FL White book

WHITE PAPER

of the Private Sector

Fundación Libertad is a private, non-profit entity that has been working for 30 years on research and dissemination of public policy issues, particularly targeted at the socioeconomic and business spheres, which encourages the ideas of freedom, republicanism, democracy and the Rule of Law.

Created in Rosario in 1988 by a group of entrepreneurs, professionals and intellectuals, Fundación Libertad carries out its activity with the support of more than 400 private companies. Its projects include courses, conferences, seminars, research, studies and publications, as well as a major presence in the media through its own columns and programs.

The institution has led the creation of Refundar (Network of Argentine Foundations), made up of a dozen related institutions located in the country’s main cities, and of the Federal Network of Public Policies, with more than 100 business and professional references at the national level and think tanks from the interior of the country. Likewise, it is a member of recognized world organizations, such as the Latin America Liberal Network and the International Foundation for Freedom, which is chaired by Nobel Prize winner Mario Vargas Llosa.

1. Introduction

Argentine democracy is in a worrying state, and not only because of the weak respect that the current government shows regarding democratic and republican principles, division of powers, regard for justice and freedom of the press. These problems are complex and politics by itself is trying to solve them in an institutionalized way.

Parallel to this political problem, a more invisible but no less dangerous threat to democracy emerges. It refers to the growing disbelief in democracy in a large part of society due to increasing poverty, unemployment and the decline in all parameters of social welfare. Surveys show that many Argentines feel “cheated” by the democratic system that after almost 40 years since the restoration of democracy has not been able to resolve the most pressing economic problems: inflation, poverty, unemployment, insecurity.

In this sense, it is imperative that the public sector understands the need to revitalize the private sector to generate work and production, not only because of the economic value it represents, but also because of the enormous political importance of emerging from this recession. That Argentina does not plunge into a crisis of political representation and perhaps into the threat of anarchy or undemocratic authoritarianism depends on whether it can overcome the current economic crisis: and this will only be achieved if the private sector is stronger.

Unfortunately, the current state of affairs harms the private sector: the State weakens Argentine companies with regulations, taxes and laws that discourage investment. The good news, if you will, is paradoxically that the situation is so dramatic that society is beginning to take note of the need to bestow SMEs a new leading role.

In this sense, the País PyME program has been a predominant actor in the public debate, in the training of Argentine companies and in the proposal of better public policies for them. The program has achieved great success in training the country’s SMEs in tools that enable them to improve its productivity and competitiveness in the context of an economy in crisis, attempting to take advantage of the opportunities that digital education offers. Likewise, País PyME has managed to create awareness in the political

establishment of the importance of the SME sector in terms of production, employment and social welfare, as well as the need to carry out economic, fiscal and labor reforms that allow further development by the private initiative.

At the end of last year there were important mid-term elections and many of the policies that Congress is discussing today have been promoted by the País PyME teams. In this sense, this document intends to serve as a guide available for any political party that wants to work to improve the situation of SMEs in the country and to carry out the concrete reforms that would allow its productive potential to be released. This text completes the efforts undertaken through more than a hundred meetings held between private sector leaders from around the country whereby training sessions, networking sessions and the development of public policy proposals were carried out.

2. Macroeconomic context of Argentina

2.1. Growth prospects

Although the evolution of the GDP for 2021 is not yet known, it would not be daring to point out that there has been some recovery with respect to the sharp drop experienced the previous year, when the product fell almost 10 points. The latest figures published by INDEC show that the GDP for the third quarter of 2021 grew 11.9% compared to the same term of the previous year. Likewise, according to OECD’s projections, Argentina will end 2021 with a GDP growth of around 8.5%.

Although these data are positive, again it should be emphasized that they are the result of a recovery rather than genuine growth. The OECD studies also showed that the growth of our country would be 2.5% by 2022 and 2.3% by 2023: these figures are lower than both the world average (4.5% by 2022 and 3.2% by 2023), as well as that of the G20 (4.7% and 3.3%, respectively). Besides these differences, it must be added that most of the countries in question did not experience recessions as strong as Argentina did during 2020.

United

South

World

Source: Fundación Libertad based upon OECD information.

2.2. Inflation

Another key variable required to understand the macroeconomic context of Argentina is inflation, which in November reached an accumulated variation of 45.4% compared to December 2020, and 51.2% year-on-year.

As well as in the previous point, the international comparison leaves Argentina exposed. With the exception of countries such as Venezuela and Sudan, which endure year-onyear inflation rates of four and three digits, respectively, our country has one of the highest inflation rates in the world. Only in the month of March 2021, when it was 4.8%, it exceeded the projected annual inflation of countries such as Germany (4%), Canada (3.8%), Great Britain (3.5%), France (2.9%) and Italy (1.7%), among others. These figures arise from measurements performed by the IMF.

Finally, it should be added that the projections for 2022 are not encouraging: although the national government estimates that inflation for the coming year will be around 33% (according to the recently submitted national budget bill), private sector estimates such as those of the Equilibria and Empiria consultants place it at around 60%; that is, almost double the figure foreseen by the government.

Fuente: Fundación Libertad en base a información del Indec.

2.3. Poverty

Another important aspect to analyze refers to the levels of poverty and indigence. Unlike the previous concepts, which are purely economic, this last one is of great social importance.

In this sense, the last Permanent Household Survey (EPH for its acronym in Spanish) carried out by INDEC showed that for the first half of 2021, in Argentina 40.6% of people are poor, and 10.7% are in a situation of indigence.

Between the second half of 2019 and the first half of 2020, poverty skyrocketed, growing 5.4 percentage points and going from 35.5% to 40.9%. This sharp increase overlapped with the arrival of the pandemic. Although, as mentioned before, it was possible to reduce it to 40.6%, poverty continues at high levels compared to the pre-pandemic situation.

Source: Fundación Libertad based upon Indec Information.

Likewise, given the economic conditions in which the country finds itself, reducing poverty, at least to its pre-pandemic state, is a complex and lengthy task. In tune with this idea is the study prepared by the Center for Distributive, Labor and Social Studies (CEDLAS for its acronym in Spanish), which maintains that even under an optimistic scenario where a 3% GDP growth per year is maintained, it would take at least five years to return poverty in Argentina to the pre-pandemic levels, and twice as long if the goal is to approach the 29% poverty level that existed in 2018.

3. Argentina’s performance in international indicators

3.1. Competitiveness

According to the Competitiveness Index prepared by the World Economic Forum (WEF) for year 2019 (latest edition), Argentina ranks 83rd out of a total of 141 countries evaluated, thus falling two positions compared to 2018. A dramatic drop is noted in the medium term, given the country has fallen 29 positions since 2005.

The WEF Competitiveness Index analyzes four study factors, namely: the “suitable environment”, whereby issues related to institutions, education and macroeconomic stability are studied; the “human capital”, whereby the degree of development of same is analyzed; the “efficiency enhancers”, which take into account the goods market and the labor market aspects; and “innovation in the ecosystem”. In turn, each of these factors is divided into subgroups or pillars. Argentina claims the worst position in the macroeconomic stability pillar, ranking 139th, while in the goods market and the labor market it ranks 120th and 117th, respectively.

In order to put these data into perspective, it should be noted that the ranking is led by Singapore, which is followed by the United States and Hong Kong. In regional terms, Chile is the leading country (position 33), followed by Mexico (48) and Uruguay (54). Argentina, in this context, is located among the worst countries in the region and surpasses only some, such as Ecuador (90), Paraguay (97), Bolivia (107) and Venezuela (133).

The following table shows the position that Argentina occupies in each variable that makes up the indicator:

It is noted that Argentina’s worst positions are in the institutional area, it is among the worst in the world in many variables of this dimension. In addition to institutional deterioration, the report points out that the weak macroeconomic environment, the financial sector’s inefficiency, inflation and regulations are the main obstacles to investment. It is worth highlighting that Argentina only achieves a good relative performance in the “skills” (31) and market size (34) variables.

In general terms, the strong deterioration in terms of our country’s competitiveness during recent years stands out. While it is currently in 83rd place, in 2005 Argentina was ranked 54th place: and to this meager result in competitiveness, we must add the notable deteriorations in the last few years regarding economic freedom, freedom of the press, property rights and corruption perception, among others.

In fact, indicators prepared by different organizations and with dissimilar methodologies also reach the same conclusion: in recent years, Argentina has deepened its institutional weakness and has become a less free and less competitive country.

3.2. Economic freedom

According to the Heritage Foundation, regarding economic freedom, in the 2021 Argentina ranked 148th out of a total of 178 countries analyzed, moving up one position compared to the last edition. This occurred despite the fact that its score worsened (from 53.1 to 52.7). Hence, it could be said that the country suffered a setback in absolute terms.

In the long term, if one considers that this ranking has been carried out since 1995, the country’s performance in terms of economic freedom suffered a constant deterioration. In fact, Argentina has been stagnant for some time now, and it is among the most repressive countries in terms of the economy: despite having advanced 21 places since 2016 - when it reached the lowest position of the entire series -, in 2021 Argentina was placed in the category of mostly “not free” countries according to the scale used in the index.

As of 2021, the table is currently led by Singapore, which is followed by New Zealand, Australia, Switzerland and Ireland. These countries have also led the ranking in recent years. Chile is the leading nation in the region, ranking 19th globally, followed by Uruguay (44), Jamaica (45) and Colombia (49). Under this framework, Argentina is in 26th place out of the 32 countries that make up Latin America and the Caribbean.

Source: Fundación Libertad based upon information issued by the Heritage Foundation..

According to the index, Argentine obtained a score of 52.7 out of a maximum of 100 points, reducing 0.4 units compared to the 2020 edition. This variation is mainly explained by the decline in the “monetary freedom” category, a figure that is also lower than the world average (61.6) and the regional average (59.5). The following graph illustrates the score achieved by Argentina since the index was created, clearly showing a downward trend with a slight recovery since 2016, when the worst score was obtained. To better contextualize the country’s situation, we have included the average scores of the world and Latin America.

According to the Heritage document, “economic freedom in Argentina has begun to sink back into the ‘repressed’ category, where it remained stagnant until 2017. The new government’s agenda, aimed at reversing many of the reforms carried out by the previous center-right administration, includes import and currency controls, company expropriations in key sectors and new subsidies. Those policies will likely worsen economic freedom in a number of areas.”

In the breakdown per variables, our country obtains the worst score in “fiscal health” with 38.4 points, followed by “monetary freedom” with 41.9 and by the “judicial effectiveness” variable with 45.7. On the contrary, the highest score is obtained in “tax burden” with 70.4 units, always on a scale from 0 to 100. In the following table, we can observe the scores obtained by Argentina, Latin America and the World for each variable.

Scores for Argentina, Latin America and the World per variable

The figures above clearly illustrate the country’s stagnation when it comes to economic freedom. It is also evident that except for the “financial freedom” and “government integrity” variables, where it exceeds the world average and that of Latin America, in the rest of them it is found at lower levels. Argentina is still among the least free countries in the world; thus, it is necessary to deepen, broaden and consolidate the reforms undertaken in order to obtain sustainable improvements in both institutional quality and economic freedom.

3.3. Bureaucracy

According to the first edition of the Bureaucracy Index in Latin America 2021 (IB-LAT), prepared by the Centro Latinoamericano de Atlas Network (Atlas Network Latin American Center) in conjunction with other institutions (including the Fundación Libertad from Rosario), Argentina is one of the countries with the most bureaucracy in Latin America along with Venezuela. A small business requires an average of 794.6 hours per year to complete all the paperwork, which is around three hours per working day.

The IB-Lat measures the administrative-bureaucratic burden of small businesses that have greater weight in the primary, secondary and tertiary sectors in some Latin American countries and in Spain. The index reveals the procedures that a representative enterprise of each sector must carry out in the following three areas: “employment management”, “operation management” and “others”.

The first group covers the management of salaries, taxes and contributions, which includes the management of vacation time or sick or accident leave, as well as the procedures required by social and health insurance. This group also includes the management of hiring and firing personnel. The category of procedures associated with the company’s “operation management” includes those related to the administration of income taxes, real estate tax, consumption taxes and VAT, waste management and vehicle administration. Finally, the “others” category includes those procedures that do not fit into the previous categories and those that are deemed typical of the most representative sectoral economic activities.

The results of the IB-Lat regarding Argentina conclude that a small company requires an average of 796.4 hours per year to comply with all the bureaucratic procedures of the three areas analyzed. In other words, a small company must allocate three hours of a working day to carry out procedures. On a regional scale, Argentina is located within a third group together with Venezuela, which endures a high burden that averages 902 hours per year. Said onus almost doubles the time spent in meeting bureaucratic procedures by the countries of group 2 (Colombia and Mexico), and triples that of the group 1 (Brazil and Spain).

Source: Fundación Libertad based upon IB-LAT information.

Of the three productive sectors previously analyzed, the secondary sector is the hardest hit with 1,082.3 hours per year required to comply with all the procedures. The greatest burden corresponds to the “employment” category for secondary and primary sector companies, while the tax management is the one that demands the most hours from the tertiary sector.

Source: Fundación Libertad based upon IB-LAT information.

Taking into consideration the representative activities per sector, the number of procedures that the company has to comply with varies between 46 and 50, of which more than 85% are digitized. The “operation management” consumes an average of 48% of the time allocated to procedures, being especially challenging for the tertiary sector company (56%). In particular, those related to tax management consume 94% of time within this subgroup of procedures. Likewise, small businesses representing the primary and secondary sectors are more impacted by employment management procedures, which require 66% and 50% of their time, respectively.

The collection of data through interviews with the company’s administrative and accounting staff (or external staff dedicated to same) enabled the detection of the number of hours a company must allocate per year in order to complete all the procedures associated with employment management and operations management. These interviews disclosed the existence of numerous regulations, with the subsequent result of multiplication of obstacles, loss of time and uncertainty regarding the fulfillment of obligations within a changing context of regulations.

Therefore, our country must inexorably move towards structural reforms, in the medium and long term, that redefine the tax system and make it simpler, lowering the tax burden in order to stimulate investment and growth. Likewise, a labor reform that is more flexible and that significantly reduces labor costs is imperative. Only through comprehensive reforms will it be possible to reverse this crisis scenario and undertake a path for growth.

3.4. Transparency

The Corruption Perceptions Index (CPI) is an indicator that measures the level of transparency of a country’s public sector. It is calculated through thirteen data sources from twelve institutions that record corruption perceptions during the last two years, based on international surveys carried out with investors and specialists on how they perceive corruption in the State.

The CPI found that for year 2020, Argentina ranked 78th out of 180 countries studied, scoring 42 points. Thus, the country fell 12 places compared to the previous year, when it ranked 56th scoring 45 points. The country’s performance in the last decade can be observed below. Although there was significant progress, mainly between 2015 and 2019, the setback featured in 2020 could indicate a reversal of the trend that had been taking place in recent years.

Considering the performance of other countries, it can be stated that Argentina has a score slightly below the regional and world average (both with 43 points). Our country is ranked worse than neighboring countries such as Uruguay (21) and Chile (25), but better than Colombia (92), Brazil (94) and Bolivia (124), among others.

4. Radiography of Argentine SMEs

4.1. SMEs’ categorization, composition and distribution

An SME is a micro, small or medium-sized company that carries out its activities in the country in one of the following sectors: construction, services, commerce, industry and mining or agricultural. Depending on the activity, it can be made up of several people, and its total annual sales in pesos cannot exceed the amounts set forth according to its category. The classification according to its sales establishes that the lowest ceilings for all the tranches are found in services; at the other end, commerce has the highest, which on average quadruples the ceilings for services. The importance of updating the amounts periodically should be noted, in order to avoid imbalances due to the country’s high and persistent inflation.

Source: Fundación Libertad’s elaboration based upon information from AFIP.

According to the Ministry of Labor, Employment and Social Security of the Nation, the stratification per size for a company in a given quarter is carried out based upon the average employment declared by the company during the last four quarters. The ranges of employment used in each size stratum vary according to the branch of activity, which takes into account sectoral differences in average labor productivity and the guidelines established by the country for the application of policies aimed at small and medium-sized enterprises.

The tranches were determined based on the level of sales of the companies defined by the SEPyME (Office of the Deputy Secretary of Small and Medium-Sized Enterprises) under Resolution 24/2001, which establishes the maximum level of sales for each category of enterprise (micro, small, medium and large company) according to the sector in which it carries out its activity. Size is a characteristic of the company as a whole and not of each location of each company. In other words, each company and the number of employees it hires, is classified in the size strata according to the total employment of the enterprise. Following this methodology, for year 2019 - the latest official data available - Argentina has a total of 494,529 SMEs.

Regarding its distribution per jurisdiction, Buenos Aires heads the list with 157,744 SMEs, followed by the Federal Capital with 125,456 and further back by Córdoba with 44,266, Santa Fe with 42,904 and Mendoza with 17,832. These five locations cover encompass 78.5% of the total number of small and medium-sized companies in the country; in other words, four out of five SMEs are seated in one of these provinces. At the other end are La Rioja (1,946), Formosa (1,999) and Tierra del Fuego (2,133), which together with Catamarca (2,438) and Santa Cruz (3,299) are the five locations with the fewest number of SMEs in Argentina: they only account for 2.4% of the total number, which shows the great contrasts that exist between the different jurisdictions.

A ratio that can be considered is that of company per inhabitant. Under this modality, the Federal Capital heads the list of SMEs with a ratio of one company per 24 inhabitants. Much further back are La Pampa (77), Tierra del Fuego (79) and Santa Fe (82), which together with Córdoba and Neuquén (84), and Río Negro and Chubut (88), are the jurisdictions that do not exceed three digits. At the opposite end are Formosa with 300 inhabitants per company, Santiago del Estero with 220, Jujuy with 209 and La Rioja with 200. Both Formosa and La Rioja reveal that they hold few SMEs in both absolute and relative terms.

According to the productive sector, SMEs are distributed as follows: 274,605 correspond to the service sector, 165,382 to the commerce sector and 54,542 belong to industry.

Distribution of SMEs per sector 2019

33% Trade

11% Industry

Services

56%

Source: Fundación Libertad based on information issued by the National Ministry of Labor, Employment and Social Security.

The five aforementioned jurisdictions with the largest number of SMEs largely determine the country’s productive structure. Following this line of thought, it should be noted that the Federal Capital is the only one that deviates considerably from the general sectorization, given it holds a greater number of SMEs related to services (71.3%) that is compensated with a lower proportion of those related to Commerce and Industry. This is largely due to the fact that the Federal Capital is a particular case because it is a city that does not possess, like other jurisdictions, rural areas or industrial parks that allow it to delve into these types of activities.

SMEs per sector in the main jurisdictions

Source: Fundación Libertad based on information issued by the National Ministry of Labor, Employment and Social Security.

4.2. Employment generation by SMEs

Small and medium-sized enterprises are not only the productive engine of the country but are also one of the main sources of employment. According to the National Ministry of Labor, Employment and Social Security, SMEs create around one of every two jobs in the private sector. In 2020 - the latest official data available -, SMEs generated 2,560,716 jobs in Argentina. Regarding the provinces, Buenos Aires heads the list with 837,590 jobs. Further back are the Federal Capital with 612,446, Santa Fe with 237,360, Córdoba with 218,951 and Mendoza with 99,940. Once again, these five jurisdictions top the list and make up 78.3% of employment at the SME level. The importance of these provinces, regarding the country’s production and employment generation, is abundantly clear.

On the other hand, Formosa, La Rioja and Tierra del Fuego, with 9,736, 10,780 and 12,092 jobs, respectively, are the provinces that contribute the least number of jobs; they barely exceed 1% of the total. Another fact that reveals the abysmal difference between the provinces is that Buenos Aires, with 32.7%, wields a higher predominance than all the other jurisdictions (with the exception of the Federal Capital, Santa Fe and Córdoba).

If a per capita ranking is set forth, as with the number of companies, the Federal Capital would lead the pack with one job for every five inhabitants. Santa Fe (15), Córdoba and Neuquén (both 17) complete the podium. La Rioja, with a ratio of one per job per 56 inhabitants, followed by Jujuy with 42 and Formosa with 40, are the provinces with the lowest amount of SME employment per inhabitant.

According to the division per productive sector, the composition of SMEs is divided into: 1,324,953 for the services sector, 707,910 for commerce purposes and the remaining 527,854 are created by industry.

21%

52%

As can be seen in the graph above, the proportions have a strong correlation with the numbers of enterprises per sector. However, the case of industry should be highlighted, which has a participation in employment generation that almost doubles that of the number of companies. This means that for each SME in the industrial sector, a considerable number of jobs are generated.

Source: Fundación Libertad based on information issued by the National Ministry of Labor, Employment and Social Security.

4.3. SMEs and the pandemic

The economic restrictions imposed due to the Covid-19 pandemic have generated countless losses for companies in the country. According to data from the Argentine Confederation of Medium-sized Enterprises, during 2020 retail sales plummeted: between March and May (the months of the strictest quarantine), monthly sales fell by almost 50% year-on-year. Likewise, it should be noted that only in the month of March 2021 was there an increase after more than three years. The last one had occurred in December 2017; thus, there were 39 consecutive months of decline. This earmarks that the economic crisis was prior to the pandemic and the health crisis only worsened it even more.

As mentioned above, the month of March 2021 featured growth in monthly sales, a situation that replicated during the months of April, May, June and July of this year. Although these are positive signs, they correspond more to a rebound in economic activity than to genuine growth.

SMEs Monthly Sales (year-on-year

Source: Fundación Libertad based upon CAME information.

When focusing the analysis on the industry sector, it should be noted that small and medium-sized companies suffered from the pandemic just like other SMEs did. This is evidenced by the results of the SME Industrial Production Index prepared by the Argentine Confederation of Medium Enterprises (CAME). The Index resulted in an increase of 24% during the first half of 2021 compared to the same half of 2020, but which was still 5.2% lower compared to the first semester of 2019.

The items most affected by the quarantine were footwear and leather goods, wood and furniture, and textiles and clothing. Although these sectors registered improvements as with the rest of the sectors, they are still at production levels below those achieved prior to the pandemic. During the first half of 2021, the aforementioned items suffered decreases of 21.6%, 14.8% and 12%, respectively, compared to the same period in 2019. On the other hand, rubber and plastic (-2.9%), food and beverages (-4.3%) and non-metallic minerals (-4.6%) were the least affected.

It is extremely important to highlight that all the categories measured revealed decreases compared to 2019. These negative variations appear more relevant when considering that, compared to 2020, the result was exactly the opposite: all displayed increases. This reflects the seriousness of the situation experienced during the quarantine but also that, as mentioned in the previous paragraph, despite the recovery currently experienced, production is still below pre-pandemic levels. The variations of each of the categories that make up the index are detailed below, comparing the first half of 2021 with both the first semesters of 2020 and 2019.

SME Industrial Production Index (year-on-year variation)

2019 - 2021 (First semester)

Food

Paper edition and priting

Chemical products

Rubber and plastic

Wood and furniture

AVERAGE

Footwear and leather goods

Non-metallic minerals

Transport equipment

Electronic devices and IT

Metal products, machinery and equipment

Textiles and clothing

Source: Fundación Libertad based upon CAME information.

5. Tax pressure on SMEs

Argentina endures an overall tax pressure that is comparable to that of many developed countries such as Canada, Japan, the United States, among others, and higher than that of emerging economies such as China, Mexico or Chile. But the situation shifts when the conformation of the tax base is analyzed: it is the taxes regarding production, which are levied on companies, that position the country in a unique situation.

In Argentina, the tax pressure on production is (by a wide margin) the highest among all the relevant economies on the planet. To be more precise, the overall tax pressure reached 28.7%1 for 2019; that is, for every 100 pesos generated by Argentines, the State takes 28.7. This figure is above the South American average (23%) and the BRICS2 countries (28%), but below the OECD members (33.8%).

However, as mentioned above, in Argentina the tax pressure is focused on companies and mainly on SMEs. According to the Doing Business report, taxes levied on companies represent, on average, 106.3% of its net profits (before taxes). in other words, an Argentine SME that pays all its taxes (on average) entails a loss. This explains, to a large extent, why almost half of the Argentine economy is in the informal sphere, because if it complied with all its tax obligations, it would probably go bankrupt. Thus, tax evasion has become a frequently used practice in the country.

These types of taxes are well above the world average (40.4%), the OECD (41.6%) and Latin America (46.6%). In the following graph, you may observe the tax pressure of each mentioned country.

1 Only national and provincial taxes are taken into account.

2 Brazil, Russia, India, China and South Africa.

Tax pressure on companies per country (As a % of net profits before taxes)3

Argentina

Bolivia

Venezuela

Colombia

Brazil

France

China

Italy

Belgium

Mexico

Greece

Austria

Slovakia

India

Sweden

Germany

Australia

Spain

Japan

Czechia

Russia

Turkey

Uruguay Netherlands

Poland

Portugal

Hungary

Source: Fundación Libertad based upon information from Data Driven and the World Bank.

3 Argentina found in red, Latin America in cerulean, BRICs in light blue and OECD in blue.

Argentina, with the aforementioned 106.3%, leads the rankings by a wide margin, followed at a substantial distance by Bolivia with 83.7% and Venezuela with 73.3%. At the other end of the spectrum is Luxembourg, with just 20.4%, followed by Denmark and Canada with 23.8% and 24.5%, respectively.

The tax burden is not only steep, but it also implies a large amount of time that SMEs must invest in meeting all the bureaucracy involved in paying taxes. As mentioned in section 2.3, the hours devoted to bureaucratic tasks pose a great burden for Argentine companies, especially for small and medium-sized ones. The tax part of these tasks entails 418 hours per year on average. In other words, SMEs sped more than half of its overall time engaged in bureaucratic procedures.

Taking into account a basic division per sectors, there is evidence that the primary sector, with an average of 156.5 hours per year, is the sector that requires the least amount of time to pay taxes. Behind we find the tertiary sector, with an average of 429 hours per year, and finally the secondary sector, which averages 532 hours per year. It should be noted that regarding the hours committed to the tax portion with respect to the overall time, the tertiary sector has the highest ratio, reaching 56.7%.

Hours per year devoted by SMEs to bureaucratic tasks

Source: Fundación Libertad based upon information from the Bureaucracy Index.

With the exception of the primary sector, the other sectors yield results that are similar to those exhibited by the Paying Taxes report published in 2020 by the World Bank and PwC, which indicated the use of 519 hours/year on the payment of taxes by medium-sized companies in the different countries of the world. These results become more relevant when compared with those of other countries. With the exception of Venezuela (434.2 hours/year), Argentina surpasses its peers by far. To give an example, the time committed to taxes is eight times greater than in Brazil (46.9 hours/year) and three times greater than that spent in Mexico (125.1 hours/year) and Colombia (126.8 hours/year).

Hours per year devoted by SMEs in different countries for the payment of taxes 4 2021

Source: Fundación Libertad based upon information from the Bureaucracy Index.

As noted from the table above, with the exception of Colombia and Mexico, whose tax hours per overall procedures ratio is around 25%, the other countries are between 4045%. The substantial difference is found in the total hours and not on its relative participation. For this reason, it can be asserted that, in relative terms, the time spent by Argentine SMEs to pay taxes is similar to that of other countries. The problem lies, then, in the amount of total bureaucratic procedures (including tax) and the time it entails.

The large amount of time and money that taxes require from SMEs is largely explained by the large number that exist. In relative terms, the most important ones are taxes on gross income, value added tax and income tax, among others. The particular case of Gross Income should be highlighted: in addition to being cumbersome when paying it, given it is caused in all the provinces, it can occur that the same SME that sells its products in more than one province is paying the same tax several times. The taxes that Argentine SMEs must pay at three levels (municipal, provincial and national) are listed below:

4 Employment-related taxes are not included.

Sales and related

List of Taxes for SMEs

VAT (Value Added Tax)

IIBB (Gross Income)

Municipal health and safety fee/Registration fees

Tax on checks and other bank transactions

Provincial stamp tax

Business profits

Profits

Labor

Gains on natural person (taxed to the SME owner)

Employer contributions

Labor Risk Insurance Company - ART (it is not a tax but it is a mandatory payroll charge)

Property tax (municipal and provincial)

Automotive tax (municipal and provincial)

On Assets

Foreign trade

Miscellaneous

Personal assets (taxed to the SME owner)

Export rights (in case of export activities)

Import tariffs (direct or contained within intermediate consumption)

COUNTRY tax (on certain foreign consumption)

Fuel Tax (several contents in the purchase of fuel)

Special funds Provinces (surcharges in IIBB or others)

Various municipal taxes (use of public space, advertising, others)

Taxes/fees/funds on electricity and gas consumption (included in the invoice)

Electricity taxes (wholesalers, which are incorporated into service costs)

Source: Fundación Libertad based upon information from IERAL.

SMEs face a tangled, complex and untidy tax system, full of inequities and double taxation. Many national, provincial and municipal taxes coexist and affect small businesses, hindering its development - and the consequent investment and job creation - and encouraging informality. According to a recent PWC report regarding the concerns of SMEs, 75% mention tax pressure as the main one.

The design of a simpler and more balanced tax system oriented towards small and medium-sized enterprises and micro-enterprises is paramount. Under this framework, the international experience offers us a good guide towards the centralization of tax collection in a few taxes that are easy to apply and control, while reducing evasion.

6. The labor cost of SMEs

The labor cost refers to the disbursement incurred by the employer in order to formally incorporate personnel into a dependency relationship, or in other words, “in blank”. It is made up of the net salary (the salary that the worker actually receives), which combined with personal contributions provides us the gross salary, and employer contributions.

On the one hand, the contributions are retained by the employer and then transferred to the corresponding organizations. On the other hand, contributions are payments that must be carried out by the employer with percentages that vary according to the size of the company.

Contributions are made up of several elements: the main one is for pensions, which is transferred to the National Social Security Administration (ANSES for its acronym in Spanish). Added to this element are family allowances, a contribution to the National Employment Fund and another to the Comprehensive Medical Care Program (PAMI for its acronym in Spanish), which is used to fund social assistance and health services for retirees and pensioners.

But other contributions should also be added. An example is the one destined to the social work chosen by the employee and the payment of compulsory life insurance (with a fixed part and another variable portion according to what ART quotes). All these figures mean that, at a minimum, the gross salary differs in around 50% of the labor cost, with a burden borne by the employer that exceeds 30% and can reach up to 40%. This means that, in a SME with 10 employees, due to the contributions, the employer pays the equivalent of having 13 or 14 employees.

These costs are expensive even at the regional level: according to the OECD, our country has the highest labor costs in the region. According to said international organization, Argentina has the highest tax burden regarding formal work, reaching 57% of salary. In other words, for every $100 received by the employee, a company must spend approximately $157. On the other hand, the average for Latin America and the Caribbean is 21.7%.

If we only consider the tax pressure on labor, that is, if the income tax is excluded (according to the work carried out by the OECD, an average salary in Argentina could not be reached by this tax) and the contributions to social security by the employee and employer are considered, Argentina leads the regional ranking with 34.6%, followed by Brazil with 32.2%, Uruguay with 30.5% and Colombia with 30%. In Chile, it is 22.6%.

5 Depende de lo que cotice la ART.

Tax pressure in Latin America and the Caribbean as a percentage of labor costs

Source: Fundación Libertad based upon OECD information.

Although the study could have included more updated data, it is relevant because it shows the high labor cost that Argentina has in comparison with its regional peers. Furthermore, it is possible to infer that, due to the rigid labor laws in our country, this pressure has not changed substantially.

The inflexibility of Argentine labor laws also implies a labor cost for SMEs that is harder to quantify in monetary terms. Some of these laws involve double compensation and the prohibition of dismissal without cause, among others: this type of law generates rigidity in the labor market, which has consequences regarding the creation of formal employment.

According to the Ministry of Labor, Employment and Social Security, for the first quarter of 2021 (latest data available), unregistered employment reached 32.4%. The arrival of the Covid-19 pandemic has only deepened the informalization of work in Argentina: studies carried out by the International Labor Organization (ILO) indicated that 82% of the new jobs that have emerged in recent months are informal. The phenomenon basically has to do with the process of losing formal jobs as a result of the Covid-19 pandemic and the quarantine, and also with the reduction of hours worked. This latest factor means that with a recovery of activities (due to the lifting of restrictions), there was no need for new hires.

This process of “informalization” of the economy that was generated in the world by the Covid-19 outbreak strongly affected our country from a comparative perspective. The contribution of informal employment in the recovery of jobs in Argentina (82%) was higher than that of countries such as Chile (53%), Brazil (68%), Costa Rica (75%). It was similar to that of Mexico and Peru (81% in both cases), and only lower to what occurred in Paraguay (91%).

Other studies, such as the one performed by the Argentine Institute for Economic and Social Development (IDESA for its acronym in Spanish), go even further and point out that there are fewer registered employees, between public and private, than the sum of self-employed and informal workers. According to IDESA, the ratio is 47% for employees registered in the public and private sectors, 30% self-employed workers (monotax and independent), and 23% who do not directly appear in any form.

The data displayed in this point enables us to reach certain conclusions. On the one hand, Argentine SMEs suffer from high labor costs, which is largely made up of social security contributions. This cost is very steep even in regional terms (the highest until a few years ago). Moreover, the labor cost is inflexible due to the rigid and numerous Argentine laws on the matter. All this generates an increased degree of informality in the economy that has deepened with the Covid-19 pandemic.

In short, for both employer and employee it pays more in economic terms to work in “black”. The former, because its labor costs and costs in general are lowered; and the latter, because he/she earns a higher net salary than if he/she had to carry out all the contributions required by a formal job.

7. Access to financing for SMEs

One of the great problems that afflict Argentine companies today - mainly small and medium-sized ones - is the possibility of accessing credit at a reasonable rate to finance itself. Access to financing is limited by numerous factors.

To begin with, it should be noted that Argentina has a very poorly developed capital market. An indicator that may be deemed appropriate to measure the depth of a financial market is that of domestic credit allocated for the private sector. According to the World Bank database, in Argentina this figure for year 2017 amounted to only 16% of its GDP, while neighboring countries such as Chile or Brazil reached much higher figures, more precisely 113% and 59%, respectively.

Domestic credit - in terms of GDPallocated for the private sector in Latin American countries 6 2017

Source: Fundación Libertad based upon World Bank information.

As observed in the graph above, Argentina only surpassed Haiti in the percentage of domestic credit allocated for the private sector (10%), which is why it is second last in the ranking and far from the regional average (46%). If the rest of the world is considered for the analysis, the gap becomes even greater, given the world average for year 2017 increased to 126%. These values reveal the difficulties that companies encounter when seeking financing in the domestic capital market.

Regarding the specific problems that SMEs face, it should be noted that both the requirements for obtaining a loan and its conditions are the main obstacles when it comes to financing. Specifically, 27.9% and 21.3% of SMEs state these as the main problems, respectively. These results appeared in a survey carried out by the Argentine Confederation of Medium-sized Enterprises, which also highlighted, among the main difficulties encountered, the lack of knowledge of assistance programs (15.6%), inconveniences when

6 Cuba is excluded from the analysis due to lack of data. For Venezuela, year 2013 (latest data available) is taken into account.

submitting legal/tax documentation (13.1%), the complexity in determining the appropriate program according to the needs of the SME (8.6%) and distrust towards credit institutions (7%).

Main obstacles for SMEs to access credit 2021

Source: Fundación Libertad based upon information from CAME.

Based on the results cited by this survey, both bureaucratic requirements and lack of information are the main reasons why small and medium-sized companies find it difficult to obtain financing.

Another aspect to highlight is the role of the public sector. Although the State launched credit programs for SMEs such as the Emergency Work Assistance (ATP) and the Productive Recovery (REPRO), among others. However, these programs did not have the desired scope or effects: this was confirmed in a study carried out by PWC, which showed that more than half (53%) of the SMEs analyzed did not access any of these pro-

grams during the pandemic. Most of the reasons stated referred to the need to prevent the State from exercising some type of control over the company.

Indeed, a clear example of state interference occurred with the companies that agreed to the ATP program: the national government imposed that all employees who participated in said program at lease once could not buy the 200 dollars allowed per month at the official exchange rate. To date this measure is in full force and effect and does not yet have an expiration date.

This type of restriction led a large number of SMEs to seek credit from private banks. According to PWC, about 44% of these types of companies sought bank loans or other types of financing in order to maintain its working capital, while 55% sought self-financing and cost reduction in order to survive. The remaining 1% carried out other types of actions.

Forms of financing for SMEs 2021

55% Self-financing/ Cost reduction

44% Loans or other financing

1% Others

Source: Fundación Libertad based upon PWC information.

Based on the information presented, it can be asserted that the scarce development of the Argentine capital market, the bureaucratic complexity of the banking system, the lack of information, the distrust towards government and credit organizations, the high inflation and the financing costs within a framework of macroeconomic instability are the main reasons why SMEs find it difficult to obtain credit. This context generates, as previously mentioned, that many enterprises seek to self-finance or cut costs, which normally generates a reduction in the product’s quality and/or service provided, a lower production level and the demise of working capital, among other negative consequences.

8. The future of work and the need to adapt

We live in a world totally different from that of our parents, and even more different from that of our grandparents. When it seems that everything has been invented, science, together with technology, surprises us with something new. Can anyone imagine what the world of our children and grandchildren will be like tomorrow? Today, we can connect via audio and video with people anywhere on the planet, as well as work from anywhere in the world. For those born in the last century, these are science fiction scenes. Something completely unthinkable by past generations.

We can find out who is the author of a famous painting just by taking a picture of it from an application and we can get everywhere through a digital map. We can know where our children are located at this very moment. We can travel without requiring to know the languages, because an application translates everything we want to say just by bringing the phone closer. Most people no longer go to the bank, but instead make their payments and transactions from their mobile phones. And they use platforms such as Mercado Pago or PayPal to make Internet purchases. All these online services have access to our data and use it for its own benefit. For example, the most advanced clothing stores check through its applications how much time customers spend in each of its geolocated racks in order to define which products generate the greatest interest in consumers. The large hotel chains saw their monopoly collapse when they were replaced by the Airbnb platform for renting apartments and houses. A significant percentage of book reading has moved from paper to screens. Travel agencies witnessed how its clients stopped needing its services by being able to organize directly through the web. Innovations don’t stop.

On the one hand, innovations seek to enable the manual tasks of the different occupations. On the other hand, they seek to replace human capital with robots. Faced with this avalanche in technological terms, the reactions are varied. The world panics when mention is made to the possibility, in the not too distant future, that people will be replaced by robots. The fact of being able to migrate our work to other countries, without the need to move, had already been growing at a sustained rate in the times prior to the pandemic. But today it is enhanced due to the development and momentum that ICT

and artificial intelligence have achieved. The generations that were born in an analog world adapted to the digital age, as in that of “if you can’t beat them, join them”. And the labor market is also in that same process of adaptation, crossed by globalization and technology. Today, a product is planned and designed in one country, produced and assembled in another, and marketed in many others. Connectivity has become a right and an obligation to be part of this new era in history.

In Latin America, where a large number of countries have a significant percentage of its GDP linked to the agricultural sector, technology makes its appearance and the labor market is in full transformation. It might be thought that because rural areas and industries use seeds, animals and its derivatives, manual work continues to be relevant, but actually these sectors are incorporating more and more technology, which in turn reduces the number of workers needed. However, taking Argentina as an example, where in the last 25 years its agricultural production has increased from 40 to 120 million tons, a determining factor for this increase in productivity has been the rapid adoption of technology. Nonetheless, in 2020, according to data provided by the Agricultural Foundation for the Development of Argentina (FADA for its acronym in Spanish), two (2) out of ten (10) jobs were generated in the agribusiness chains. In 2021, it is estimated that 3,716,317 jobs were created.

Today it is necessary to expand and strengthen the services and knowledge economies. It is one of the possible paths for the generation of new jobs by large companies, but also by SMEs.

Technology not only appears as a tool to improve production or the quality of the product that is manufactured. It is also a way to replace the missing workforce. This is the example of the gigantic Uniqlo, the third largest textile group in the world, which in 2019 replaced 90% of its Tokyo workers with robots. The reason that led to this decision was the aging of the Japanese population, which leads to a shortage of workforce. The possibility of reaching full automation was granted by startup Mujiin. Together with Uniqlo, Mujin set out to build a robot with an arm capable of picking up garments and gently placing them in boxes, to then be shipped to customers. A task that at first glance seems simple but is highly complex because, in addition to being light and delicate pieces, it must be programmed according to the different garments, which change seasonally, coming in different shades, materials and types of fabric. packaging. The Japanese firm, which sells around 1.3 billion garments per year, needed to update its system and cover a shortage of employees.

The reality is that these new members of factories and warehouses are here to stay. This process of technological adaptation is inevitable, irreversible and much faster than we thought. Since the telephone was invented in 1876, it took almost a century for the first mobile phone to be created. Then 34 years would pass until the first IPhone was introduced. Barely 12 years later, that same mobile phone began to unlock just by looking at it, when recognizing its owner’s face. We are facing a unique dematerialization process. The television went from being a square, robust and large box, which fulfilled a single function in the home, to become a high definition flat screen with access to the most varied digital content: Netflix, YouTube, Spotify and even video games, all coming from the same device. Any technological artifact linked to music that I remember from my childhood, such as records, tapes and CDs, have been swallowed up by digital platforms that we hold free access to from anywhere in the world. Even money is on its way to becoming dematerialized with the emergence of digital wallets and cryptocurrencies. We changed from huge and heavy products to smaller and lighter ones. And some of them we completely removed from the physical spectrum to turn them into digital constructions. This dematerialization, product of the advancements in technology, influences employment. Information used to occupy large tons of paper and involved logistics costs and time for its transportation. Now it is possible to send it by mail or store it on a microchip, hence all those occupations that are part of this work chain are disappearing to make way for new ones. This phenomenon affects companies from the way they manufacture and provide services to the requirements and profiles that will be necessary for this new era.

It is undeniable that advances in designs, processes, technologies and management and storage capacity have increased efficiency and economic savings in various sectors, but said progress have also produced unforeseen impacts. However, technology can have less than positive effects. At least this is clear from the case published by the National Bureau of Economic Research on how robotization affects the Colombian employment market. In 2016, the Phoenix Group, a multinational company engaged in the food and beverage packaging industry, one of the main industrial sectors in terms of robot adoption in the United States, began a relocation initiative that involved an investment of 48.7 million for the expansion of a subsidiary in Virginia and the transfer of 145 jobs from Colombia to the United States. The United States is one of Colombia’s largest trading partners, recipient of more than 30% of its total exports. Therefore, Colombian workers are affected by the automation that may arise from its main partner, and each new U.S. robot that can locally perform activities that were previously carried out in Colombia negatively impact the employment and wages of Colombians. If U.S. manufacturers now

have access to lower-cost production at home through the more efficient use of robots, the logic of trade between nations is bound to change. It will be cheaper to manufacture certain goods locally instead of importing them from countries that manufactured the products with cheaper labor. This is how technology can become an opportunity and a solution for our region. But an opportunity not without perils.

When it seemed that we already had enough technology impacting our lives, suddenly we found ourselves affected by it even more. The Covid-19 global outbreak has left, and continues to leave, consequences that we are not yet able to measure. Technology has enabled greater State interventions and controls over people’s lives. Suddenly, a new way of seeing life, of conceiving relationships, physical contact, and purchasing products has appeared. The closure of companies, stores and other non-essential businesses and the suspension of mass events produced a highly negative impact on formal and informal workers in the region, and consequently precipitated a drop in activity in all sectors. In these months of change, the accelerated incorporation of technologies has provided a response in different areas, particularly in the labor market. Video conferencing applications such as Hangouts, Zoom, Jitsi, Meet or Houseparty gave rise to a new way of communicating that had existed since 2003 with the launch of Skype.

Technology allowed us all to be closer. It is interesting how these platforms transformed into the main work tool for millions of people. Lately, many of the debates revolve around how we will work after the pandemic. How much everything will change, whether or not you will return to the offices, how and how much will we travel. These are the questions asked today by those who are beginning to imagine the day after. A permanent adaptation to a model that combines face-to-face work with virtual work will not be an easy task. This is what executives from Microsoft, Google, Slack and Zoom say, who agree that the biggest challenge was to make its employees - those who work from home as well as those who attend the office - feel on the same level.

Starting from this goal on, they began to further develop and improve the platforms. Google is working on an update that will include the ability to overlay voice and video chat with the use of shared folders and files in order to improve the exchange within the work team. Microsoft Team and Slack plan to redesign offices by incorporating microphones and cameras that allow simultaneous and seamless communication between those who do not share the same physical space. The readaptation of offices due to the return of workers, for at least some days a week, has given rise to the transformation of many companies and the emergence of new ones that are trying to capitalize on these changes. In the US, for example, software company Tandem launched a desktop app for collaborative work: each user shows what teammates are working on so colleagues

know if they’re available for an impromptu video call within the app. The user status list updates automatically so people know if their colleagues are on a call, typing in Google Docs, or doing something else. Pragli and Tribe, two software companies founded in 2019, also offer similar products. People can use Pragli’s product to create ongoing audio or video calls that others can join. Tribe’s software uses busy and available statuses in order to facilitate video calls on the platform. Owl Labs, a company as from 2017, is also trying to address “attendance”. It causes a 360-degree video camera, microphone, and speaker to be placed in the middle of a conference table and automatically zooms in on the person speaking. Not only did we see how this new hybrid way of working emerged and became a challenge for companies and organizations, but we also witnessed a boom in startups.

While the isolation measures made it difficult to acquire different goods, and the lack of employment and education deepened, the startups that were able to offer different and effective technology and digital assets rendered excellent results. These emerging companies are among those that have received the most investments during 2020, especially those engaged in biotechnology, software and EdTech. According to the ranking of the best valued startups in the world, published by CB Insights, there are 17 companies of Latin American origin that have proven to be disruptive in their segment. Among them is Nubank, the Brazil-based fintech, currently the largest in the region, valued at $25 billion, while Colombian delivery app Rappi Inc. raised some $300 million in 2020. A year later, Rappi reached a valuation of at least 3.5 billion dollars.

In recent years, more than 1,000 technology startups have been born in the Latin American region and have raised at least one billion dollars. However, all these changes also trigger collateral effects on commercial activity and the restructuring of cities. The remote work revolution does not only affect the modality of work itself. It also impacts transport, commerce, industry, and services in cities. Just like what happened with the installation of factories at the time, the offices caused urban and commercial development around them. Clothing stores, cafes, restaurants, bookstores, gyms, etc., settled nearby, forming shopping centers that grew and prospered due to a greater circulation of workers. But, what happens to these businesses if the offices are no longer essential? The challenges facing digitization are even greater than we can imagine.

The Internet has given us access to new realities and opportunities in all sectors of the economy. But it also opened the doors to another form of employment. This is the case of the GIG economy or platform economies, which emerged more than 10 years ago at a global level and have meant one of the greatest disruptions in the working world. This new model, generally present in the service industry, is aimed at taking advantage of

existing and underused assets and resources such as Airbnb, BlaBlaCar, Couchsurfing, MercadoLibre, among many others. They were also adopted as a new form of independent employment, more flexible, temporary and by choice, such as Uber, Glovo, UpWork, JobToday, Taskrabbit. Although there are few statistics, one of the studies carried out by the GIG Economy Index regarding the United States shows that 40% of workers generate a large part of their income through collaborative economy platforms. Likewise, the rapid expansion of this new modality generated 1.21 trillion dollars in 2020. Digital platforms have been strengthened by the pandemic and actually has reduced transaction costs, promoted competitiveness and generated new employment opportunities. The job offer that a designer could access would not be the same if he/she had to go personally to see each of his/her clients. And, surely, those individuals who decide to work with some application for the mobilization of persons, in which they hold the freedom to accept whether they want to make the trip or not, they could not do the same if they were part of a taxi company. They would probably have to comply with the hours and number of trips established in the employment contract.

A distinction should be made with respect to this model of employment. There are people with different income levels: those who own a property to rent through Airbnb or use their own car to work from Uber are not the same as those who use it as a survival tool and must struggle all day to obtain a daily income. One of the major points in favor of this new form of employment is that it contributes to the creation of an egalitarian society, by reducing discrimination in the employee selection processes, and when choosing who to carry out the work, it is limited to the rating provided by the users and not by ethnicity, age or gender.

Now, there is a reality that needs to be mentioned. Given there are no traditional employment contracts on these platforms, workers do not enjoy any labor protection. Incomes are highly fluctuating depending on demand and, in one way or another, cause a decline in working conditions, which is one of the biggest problems in Latin America. Some countries have begun a path to promote this new form of work, such as Uruguay, which managed to extend coverage to platform workers who perform tasks informally. Since 2017, the drivers of the transport platforms (Uber or Cabify) are required to register as small enterprises before the local authorities in order to obtain the corresponding license, and before the Previsión Social Bank (BPS for its acronym in Spanish), Uruguay’s social security institution. The platform pays the corresponding taxes of a multinational company, and the driver pays the contributions before BPS, enabling him to access social security coverage.

Digital technology creates new challenges for the effective application of labor protections. The existence of more and more digital platforms that interconnect needs with solutions requires the development of an international governance system that establishes and requires that the platforms (and its clients) respect certain minimum rights and protections. One example is the Maritime Labor Convention. It is a global labor code for seafarers, and is a source of inspiration to address the challenges of employees, employers, platforms and customers operating in different jurisdictions. For some, digital platforms are the opening of new, more flexible job opportunities. For others, it represents just one more step towards job insecurity. The truth is that work through platforms is growing and it is necessary to acknowledge that laws and regulations do not evolve at the same pace. A great challenge is to adapt regulations to the new ways of working.

But not only the labor laws continue without being transformed and adapted to the labor market of this new century: it also happens with the institutions of worker representation, the labor unions. Since its inception, these associations, which aim to defend the interests of workers, have remained inert over time despite having witnessed globalization and the increasing incorporation of technology into work. The new ways of working pose new challenges for guilds and unions, and for workers and their way of demanding around the world. This is why it is important to discuss union organization models and its future.

9. Proposals

Given the starting point explained throughout this document, characterized by high tax pressure, elevated bureaucracy, prohibitive labor costs, the advance of digitization and little or no financing for small businesses, in Argentina the proposed change must be disruptive. “Gradualism or shock” is a false choice in this context: change cannot be gradual. In Argentina, 60% of the children are poor and no private employment has been created since 2012. The poverty rate is around 40% and it is the only country in the world that has multiplied poverty tenfold in the last fifty years, public spending by two and social plans by twenty.

This serious state of affairs, portrayed in the various international indicators and the obstacles faced by SMEs, forces us to think about proposals of a structural nature. In this sense, it is essential to achieve macroeconomic and institutional stability: SMEs would greatly benefit from a framework of low inflation and stability, provided their smaller scale makes them weaker in the face of continuous changes in policy, regulations, and standards.

Considering these afore-mentioned elements and the difficulties endured by small and medium-sized companies in Argentina, elaborated throughout this work document, below we submit the following proposals.

Reform the tax system

Argentina needs a shock tax reform: it is necessary to lower and simplify taxes at all levels, without hesitation or exceptions.

In Argentina there are 170 taxes with four characteristics: high, complex, tricky (the same tax is designed to generate fines) and unfair (the State does not have the same duty as the taxpayer, thus producing asymmetries). This set of characteristics encourages evasion due to unsustainability given the fiscal relationship is broken. On the other hand, there are one hundred forced collection mechanisms (perceptions and withholdings) and 25 withholding agents. As mentioned above and according to World Bank data, Argentina has the highest income tax rate in the world of 106% on profits, second only to the Comoros Islands. For all these reasons, the tax system must be changed and taxes repealed.

Tax reform must be comprehensive and decisive. Under this framework, first of all, the tax principles articulated in “The Wealth of Nations” by Adam Smith in 1776 must be taken into account, namely:

Principle of certainty: “the tax that each individual is obliged to pay must be fixed and not arbitrary. When this does not happen, all those who are subject to the tax are more or less at the mercy of the collector”.

Principle of convenience: “This principle states that all taxes must be collected at the time and place that is most convenient for the taxpayer. This principle not only indicates that there must be an efficient and citizen-friendly collection process, but also that it must take into account the place and date of payment of the tax, which must be at the time of year when it is most likely to occur, having the means to pay for it.

Principle of justice and equity: that the subjects of each State must contribute to the maintenance of the government in a proportion as close as possible to their respective capacities.

Principle of economy: “every tax must be planned so that the difference between what is collected and what enters the State’s public treasury is as small as possible”.

Based upon these principles, the debate and the reform should revolve around the following proposals:

9.1. Establish a “legal ceiling” on the tax burden

The overall tax burden, that is, the sum of all national, provincial and municipal taxes, should not exceed a certain fixed limit (for example 30% or 35% of income). This way, citizens, companies and investors would have full predictability to think and carry out their projects. Any additional tax above that limit would be confiscatory and therefore unconstitutional and unenforceable. This principle, if carried out, would generate a tsunami of investments where the limit will be in favor of the taxpayer for the first time in history. In this sense it would be ideal for the Supreme Court to establish an agreed tax ceiling that works as an institutional limit to fiscal greed. This tax reform should include an institutional ceiling supervised by the Court so that 106% of profits no longer be taxed, no more income tax is paid on top of the inflationary tax, and so that the provinces do not unleash and charge any rate regarding gross income, among others. Promoting a “tax ceiling” should be equivalent to the “maximum consolidated tariff” that the World Trade Organization (WTO) possesses.

On the other hand, the Value Added Tax (VAT) should be reduced to a 10-15% range, which is what society effectively pays today: approximately half is informal. Likewise, the income tax should not exceed the minimum rate set forth in Europe, which is 20%. And the labor tax, which includes the union, social work and a small unemployment insurance, should be in the order of 12% to 15%.

9.2. Lower taxes to raise revenue

The political class makes linear accounts where it concludes that lower rates represent less tax revenue. That statement is false: the Laffer curve proves it. In the Argentine case, the optimal fiscal point is largely exceeded (said tax pressure that maximizes collection), therefore any reduction in taxes will generate more incentives to launder flows and the creation of larger tax bases due to investment. A simulation exercise carried out shows that if an equal import-export tax rate of 5% is established for all products, that is, withholdings of 5%; 20% to profits plus 10% that can be collected directly for the provinces; a VAT of 21% (11% Nation and 10% to provinces); labor taxes of 15% on new jobs; and eliminating all the rest of the taxes except a real estate tax for the municipalities, Argentina would collect, with all these assumptions, 30% of the GDP and could finance a size of the State of 26%, as in the 1990’s. In summary, it would be convenient to reduce the complexity to five or six taxes, given ten of the 170 account for 90% of the collection.

What the government has to understand is that what is important for a businessman is the global cost of taxes and not one in particular. If gross income increases and VAT is reduced, there are no substantial differences for the employer because they are neutralized. In other words, if one of 170 taxes is relieved, it is going to barely have a marginal effect. This is also aggravated, and as it has been happening since the 1990s onwards, because the governments have no credibility: if the tax is reduced today but the agent suspects that it will rise again in two years, he will not be encouraged to invest. That is the reality of Argentina: all tax cuts last just a few months.

It should also be considered that there are successful tax reforms in the world (such as the cases of Estonia and Ireland) where single taxes were established, and the entire tax structure was abolished without fear from one day to the next. The success in the collection was such that the reduction of taxes continues year after year and, pari passu, foreign investment has turned these two countries into European economic miracles.

9.3. Promote “proportional taxes”

Even if they arise from good intentions, “progressive taxes” cause losses for all because any tax levy results in actual lower income for the poorest. When taxes are paid by “only the rich”, what happens is that they lose purchasing power, which in turn results in less demand for goods and services provided by the poor. Therefore, the negative impact reduces the purchasing power of the latter as much as the rich.

Furthermore, the Argentine tax history shows that all taxes initially designed “to punish the rich” ended up also taxing the income of the poor (such as taxes on fuels, profits or personal assets, among others). To think that taxes affect only those who are directly affected by them is equivalent to magical thinking. The “progressive tax” is nothing more than an excuse to create more taxes.

Opposition to progressive taxes should not imply support for the so-called “regressive” ones, whose most emblematic case is the inflationary tax that the poorest people pay disproportionately more. The tax system must try to tax individuals with the same percentages, which in any case implies that those who have more wealth pay higher amounts of taxes.

9.4. Eliminate all withholding and collection mechanisms at all levels

Taxpayers cannot be required to perform unpaid work such as collections for governments, and much less pay the financial cost of anticipating such taxes. In a country with the inflation level that Argentina has, the frequent delays in returns make these a highly onerous expense.

Two major problems caused by withholding and collection mechanisms in small and medium-sized enterprises are their obscurity and frequent inapplicability. Regarding the first matter, neither individuals nor SMEs are formally served of the levies that take place in banks, thus one believes to have an amount of money available that actually is not because the State withholds income. This, in turn, affects the return of withholdings because time and money must be spent for tracking them down and performing presentations in order to integrate them into the current tax payment.

Regarding the inapplicability issue, there are perceptions for taxes that sometimes should not even be paid. In these cases, the State collects an inappropriate tax in advance but does not bear the costs of said decision, which fall upon the SMEs.

9.5. Centralize collection in a single agency

Today technology allows the centralization of collection. Argentina needs to simplify the tax system because the collection method is more expensive than what is collected itself.

The multiplication of agencies causes squandering, inefficiencies and corruption. Public spending rises due to the hiring of more employees and the maintenance of more structures with the same purpose. However, this can lead to double and even triple taxation like the ones that exist today (as is the case for the “wealth tax”, the personal property tax and the real estate tax, for example). The fact that there are so many collection systems unknown by the general public contributes to the existence of pressure and lobby to obtain undue exceptions.

However, the centralization of collection should not imply an arbitrary distribution of fiscal resources, which is the current case in Argentina. All taxes should be collected by the AFIP, but legislation should be generated that imposes automatic transfers to the nation, provinces and municipalities.

Complementary Reforms

9.6. Deregulate the economy

The current regulatory system is unfeasible: it is poorly designed and makes investment and job creation unsustainable, as reflected in the previously mentioned Bureaucracy Index. This necessarily imposes a full deregulation of all new activities, new companies, new investments and new products: a new regulatory paradigm whose purpose is the elimination of the “prior permission” concept and its replacement by a “subsequent control”.

Some Estonian-style deregulation has to be carried out for anything new. In August 1991, Estonia declared its independence for the third time in seventy years: the Nazis and the Soviets had passed over its territory, decimating its population. Thousands of people ended their days in the Siberian gulags. Meanwhile, the country operated under a closed, hyper-regulated economy, with entrenched mafias and generalized poverty, hyperinflation and terrible competitiveness. The Russian military withdrew only in 1994: but after independence, Estonians were encouraged. They carried out a pro-market economic reform with the elimination of taxes, rate reduction, rationality and tax justice, procedure dismantling, electronic government, commercial opening, privatization and currency convertibility. Fiscal deficits have been prohibited by law since 1992.

Today, Estonia has a GDP per capita of 20,000 euros per year (double of Argentina) that has increased fivefold in twenty years. Unemployment is at 7%, public debt relative to GDP is 8%, inflation is less than 10% per year since 1994. In Estonia you can open a business in twenty minutes: every two inhabitants own a car, and the risk of poverty is 21% (half of Argentina). Estonia is an open country: imports represent 55% of GDP and exports 52%. Estonia ranks 16th in the tax competitiveness ranking out of 196 countries: it is a success story thanks to deregulation.

9.7. Digitize the state bureaucracy

Parallel to the processes of deregulation of the economy, progress must be achieved in the digitization of the bureaucratic procedures that must be maintained. Digitalization, at all levels, brings transparency to the government, given it reduces the probability of operating outside the system and hence reduces corruption.

Likewise, digitalization contributes to the efficiency of processes and better management of human resources within the State, provided it is easier to identify errors. The digitization of processes and, in general, the existence of an open government, also enable the publication of useful and sustained data over time in order to propose and improve public policies.

In particular, the creation of companies through electronic procedures should be streamlined. The purpose should be to approach countries like Chile, where it is possible to create a company in 4 days (while in Argentina that number is 11.5, according to data from the World Bank’s Doing Business Report). This goal cannot be achieved if procedures continue to be paper-based, which implies additional costs in time and money for anyone who uses them.

9.8. Generate incentives for the digitization of the economy

The Covid-19 pandemic has accelerated a pre-existing process of digitizing work and sales in small and medium-sized businesses. This issue, as described in the section regarding the future of work, has contributed to the rise of new jobs and the disappearance of others.

However, Argentine legislation regarding the digitalization of work remains unchanged or includes changes that harm SMEs. The teleworking law approved by Congress in 2020 must be modified in such a way that it does not imply onerous extra expenses for companies (as in the case of the reversibility that the employee can request from one day to the next, which increases logistics costs) nor allow the increase in litigation that it currently promotes.

If there is to be a parallel regime regarding Employment Contract Law, then the focus should be on promoting and not discouraging digitization. The current existing legislation discourages job creation, which makes Argentina non-competitive in a context in which other countries embrace digitization and become more efficient due to its use.

9.9. Enable the flexibility of labor laws

Labor legislation prevents employment generation. By prohibiting dismissal, as is the case currently in Argentina, hiring is being prohibited de facto. We must move towards the deregulation of the labor market. And it is possible to comply with article 14 Bis of the National Constitution through an American-type system without compensation for dismissal to be borne by companies. Under this framework, the proposal is to reduce labor costs and pay a percentage of salary for unemployment insurance. As previously mentioned in the tax reform section, the gross salary should be similar to the net salary: 12% - 15% less, but not 45% less.

A new labor system must be designed for the unemployed and for those who obtain their first job with total labor charges of 15% (6% for social security, 3% for unemployment insurance, 1% for the union, 2% for occupational risk insurers, 3% for retirement contribution) where the employee’s protection against dismissal is through unemployment insurance and severance paid by the employer is eliminated.

Likewise, it is necessary for the private wage to be above the public wage so that there are incentives towards the private economy. Therefore, entry into the public sector must be frozen: employees must not be fired, but vacancies must be frozen, early retirements must be carried out and structures must be eliminated. All economic agents go to the public sector for a rational reason: they do what the incentives indicate. If taxes are lowered and labor laws are more flexible, companies will be created and there will be more individuals willing to join them.

On the other hand, the design a free labor regime for those who have not yet entered the labor market is being proposed, which would lead to the reduction of the power of the labor unions. Likewise, suggesting segmented collective agreements for SMEs, such as the ones existing in many neighboring countries, would be essential for the competitiveness of the sector.

Finally, it is worth mentioning that the existence of an independent judiciary would significantly reduce the labor cost associated with the :anti-business” bias of the labor judiciary, which regulates compensation that causes the bankruptcy of SMEs and encourages informality. This implies the elimination of the so-called “lawsuit industry”, whereby any SME that faces a lawsuit almost automatically loses it: there is no justice if the outcome of a dispute is already defined beforehand.

9.10. Devise a plan to reduce debt for SMEs

The State displaces the private sector to finance its imbalances and increases the interest rate, thereby preventing investment and the development of SMEs. Lowering the interest rate is only possible with fiscal solvency and credibility. In this sense, it must be taken into account that at least 1/3 of the SMEs are highly indebted (situation 3, 4 and 5 of the banks), thus are not subject to credit. For an Argentine businessman, the horizon of visibility is nil.

The indebtedness of the group of SMEs reaches 1.8% of the GDP; that is, about US$ 7.2 billion. Such indebtedness is fiscal (national, provincial and municipal) and financial (private and public banks), and for this reason it is critical: in many cases it is overdue, intimidated, close to embargoes and/or reorganization proceedings or threatened with bankruptcy. Indebtedness in Argentina hinders the entire development of companies and generates extraordinary income for lawyers and experts, multiplies costs via interest, generates sustainability problems and breaks solvency and liquidity ratios. Business debt is short-term and therefore, given the circumstances, the possibility of effective payment is doubtful.

A friendly mechanism must be achieved with the banking system with state guarantees and the commitment of the companies with the greatest exports or greatest job creation in exchange for passing the debt to long and payable terms. Over-indebted companies and individuals should participate in exchange for employment, formalization and export commitments in a debt-for-currency swap program for longer terms.

10. Conclusion

In this White Paper on the Private Sector, we have outlined diagnoses of the problems faced by small and medium-sized enterprises in Argentina, as well as proposals to overcome them. In our country, the State’s taxes and bureaucratic obstacles hinder the activity of SMEs appear to be the most pressing issues to be resolved. There are an exorbitant number of taxes, many of which overlap or are severely distorting, and the system aims at a “progressivity” that destroys the incentives to produce wealth. In particular, high labor costs push SMEs to resort to unregistered work, and practically confiscatory taxes also force informality on the balance sheets.

This paper has presented alternatives to attack the tax and bureaucratic problems of Argentine SMEs. The establishment of a “legal ceiling” on the tax levy would impose a limit on the state’s ability to collect taxes, which should also be lowered strategically in order to increase collection. On the other hand, the promotion of proportional taxes would not attack the incentives to produce and would not culminate in regressivity paid by the poorest. Simultaneously, the elimination of withholding and collection mechanisms and the centralization of collection would lead to a more transparent tax system and less susceptible to abuse of authority. Generally speaking, the deregulation of the economy, more flexible labor laws and a plan to reduce debt for SMEs appear to be essential to provide the latter with certainty regarding a sustainable path to development.

Within this framework, the other outgoing issue of this document has been digitization, and that the future of work is undoubtedly digital. In this sense, the Covid-19 pandemic accelerates a process that was also seen before, whereby both the supply and demand for work move from face-to-face to virtual. Companies have new opportunities to sell its goods and services online; workers have new opportunities to work from home. But abrupt transitions are not easy, and that is why the País PyME program has focused (both in its events and in this document) on training and producing incentives for digitization so that SMEs can take advantage of it in the best way possible.

In addition, digitization appears as a particularly relevant opportunity in a country like Argentina, whose SMEs, as explained in this document, suffer from serious difficulties. And the resolution of these pressing problems is essential in two ways: on the one hand, a private sector that does not grow or even decreases in terms of employment, and production cannot drive the economy. As Argentina has been showing for years, a dynamic in which the public sector is the only one to grow is not sustainable: a process that destroys the country’s productive capacity ends up impoverishing the entire population.

However, there is another sense in which it is important to release the productive capacity that SMEs can take advantage of, and that is the strengthening of democracy. It is essential that the private sector be robust so that politics cannot hoist messianic and presumably saving promises that lead the country towards authoritarianism. Indeed, it is the strength of civil society that has allowed, until now, the authoritarian attacks by the armed forces (in the past) and by popularly elected governments (in the present) to have finally been defeated. And there is plenty of evidence, at a global level, about the relationship between high degrees of democracy and economic development. But we cannot know if the Argentine population, which has already endured decades of stagnation, will be willing to withstand a democracy that materially does not work.

If SMEs are not strong enough, the economy will not be robust, and an economy that is not robust will become a breeding ground for the return of authoritarianism. In conclusion, it is essential to strengthen small and medium-sized enterprises in order to maintain the health of the economy, but above all, the health of our democracy. We know how to do it: the challenge, from now on, will be to transform these proposals into action.

More information:

In Rosario: Edificio Faro Mitre 170, Rosario (Santa Fe) Phone No. (0341) 4105000 info@libertad.org.ar

In Buenos Aires: Fundación Libertad, Oficina CABA Av. Córdoba 637, 2nd floor, suite 202 sedecaba@libertad.org.ar