180011-7
improvement stimulated consurnption and accelerated growth of GDP from 3.810
i-~ 1972 to 5.410 for 1973. 1'rofit~, however, declined under the pressure of higher
wages, frozen prices, and a 4";% increase in the cost of imported inputs. As a
result, returns an US direct investment declined From an average of G.S~/o in 1972
to 4.5% a year later, and profits of ~`.rgentine businesses, also doclincd to roughly
two-thirds their former level.
10. In the face of falling profits, black markets burgeoned and supplies of
goods at controlled prices dwindled rapidly toward the close of 1973 as producers
discontinued less profitable lines and customers snapped up inventories. To ease
the supply situation, the government in Marcli 1974 authorized arross-the-board
price hikes averaging abo:-t 7%. Labor was again granted wage hikes in April, July,
and November totaling about 4U?lo while prices remained basically frozen at the
March levels. rinally, in November, prices were p~er~cnitted to adjust to non-wage
cost, increases incurred si;-ce 1973, but this ,'ed to another round of labor demands
that culminated in a hike of around 20% in March of this year. The cycles of
wage and price increases have produced little sustained improvement in either
supplies of goods or real wages yet leave seriously distorted the distribution system.
r',:t.i-ough real wages gained an average of 6% in 1974, the gain ~~as largely eaten
away by March 1975, and production i-~ key industries had already begun to decline.
11. The pressure from multiplf; wage hikes in 1974 was exacerbated by
another 4(}%-50% rise in import prices. In response, the government introduced
a variety of stop-gap measures to improve the supply of goods and services while
holding down prices. Among the measures tried were su~sidized exchange rates
for critical imports, selected tariff exemptions, establishment of a state enterprise
to contract for and sell selected imports at subsidized prices, and finally, in June
1974, legislation enabling the executive branch to intervene directly in the
operations of individual firms in the interest of maintaining "adequate supplies."
These measures not only failed to eliminate the market distortions and losses to
producers emanating from the price freeze but also added greatly to the costs
and problems of doing business, as each new measure was accompanied by further
bureaucratic entanglement and confusion. The net result was continued shortages
and growing losses for business. US investors as a group may have actually lost
$5 million or more on their Argentine holdings during 1974.
Balance-af-Payments Constraint
12. Argentina's long-term growth -and indire.;tly the profitability of direct
foreign investment -has been repeatedly constrained by balance-of-payments crises
and the availability of foreign exchange. Because of Argentina's continued
Approved For Release 2001/08/2Qor,~4-~P86T00608R000500180011-7
 Approved For Release 2001/08/2~a,{1'j~~j P86T00608R000500180011-7
dependence on agriculture for some 80'~~ of foreign exchange earnings, trends in
trade and payments arc primarily triggered by changes in world commodity markets.
The major achievements of tho Peronist government -accelerated growth and
increased employment -were made Possible by forttaitous improvements in weather
and in world agricultural prices. High world grain and meat prices combined with
improved harvests generated a record trade balance in 1973,,which provided the
foreign exchange needed to cover both enlarged budget deficits and increased
domestic consumption (see the table). Altltough new investment and industrial
profits dwindled during the period, output and sales gained from the upswing in
consumer demand, reflecting the growth of real wages and, beginning in 1974,
a large rise in public investment spending for housing and infrastructure. Thus
manufacturing output continued to grow almost as rapidly as in earlier years.
Argentina: Balance of Payments
Million US $
Exports (f.o.b.)
1972
1,941
1973
3,266
19741
3,553
1975
3,000
Imports (c.i.f.)
1,905
2,235
2,882
2,900
Trade balance
36
1,031
671
100
Nct services
-259
-315
-323
-300
Current account
-223
716
348
-200
Capital account
51
-45
-310
-4003
Private (net)
71
82
-110
-150
Public (net)
-65
-85
-150
-200
Banks (net)
45
-42
-50
-50
Change in reserves
-172
671
38
-6Q9
1. Preliminary.
2. Projected.
3. Assumes capital inflows of 52.3 billion and outflows of 52.7 billion, including 51.2
billion in public and 51.5 billion in privato debt amortization.
13. For sound development, the Peronists should have channeled at least part
of the improved resource flows deriving from the improvement in external accounts
into productive capital formation. Instead, they used the entire windfall to finance
social and economic reform. Escalating wage payments and puL-lic sector outlay;:
led to sharply increased government deficits in 1973 and 1974. Even with higher
taxes on business and the shifting of profits to labor and consumers, the government
was forced to step up borrowing abroad and continued to rely heavily on central
bank financing of deficits. This only added to the squeeze on private enterprise.
Foreign firms in particular were forced to go abroad for needed financing. Thus
Approved For Release 2001/08/2Qor,i~l~a+IdDP86T00608R000500180011-7
 Approved For Release 2001/08/2'ISO!1~4~P86T00608R000500180011-7
tight credit plagued corporate enterprises ir. spite of a doubling of the money supply
in 1973 and further growth of more than 60% in 1974.
14. In the best of circumstances the boom fostered by the Peronist
government could not have been long sustained. In fact, the deterioration of the
world beef market in 1974, higher raw materials prices for industry, and the
softening of world prices for grains in late 1974 hastened the day of economic
reckoning. Argentina now faces foreign debt service payments equivalent to 40%
of export earnings; and the nation's reserves, after reaching a peak of $1.2 billion
in July 1974, slipped to $746 million by the end of December. By the end of
the first quarter of 1975, deteriorating terms of trade and capital flight dropped
net foreign reserves to about $100 million, and no recovery is in sight. This, of
course, leaves the foreign investor with an even more gloomy prospect.
Impact on US Subsidiaries
15. Peronist economic policy has seriously undermined the position of foreign
investors. Although government price and wage policies have hurt all large firms,
increased taxes and restrictions under the new foreign investment laws have greatly
intensif;ed the pressure on the profits and liquidity positions of foreign subsidiaries.
For example, the Pepsicola subsidiary, which together with Coca-cola dominates
the Argentine soft drink industry, has reportedly lost about $10 million from
operations since mid-1973, and losses by Coca-cola apparently are comparable.
Difficulties of the foreign-owned automotive firms have been particularly striking.
The industry as a whole showed a net loss of more than $160 million in 1974;
the three US majors accounted for $70 mil'uon of this. Rapidly rising costs now
are causing losses even on automobile export sales to Cuba despite continued
government subsidies and mandatory export quotas. Automobile output is currently
declining at an annual rate of about 4%.
16. Restrictions on borrowing by foreign firms have aggravated financial
pressures, and US subsidiaries have been forced to defer capital replacements to
cover operating expenses. Indeed, many have been forced to turn to their parent
firms to replem'.sh working capital. US parent firms have begun to meet these
persistent financial drains by shutting off funds, forcing some subsidiari?s into near
bankruptcy. Most US subsidiaries have sought to minimize losses and to continue
production for fear of nationalization under duress or expropriation. The ,
government has already begun nationalization of an ITT subsidiary, and pressure
is mounting to take over private petroleum refineries.
Approved For Release 2001/08/2~or~~rr ff~! P86T00608R000500180011-7
 Approved For Release 2001/08~~f~~~~~DP86T00608R000500180011-7
17. In addition to financial pressures, l1S firms littvc bccn Burt by the
deteriorating political and securlty situation in Argentina. Despite the two-year
moratorium on wage negotiations, firms have bccn plagued by wildcat strikes, labor
violence, and extra-legal wage settlements. Nearly all US subsidiaries bout bccn
the target of terrorist action, and security considerations have shrunk the resident
business community to probably less than 100 US citizens. The exodus of US
managers has led to a loss of managerial control. The presence of tcnorist elements,
rival political factions, and rival unions within tlic plants and offices of US
subsidiaries has resulted in growing labor disruptions, slowdowns, and even sabotage.
Since business interests exert the least influence on the Peronist political scene,
producers have bccn forced to absorb the resulting increased costs and loss in
productivity. Many US firms have been forced to maintain their output under threat
of expropriation even though productivity has declined as much as 40% since 1973
and financial losses have eroded their capital base.
18. The situation of US companies in Argentina will probably grow worse
over the next year or so. The likelihood of overt moves against US interests will
increase as the antibusiness stance of Peronist supporters and growing political
unrest force the government to take drastic steps to divert attention from the
growing domestic diffic~.tlties. The Peronists' failure to meet income redistribution
targets will probably force the government to continue tight price controls for
most of 1975 while granting renewed rounds ~f wage hikes. As a result, the squeeze
on profits probably will tighten. No policy reversal can be expected unless dramatic
drops in production exacerbate consumer unrest to the point of threatening Mrs.
Peronss government. E~~en then, a successor government is uri~..kely to loosen
restrictions on, or to embrace a larger role for, foreign capital.
19. The economic and political advantages enjoyed by business in general
and US investors in particular before the return of the Peron government have
disappeared. Retrenchment of private investment is eroding industrial capacity.
Reduced crop production and lower world market prices are undermining
balance-of-payments prospe~ ~s. And the political consensus of the Peronist
government is dwindling. T .;onomic growth will probably decline during the latter
part of the year as constraints on industrial capacity come increasingly into play.
20: The options of the foreign investor in Argentina are seriously
circumscribed in the present situation. Most firms appear to have resigned
themselves to gradual erosion of their equities over the coming months. While most
Approved For Release 2001/08/21 :eCIA-RDP86T00608R000500180011-7
Confidential
 Approved For Release 2001/08/z~R"f~~I7~~`fkDP86T00608R000500180011-7
aui lx; expcctcd to continue operations as long as possible to avoid violent
repercussions from Irrbor and expropriation by the govcrnmcnt, gradual liquidation
of equities is in fact taking place through failure to replace cduipment on a nor-nul
basis. Lven so, this process of liquidation is generally along-teen process, and
few companies arc expcctcd to I'orcc a confrontation unless earnings drop below
current out-of-pocket costs.
2l. The balance of payments appears to be Argentina's most critical problem
for 1975 and 1976. ~orcign exchange earnings arc falling rapidly as world
commodity prices and lower crop production cut Argentina's vital grain export
receipts. Although the 33`% devaluation of the peso in March 1975 may help bolster
sagging exports of manufactures, continued recession in the developed countries
and the depressed world beef market will probably keep total export earnings some
$600 million behind last year. Cvcn with strict import controls, purchases abroad
will total about $2.9 billion. These elements, combined with heavy debt service
obligations, will probably reduce foreign exchange reserves by $600 million or moro.
22. Increasing import curbs may force Argentina to pay a heavy price in
stagnating or even declining industrial production over the next 12 to 18 months.
The resulting increases in unemployment and losses in real income could bring
serious political problems for Mrs. Pcron's already shaky govcrnmcnt. Officials could
increasingly turn to attacks on foreign interests to court Argentina's basic
xenophobia and to divert attention from its deteriorating domestic scene. Such
an event would quickly turn the foreign investment picture from difficult to
impossible.
Approved For Release 2001/08/2'brrfk3~AtbtDP86T00608R000500180011-7