Cablegate: Argentina: Secretary of Labor Chao Talks Investment Climate


DE RUEHBU #2353/01 3521300
R 181300Z DEC 07




E.O. 12958: N/A
SUBJECT: Argentina: Secretary of Labor Chao Talks Investment Climate
with U.S. Companies

Ref: Buenos Aires 2338

This cable contains sensitive information - not for internet


1. (SBU) Secretary of Labor Chao met December 10 with
representatives of Citibank, IBM, and Wal-Mart, all major U.S.
service sector employers in Argentina. Company reps highlighted
their profitable operations here, praised the caliber of Argentina's
labor pool, and agreed that rapid expansion of U.S. investment in
Argentina's service sector over the past five years has been fueled
by the nations well-educated, highly capable and relatively
inexpensive workforce. In response to the Secretary's prompting on
investment climate challenges U.S. companies face, participants
cited labor law inflexibility, rising inflation, poor contract
enforcement, ingrained corruption, systemic weakness in the national
judiciary and frequently changing tax and regulatory rules of the
game. Secretary Chao questioned the impact of Argentina's still
unresolved post-crisis legacy of debt default and the GoA's growing
reliance on bond placements by Venezuela. Participants acknowledged
that Argentina's decision to pre-pay relatively inexpensive IMF debt
and instead rely on national and Venezuela-assisted bond issues has
been financially and politically costly. They predicted that
resolving outstanding Paris Club arrears would be high on new
President Cristina Fernandez de Kirchner's (CFK's) agenda and agreed
that the key challenge facing the incoming CFK administration will
be to manage needed economic policy changes in a way that sustains
Argentina's five-year-long track record of strong growth.
End Summary.

--------------------------------------------- -----
Lunch with U.S. Companies that are Major Employers
--------------------------------------------- -----

2. (U) Secretary Elaine Chao and Ambassador hosted a December 10
luncheon for representatives of U.S. service sector companies who
are major employers in Argentina to discuss their company operations
in Argentina and the challenges the local investment climate poses.
Attendees included Juan Bruchou, President of the American Chamber
(AmCham) & CEO Citibank; Alejandro Diaz, CEO of the AmCham; Ezequiel
Gomez Berard, CEO of Wal-Mart Argentina; and Sebastian Mocorrea,
Vice President of Governmental Programs for IBM Argentina. All
company representatives noted that their operations were profitable
and that Argentina remains a very attractive regional market from
their headquarters perspective.

--------------------------------------------- ------
Attraction: Argentina's Capable, Educated Workforce
--------------------------------------------- ------

3. (SBU) Secretary Chao noted Argentina's reputation as a nation
with a strong societal and family emphasis on education and asked
about the quality and training of the nation's labor force.
Participants praised the caliber of Argentina's labor pool and
agreed that the rapid expansion of U.S. investment in Argentina's
service sector over the past five years was a function of the
nation's well-educated, highly capable and relatively inexpensive
workforce -- the latter due to GoA policies to maintain artificially
low nominal currency values. IBM's Mocorrea explained that these
competitive advantages made it easy for IBM to choose Argentina as
one of its four global service export centers alongside China, India
and Brazil. IBM currently employs over 6,000 Argentine software
engineers and technicians making it the second largest U.S. employer
in Argentina. Its operations here focus on IT service exports to
other western hemisphere IBM affiliates.

4. (SBU) Wal-Mart's Berard noted his own company's rapid expansion
during the 5-year economic growth surge that followed Argentina's
2001/2 economic crisis: Wal-Mart now has 21 stores in Argentina and
has hired over 1,500 employees in the past year alone to reach a
total of over 7,500 employees, making Wal-Mart the single largest
U.S. company employer in Argentina. Ambassador noted that, in a
recent local employee survey of "best companies to work for," six of
the ten top-ranked firms and ten of the twenty top-ranked firms in

Argentina were U.S.-owned.

5. (SBU) Citibank's Bruchou highlighted his bank's 90-year history
in Argentina, with a network of 60 branches, 3,500 employees and
"universal" consumer finance, corporate finance and investment
operations here. Citi had lost most of its capital in the aftermath
of the economic crisis, Bruchou said, but it has recuperated well
over the past four years of financial sector consolidation
(including the departure of U.S. competitors Bank of America and
Bank Boston) and economic recovery. In response to the Secretary's
question on banking penetration, Bruchou noted that, although loan
volume has increased substantially, Argentina remains substantially
under-banked, with financial sector assets hovering at 11-12% of GDP
(down from pre-crisis levels of 22-24%), well below the 30-40% of
GDP averages in neighboring countries. Key reasons are Argentina's
cash-economy tradition, a lack of consumer confidence in the local
banking system following the crisis (where deposits were frozen and
many savers suffered substantial losses), and a linked tendency for
Argentine's to hold their capital overseas, with some estimates of
Argentine capital flight ranging as high as $100 billion.

--------------------------------------------- ----------
Investment Constraints: Labor Inflexibility, Inflation, Price
Controls, Corruption, Rule of Law
--------------------------------------------- ----------

6. (SBU) With capable human capital a key Argentine competitive
advantage, Mocorrea called IBM's greatest challenges in Argentina
growing competition for qualified employees, the lack of flexibility
in local labor legislation and a judicial system that favors
employees in most legal action. In response to the Secretary's
question on how Argentine labor law rigidity impacts the investment
climate, Citibank's Bruchou noted that foreign multinationals
generally compete for high-end employees who have numerous job
alternatives. But, he said, labor law inflexibility hurt
Argentina's small and medium enterprises (SMEs), traditionally an
engine for growth and employment. The high cost of firing workers
has made SMEs wary about bringing on permanent documented employees,
Bruchou said. (Notwithstanding Bruchou's concerns, according to
government statistics, domestic unemployment has dropped from a
post-crisis high of over 20% to the 8% level, close to Argentina's
structural rate of unemployment).

7. (SBU) Citi's Bruchou added that relative cost advantages of
Argentine labor are waning as high domestic inflation rates are
encouraging Argentina's strong labor unions to aggressively defend
their members' purchasing power. Over 40% of Argentina's workforce
is currently unionized and participants discussed the growing
strength of Argentine unions and GoA's post-crisis efforts to
cultivate union leaders and maintain social calm, including by
flowing government social safety net payments to unemployed heads of
households through union and "piquetero" unemployed worker groups.
The incoming CFK administration has indicated that it plans to
address growing inflation by working with industry and labor to
negotiate multi-year sector-by-sector "social pacts" to contain
prices and wages. AmCham's Diaz, however, said that in the
Chamber's recent discussions with Labor Minister Tomada, the
Minister was not yet sure how these pacts would be structured.
Ambassador noted that an earlier CFK statement that Argentina looked
to Germany as a model for economic development was likely based in
part on her respect for Germany's tradition of consensual
government, industry, and labor dialogue.

8. (SBU) In response to the Secretary's prompting on investment
climate challenges U.S. companies face in Argentina beyond labor law
inflexibility and rising inflation, participants noted generally
weak Argentine rule of law in terms of enforcing the sanctity of
contracts, a legacy of "ingrained" corruption, systemic weakness in
the national judiciary (with the time to investigate and prosecute
corruption cases averaging 15 years), and frequently changing rules
of the game. Citi and IBM highlighted abrupt changes in tax rates
and regulations, the imposition of formal and informal price
controls, the attempted imposition of interest rate caps on loans,
and the business uncertainty that such moves have engendered.
Wal-Mart offered that price controls on retail consumer items it
sells have largely been "politically cosmetic" and haven't
significantly impacted Wal-Mart's bottom line.

9. (SBU) Secretary Chao and Citi discussed the impact of Argentina's
still unresolved post-crisis legacy of debt default, with
outstanding claims to both the Paris Club and to a significant group
of bond "holdouts," as well as an increasing GoA reliance on bond
placements on its behalf by Venezuela. Citi acknowledged that
Argentina's decision to pre-pay relatively inexpensive IMF debt and
instead rely on restricted bonds issued under national law has been
costly for the nation, both in terms of the price Argentina must pay
to access international capital markets, and in terms of Argentina's
reputation as a nation that continues to flout international market

Moving Forward with the CFK Administration

10. (SBU) Ambassador suggested that the challenge for the incoming
CFK administration will be to manage economic policy changes in a
way that sustains the benefits Argentina has gained over the past
five years of strong growth. Wal-Mart agreed that the challenge
will be engineering a soft landing to more sustainable GDP growth
levels and noted the GoA's successful efforts to maintain a primary
fiscal surplus. Citi suggested that the best advice the USG could
offer to CFK would be to "talk to us"; to actively engage U.S.
companies operating in Argentina and so better get the word out to
potential investors that her administration is "open for business."
Citi also predicted that resolving outstanding Paris Club arrears
would be high on CFK's agenda and that, at this point in time, it is
more important for Argentina to clear Paris club arrears than to
resolve outstanding debt to bond holdouts.

11. (U) This cable has been reviewed by the Secretary's delegation.


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