The Tierra del Fuego Industrial Sub-regime: A Reformulation Proposal for a Failed Industrial Policy

Abstract

The Tierra del Fuego industrial sub-regime is Argentina's most controversial and costly economic promotion program. Established in 1972 as a central component of a broader incentive framework, it regulates the entry of products manufactured in Tierra del Fuego into the rest of the Argentine market, detailing the associated benefits and access conditions. Despite its significance and centrality in public discourse, no concrete proposals for a comprehensive reformulation of the sub-regime have been advanced to date, nor have adequate analytical tools been developed to assess its expected impacts. This paper proposes a reformulation based on a diagnostic analysis that identifies a design flaw in the incentive scheme, which rewards company sales rather than the value they add. Our proposal aims to gradually reduce most of the tax expenditure associated with the sub-regime over an 11-year period. Additionally, we develop a simulation model to assess the impacts of this proposal in terms of employment, production, and fiscal outcome. The results indicate that the sub-regime’s fiscal cost amounts to approximately USD 1,070 million per year, and that implementing our proposal would result in an accumulated fiscal saving of approximately USD 5,900 million over 11 years (with nearly USD 900 million in additional annual savings thereafter). Simultaneously, an estimated 7,250 jobs would be lost, though these could be offset – according to a complementary study (Bril Mascarenhas et al., 2023) – by the creation of a similar number of jobs in emerging self-sustaining sectors.