CORDOBA GOVERNOR DE LA SOTA: ARGENTINA'S FREE MARKET

UNCLAS BUENOS AIRES 002386

SIPDIS

SIPDIS
SENSITIVE

E FOR THOMAS PIERCE, WHA FOR WHA/BSC AND WHA/EPSC
PASS NSC FOR JOSE CARDENAS
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN
TREASURY FOR ALICE FAIBISHENKO
USDOC FOR ALEXANDER PREACHER AND JOHN ANDERSEN
US SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ECON ETRD EFIN AR
SUBJECT: CORDOBA GOVERNOR DE LA SOTA: ARGENTINA'S FREE MARKET
STALWART

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Summary
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1. (SBU) Cordoba Governor Jose Manuel de la Sota, in a dinner with
the Charge, portrayed himself as a champion of free market orthodoxy
standing up to a Kirchner administration riding roughshod over
market disciplines and contractual sanctity. He questioned the
values of a politically and socially immature Argentina that
undervalues the rule of law and fails to re-invest appropriately in
primary economic infrastructure. De la Sota highlighted his
provincial administration's successful use of targeted incentives in
attracting new high-tech investment -- including Motorola and Intel
software development centers and call center jobs -- to renew and
expand Cordoba's productive capacity. He complained that the GoA's
increasing reliance on export tariffs and financial transaction
taxes not shared with the provinces under Argentina's
"co-participation" scheme has dramatically strengthened President
Kirchner's hand in allocating government revenues, allowed him to
consolidate political power. De la Sota will complete two terms as
Governor in 2007 and he hinted at possible ambitions to run for
President in the 2011 elections.
End Summary


2. (U) On October 12, Cordoba Governor Jose Manuel de la Sota hosted
Charge, EconCouns, Defense Attache and Poloff to dinner, with his
guests Cordoba Production and Labor Minister Adriana Nazario,
Federal Senator and Cordoba industrialist Roberto Urquia, President
of the Cordoba Export Chamber of Commerce Ercole Felippa, Vice
President of the Cordoba Stock Exchange Manuel Tagles, and Vice
President of the Cordoba Industrial Union Rodolfo Banchio.

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Argentina Adrift
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3. (SBU) Governor De La Sota welcomed the Embassy visit, noted
longstanding ties of U.S. multinationals in his province, and --
after seven years in office that spanned the 2001/2 economic crash
-- reflected on Argentina's current crisis of identity. He called
Argentina's current social and economic structures worryingly weak
due to: (1) the lack of a cohesive sense of society, manifest in
citizens' lack of regard for the common good and for public property
-- "Argentina will be 200 years old in 2010: We are hardly a young
county but remain very politically and socially immature;" (2) the
lack of a culture of respect for the rule of law, manifest in a
sense that the law is for others and those who obey the law are
either naive or foolish; (3) the lack of reinvestment in primary
economic infrastructure, with periods of growth taken as a windfall
by provincial and federal governments alike to be enjoyed and
exploited in the moment; and (4) the tendency of Argentines to favor
strong caudillo-like central authority with a consequent
hollowing-out of government institutional capacity.

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Cordoba: A Haven for Multinational Investment
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4. (SBU) Early in his governorship, de la Sota said, he appreciated
the importance of attracting targeted investment to Cordoba province
to renew and expand its productive capacity. He called the
high-tech sector cluster one of Cordoba's "jewels," and detailed a
variety of targeted investment incentives -- including tax holidays,
new employment bonuses and close coordination with the science
faculties of Cordoba University -- used to beat stiff international
competition to win Motorola (2001) and Intel 2005) software
development centers. Building on this success, Cordoba is now
employing similar incentives to attract a wave of call-center
investments, taking advantage of the provinces well-educated,
multilingual and relatively low-cost university graduates. (Note:
There are currently over 30,000 call center jobs in Argentina, split
between the city and Province of Buenos Aires and the cities of
Cordoba and Rosario. The industry is growing at a rapid 20 percent
per annum. End Note.)

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Trade Concerns
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5. (SBU) On trade issues, Senator Urquia asked about the status of
our GSP program renewal, noting that Cordoba province produces the
bulk of Argentina's peanut crop, whose exports would be
significantly impacted by any loss of privileges. (Note: Argentina
exported nearly USD 237 million in peanuts and peanut products
worldwide in 2005, including USD 24 million in exports to the U.S.,
just over USD 2 million of which was exported under GSP. End Note).
Urquia owns a major oil-seed processing and export factory in
southern Cordoba which he said is Argentina's fifth largest overall
and second largest nationally owned exporter. Export Chamber of
Commerce President Ercole Felippa, who also runs Manfrey, a major
Cordoba dairy company. He complained bitterly of the Chilean
National Commission for Price Distortion's October 6 decision to
impose a temporary 23 percent tariff on some milk and cheese product
imports from Argentina. Felippa attributed this to soaring Chilean
export of diary products thanks to a variety of free trade
agreements, with Argentine imports supplementing supplies for
residual domestic consumption. (Note: This does not appear to be
the case. While the value of Chilean dairy imports from Argentina
grew to $28.6 million for the 5-month period January to May 2006, up
230% year-on-year, Chile's dairy exports fell by some 25% during
this period. Chile charges that Argentine dairy exports increased
as a result of artificially low prices, supported by controlled
energy costs, direct GoA subsidies to the sector, and the reduction
of GoA dairy sector export tariffs.)


6. (SBU) De la Sota noted that, as elsewhere in Argentina following
the 2002 peso devaluation, agricultural production has exploded,
with soy and corn yields doubling over the past four years. (Note:
This claim appears exaggerated: According to the U.S. Foreign
Agricultural Service, while total Argentine soy production has
increased 262 percent from 1996 to 2005, soy yield have increased 48
percent in the same period. Corn production has increased 53
percent from 1983 to 2005 and corn yields have risen 92 percent in
that same period. End Note). He was particularly excited about the
prospect of developing an ethanol industry in the province, with
corn-distilled fuel production adding local value and contributing
to the GoA's legislative mandate to have domestically-sold
conventional diesel and gasoline contain a mix of 5% biodiesel (oil
seed-derived) and/or ethanol (corn- or sugar-derived) by 2010.

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Provincial/Federal Frictions
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7. (SBU) Turning to longstanding provincial frictions with the
federal government, de la Sota complained that the GoA's reliance on
export tariffs and the financial transaction tax - taxes not covered
by Argentina's "co-participation" law, which defines the split of
federally collected revenues with the provinces - has dramatically
strengthened the hand of the federal government. He explained that
the co-participation formula agreed upon in the 1960s mandated an
"equitable" 40-60 percent split of revenues between provinces and
the federal government. Factoring in the new unshared taxes, the
province's cut of federal revenue collections has been pared to an
"unsustainable" 30-70 percent split. (Note: Export tariffs
contributed 11.5 percent of GoA revenues in 2005, net of social
security contributions. End Note). President Kirchner has used
federal control over revenues to consolidate power and put
provincial governors under his thumb, de la Sota concluded, calling
it imperative that the co-participation formula be revised for the
sake of "political sanity."


8. (SBU) De la Sota called the federal export tariff and financial
transactions taxes broadly regressive and noted that Cordoba's
citizens are currently paying Pesos 1.4 billion into federal
coffers but getting back only Pesos 300-400 million in
co-participation revenue sharing. Adding insult to injury, he
added, the provinces are paying for the federal government to
subsidize "excessive" transport and social service subsidies for the
Federal District City of Buenos Aires. The poor in Cordoba, he
said, must pay significantly more for public transportation than do
City of Buenos Aires residents, whom President Kirchner feels it is


necessary to appease.


9. (SBU) De la Sota commented on outstanding ICSID arbitration
cases against the GoA by multinationals whose public service
contracts were abrogated by the GoA's 2002 pesification decree.
While the federal government has taken control and re-nationalized
both City and Province of Buenos Aires waterworks concessions (from
France's Suez and the U.S.'s Enron, respectively),Cordoba has
maintained its majority Suez-run Aguas de Cordoba concession. The
provincial government, de la Sota explained, is not in the habit of
unilaterally renegotiating service contracts with either foreign or
domestic companies and in any case, the Cordoba waterworks contract
remains cost effective and well run. "How can we attract new
investment if we keep changing the rules of the game?" he concluded.


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Break from Kirchnerism
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10. (SBU) Governor de la Sota stressed his independence as a
politician, said he has enjoyed his time as governor, but that after
eight years in office, it is time for a change. He explained that
the electorates of more "sophisticated" provinces like Cordoba want
change of leadership, even if they do not immediately recognize the
need themselves. De la Sota raised the controversial initiative by
the current Misiones province governor to change the constitution to
allow for his own indefinite reelection. De la Sota said that this
was especially dangerous in a small province like Misiones, because
the electorate is indebted to the local government for publicly
administered social programs and for locally determined civil
service employment. With 40 to 60 percent of its population in
public service positions, the electorate of Misiones is unlikely to
vote for change, he said. Cordoba, however, has only about five
percent of its population in public positions, and therefore enjoys
a truly independent electorate.

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Comment
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11. (SBU) De la Sota's agenda was clearly to present himself as a
free market stalwart, one whose track record of a successful
commitment to market disciplines and contractual sanctity stand him
apart from the policies of the Kirchner administration. His closing
comments on elections made it evident that he sees the Kirchner
administration with a lock on the October 2007 presidential
elections. De la Sota's presentation of Cordoba's progress and
success under his administration hinted at his possible ambitions to
run for President in 2011 elections. De la Sota is charismatic,
astute, and enjoys high public approval ratings. He was considered
as a possible Peronist Presidential candidate for the 2003
elections, but did not make the cut. He has a demonstrated a record
of strong economic growth and stability in Cordoba, but has yet to
transform into a national figure. If President Kirchner's heterodox
economic policy mix cannot sustain the current economic health of
the country into and through a second mandate, Governor de la Sota
may well have a compelling message to offer voters in the 2011
elections.

MATERA