VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #2353/01 3521300
ZNR UUUUU ZZH
R 181300Z DEC 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 9923
INFO RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6732
RUEHCV/AMEMBASSY CARACAS 1631
RUEHMN/AMEMBASSY MONTEVIDEO 6936
RUEHSG/AMEMBASSY SANTIAGO 0947
RUEHBR/AMEMBASSY BRASILIA 6616
RUEHLP/AMEMBASSY LA PAZ DEC SAO PAULO 3607
RUEHRI/AMCONSUL RIO DE JANEIRO 2409

UNCLAS BUENOS AIRES 002353 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: AR ECON EFIN BEXP OVIP
SUBJECT: Argentina: Secretary of Labor Chao Talks Investment Climate 
with U.S. Companies 
 
Ref:  Buenos Aires 2338 
 
This cable contains sensitive information - not for internet 
distribution. 
 
------- 
Summary 
------- 
 
¶1. (SBU) Secretary of Labor Chao met December 10 with 
representatives of Citibank, IBM, and Wal-Mart, all major U.S. 
service sector employers in Argentina.  Company reps highlighted 
their profitable operations here, praised the caliber of Argentina's 
labor pool, and agreed that rapid expansion of U.S. investment in 
Argentina's service sector over the past five years has been fueled 
by the nations well-educated, highly capable and relatively 
inexpensive workforce.  In response to the Secretary's prompting on 
investment climate challenges U.S. companies face, participants 
cited labor law inflexibility, rising inflation, poor contract 
enforcement, ingrained corruption, systemic weakness in the national 
judiciary and frequently changing tax and regulatory rules of the 
game.  Secretary Chao questioned the impact of Argentina's still 
unresolved post-crisis legacy of debt default and the GoA's growing 
reliance on bond placements by Venezuela.  Participants acknowledged 
that Argentina's decision to pre-pay relatively inexpensive IMF debt 
and instead rely on national and Venezuela-assisted bond issues has 
been financially and politically costly.  They predicted that 
resolving outstanding Paris Club arrears would be high on new 
President Cristina Fernandez de Kirchner's (CFK's) agenda and agreed 
that the key challenge facing the incoming CFK administration will 
be to manage needed economic policy changes in a way that sustains 
Argentina's five-year-long track record of strong growth. 
End Summary. 
 
--------------------------------------------- ----- 
Lunch with U.S. Companies that are Major Employers 
--------------------------------------------- ----- 
 
¶2. (U) Secretary Elaine Chao and Ambassador hosted a December 10 
luncheon for representatives of U.S. service sector companies who 
are major employers in Argentina to discuss their company operations 
in Argentina and the challenges the local investment climate poses. 
Attendees included Juan Bruchou, President of the American Chamber 
(AmCham) & CEO Citibank; Alejandro Diaz, CEO of the AmCham; Ezequiel 
Gomez Berard, CEO of Wal-Mart Argentina; and Sebastian Mocorrea, 
Vice President of Governmental Programs for IBM Argentina.  All 
company representatives noted that their operations were profitable 
and that Argentina remains a very attractive regional market from 
their headquarters perspective. 
 
--------------------------------------------- ------ 
Attraction: Argentina's Capable, Educated Workforce 
--------------------------------------------- ------ 
 
¶3. (SBU) Secretary Chao noted Argentina's reputation as a nation 
with a strong societal and family emphasis on education and asked 
about the quality and training of the nation's labor force. 
Participants praised the caliber of Argentina's labor pool and 
agreed that the rapid expansion of U.S. investment in Argentina's 
service sector over the past five years was a function of the 
nation's well-educated, highly capable and relatively inexpensive 
workforce -- the latter due to GoA policies to maintain artificially 
low nominal currency values.  IBM's Mocorrea explained that these 
competitive advantages made it easy for IBM to choose Argentina as 
one of its four global service export centers alongside China, India 
and Brazil.  IBM currently employs over 6,000 Argentine software 
engineers and technicians making it the second largest U.S. employer 
in Argentina.  Its operations here focus on IT service exports to 
other western hemisphere IBM affiliates. 
 
¶4. (SBU) Wal-Mart's Berard noted his own company's rapid expansion 
during the 5-year economic growth surge that followed Argentina's 
2001/2 economic crisis: Wal-Mart now has 21 stores in Argentina and 
has hired over 1,500 employees in the past year alone to reach a 
total of over 7,500 employees, making Wal-Mart the single largest 
U.S. company employer in Argentina.  Ambassador noted that, in a 
recent local employee survey of "best companies to work for," six of 
the ten top-ranked firms and ten of the twenty top-ranked firms in 
 
Argentina were U.S.-owned. 
 
¶5. (SBU) Citibank's Bruchou highlighted his bank's 90-year history 
in Argentina, with a network of 60 branches, 3,500 employees and 
"universal" consumer finance, corporate finance and investment 
operations here.  Citi had lost most of its capital in the aftermath 
of the economic crisis, Bruchou said, but it has recuperated well 
over the past four years of financial sector consolidation 
(including the departure of U.S. competitors Bank of America and 
Bank Boston) and economic recovery.  In response to the Secretary's 
question on banking penetration, Bruchou noted that, although loan 
volume has increased substantially, Argentina remains substantially 
under-banked, with financial sector assets hovering at 11-12% of GDP 
(down from pre-crisis levels of 22-24%), well below the 30-40% of 
GDP averages in neighboring countries.  Key reasons are Argentina's 
cash-economy tradition, a lack of consumer confidence in the local 
banking system following the crisis (where deposits were frozen and 
many savers suffered substantial losses), and a linked tendency for 
Argentine's to hold their capital overseas, with some estimates of 
Argentine capital flight ranging as high as $100 billion. 
 
--------------------------------------------- ---------- 
Investment Constraints: Labor Inflexibility, Inflation, Price 
Controls, Corruption, Rule of Law 
--------------------------------------------- ---------- 
 
¶6. (SBU) With capable human capital a key Argentine competitive 
advantage, Mocorrea called IBM's greatest challenges in Argentina 
growing competition for qualified employees, the lack of flexibility 
in local labor legislation and a judicial system that favors 
employees in most legal action.  In response to the Secretary's 
question on how Argentine labor law rigidity impacts the investment 
climate, Citibank's Bruchou noted that foreign multinationals 
generally compete for high-end employees who have numerous job 
alternatives.  But, he said, labor law inflexibility hurt 
Argentina's small and medium enterprises (SMEs), traditionally an 
engine for growth and employment.  The high cost of firing workers 
has made SMEs wary about bringing on permanent documented employees, 
Bruchou said. (Notwithstanding Bruchou's concerns, according to 
government statistics, domestic unemployment has dropped from a 
post-crisis high of over 20% to the 8% level, close to Argentina's 
structural rate of unemployment). 
 
¶7. (SBU) Citi's Bruchou added that relative cost advantages of 
Argentine labor are waning as high domestic inflation rates are 
encouraging Argentina's strong labor unions to aggressively defend 
their members' purchasing power.  Over 40% of Argentina's workforce 
is currently unionized and participants discussed the growing 
strength of Argentine unions and GoA's post-crisis efforts to 
cultivate union leaders and maintain social calm, including by 
flowing government social safety net payments to unemployed heads of 
households through union and "piquetero" unemployed worker groups. 
The incoming CFK administration has indicated that it plans to 
address growing inflation by working with industry and labor to 
negotiate multi-year sector-by-sector "social pacts" to contain 
prices and wages.  AmCham's Diaz, however, said that in the 
Chamber's recent discussions with Labor Minister Tomada, the 
Minister was not yet sure how these pacts would be structured. 
Ambassador noted that an earlier CFK statement that Argentina looked 
to Germany as a model for economic development was likely based in 
part on her respect for Germany's tradition of consensual 
government, industry, and labor dialogue. 
 
¶8. (SBU) In response to the Secretary's prompting on investment 
climate challenges U.S. companies face in Argentina beyond labor law 
inflexibility and rising inflation, participants noted generally 
weak Argentine rule of law in terms of enforcing the sanctity of 
contracts, a legacy of "ingrained" corruption, systemic weakness in 
the national judiciary (with the time to investigate and prosecute 
corruption cases averaging 15 years), and frequently changing rules 
of the game.  Citi and IBM highlighted abrupt changes in tax rates 
and regulations, the imposition of formal and informal price 
controls, the attempted imposition of interest rate caps on loans, 
and the business uncertainty that such moves have engendered. 
Wal-Mart offered that price controls on retail consumer items it 
sells have largely been "politically cosmetic" and haven't 
significantly impacted Wal-Mart's bottom line. 
 
¶9. (SBU) Secretary Chao and Citi discussed the impact of Argentina's 
still unresolved post-crisis legacy of debt default, with 
outstanding claims to both the Paris Club and to a significant group 
of bond "holdouts," as well as an increasing GoA reliance on bond 
placements on its behalf by Venezuela.  Citi acknowledged that 
Argentina's decision to pre-pay relatively inexpensive IMF debt and 
instead rely on restricted bonds issued under national law has been 
costly for the nation, both in terms of the price Argentina must pay 
to access international capital markets, and in terms of Argentina's 
reputation as a nation that continues to flout international market 
norms. 
 
------------------------------------------ 
Moving Forward with the CFK Administration 
------------------------------------------ 
 
¶10. (SBU) Ambassador suggested that the challenge for the incoming 
CFK administration will be to manage economic policy changes in a 
way that sustains the benefits Argentina has gained over the past 
five years of strong growth.  Wal-Mart agreed that the challenge 
will be engineering a soft landing to more sustainable GDP growth 
levels and noted the GoA's successful efforts to maintain a primary 
fiscal surplus.  Citi suggested that the best advice the USG could 
offer to CFK would be to "talk to us"; to actively engage U.S. 
companies operating in Argentina and so better get the word out to 
potential investors that her administration is "open for business." 
Citi also predicted that resolving outstanding Paris Club arrears 
would be high on CFK's agenda and that, at this point in time, it is 
more important for Argentina to clear Paris club arrears than to 
resolve outstanding debt to bond holdouts. 
 
¶11. (U) This cable has been reviewed by the Secretary's delegation. 
 
 
WAYNE