Thursday, December 28, 2006

State Policies

In 1996, Fundación ProMendoza was founded as a state-financed but privately managed foundation to promote products from Mendoza in the international markets. ProMendoza officially has four members: the provincial government, the Chamber of Commerce and Industry, the Stock Exchange and the Economic Federation of Mendoza. The provincial government finances about 70% of ProMendoza’s operations, but only retains 25% of the decision-making power. ProMendoza funds promotional exhibitions throughout the world, which might include a tasting stand at a wine fair in San Francisco or representing organic producers at a conference in Germany on emerging technology in organic farming.

The growth of the private-public sector linkages such as ProMendoza is interesting due to the timing of their growth in popularity. The prevailing economic theory in Argentina during the 1990s argued for less government involvement in the market. Running counter to this trend, the provincial government in Mendoza took the lead in bringing together several different sectors under one organization.(Source Figure 3: National Institute for Viticulture)

In 1995, the governments of Mendoza and San Juan reached an agreement to decide annually how much of each year’s grape harvest must be used for concentrated grape juice and not used for wine. The agreement was a way to diversify grape production and maintain stable grape prices. Typically the two governments agree that about 25% to 30% of each year’s harvest must be made into concentrated grape juice. This juice is almost exclusively exported and is used as a sugar concentrate in such products as soft drinks. For the past ten years, the agreement has worked extremely favorably for the two provinces, with the majority of concentrate sold to the U.S. Argentina is currently the number one producer of sugar concentrate in the world.

In addition, the province offers a significant amount of protection from hail storms that often pass through Mendoza, which can destroy 12% of a year’s crop in five minutes. In the San Rafael region of Mendoza, it is well-known that there is a 1 in 8 chance that your crops will be destroyed by hail. The province pays for planes to fly over potential hail-storm clouds, releasing a chemical that breaks up the forming hail in the clouds. Secondly, many winemakers use small nets to put over the vines to protect against the hail. The government pays a large part of the interest rate when the winemakers borrow from a bank to install the protective nets. A normal loan would have an interest rate of about 15%, but with the government subsidy the winemaker pays only 5% interest. The third way the government protects against hail is by paying minimal insurance premiums to take out policies against hail.

Alfredo Aciar, Chief of Cabinet in the Mendoza Province Economic Ministry states, “The market alone can’t fix issues and we are aware of this problem.” In 2005, the government purchased a large supply of grapes to be destroyed in order to maintain stable prices. The Economic Ministry has calculated that there is an overproduction crisis every six years, and 2006 was set to be the year for the next crisis.

In December of 2003, the law entitled the “Strategic Plan for the Argentine Wine Industry 2020” (Plan Estratégico Argentina Vitivinícola 2020 or PEVI) was passed in the national legislature to institute on a national level the pro-export marketing model of Mendoza. Plan 2020 called for Argentina to achieve a 20% share of the world wine market by 2020. Currently, Argentina enjoys about 2% of the international wine market. The body created to oversee PEVI, Corporación Vitivinicultura Argentina (COVIAR), is based in Mendoza and seeks to promote Argentina wine abroad, although it has recently taken on a domestic marketing plan as well.

Although the growth of the wine industry in Mendoza was largely due to the growth of exports, domestic consumption of fine wine began to increase in the 1990s for the first time in decades. Following Argentina’s default on foreign debt in 2001 which subsequently ended the one-to-one exchange rate, Argentina and Mendoza specifically have seen an explosion in tourism. Mendoza is the second-most visited tourist destination in Argentina, behind only Buenos Aires. The tourism boom has grown peripheral industries that are almost worth as much as the wine industry itself. In fact, it is estimated that the peripheral industries to wine – tourism, oenologists, consultants, engineers – is worth about $1 billion dollars to the province of Mendoza.

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