15

JULY, 2016

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by The Economist | Time: 07:53

EARLY on a Tuesday morning, a team of mainly female workers is assembling mobile phones. Hair covered and hands gloved, they connect chipsets and insert batteries. This could almost be China, the homeland of Huawei, the company which designed these devices. But the plant is 16,000km (10,000 miles) away from Huawei’s base, and a long way from almost everywhere else: in the archipelago of Tierra del Fuego, a place where the buzz of productive energy, impressive as it is, has begun to die down.

The assembly line’s location in a land of glaciers and tundra reflects a giant exercise in mixing geostrategy with industrial policy. Argentina’s half of the main island became a special economic zone in 1972 when the then ruling junta decided to populate it, hoping to keep Chile’s military ambitions at bay. To lure people to this wild corner of the Earth, it exempted firms and residents from most taxes.

As a bid to turn a remote place into a hive of manufacturing, the industrialisation of Tierra del Fuego recalls the towns planted by Soviet planners in Siberia. But a closer parallel is with Manaus, the steamy, inaccessible city on the Amazon where Brazil’s generals, in a similar use-it-or-lose-it spirit, created a free economic area in 1967. Both South American zones have become bases for consumer electronics; Manaus also makes almost all Brazil’s motorcycles. In both cases, tax breaks go with protectionism; a minimum of parts and accessories must be made domestically.

Ushuaia, Tierra del Fuego.

However boldly planners set out to defy geography, the effort usually peters out in the end. But with Tierra del Fuego, it is not for lack of trying. The place did draw people; its population rose 11-fold between 1970 and 2015 to about 150,000. That marks a rise of about a fifth since 2009, when Cristina Fernández de Kirchner, Argentina’s former president, blocked foreign electronic goods by raising sales and import taxes. Since then international brands have had to use local makers like Grupo Newsan, the owner of that phone-making line, to reach Argentine users. Newsan’s six plants in Tierra del Fuego also put together TV sets, computers and air-conditioning units. Phone kits come in up to 40 pieces. Once assembled, they are officially Argentine and escape import tax. Between 2009 and 2015 output in the province’s electronics plants tripled and employment surged. Newsan is the main private employer: in 2015 it was responsible for 5,000 jobs.

“Tierra del Fuego, a giant economic experiment at Argentina’s southern tip is starting to flag”

But this year demand for its wares has cooled as Mauricio Macri, Argentina’s president since December, brings a dose of realism to a land where his predecessor gave a sham sense of economic security. Consumption has fallen, as high interest rates are used to curb inflation of around 42% a year. The country’s dip into recession is felt in Ushuaia. In late 2015 Newsan was turning out 500,000 phones a month; in the first six months of 2016 it was half that rate, and 400 jobs were shed.

Ushuaia’s dowdy state does not help the mood. Drab buildings are in ugly contrast to the snow-capped peaks. In the provincial governor’s office, corridors are grubby and the ceiling needs repair. Gloomy islanders see many threats. Managers fear Mr Macri will open the electronics market to imports. A government vow to avoid “indiscriminate” liberalisation did not reassure them. In 2023 the province’s status as a special economic zone will expire, and it may not be renewed.

Ushuaia

On Google Satellite View

Without it, Tierra del Fuego’s electronics firms would struggle much harder. In order to find staff, they already pay around three times the Buenos Aires wage. Isolation costs a lot. Because Tierra del Fuego lacks a good port, about 90% of foreign inputs are shipped to Buenos Aires before being loaded up for a four-day road trip south. Once products are assembled, they trundle back. This makes them crazily expensive. It can be cheaper to fly to New York and buy a phone than to get the same device in Buenos Aires.

The island’s public sector, too, is hard to sustain. Some 98% of the provincial budget goes on employment costs. Under a “law of 25 winters”, state workers can retire after 25 years on very generous terms; some stop work at 42 on a pension of up to 210,000 pesos ($14,000) a month. The head of the local teachers’ union, Horacio Catena, calls these advantages fair return for “the cold, the wind, the storms, the isolation”. But they seem unsustainable. When Rosana Bertone, the province’s governor, took office in December, pensioners had not been paid for three months.

On January 8th she raised the retirement age to 60 and put a levy of up to 4.5% on public-sector wages and pensions to plug the gap. Irate citizens blocked the road to the mainland for ten days and erected a camp outside government house, keeping Ms Bertone from her office. Striking teachers sent 35,000 pupils out of class for up to two months. On May 31st police burned the camp and dispersed the protesters. They remain defiant, but so is Ms Bertone. “This is not a fantasy island,” she says.

With a fiscal deficit of 5.8% of GDP in 2015, the national government can ill afford a status quo which means the treasury forgos 23.5 billion pesos a year (0.5% of GDP) in tax receipts. And the place lost strategic importance after Argentina made peace with Chile in 1984.

So far the government has revealed no plans for the archipelago. That frustrates local firms; they want the authorities to find new ways to make them competitive, for example by expanding the port.

Some also want the province to imitate Manaus and move beyond consumer devices, perhaps into automotive electronics. But more hope may lie in bolder change. Ms Bertone would like to tilt the economy towards tourism, timber and hydrocarbons, which abound in the sea. Ushuaia could thrive as a base for Antarctic tours. “Our geographical position is privileged,” insists the governor, who calls herself a “natural optimist”. It will take clear thinking as well as an upbeat spirit to sustain that mood.

From The Economist print edition: The Americas