Argentina - Industrial Credit Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No.1521 b-AR STAFF PROJECT REPORT ARGENTINA INDUSTRIAL CREDIT PROJECT - BANCO NACIONAL DE DESARROLLO May 25, 1977 Regional Projects Department Latin America and Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performanc2 of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS All currency amounts are expressed in Argentine Pesos ($a) and US Dollars (US$) December 31, 1976: US$1 = $a 277 $a 1 = US$0.004 May 12, 1977: US$1 = $a 363 $a 1 = US$0.003 GLOSSARY OF ABBREVIATIONS BANADE Banco Nacional de Desarrollo (National Development Bank) BCRA Banco Central de la Republica Argentina (Central Bank) DFC Development Finance Company ERR Economic Rate of Return FIEL Fundacioon de Investigaciones Econo'micas Latinoamericana (Latin American Economic Research Foundation) FRR Financial Rate of Return GDP Gross Domestic Product GNP Gross National Product IDB Inter-American Development Bank IFC International Finance Corporation LAFTA Latin American Free Trade Association VNA Valores Nacionales Ajustables (National Adjustable Bonds)  FOR OFFICIAL USE ONLY ARGENTINA INDUSTRIAL CREDIT PROJECT - BANCO NACIONAL DE DESARROLLO STAFF PROJECT REPORT TABLE OF CONTENTS Page No. INTRODUCTION AND SUMMARY ............ ............... ixiii I. THE INDUSTRIAL SECTOR . . c o . .... . ... . .. . ...... 1 A. Background ................. ........ 1 Industrial Growth and Cyclical Fluctuations 1 Structural Change and Development of Non-Traditional Industrial Exports ......... 2 New Technology and High Cost Production ...... 3 Industrial Employment ........................ 4 B. Industrial Issues and Policies ............... 5 Instability, Import Dependence and Macro- economic Policies ................... ... 5 The Shift from Import Substitution to Export Diversification .5.................... 5 New Government Policies to Stabilize and Stimulate Foreign Exchange Earnings .... 6 Mfajor Causes of Industry's Efficiency Problems 7 Policies to Improve Efficiency of the Industrial Sector ....... . . . .......a ... . ..... ...... . 9 Employment Issues in Industry and Policy Options ....o o.... ...o. .o......... 11 C. Prospects and Project Implications ................ 12 Growth, Investment, and Exports ......... 12 Figure 1: Fluctuations of Industrial Growth and Rates of Return in Industry This report is based on the findings of appraisal missions, led by Mr. Ludvik and composed of Messrs. Santiago, IJogart (all of the Bank) and Reich (consul- tant) which visited Argentina in September and November/December 1976. The missions were assisted by Mr. Segura. This document has a restricted distribution and may be used by recipients only in the performance of their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (Continued) Page No. List of Tables: Table 1-1: Growth and Structure of Value Added in Manufacturing ......... ............. ............ . 16 Table 1-2: Growth Rates and Industry Shares of GDP in Selected Latin American Countries 17 Table 1-3: Industrial Production 18 Table 1-4: Exports of Manufactured Products, 1960-1975 . 19 Table 1-5: Exports from Argentina to LAFTA 20 Table 1-6: Industrial Employment, 1950-1975 ...... 21 Table 1-7: Utilization of Installed Capacity .... 22 Table 1-8: Comparison of Argentine with World Market Prices of Some Industrial Goods, 1960-70 23 Table 1-9: Fiscal and Monetary Incentives for Manufactured Exports, 1970-1974/75 24 Table 1-10: Exchange Rates, 1960-1975..... 25 Table 1-11: Commercial Bank Credit to the Industrial Sector in Real Terms .. .* ....... ................ 26 Table 1-12: Summary Table - Industrial Development 27 Table 1-13: Short-Term Output, Export and Investment Plans of 110 Industrial Firms 28 Table 1-14: Medium-Term Output and Investment Plans of 32 Industrial Enterprises 29 II. THE FINANCIAL SYSTEM . ....... ...... ...oo..........., 30 A. Background ..o .......... 400- .. . . .... . ..30 Financial Institutions .o .........oo ....... 30 Past Policies. . .... . . ...... . . . 32 Recent Developments o........ooooo ............. 32 Industrial Credit .,- -o-.-. ............o... 33 B. Measures to Revitalize the Financial System ...... 34 Interest Rate Policies ...........o..... oo 35 Banking Legislation .... o .... ooo ...... o.. 36 The "Nationalized Deposit" System .... oo ... 37 Foreign Currency Borrowings .... o......o ... 38 C. Future Prospects .......... ..... ......... 38  TABLE OF CONTENTS (Continued) Page No. III. BANCO NACIONAL DE DESARROLLO (BANADE) ............... .. 40 A. The Institution ............... .. ................. 40 Background .................................. 40 Board of Directors, Organization and Staff .. 40 Appraisal and Supervision ................. .. 44 Procurement and Disbursement ................ 45 B. Operations .................. * .................... 45 Operations by Sector .................... * ... 45 Operations with State Enterprises ........... 46 Industrial Development Banking Operations ... 48 Commercial Banking Operations .... ........... 50 Financial Situation ..... .................... 52 Financial Policies ......................... 55 Interest Rate Policies ..... ................. 56 External Auditing Arrangements ............. . 57 Projected Operations and Prospects . ......... 58 Cofinancing Operations ...................... 60 IV. THE PROJECT ................. . ............. .. .............. 63 A. Objectives of the Proposed Industrial Credit Project ................. . ....... ... .. 63 B. Demand for and Expected Utilization of the Proposed Loan ........... ........................ 65 C. The Proposed Loan .................... 66 General Description ................ ......... 66 Subloan Terms . ............ .#.................. . 66 Approval Limits ... ............................ 66 Procurement and Disbursement .... ............ 67 Technical Assistance Component ............ o. 67 V. AGREEMENTS, UNDERSTANDINGS AND RECOMMENDATION .... ..... 68 A. Agreements Reached .. .......................... .68 B. Recommendation ..... .............. ................. 68 LIST OF ANNEXES 1. Charter of Incorporation 2. Statement of Policies 3. Estimated Schedule of Disbursement for the Proposed Loan 4. Related Documents and Data Available in the Project File MAP   STAFF PROJECT REPORT INTRODUCTION AND SUMMARY Reprint of the Sector and Pro4 ct Sections of the President's Report PART I - THE INDtTST.IAL AND FINANCIAL SECTORS The Industrial Sector _ Backz l nd 1. Industry has long 'oeer an- f-.orrant sector of the Argentine economy. At the turn of the century, the l.aare c: 7enmfacturing in total output had already reached about 15%. From this base, industrial growth surged ahead during the Great Depression and again during World War II, propelled each time by the substitution of locally manufactured goods for imported products. After World War II, the Argentine Governmsnt began to promote actively its industrial sector through a combination of foreign exchange and import con- trols, high tariffs and special tax incentives. Growth in manufacturing value added averaged 4.1% in the fifties, rose to 5.6% in the sixties and accelerated to 7.2% between 1970 and 1974, before falling to 3.2% in 1975. The average industrial growth rates in the past, however, conceal wide fluctuations in the annual rates of expansion which have ranged from 10% to -5% in the last twenty years. The bottom of the latest recession was reached in mid-1976, and many industrial subsectors have since experienced increasing sales. This was particularly noticeable in food processing and agricultural supply industries, such as agricultural machinery, tractors and trucks. 2. Government efforts to pronnote ndustry in the postwar period were based on the concept of industrialization through import substitution. Laws and decrees were issued offering both protection and incentives which encour- aged a shift from the traditional industries to the "dynamic" modern sub- sectors, mainly chemicals, rubber, metals, and machinery and equipment. The share of total output of metal products, machinery, and transport vehicles and equipment rose from 16% to 33% betwere 1950 and 1975, while the share of the traditional industries declined from 50% to less than 30% during the same period. Argentina became one of the few conatries in Latin America in which the value added of these three "1dynamic" branches of industry surpassed the value added of the "traditionals." 3. In spite of a fairly rapId grcth rate and continuous diversification, the Argentine manufacturing sector continues to be confronted with three major interrelated problems: (1) a substantial degree of instability with rapid swings from strong expansion to sharp conaraction; (2) a high-cost structure, as reflected in relatively high prices and underutilization of capital; and (3) a low labor absorption rate, which has left the manufacturing sector's share of total employment a.t the ~3% zta existed in the early postwar period. These problems and the measures being taken by the Government to cope with them are discussed below. Instability and Import Dependence 4. Import substitution pdlisces have changed the composition of imports, but not the volune and value cG :'F- tS . have continuously grown. Total  - ii - imports doubled in value between 1960 and 1974, growing rapidly each time a foreign exchange crisis had been overcome. During the same period, imports of intermediate goods increased from 50% of total imports to 70%. The dependence on imports is strongest in the "dynamic" branches of the industrial sector. Consequently, industry remained highly dependent upon the foreign exchange earnings of the agricultural sector. Whenever agricultural exports grew at too slow a pace, usually due (separately or in combination) to inappropriate macroeconomic policies, poor growing conditions and marketing difficulties, industrial growth was severely hampered by acute shortages of foreign exchange. In the fifteen years following World War II, import substitution industries were promoted. In the early 1960s, however, policymakers realized that higher and more stable growth rates could only be achieved through a program of export diversification. In 1962, several fiscal and monetary incentives to stimulate industrial exports were introduced, but had little influence in the first years because of erratic exchange rate policies. Later, when these incentives were supplemented by global reimbursements of income taxes, an export insurance scheme and more realistic exchange rate adjustments, industrial exports accelerated, reaching 23% of total exports between 1972 and 1975. As was the case with overall industrial growth, the rapid increase in manufactured exports at an average of 20% per year in real terms between 1968 and 1975 was led by the "dynamic" industries, which reached 40% of total manufactured exports in 1973/75. 6. The Government is aware that the most important prerequisite for stable and continuous availability of foreign exchange is adequate incen- tives for the Argentine exporter. It has placed emphasis on realistic management of the exchange rate, which now offers both traditional and non- traditional exporters a predictable prlce for their sales abroad. In the specific case of nontraditional exports, the Government has negotiated trade agreements with Brazil, Bolivia, Chile, Paraguay and Venezuela which contain provisions for the exports of relatively sophisticated manufactured products from Argentina in exchange for mostly raw materials and intermediate goods. Efficiency in Argentine Industry 7. The level of efficiency and competitiveness of Argentine industry varies greatly among sectors. Although generalizations are difficult to make, it is apparent that prices of many Argentine industrial products are substantially above those in the industrialized countries and that the level of capital utilization has been low during the major phases of the import substitution cycle. In addition, there are specific problems of efficiency in the various industrial subsectors. The "dynamic" industries tend to be tech- nically efficient but relatively high-cost producers mainly because many firms have remained too small to enjoy economies of scale. Most of the "tradi- tional" industries, on the other hand, work with rather outdated equipment and management methods which have made it difficult to sell beyond the domestic market. This dualistic character is also evident in intra-industry analysis which shows that a great number of subsectors are composed of a few enterprises that are relatively large by Argentine standards, alongside numerous small and rather inefficient firms.  - iii - 8. The main causes of the present low efficiency levels would seem to be the lack of competition due to high and uneven protection of import substi- tution industries, lack of control and inefficient management in many state enterprises supplying basic inputs to industry, and mismanagement of public finances, which frequently deprived the private sector of necessary funds. The authorities have reversed past policies and called for: (1) a gradual opening up of the economy to international competition by a reduction of import bar- riers and further promotion of exports; (2) a restructuring of major industries by merging or eliminating marginal firms in branches which are plagued by excess capacity; and (3) an improvement in the performance of state enter- prises, both in the directly productive and in the infrastructure industries. Broad tariff reductions averaging 25% were implemented in November 1976. Since tariff reductions for imported inputs were smaller than for final products, the effective protection of a great number of products decreased even more than the nominal tariff reduction. Effects of these tariff reductions are now being analyzed by the Government to consider further action. The restructuring of the automobile industry and its suppliers represents a major specific task of the Government. A commission has been formed to analyze possibilities of decreasing the number of firms and increasing economies of scale. Finally, recent legislation has changed rules and regulations in the state enterprises, increasing the regular workweek, providing necessary incentives for different skills and responsibilities, and gradually decreasing the number of excess employees. Employment in Industry 9. Argentina's most active phase of import substitution did not provide a significant number of new employment opportunities. Total employment in the manufacturing sector, which had reached 1.4 million in 1950, expanded by an annual rate of 1.4% in the following eight years. Between 1958 and 1968 em- loyment in manufacturing was stagnant. It was only in recent years that labor absorption in industry grew markedly, averaging 3% p.a. between 1968 and 1975, ,due to a gradual expansion of manufactured exports and a substantial increase in employment by state enterprises. Due to these factors, the level of un- employment in the economy has remained at a low level of 4.5%. As part of its strategy to improve the efficiency of state enterprises, and to improve its fiscal situation, the Government's goal is to encourage the private sector to absorb manpower that is now in surplus in the state enterprises. This would be accomplished by decreasing numerous fringe benefits in state enterprises and by limiting increases in real wages to those who have contributed to improving productivity. In the medium term, this shift should be possible as the recovery under way gains momentum, stimulated by Government policies to expand manufacturing production, especially of export-oriented industries with high skilled labor inputs. The proposed project would help create new job opportu- nities in the industrial sector. Investment Prospects 10. Current Government policies have been designed to lay the ground- work for a more efficient industrial sector and provide the internal and external monetary stability essential for new investments, higher output, and  - iv - increasing exports. Potential industrial expansion has been estimated on a macroeconomic basis and checked against an independent survey of 100 industrial firms undertaken in November 1976 by the Argentine research foundation FIEL. The planned growth rate of about 5% per annum in GDP, the expected minimum growth rate in the medium term, would require annual investments by all sectors in machinery and equipment of about US$6.0 billion in 1977/78, assuming that the 13Z share of total investments of machinery and equipment in GDP that existed during the early 1970s were to continue. On this basis, imports of capital goods are estimated to reach US$610 million in 1977 and US$710 million in 1978. The manufacturing sector accounts for about 28% of total investment but absorbs 55% of investment in imported machinery and equipment. Con- sequently, investment demand for machinery and equipment by the industrial sector should be US$1.7 billion per year, while industry's demand for imported machinery and equipment would average US$360 million annually for 1977 and 1978. The results of the FIEL survey, which covered about 7% of total sales and about 11% of total investments in the manufacturing sector, are consistent with the projected investment figures based on macroeconomic analysis. The demand for medium- and long-term credit is also reflected in the project pipeline of BANADE which included 143 subprojects at an advanced stage of consideration at the end of 1976. These projects require US$420 million for investment financing. In addition, there were another 200 subprojects at a less advanced stage. These figures indicate that the industrial sector is on the verge of embarking on a sizable modernization and expansion program. The Financial Sector - Background 11. Argentina's relatively well-developed financial system consists of the Central Bank, more than a hundred commercial banks, two state-owned development banks, two investment banks, a mortgage and a savings bank, as well as several credit houses and consumer credit unions. It also has four stock exchanges. This extensive network has been built over a long period of time--Argentina already had a relatively mature financial system in the 1940s. During the late forties, however, a long period of deterioration set -in stemming from inappropriate Government policies. On several occasions, positive measures were taken to reverse this deterioration, but with limited success. In recent years, financial intermediation has been particularly affected by Government policies and the general instability which came to a head in the explosive inflation of 1975 and early 1976. 12. Private financial assets and credit to the private sector declined substantially in 1974 and 1975 because of huge fiscal deficits, low nominal interest rates, and "nationalization" of deposits (paragraph 14). The market for long-term corporate securities declined with new share issues in 1974-76 representing a mere 5% of the annual volume reached in the early sixties. Term credit virtually disappeared. Together with the decline in credit came the expansion of extra-banking markets and capital flight. By June of 1976, total domestic credit to the private sector had declined in real terms to only 44% of the December 1974 level. Credit to the industrial sector followed the same pattern. In fact, by end of December 1975, the real value of commercial bank credit to the industrial sector had dropped to 73% of the year-end 1974  - v amount. To compensate for the sharp reduction and further encouraged by subsidized forward exchange rate guarantees, companies increasingly turned to borrowing short-term overseas. This was not sufficient, however, to compen- sate fully for the decline in local credit since total private sector foreign borrowings only increased from US$3.4 billion at the end of 1974 to US$3.9 billion by June of 1976. Measures to Revive the Financial System 13. After the change in Government in March 1976, the monetary authori- ties began to introduce important measures to revitalize the financial system, including the institution of positive real interest rates. Short-term rates for certificates of deposit have been completely freed and indexed instruments have been introduced into the market. The Government is also considering measures to facilitate the gradual lengthening of the assets and liabilities of the financial system. In the future, after some confidence in the economy has been restored, it should be possible to develop a market for term debt based on floating rates or indexed instruments, such as the Government's indexed bonds (VNAs). At the request of the Government, a recent IFC mission assisted in studying these matters. Its recommendations are being discussed with the Government. BANADE, in cooperation with private financial institu- tions, is also studying ways of developing the domestic capital market. 14. The Government has recently transformed the system of "nationalized deposits"--whereby banks were required to accept deposits on behalf of the Central Bank which then relent funds to financial institutions through rediscounts and advances--into a fractional reserve requirement system. It has also freed the resources raised through certificates of deposits and indexed deposits and abolished special lines of rediscount. 15. A new law on financial institutions was recently enacted which reduces the Central Bank's role in matters unrelated to normal central bank- ing functions while increasing its powers to supervise the orderly operations of financial intermediaries and to control the money supply. A major innova- tion of the new law is the ending of specialization of financial institutions. Commercial banks may now provide a wider spectrum of financial services, including those hitherto reserved to specialized entities. Since commercial banks control the bulk of financial assets, this could eventually result in an overall increase in term financing as some progressive banks move into longer- term intermediation. Taking into account these developments, BANADE is con- sidering the formation of consortia with private financial institutions to help channel additional funds to its projects. 16. The domestic private credit market is being revived by the policies the Government is introducing in the financial system. The policy of main- taining positive real interest rates has already resulted in a major shift from non-financial to financial savings and could help draw back into the system funds previously diverted overseas and to the extra-banking market. In addition, Government measures to reduce the fiscal deficit and to improve the efficiency and profitability of state enterprises are expected to result in a gradual reduction of public sector competition for funds.  -vi.- 17. While the gradual normalization of the economic environment can be expected to restore savers' confidence and to result in a further expansion of the credit market, it will probably take some time for a term market to be established. Whereas short-term funds would be available from private local and foreign commercial banks and input suppliers, the term credit needs of industry will not be fully satisfied by the financial system for some time. Reliance on foreign capital markets to fill this gap completely is not feasible since only the largest firms have access to foreign borrowing and since it will take Argentina several years to reestablish its position as a substantial borrower of long-term capital in international markets. 18. The proposed Bank loan to BANADE would thus help fill an important gap in the financing of the Argentine industrial sector directly, and indirectly through complementary funds mobilized through co-financing arrangements. It would be oriented towards the sector's most pressing need--term financing of productive investments. PART II - THE PROJECT Background and Objectives 19. In recent years, most industrial firms not only postponed plans for expansion but also neglected necessary investments for reequipment, because of the prevailing economic and political instability. As a result, a large portion of the present equipment and machinery in the industrial sector is economically obsolete. The new Government has now taken energetic steps to stimulate priority investments. The industrial sector has responded positively and has stepped up investment plans for modernization and expan- sion. The proposed Bank loan to BANADE, as a complement to the Government policy measures already taken, would help provide scarce resources to finance the foreign exchange component of fixed asset purchases associated with specific industrial subprojects. 20. While providing scarce long-term funds, the proposed Bank loan would help accomplish the following objectives: (i) to increase the overall effi- ciency of the industrial sector by helping to finance projects with the greatest potential for exports and import substitution; (ii) to support the design and implementation of reforms instituted by BANADE's new management aimed at rationalizing resource allocation in the industrial sector; (iii) to provide BANADE with technical assistance to improve its lending to the indus- trial sector; and (iv) to serve as a catalyst for the mobilization of comple- mentary external funds from the international capital markets through co- financing arrangements. The Institution 21. BANADE was created in 1970, as successor to Banco Industrial de la Republica Argentina. Battered by uncontrolled inflation, highly negative interest rates, and frequent management changes, BANADE became primarily a  - vii - channel for Government subsidies to state-owned enterprises and autonomous agencies; its role as a provider of credit to private industry was largely limited to short-term loans and guarantees of short-term foreign suppliers' credit. Mobilization of medium- and long-term resources in domestic and external capital markets was insignificant due to the prevailing economic situation in Argentina. By early 1976, lending at highly negative interest rates had almost completely eroded BANADE's equity base, and its lending operations had come to a virtual standstill. 22. Between 1973 and 1975, industrial project financing declined sub- stantially. Short and term loans by BANADE to the manufacturing sector declined from 64% of total loan approvals in 1973 to 41% in 1975, while the financing of public sector service entities increased from 11% to 37% of the total. Medium- and long-term fixed asset financing for private industry declined from 32% in 1973 to 17% of total loan approvals in 1975, while the financing of working capital and foreign trade, essentially commercial banking activities, represented about one-third of total operations during this period. BANADE used its guarantee authority extensively, mostly for state enterprises, to cover foreign supplier and financial credits. On the other hand, through its nationwide branch system, BANADE made a strong effort to attend to the needs of industry outside of the capital area. In 1975, approvals of loans to private borrowers located in the interior accounted for about one-half of the amount and three-fourths of the number of loans approved for private enterprises. Organization and Management 23. The new Government has taken drastic measures to put BANADE on a sound foundation. The institution was recapitalized and an experienced and highly qualified management team brought in. During the preparation of this project, Bank staff have worked closely with the new BANADE management in its efforts to reform the institution and restore its ability to function as an effective industrial development bank. Substantial progress has already been made. BANADE's objectives have been clearly defined and sound operating policies have been introduced. A new Charter of Incorporation has been approved by the Ministry of Economy and will be enacted by Decree-Law prior to the signing of the proposed loan. In addition, a new Policy Statement has been approved by BANADE's board of directors. The Charter stresses the institution's primary role as a term lending development institution, within the overall industrial promotion policy framework set by the Government. At the same time, it provides safeguards for operational autonomy, sound evalua- tion standards, and financial viability. 24. BANADE's board of directors, composed of distinguished professionals who come from successful careers in private banking, industry and the Govern- ment, has moved swiftly to create an organizational structure which emphasizes project lending. The reorganization has been smoothly implemented and key positions filled With highly capable staff. Operating departments have been clearly separated from support departments and have been set up according to functional lines into industrial, mining, and commercial lending. Capable  - viii - professionals have been assigned to project evaluation work and additional staff with potential for this task have been identified. BANADE is well staffed to undertake its role as the country's leading industrial development bank, though some additional training is required to support increasing operations in the future. The proposed loan would consequently support a comprehensive training program to strengthen and enlarge the core of qualified project staff. 25. In anticipation of being called upon to support projects which require concessionary funds, such as for social purposes, BANADE's Charter of Incorporation authorizes the establishment of special trust funds. Special fund operations must be kept completely separate from ordinary operations and BANADE may not be charged with any losses, expenses, or other liabilities pertaining to those operations, nor may any of BANADE's resources be trans- ferred to special funds. 26. Concerted efforts are being made to upgrade BANADE's capability to advise the Government in pursuing rational industrial policies. For this purpose, a new unit, the Division of Economic Studies, has been created to conduct industrial sector studies, to assist management in its dialogue with the Government and to help focus BANADE's project promotion efforts. BANADE is uniquely qualified to provide, at the project level, advice and feedback to the Government on the impact of overall industrial policies. Through its participation in the financing of large Government-supported industrial projects, BANADE will help ensure that adequate measures to improve overall operational efficiency will be taken. The proposed loan would include a technical assistance component to help finance consultants for industrial sector work in view of its importance for both BANADE's operations and Government policies (paragraph 39). 27. As in other public institutions, inflation has diminished salaries in real terms of BANADE's professional staff to a greater extent than in the private sector. Salary ceilings at the higher levels have recently been increased significantly. To enable BANADE to retain key staff members and recruit new qualified staff, the Government plans to require BANADE to make periodic adjustments as needed. Project Appraisal and Supervision 28. While BANADE's technical staff has adequate project evaluation expe- rience, past appraisals consisted principally of technical, market and finan- cial analyses, including financial projections. The evaluations did not always focus on the major project issues nor did they contain financial (FRR) or economic (ERR) rate of return calculations. Efforts have now been made to upgrade project evaluation procedures. BANADE's Policy Statement requires that all projects financed be technically, economically and financially viable, that they be adequately managed, and that they have reasonable market pros- pects. Steps are being taken to utilize financial and economic rates of return in the selection and evaluation of projects. BANADE has agreed to include FRR and ERR calculations for all subprojects utilizing US$500,000 and  - ix - more of Bank funds. The evaluation of subprojects will also include estimates of direct employment generation and balance-of-payments impact, particularly export potential (Section 3.02 of the draft Loan Agreement). 29. Management is taking steps to improve project supervision. In following the execution of the project, Bank staff would focus on progress in this field over the commitment period of the proposed loan. Financial Situation and Policies 30. BANADE's equity capital, which had been eroded from US$87 million equivalent in 1970 to a mere US$7 million in 1975, was increased in June 1976 by $a52 billion (approximately US$208 million as of mid-1976) in part by a Government contribution to BANADE's equity of $a20 billion, and in part by capitalizing $a25 billion of BANADE's liabilities due to the Central Bank arising from special rediscounts of loans to state enterprises. The Government has agreed to increase further the equity base of BANADE by capitalizing addi- tional liabilities to the Central Bank of $a20 billion on account of general rediscounts. FurthermoDre, at least another $a15 billion of BANADE's debt to the Central Bank arising from special rediscounts of loans made to state enterprises will be consolidated in the form of a ten-year bond. These measures, reinforced by BANADE's new policy of lending at positive real rates of interest, will ensure a firm and substantial base for BANADE's operations. 31. BANADE's Policy Statement sets forth operational limitations which will protect the instiltution from unreasonable financial risks in the future. These policies cover concentration of assets, equity investments, liquidity and liability management, financial ratios and management of special funds. The maximum debt/equity rat:Lo, including contingent liabilities, has been set at 10 to I (Section 4.0)6 of draft Loan Agreement). This ceiling is reasonable since BANADE would operate as a mixed commercial and development bank. With the 1976 increase in capital, BANADE's debt/equity ratio, excluding con- tingent liabilities, decreased from 36.6:1 to 1.7:1 and is not expected to surpass 4:1 by year-end 1979. Short-term., medium- and long-term, and guaran- tee operations would each account for about one-third of liabilities. Since external auditing has not been fully comprehensive in the past, BANADE has agreed to arrange for auditing satisfactory to the Bank (Section 4.02 of the draft Loan Agreement). 32. The principal of peso-denominated medium- and long-term loans are now being indexed in accordance with the same index applied to Government readjustable bonds, and bear interest at 3.5% to 7.5% depending on their pur- pose. Most fixed asset financing for private industry will carry a rate of 7.5%, while loans for certain agroindustrial activities, regional promotion and basic industries will be made at lower rates. Medium- and long-term loans granted prior to mid-1975 do not contain an indexing clause; however, BANADE attempts to convert these to indexed loans whenever possible.  Projected Operations 33. The trend of the past four years toward increased financing of public utilities and public sector services would be reversed in favor of financing of the manufacturing sector in line with BANADE's redefined objectives. In the future, BANADE will, as required by its Charter, give priority to the medium- and long-term financial needs of private industry. BANADE's projections for the years 1977-79 show that lending to the manufacturing sector would increase from 41% to 64% of total lending, with a corresponding decrease in the financ- ing of public sector enterprises. Average total annual loan approvals would increase threefold over the 1976 amount to a level of about $a200 billion or US$720 million equivalent (all figures for projections are measured in constant 1976 prices, at an exchange rate of $a277 per US dollar). 34. As mentioned before, BANADE's past operations with state and state- related enterprises contained a large subsidy element due to lending at highly negative interest rates in real terms and to lenient lending practices. BANADE's Charter and Policy Statement now contain sound policies for future operations with these enterprises. BANADE's Charter requires that new opera- tions be conducted in a way which preserves the real value of its capital base. All projects financed by BANADE, including specifically state enter- prise projects, must meet sound economic, technical and financial criteria, as determined by BANADE, and operations must be conducted in a way which preserves the real value of BANADE's equity. Furthermore, the financing of infrastructure and public works will be an exception, limited by the Policy Statement to those which are linked to industrial or mining development projects. Commercial banking operations will be continued, but will be oriented to the extent possible toward support of BANADE's industrial develop- ment objectives. Special emphasis will be given to the credit needs of small- and medium-size firms in the interior, and also to complementary working capital financing of large-scale industrial projects supported by BANADE. Management estimates that during the next two to three years, approximately one-third of BANADE's loan portfolio will be of a commercial banking nature. Future Resources 35. BANADE's future short-term operations will be funded with deposits of the public, which are expected to increase to $a50 billion by year-end 1979. This goal appears to be well within BANADE's capabilities, given its nation- wide system of branches. To finance the projected volume of medium- and long-term lending operations, BANADE will have to raise $a35 billion (US$126 million) in the local capital market by year-end 1979, which appears feasible given the Government's efforts to revitalize the financial system. Foreign currency liabilities are projected to increase to $a140 billion equivalent (US$505 million) by year-end 1979. In addition to the proposed Bank loan of US$100 million, BANADE is negotiating loans of US$30 million from IDB and US$25 million from the US Eximbank. Short-term foreign exchange liabilities would amount to about US$145 million. Forecasts indicate the need for an additional US$205 million of foreign term financing. BANADE's management has already taken steps to fill this gap. BANADE's standing in international  - xi - capital markets has improved substantially following its reorganization and policy changes which have been accomplished with Bank support. As a result, a London bank has been able to arrange a US$100 million five-year Eurodollar loan to BANADE at an interest rate which will fluctuate with a margin of 1-3/4% p.a. above the London Inter-Bank Offer Rate (LIBOR) which would be earmarked for the financing of six large industrial projects supported by the Government. These projects are already under implementation and would, consequently, utilize the loan by July 1977. Co-financing Operation 36. In connection with this loan, the Bank has urged BANADE to take the opportunity to seek cofinancing from private banks to help fill its financing gap. BANADE has accepted firm offers from two major banks (one European and one US) to participate in such cofinancing in the amount of US$50 million each. The cofinancing operations would enable BANADE to obtain a longer maturity, a longer period of grace and a lower interest rate than BANADE and prime Argentine borrowers have been able to negotiate so far. However, the shorter term of the private loan compared to the Bank loan and the differen- tial in the interest rate structure of subloans made from the private loan and those made from the Bank loan, make it advisable for BANADE in its financing of subprojects to mix private funds and Bank funds as may be required. In order to assist BANADE in matching the amortization of subloans to the amortiza- tion of its external borrowings as closely as possible, it is proposed that the Bank agree to permit BANADE to use most of the Bank funds to finance the later maturities of its loans to subborrowers, while using funds drawn from the cofinancing commercial banks to cover most of the short-term maturities on its subloans. 37. When the cofinancing operation is finalized, amendments to the Loan Agreement between the Bank and BANADE will be presented to you (i) to include a cross-default clause referring to the private cofinancing loan in the form normally employed by the Bank in relation to co-lenders; and (ii) to allow BANADE to adjust principal payments on Bank subloans for subborrowers utiliz- ing funds from both the Bank loan and the private banks' loan in the manner mentioned in paragraph 36. The Bank would also enter into a Memorandum of Understanding with the agent for the private banks providing for the Bank, if requested, to act as channel for the service payments on the private banks' loan and for the Bank and the private banks to exchange information and consult each other on any matters which might seriously affect the service or accomplishment of the purposes of their respective loans. Terms and Conditions of the Proposed Bank Loan and Subloans 38. The proposed loan of US$100 million to BANADE, with the guarantee of the Argentine Republic, would be utilized to finance the foreign exchange component of industrial projects and would include a technical assistance component of US$250,000. Bank funds would finance the cost of imported equip- ment and the foreign exchange component of locally manufactured equipment. BANADE will relend the proceeds of the proposed Bank loan in dollars. The  - xii - exchange risk between the dollar and the currencies repayable to the Bank would be carried by the Argentine Government. The proposed loan is expected to be committed by December 31, 1979 and disbursed by December 31, 1981. Following standard DFC practice, the amortization of the relent portion of the proposed loan would conform to the aggregate of the amortization schedules of individual subloans. 39. The technical assistance component would include: (a) US$200,000 to help finance about 65 man-months of consultancy services (at about US$4,100 per man-month) for staff training and sectoral studies, and (b) US$50,000 to help finance the sending of professionals overseas for fellowships and training programs. The qualifications, experience and terms and conditions of employ- ment of the consultants required under the project would have to be satis- factory to the Bank (Section 3.05 of the draft Loan Agreement). This technical assistance component would be repaid over 15 years, including 3 years of grace. 40. Subloans would be for up to 15 years (subject to a maximum term for the Bank loan of 15 years), including a reasonable grace period not to exceed 3 years. The amortization schedule for subborrowers utilizing funds from the proposed co-financing operation would be adjusted as indicated in paragraph 36 above. Unless the Bank otherwise agreed, the maximum amount of Bank funds that might be utilized for any subproject would not exceed US$6 million (Section 2.02(a) of the draft Loan Agreement). Subloans would be denominated in dollars and would carry an interest rate of not less than 11%, with a commitment fee on the undisbursed balance. The spread of 2.8% p.a. between BANADE's relending rate of 11% p.a. and the Bank's lending rate of 8.2% p.a. would be adequate to cover subloan administration and supervision expenses. By September 30, 1978, at the latest, BANADE and the Bank would exchange views on the appropriateness of the terms and conditions of subloans (Section 4.08 of the draft Loan Agreement). The first four subprojects would require Bank approval irrespective of subloan amount; a free limit of US$2 million would apply thereafter (Section 2.02(b) of the draft Loan Agreement). This arrangement would result in Bank review of a representative sample of subprojects covering approximately 60% of the loan amount. Procurement and Disbursement 41. While BANADE's procurement procedures were not adequate in the past, BANADE would now satisfy itself that goods and services purchased are suitable to the projects and are reasonably priced (Section 3.04(a)of the draft Loan Agreement). It is BANADE's intention to require subborrowers to obtain three quotations for purchases of most goods and services. Procurement for subproj- ects would thus be in accordance with standard practice for the Bank's loans to DFC's. Disbursements for expenditures financed by subloans would cover 100% of foreign expenditures for direct imports, 30% of those for locally produced equipment, and 60% of those for foreign equipment purchased off-the- shelf. These percentages represent the estimated foreign exchange component of these items. Under the technical assistance component, the Bank would finance 75% of total expenditures for consulting services, and 100% of foreign expen- ditures for fellowships and training abroad.  - xiii - Prolect Risks and Benefits 42. Assuming that the present high quality of management is continued in the Argentine economy and in BANADE itself, the project does not present any special risks. The existence of a substantial demand for long-term financing has been established during the preparation of the proposed project. Argentina's industry needs a major overhaul in view of the large proportion of economically obsolete equipment and machinery. The proposed Bank loan would play a decisive role in channelling long-term funds into the industrial sector, which has been disinvesting in the past few years but is now planning rather heavy investments to modernize and expand capacity. While we expect the proposed loan to be committed and disbursed according to schedule, the actual timing will, to a large extent, depend on the continuation of the present pace of economic recovery. Proceeds of the Bank loan would be used principally to finance high priority medium-size subprojects averaging about US$8 million. It is expected that many would be located in outlying provinces, thus contributing to the Government's industrial decentralization efforts.   I. THE INDUSTRIAL SECTOR A. Background Industrial Growth and Cyclical Fluctuations 1.01 Observers of the Argentine economy tend to emphasize the importance of agriculture and its impact on foreign trade, but in fact industry has been an increasingly important sector for over half a century. Twenty percent of the nation's labor force was already engaged in manufacturing at the turn of the century, a time when the sector's share of total output reached about 15%. Argentina's industry consisted of a rather large number of small factories in food processing, printing and publishing, non-metallic minerals and some traditional branches of the chemical industry. The big surge of industry occurred during the Great Depression when manufacturing value added grew 40% faster than GDP. Import substitution behind high tariff walls took place mainly in the textile industry, which increased its share of total supply in the domestic market from less than 30% in the 1920s to 50% in the 1940s. Less important to overall industrial output, but even more rapid than import substitution of textiles was the shift to domestic rubber supply of which national industry had provided less than 10% before 1930 but was able to furnish nearly 90% by the end of that decade. 1.02 A second wave of import substitution occurred during World War II when the industrialized countries were unable to export any significant amount of their products to Latin America. During that time, Argentina's industry increased its share of the domestic market from slightly over 75% to 85% as basic industries in the metallurgic sector were established and the more sophisticated branches producing electrical machinery and appliances as well as vehicles and non-electrical machinery started to diversify their production. It was, however, only after World War II that these industries received active promotion from the Argentine Government through the use of a combination of foreign exchange and import controls, high tariffs and special tax incentives to stimulate rapid growth. Growth in manufactured value added averaged 4.1% in the fifties, rose to 5.6% in the sixties and accelerated to 7.2% between 1970 and 1974 before it fell by 3.2% in 1975 (Table 1-1). As a consequence, the share of manufacturing in total value added rose from 25% in 1950 to 35% in 1975. The rate of expansion has, however, fluctuated widely, reflecting the "stop-go" cycle of macro-economic policies. These fluctuations were particularly pronounced in the last 20 years (Figure 1). Industrial activity exceeded a growth rate of 10% in six of the years between 1955 and 1975, but actually declined or was stagnant in five years. It is characteristic that in each of the five recession periods, Argentina suffered not only from external balance of payments deficits and acute shortages of foreign exchange but also from a high rate of inflation. The same strong cyclical fluctuations seen in industrial output growth were also reflected in the data on overall domestic investment, investment in machinery and equipment, and corporate profits of manufacturing enterprises.  -2- 1.03 Fluctuations in industrial output and investment have been marked in most Latin American economies, yet in Argentina they have been more signifi- cant than in other major industrializing nations of that continent. 1/ In spite of the more pronounced cyclical fluctuations, overall growth rates (both for industry and GDP) were about the same level as the rates of most Latin American neighbors (Table 1-2). The major reason for the increasing growth rate of Argentine industry was the dynamic expansion of newly established industries, such as chemicals, metal products, machinery and transport vehic- les equipment. They more than doubled their output between 1950 and 1960, and nearly tripled production between 1960 and 1974/75. Within these subsectors, output accelerated particularly in synthetics, steel and automotive vehicles (Table 1-3). Structural Change and Development of Non-traditional Industrial Exports 1.04 The shift from "traditional" industries, such as food, beverages, tobacco, textiles, clothing and leather to the above-mentioned "dynamic" industries is apparent from the statistics. Whereas the share of the first group declined from 50% of output to less than 30% between 1950 and 1975, the share of metal products, machinery, and transport vehicles and equipment rose from 16% to 33.5% during the same years. Argentina became the only country in Latin America in which the value added of these three "dynamic" branches of industry surpassed the value added of the "traditional" ones, a fact that enabled the country to sell substantial amounts of these products to its neighbors during the 1960s within the framework of special trade agreements of the Latin American Free Trade Association (LAFTA). 1.05 Table 1-4 shows the development of non-traditional manufactured exports during the last ten years. 2/ Real growth was fairly rapid in the late sixties and early seventies, averaging 18.6% per year between 1966 and 1970, and accelerating to an annual 21.6% between 1970 and 1974. Manufactured ex- ports declined abruptly from their peak volume in 1974 to US$800 million in 1975, but recuperated to US$1,100 million in 1976. Manufacturing's share of total exports advanced from 8% in 1966 to an average of 23% in the 1970/75 period. Exports as percent of industrial value added, however, remained modest during the same period, increasing from slightly less than 2% to an average of 8%. A look at the changing structure of these exports clearly 1/ The coefficient of variation of industrial growth between 1955 and 1973 was 119% for Argentina as compared with 60% for Brazil and 45% for Colombia. 2/ Argentina has traditionally been an exporter of processed agricultural goods, such as meat and dairy products, flour and edible oils, wool and, more recently, sugar; these are normally included in agricultural ex- ports. There are, however, differences as to the degree of elaboration which makes an exact computation of the category foodstuff, beverages and tobacco difficult.  -indicates the dynamic expansion in machinery as well as transport vehicles and equipment, which averaged 25% in real terms between 1970 and 1976. Less spectacular was the increase in exports of metal products, mainly iron and steel. There was substantially slower export growth in the more traditional branches such as foodstuff, beverages, tobacco, textiles, wood, and printing and publishing products. The only exception was the exports of leather and leather products, for which export sales quadrupled between 1970 and 1976, benefitting from the rapid increase in world demand. 1.06 The rapid export expansion of the "dynamic" industries is also reflected in the changing shares experienced by the various subsectors during the past ten years. Exported machinery, transport vehicles and equipment reached nearly 40% of total manufactured exports in 1974/1976. Metal producing industries raised their share at a much slower rate, from 9.9% to 13.1%, and the share of most traditional industries fell from 50% to 25%. This pattern reflects Argentina's relatively advanced status within the "industrializing" countries. By selling "product cycle" goods to other LDCs, i.e., mostly to other Latin American countries, it used its comparative advantage within that region. Table 1-5 shows that Argentina already exported 47% of its manufac- tured goods to other LAFTA members in 1968 and that it increased that share to 53% in 1973. In addition, special agreements with Cuba, Costa Rica, and Chile, countries which were granted medium- and long-term credit to buy machinery and road motor vehicles, provided an extra impetus to exports by the "dynamic" branches of industry. 1/ New Technology and High Cost Production 1.07 The postwar industrialization process in Argentina was made possible by the introduction of modern technology and knowhow. Since neither was available in Argentina during the 1940s and 1950s, substantial foreign invest- ment was required. The first foreign investment law was decreed in 1953, to be followed by two modifications in the mid-fifties and a wider ranging new law in 1959 which was combined with an industrial promotion law. The 1958 law heavily favored foreign private capital inflow into such industries as automo- biles, petrochemicals, machinery and equipment, as well as metals and chemi- cals. The annual average flow of foreign private investment into manufacturing increased from US$15 million in 1954/58 to over US$100 million in 1958/61, increasing the foreign share of industrial investment from 3% to nearly 10%. Although the contribution of foreign-owned firms to total manufacturing value added amounted to less than 20%, foreign investors were dominant in such 1/. Exports of transport vehicles to these three countries amounted to US$85 million in 1974 and US$120 million in 1975, making up over 50% and 87% of total exports of this important category. For machinery, the shares were 20% for 1974 and 24% for 1975.  -4- leading subsectors as chemicals, metals, machinery and transport. In the early 1970s, US companies alone contributed 25% of value added to paper and chemicals and over 15% to the largest SITC group, which includes metal pro- ducts, machinery and transport vehicles. 1.08 Due to the introduction of new technology and heavy infusion of capital, labor productivity experienced substantial annual increases averaging 3.5% in the 1950s, 4.3% in the 1960s and 3.9% in the early 1970s. Overall, productivity of a specific sector or activity is, however, also determined by the scarce factor (capital) and its uses. Although capital stock and compar- able cost data are not available, some indication of the rather inefficient use of capital during the sixties is provided by the data of Table 1-7, which show that utilization of industrial firms' capital stock amounted to only 66% in 1965, a figure which was still above the utilization rates in 1963 and 1964. There was a significant improvement in industry's overall capacity utilization in the seventies, before the recession in late 1975 set in, but even during the strong growth years, several subsectors such as bever- ages, electrical appliances, and steel continued to suffer from excess capacity. 1.09 International price comparisons which were undertaken in the mid- sixties and the early seventies also indicate the relative inefficiency of Argentine industry. In 1965 it was found that prices for intermediate goods were from two to seven times higher in Argentina than in world markets. Anhydrous ammonia, for example, was 7.4 times as expensive as in the United States. Sulfuric acid was twice, three times, and 1.5 times as expensive as in the United States, West Germany and Japan, respectively. Methanol, ethyl alcohol, kerosine and urea were all between 1.5 times and four times more expensive in Argentina than in the US, and 1.8 times as eqpensive as in Japan. While domestic and international price differentials were not as great for capital goods as for intermediate goods, they were, nonetheless, substantial. Machine tools were between 1.3 and 1.4 times more costly in Argentina than in world markets; metal and metal products (steel billets and slabs, seamless pipes, reinforcing bars, etc.) were between 1.2 and 1.7 times more expensive in Argentina; and automobile prices were an average of 2.2 times higher in Argentina. Price differentials were somewhat smaller in 1969-70. Table 1-8 shows that the ratio was still above 2:1 for several chemical products, synthetics, automobiles, and a number of products in the electrical and non-electrical machinery industries. Industrial Employment 1.10 Argentina's most active phase of import substitution did not provide a significant number of new employment opportunities. Total employment in the manufacturing sector, which had reached 1.4 million in 1950, expanded by an annual rate of 1.4% in the following eight years. Between 1958 and 1968 increases were matched by declines so that the net gain was zero. It has only been in recent years that labor absorption by industry grew markedly, aver- aging 3% p.a. between 1968 and 1975. In spite of its much more rapid growth in output, the share of employment generated by the "dynamic" industries  -5- remained rather constant at 38% between 1958 and 1975 (Table 1-6). Because of the limited employment opportunities in the newly established industries, Argentina has relied increasingly on the service sector to absorb a major proportion of the new labor force. Whereas the share of manufacturing employ- ment fell from 22.8% to 19.7% between 1950 and 1970, services raised its contribution from 45.4% to 57.2%. B. Industrial Issues and Policies 1.11 In spite of a fairly rapid growth rate and continuous diversifica- tion, as shown in the previous paragraphs the Argentine manufacturing sector has been confronted with three major inter-related problems: (i) a substan- tial degree of instability, as characterized by rapid swings from strong expansion to sharp contraction; (ii) a high cost structure, as reflected in relatively high prices and under-utilization of capital; and (iii) a slow labor absorption rate, which has left the manufacturing sector's employment share unchanged since the early postwar period. Instability, Import Dependence and Macroeconomic Policies 1.12 A comparison between industrial and overall economic growth rates on the one hand and Argentina's balance of payments on the other shows the close link between industrial activities and the behavior of exports and foreign exchange reserves. Imports of intermediate and capital goods expanded rapidly when industrial output advanced at a rapid pace, but had to be reduced when exports and the earnings of foreign exchange were not able to keep pace. Although one might expect that an import substitution policy would decrease import dependence, this has not been the case. As imports have been pro- gressively compressed to a level where they supply less than 10% of total industrial output, only those items remained which cannot be produced in Argentina. Yet they are essential inputs to the industrial sector. The result is that dependence on imports in a qualitative sense increased since a much higher proportion of total imports can be classified as essential inputs for use in local manufacturing. The importance of intermediate goods in total imports increased from 32% in 1910 to 52% in 1960 and 70% in 1974-75. These imports constitute over one-seventh of total purchased inputs used by the industrial sector and are especially important in the newly established, rapidly expanding intermediate and capital goods industries, such as rubber, chemicals, metal products, machinery and equipment. Laws requiring increasing purchases from nationals have helped to stimulate domestic supply, particu- larly for automobiles, but many of these suppliers in turn rely on imported inputs. Consequently, industrial growth has been severely hampered each time agricultural exports grew at too slow a pace and foreign exchange became scarce. The Shift from Import Substitution to Export Diversification 1.13 In the early sixties it became clear that import substitution made it more difficult to manage the Argentine economy. Not only did industrial  - 6 - production become more vulnerable to fluctuations in the level of export earnings, but output and employment also became more sensitive to shifts in domestic aggregate demand. Since high-cost import substitutes were sold almost exclusively to domestic customers, both industrialists and policy- makers realized that high and stable growth rates could not be achieved without engaging in a program of export diversification. In 1962 several fiscal measures, such as "drawbacks" and rebates on taxes, as well as special lines of credit at subsidized rates of interest, were introduced. Because of an erratic exchange rate policy, however, these measures had little effect on industrial exports during the early years of the export diversification drive. 1/ 1.14 Significant strides were made in industrial export promotion only beginning with 1967-68 when the authorities simplified the exchange rate system, extended the "drawbacks," instituted a tax refund incentive of 10% of the value of exports and negotiated new preference agreements with the LAFTA partners. These measures were further bolstered by increased export credit facilities by the Central Bank and by establishment of an export insurance scheme fashioned after similar systems prevailing in industrialized countries. This set of incentives proved quite effective in promoting indus- trial exports. After 1970 exchange rate adjustments for non-traditional industrial exports barely compensated for the loss of international purchasing power of the Argentine peso (Table 1-10). Fiscal incentives, however, rose by nearly 200% within four years and export credit more than quadrupled (Table 1- 9), leading to increasing export incentives which rose from less than 15% to over one-third of the value of non-traditional manufacturing exports earnings in 1974. New Government Policies to Stabilize and Stimulate Foreign Exchange Earnings 1.15 The current government is aware that in order to lessen the foreign exchange constraint industry has to export continuously, irrespective of the domestic demand situation. In addition to this, it is expected that the competition in international markets will contribute to improve the quality of Argentine manufacturing products as well as lower per unit costs in cases where large-scale production is required. Consequently, the Central Bank unified the exchange rate in late 1976 and has followed a policy of a "crawl- ing peg" since then. On the other hand, the government authorities have reviewed the fiscal and monetary incentives granted to industrial exporters in recent years and decided to increase the interest rate substantially. In a situation where the fiscal deficit is considered to be the most serious 1/ Regression between industrial exports and the "real effective exchange rate," i.e., the nominal exchange rate adjusted for incentives, and the difference between domestic and international inflation, was insignifi- cant during the years 1962-1968. However, two other variables, excess capacity and special LAFTA agreements, were important, implying marginal cost pricing in the first case and export into protected markets in the second.  - 7 - obstacle to a future stable expansion of the Argentine economy, fiscal incen- tives will be reviewed and reduced gradually as industry becomes more competi- tive. Since it is expected that Argentina will continue to export the largest part of its manufactured products to its Latin American neighbors, the new government has been actively engaged in negotiating new trade agreements with Brazil, Bolivia, Chile, Paraguay and Venezuela. Recent discussions with the Cuban government have also succeeded in resuming exports to that country, which had stopped its imports in 1976 because of rapidly falling sugar prices. 1.16 At the same time, the government has adopted a series of general economic policies which aim at increasing and stabilizing the inflow of foreign exchange and reducing the rate of domestic inflation. The stimulation of traditional agricultural exports through more realistic exchange rates and abolition of export taxes on the one hand, and the new foreign investment law on the other, were effective in raising exports rapidly in 1976. The inflow of foreign capital will very much depend on the improvement in monetary and economic stability of the Argentine economy. These policies are consis- tent with the government's aim of reducing the fiscal deficit from 8% in 1976 to 4% of GDP in 1977 in order to lessen the expansion of money supply and with it inflationary pressures in the Argentine economy. Since foreign exchange crises have been intimately connected with monetary disequilibrium within the Argentine economy in the past, it is clear that stabilization of foreign exchange earnings is also a function of stabilization of the internal price level. Major Causes of Industry's Efficiency Problems 1.17 The level of efficiency and the extent of competitiveness of Argen- tine industry varies substantially from sector to sector. Although generali- zations are difficult to make, it is apparent that the new "dynamic" indus- tries tend to be technically efficient but relatively high-cost producers, while the "traditional" industries are in the majority of cases relatively inefficient in a technical sense but nevertheless produce at lower costs compared with international producers. The reasons for this paradox are manyfold, but a few distinctive characteristics stand out. First, many of the new industries producing intermediate, capital and durable consumer goods require large markets in order to produce at minimum average costs, important examples being steel, automobiles, tires, basic chemicals, and a number of electrical appliances. Although Argentina offered a large and prosperous market in relation to most other Latin American contries, too many firms entered at the same time, each of which was not able to reach large-scale production common in developed countries. On the other hand, the smaller traditional industries have been able to use the skilled labor force much more in.tensively without facing the strong power of organized labor in big industry. A second important reason for the cost differential is the fact that most of the "traditional" industries are receiving their inputs from the "efficient" agricultural sector, whereas the modern industries are linked to the inter- mediate and basic industries of Argentina, which are high-cost producers, mainly because of lack of control and inefficient management. In all cases, the import substitution policies of past governments have played a dominant  -8- part in determining the structure and problems of technical and economic efficiency and it is therefore important to discuss the impact of these policies in some detail. 1.18 Since "infant" industries are by definition inexperienced in produc- tion, marketing and finance, it is generally agreed that they should be protected against foreign competition until they have been able to expand their markets, improve their production techniques, and lower their average costs. In almost all Latin American countries in general, and in Argentina as the first industrializing country in particular, protection has, however, continued to play an important role long after the industries have been established. This has been effected not only through high tariffs but also with the help of import restrictions, quotas, prohibitions, differential exchange rates and prior deposits, all of which increased the price of im- ported goods competing with national products. Moreover, necessary inputs and capital goods not produced at home could be imported at very low tariff rates or were even exempted from paying any import duty. "Effective" protection has become am important indicator to measure both the high protection from com- peting imports and the low protection for imported intermediate and capital goods needed in the production process. In Argentina's case, several studies analyzing postwar protection through 1969 came to very similar conclusions. Overall effective protection was high (over 140%), with capital goods aver- aging 200%, intermediate goods 150%, and nondurable consumer goods less than 100%. In addition, protection was uneven and granted not according to the degree of development and age of each industry but to the degree of ineffi- ciency and the political pressure the sector could exert on policy makers. Cotton yarn and textiles, for example, were protected by tariffs of 80% and 150%, respectively, until 1976, whereas their major inputs had tariffs of 35% and 75%, respectively. Consumer goods, such as household appliances and clothing, were protected by even higher rates of 100% and 200%. Although protection in intermediate goods was lower, it was often more effective because of import quotas and other regulations. This was true for steel and other basic metals produced in Argentina as well as basic chemicals and petrochemicals. 1.19 Macroeconomic management in the past has impaired stable and con- tinuous growth of industries. The "stop-go" character of fiscal, monetary and foreign exchange policies and the concurrent eruption of high rates of inflation have likewise affected management in an unproductive way. Many industrial enterprises were unable to reinvest because depreciation principles for tax purposes did not take into consideration the inflationary erosion of the historic value of machinery and equipment. When inflation increased in the early seventies and got out of control in 1975, industrial managers increasingly devoted more time to financial than to technical and marketing considerations. Special attention was paid to management of tax payments. The rapid decline in tax revenue was directly related to the firms' ability to delay payments. These tactics became commonplace because not only were long-term funds practically nonexistent during the last few years, even short-term funds decreased in real terms with only the large firms being able to borrow abroad.  - 9 - 1.20 Another, more indirect effect of government action on industrial costs is connected with the problem of state enterprises. Similar to the experience in other Latin American countries, manufacturers of capital and durable consumer goods in Argentina have complained about the high costs of domestically produced industrial inputs, especially basic metals and petro- chemicals. In 1976, basic steel products were reported to be over 30%-50% more expensive than equivalent imports. There are a number of reasons for this problem, some of which may not be easily removed in the short run. First, there is the relatively small-scale of production, which has not increased significantly with industry's move into some foreign markets. Secondly, in the case of steel, Argentina depends on imported iron ore and coal. Although this does not need to impede low-cost production, as the example of Japan shows, the fact that the major steel mill is located at a site which cannot be reached by modern large freighters of over 20,000 tons, leads to problems of transshipment and additional costs. Thirdly, techno- logical innovation on the international level has been rapid, especially in chemicals and petrochemicals. The transfer of the new knowhow and its adapta- tion to Argentine industry is costly. Fourth, and probably most important, there have been gross operational inefficiencies and problems in quality control in the state enterprises dominating the basic industries. 1.21 A further cause of the high price structure of many industries is the "dualistic" character of their composition. Specific studies on such industries as agricultural machinery, tools, and electrical appliances have pointed out that these industries are composed of a few relatively big and well-managed firms and a large number of small and rather inefficient firms, most of which will not be able to redirect their production efforts toward exports unless they join forces with stronger competitors. Policies to Improve Efficiency of the Industrial Sector 1.22 Since most of the efficiency problems seem to stem from past poli- cies, the new government expects to solve them by first reversing these policies. The remedies called for would be: (1) a gradual opening of the economy to international competition by a reduction of import barriers and further promotion of exports; (2) a restructuring of major industries by merging or eliminating marginal firms in branches which are plagued by excess capacity; (3) an improvement in the performance of state enterprises, both in the directly productive and in the infrastructure sectors. The present government has acted in all three areas, which should eventually not only improve the performance of Argentine industry but also raise incomes directly and indirectly throughout the economy. 1.23 One of the first steps of the new government in mid-1976 was to dismantle import controls. Secondly, a decrease of nearly 4,000 out of 7,600 tariff items was decreed in November 1976. The overall tariff reduction was about 25%, with particular emphasis on the capital goods sector in which rates of over 1,700 items were cut from 80% and 90%, to 60%. Since tariff reduc- tions for imported inputs were smaller than for final products, "effective" protection of a great number of products decreased even more than nominal  - 10 - protection. A current study by the Central Bank, which has been commissioned by the Ministry of Economy, is assessing the impact of the tariff reductions on Argentine industry. With the help of that analysis, it should be possible to evaluate further steps in changing the incentive system so that the gradual opening up of the industrial sector can be accomplished in an orderly fashion. The sudden tariff change in 1976 had led to criticism in many industries which saw their chances of survival threatened, but it seems that the private industrial sector as a whole is willing to adjust to a higher degree of competition if the public sector efficiency can be raised likewise. 1.24 Restructuring whole industry groups is a long-term, tedious and difficult task. Since November 1976, a mixed public and private commission has been studying the possibility of consolidating the automobile sector. It is understood that the current number of firms (over 10) cannot survive in a market which only absorbs about 250,000 cars during years of relatively high growth and prosperity. 1/ Since the automobile industry is not only an impor- tant contributor to overall output but also to total industrial employment, absorbing over 20% of the industrial labor force either directly or indi- rectly, the task of consolidation will be difficult to accomplish. 1.25 The most urgent, but also most arduous, problem which will affect not only the industrial sector, is improving the performance of state enter- prises. In 1976, fiscal recovery was the dominant issue. Consequently, a start has been made by adjusting public sector prices, ranging from power rates to gasoline prices. While these corrections improved the financial situation of most entities, it increased consumer prices directly and indirec- tly, by raising the cost of production. The costs of the public enterprises were held down by adjusting only part of wages to the inflation in 1976. This policy, however, cannot be continued for a prolonged period. Therefore the government has started to increase working hours and working requirements for certain levels of occupation. The crucial steps of slowly transferring a large number of the underemployed public employees to the private sector or into retirement is expected to be taken during the second part of 1977 and 1978 when the economy should recuperate fully and the fiscal situation may permit more generous payment for those who retire earlier. The initial out- lays should be largely compensated by the long-run savings in public sector salaries. 1.26 While the government's interest is clearly to promote a more compe- titive market system, in which increased competition should benefit the efficient producer and the consumer, other objectives are currently discussed within the framework of the new Industrial Promotion Law. The two major goals which may possibly conflict with the previous set of priorities are regional decentralization and support of basic industry, which is believed to be of strategic importance to the security of the country. In the latter category, 1/ During the recession year 1976, the government granted special tax and foreign exchange incentives and likewise decreased steel prices to lower input costs for automobile exports.  - 11 - Argentina plans to complete its petrochemical complex in Bahia Blanca and to double the capacity of its steel mill in San Nicolas as well as to lay the groundwork for a second government-owned steel plant. The expansion plans of SOMISA have been recently studied by a team of Japanese technicians and it can be expected that productivity and financial management will improve when the second blast furnace comes into production in June 1977. As for decentraliza- tion, the previous policies did correctly attempt to redress the regional imbalance of industrial production, over 85% of which is located along the La Plata River between Buenos Aires and Santa Fe, as well as in Cordoba. In the past, however, the benefits of regional development have not been compared with the costs of fiscal and monetary incentives which were granted to induce firms to expand production in the remote provinces. The present government intends to establish annual quotas on the amount of incentives to be granted under the Industrial Promotion Law. The establishment of maximum sums for incentives would induce the setting of priorities to ensure that only deserving projects would be supported. Employment Issues in Industry and Policy Options 1.27 The rather slow absorption of labor into the industrial sector is basically caused by the same problems which have prevented rapid employment increases in other countries which have concentrated on import substitution policies for a long time. First, new industries and technologies introduced were relatively capital intensive, and whatever gains made by the opening up of new job opportunities were dampened by the decline of employment opportun- ities in small-scale industry. Secondly, the government induced an even wider use of capital by subsidizing interest rates and overvaluating the foreign exchange rate for capital goods. In spite of the power of labor unions, real industrial wages increased less than productivity in the Argentine economy, but on the whole, labor legislation with its inflexible rules and substantial fringe benefits did not encourage labor intensive production. These two fundamental causes were certainly of great importance between 1958 and 1968. It remains to explain the sudden increase of industrial employment after 1968, which lasted over six years and has contributed to the lowering of the unem- ployment rate in major urban centers to less than 3% during the strong expan- sion years (1971/72). The stability of macroeconomic policies between 1966 and 1969 and the gradual expansion of manufactured exports contributed to the first phase of employment increases. During the early 1970s, two "populist" measures became more important. On the one hand, aggregate consumption expanded rapidly, partly due to liberal wage increases and partly due to the extraordinary windfall gains from rapid increase in export prices. On the other hand, state enterprises experienced an amazing growth in their payrolls; public firms such as the petroleum company, the steel factory, the power and gas company, and other state enterprises hired over 160,000 employees between 1970 and 1975, an increase of 56% within four years. 1.28 Clearly, the last two measures are inconsistent with the current government philosophy of raising the efficiency of public enterprises and increasing the savings coefficient in the public and private sectors to facili- tate future growth. During the recession year 1976 the authorities did not  - 12 - engage in releasing the excess labor force of government-owned enterprises and they asked the private firms to keep as many workers as possible on the payrolls. Due to this policy, the level of unemployment has remained low and is currently estimated at only 4.5% for the entire country. The expectation of the policy makers is that with recovery under way excess labor will find new job opportunities in industry and other services. In the short run employment will probably not increase. On the other hand, with the growth of industrial production in the years to come, particularly in the more labor- intensive "traditional" branches and in the mechanical engineering subsector, employment expansion over the medium and long run can contribute to increasing the shift of the employment structure toward those working in directly pro- ductive activities, which should make it possible to raise living standards for the whole population without causing an inflationary upsurge. The pro- posed loan would help in creating productive job opportunities. C. Prospects and Project Implications 1.29 After several years of strong and continuous expansion, industrial development came to a grinding halt in 1975 and the recovery in major sectors has started only recently. The bottom of the recession was reached in mid- 1976, with a number of branches experiencing increasing sales since September 1976. This was particularly true for those industries supplying the agricul- tural sector, which reacted rapidly to the new price policies of the govern- ment. Output increased for agricultural machinery, tractors and trucks, which in turn had a favorable impact on the supplier industries of these firms. Similarly, growth resumed in the food processing industries, such as flour milling, oilseed refining, and dairy production. On the other hand, the leading subsectors, such as metals, passenger cars, and chemicals, were still working well below capacity at the end of 1976 and the beginning of 1977. Growth. Investment, and Exports 1.30 Total investment in machinery and equipment was stagnant in 1974 and 1975, mainly because of price controls and uncertainties arising from in- creased political instability. Although overall investment in industry has suffered in the past five years from the unstable political and economic situation, some sectors continued to invest until 1974 and others have already resumed investing in 1976. This seems to be true for paper and pulp, steel and some textiles. On the other hand, most consumer goods and capital goods industries have experienced serious declines in investment. If, in a macro- economic context, an annual growth of 4-5% were to be achieved and the 13% share of total investment of machinery and equipment in GDP that existed during the early 1970s were to continue, annual investment by all sectors in machinery and equipment in 1977/78 would be US$6.2 billion. Similarly, imports of capital goods are estimated to reach US$610 million in 1977 and US$710 million in 1978. The manufacturing sector accounts for about 28% of total investment, but it absorbs 55% of investment in imported machinery and  - 13 - equipment. Consequently, investment demand for machinery and equipment by the industrial sector should be US$1.7 billion per year and industry's demand for imported machinery and equipment would average US$360 million annually for 1977 and 1978. The proposed Bank loan of US$iOC million equivalent, amounting to 14% of two years' capital goods imports by industry and 2.9% of two years industrial investment, would cover only a relatively small portion of the capital requirements of industry. Bank funds channeled to industrial firms by BANADE would finance the foreign exchange costs of both imported and domes- tically produced machinery and equipment. The foreign exchange costs of domestically produced capital goods is estimated to amount to between 30% and 40% of total costs. 1.31 Argentina has returned to economic order only since March 1976 and investment plans of private firms are still tentative. A change in the attitude of entrepreneurs about sales and investment prospects, however, has been registered in periodic industrial surveys undertaken by the research foundation FIEL during 1976 and by a special study made by FIEL to ascertain industrial investment plans over the period 1977-1980. The FIEL study covered 100 major manufacturing firms which represent about 7% of total sales and about 11% of total investments in the manufacturing sector. The study shows that fixed investment by the manufacturing sector during 1977 would reach about US$1.6 billion. Of this fixed investment, about US$900 million would be for machinery and equipment. The FIEL study anticipates that imports of machinery and equipment in 1977 would reach about US$320 million. These figures are consistent with the two-year estimates of investments obtained from overall macroeconomic parameters, presented in paragraph 1.30 above. Interviews with industrial firms in Buenos Aires and the interior confirmed the findings of the FIEL investigations. 1.32 Industrial enterprises included in the survey are expected to increase substantially output and investments. Total sales in real terms were forecast to rise by 30% in 1977 over 1976, which represents a 12% increase over 1975. The breakdown into eight different industrial groups in Table 1-13 shows that real growth is expected by all industries to proceed at least by about 20% in 1977, with steel and metalmechanical industries being the lead- ing branches. Business also expects exports to increase rapidly; a 28% gain is forecast for 1977 over 1976 export sales. Furthermore, the share of indus- trial sales abroad to total sales would remain nearly constant at about 6.5%, after reaching an all-time low of 2.7% in 1975. Many firms which had increased their exports in 1976 indicated that they would concentrate increasingly on the domestic market as the current recession eases, but that they expected to maintain an active export market in order to provide stability to their operations. The strongest expansion in exports is expected to occur in the textiles and leather industries, where the sampled firms plan to raise their export-output share from 3.0% to 6.4%. In all other branches, exports are expected to experience a similar growth as output so that the shares would remain fairly constant.  - 14 - 1.33 Total investment plans of the industrial firms surveyed by FIEL are 75% higher than in 1976, and 46% higher than in 1975. The investment plans of the steel, paper, petroleum and chemical industries surveyed by FIEL were quite firm, if not under way, while the investment plans of the consumer and construction industries appeared to be more tentative. Investment needs differ from industry to industry. Firms in the chemical and steel industry plan large investments for expanding capacity. Large investment outlays are also expected in the transport vehicles and equipment and miscellaneous indus- tries, but in both of these branches replacement of obsolete equipment would absorb over 25% of capital formation in 1977. The need to re-equip outdated machinery is also strong in the metal-working industry and even more urgent in the traditional branches such as textiles and leather, non-metallic minerals, food, beverages and tobacco. Imported machinery and equipment is expected to account for about 35% of all required machinery and equipment. Except for the textile and leather industries, which expect to spend 50% of total investments on imported machinery and equipment, the import component of investment for most industries is expected to fall close to the overall average of 35%. 1.34 Forecasts beyond 1977 were obtained from only 32 firms in the FIEL survey. In general, the "dynamic" industries (chemicals, transport equipment and vehicles) are again forecasting more rapid growth than the traditional industries during 1978/77, although the gap is smaller than during the late 1960s. The expected growth rate in the textile and leather industries, together with the chemical and transport industries, exceed the forecast average growth rate of industry (Table 1-14). Taken together, the surveyed firms indicate that in 1978 and 1979 the real level of fixed investments would increase at about 6% over the level expected to be achieved in 1977. 1.35 The substantial demand for new investment shown by the FIEL study is reflected in the large size of the pipeline of subprojects currently being reviewed by BANADE; i.e., 143 subprojects at an advanced stage of considera- tion requiring investments of about US$420 million, plus another 200 subproj- ects at a less advanced stage. As the next chapter will show, BANADE, with the financial support to be given by the proposed loan, would be instrumental in providing the long-term financing required for the envisaged investments.  ARCENTINA INDUSTRIAL CREDIT PROJECT - BANCO NACIONAL DE 1ESAR=OLLO %6 Choogtfl FLUCTUATiONS OF INDUSTRIAL GROWTH (X) AND RATES OF RETURN (Y) IN INDUSTRY g RI 11 x~~~~~~~~~~~~ -10 _ T _ 6 I t I~~~I It355 be, 57 58 59 1960 61 62 63 64 65 66 67 Gs 69 1970 71 72 73 74 i5 Wnrld 6:.nk-17313  ARGENt'I'[NA INDIJSTRIAL CREITT PIR)JEC:T - BANCO NACIONAL. DE DESARROLIo Table 1-1: Growth and Structure of Value added in Manufacturing Years ISIC* 31 32 33 34 35 36 37 38 39 Total Millioni 1960 Pesos t950 502.9 458.1 48.0 105.2 224.8 104.5 43.8 305.4 131.0 1,923.7 1960 574.7 505.1 56.6 122.8 422.5 121.4 117.2 810.1 147.5 2,878.0 1965 706.3 554.1 73.6 170.5 662.0 154.6 213.7 1,176.3 171.0 3,882.1 1970 881.0 581.4 83.0 217.2 926.5 238.9 289.8 1,549.() 211.1 4,977.9 1974 1,052.3 77(0.1 94.3 264.5 1,212.9 252.0 427.8 2,254.7 243.6 6,571.7 1975 1,016.9 804.8 82.4 262.1 1,210.2 253.6 419.2 2,073.7 235.4 6,358.3 Struictuire in 7. 1950 26.1 23.8 2.5 5.5 11.7 5.4 2.3 15.9 6.8 100.0 1960 20.0 17.6 1.8 4.3 14.7 4.2 4.1 28.2 5.1 100.0 1965 18.2 14.3 1.9 4.4 17.1 4.0 5.4 30.3 4.4 100.0 1970 17.7 11.7 1.6 4.5 18.6 4.8 5.8 31.1 4.2 100.0 1974/5 16.0 12.2 1.4 4.1 18.8 3.7 6.6 33.5 3.7 100.0 Annual Crowth in 1950-60 1.4 1.0 1.7 1.5 6.5 1.5 10.3 10.2 1.2 4.1 1960-65 4.2 1.9 5.4 6.8 9.4 4.9 12.5 7.7 3.0 6.2 L965-70 4.5 1.( 2.4 5.0 6.9 9.1 6.5 5.6 4.3 5.1 1970-75 2.9 6.7 -0.1 3.8 5.5 1.2 7.7 6.0 2.2 5.0 1950-75 2.9 2.3 2.2 3.7 7.0 3.6 9.5 8.0 2.4 4.9 Er k 31 fuod, beverages & tobacco; 32 textiles & wearing apparel; 33 wood & wood prodticts; 34 paper, printing & piublishing; 35 chemicals; petroleuim, ruhher & plastics; . 36 non-metallic minerals; 37 basic metals; 38 metallic products, machinery & transport equipment; 39 others. Source: Central Banik of Argentina: Sistema de cuentas del producto e ingresso de fa Argentina, 1975, and uinpublished data.  - 17 - TABLE 1-2 ARGENTINA IITLUSTRIAL CREDIT PROJECT - BANCO NACIONAL DE DESARROLLO Table 1-2: Growth Rates and Industry Shares of GDP in Selected Latin American Countries (in %) ANNUAL GROWTH RATES-/ Real GDP Real Industrial Value Added 1960-70 1970-73 1960-70 1970-73 Argentina 4.3 7.5 5.6 7.2 Brazil 6.0 11.0 7.3 11.5 Chile 4.4 1.6 5.4 3.7 Colombia 5.2 6.6 6.0 8.9 Mexico 7.0 6.1 9.0 6.4 Peru 5.3 6.1 6.3 4.3 Venezuela 5.9 4.2 7.3 6.4 2/ INDUSTRIAL VALUE ADDED SHARE OF GDP- 1960 1970 1973 Argentina 31.1 35.3 34.8 Brazil 21.6 24.3 24.6 Colombia 17.9 19.2 20.5 Ecuador 15.6 17.1 17.4 Mexico 22.6 27.0 25.3 Peru 3/ 17.2 19.0 18.4 Venezuela- 14.2 16.2 17.3 (19.3) (20.1) (20.5) United States 27.4 28.5 25.3 United Kingdom 32.2 28.3 27.1 1/ In 1970 prices. 2/ At 1963 prices; 1973 shares at current prices. 3/ Figures in brackets indicate industrial share of GDP exclusive of the petroleum sector. Source: UCN, Yearbook of National Accounts Statistics, and Monthlv Bulletin of Statistics; 1DB, Annual Reports.  ARGENTINA INDUSTRIAL CREDIT PROJECT - BANCO NACIONAL DE DESARROLLO Table 1-3: Industrial Production Indices 1950-1975 1950 1955 1960 1965 1970 1974 1975 ISIC INDUSTRY "Traditional" Industries 31 Food, beverages, tobacco 87.5 93.2 100 122.9 153.3 183.0 176.9 32 Textiles, Clothing, Leather 90.7 99.2 100 109.6 115.1 152.2 159.3 33 Wood Products (incl. furniture) 84.7 107.4 100 129.9 146.5 166.6 145.6 34 Paper, printing, publishing 85.7 96.2 100 138.9 176.9 215.4 213.4 36 Non-metallic minerals 86.1 87.4 100 127.3 196.8 207.6 208.9 "Growth" Industries 35 Chemicals 53.2 76.6 100 156.7 219.3 287.1 286.4 Industrial Chemicals 54.6 87.8 100 258.3 358.4 545.51/ n.a. Synthetics & Plastics 48.3 69.2 100 402.1 477.7 753.0 780.0 Petroleum derivatives 136.6 161.6 100 161.0 415.5 578.3 578.3 37 Basic Metals 37.4 73.9 100 180.2 247.2 364.6 357.7 Iron & Steel 31.1 72.0 100 199.9 281.7 426.1 420.1 38 Metals, Machinery, Transport Equipment 37.7 56.8 100 145.2 191.2 278.3 256.0 Motors 12.1 27 0 100 469.6 781.3 2,925.3 2,565.5 Automotive vehicles 23.8 31.7 100 200.8 271.9 441.7 359.5 Radio and T.V. 10.2 19.7 100 113.2 123.1 158.0 170.9 Electric household goods 25.8 78.1 100 109.3 133.3 152.6 146.3 Agricultural machinery & equipment 15.7 44.4 100 88.8 90.2 144.8 123.2 TOTAL INDEX 66.8 81.1 100 134.5 173.0 228.3 220.9 Source: Central Bank of Argentina: Sistema de cuentas del producto e ingresso de la Argentina, 1975. 1/ 1973. _ 9,I-.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  INDUSTRIAL CREDIT PROJECT - BANCO NACIONAL DE DESARROLLO Table 1-4: Exports of Manufactured Products, 1960-1975 (Value of Exports in Millions of UIS Dollars) Structure of Exports Growth of Expot 1965 1966 1970 1971 1972 1973 1974 1975 1976 1965c66re 974_ o96r-ow 197 Ep 76 Food, Beverage, Tobacco 24.7 47.1 95.1 106.4 95.9 150.8 189.4 94.3 154.1 30.5 14.4 31.0 10.2 Textiles and Wearing Apparel 8.9 9.8 17.1 16.5 27.5 78.4 72.4 21.7 44.0 7.9 4.5 14.0 20.8 Textile Products 8.7 9.6 16.8 15.3 24.2 57.2 42.9 16.3 39.0 Shoes, hats, etc. 0.2 0.2 0.3 1.2 3.3 21.2 29.5 5.4 5.0 Wood and Paper Products 9.8 11.2 16.9 17.0 21.5 38.9 61.4 28.1 34.2 8.9 4.1 11.5 15.1 Of Which Paper and Pulp 0:4 0.2 2.1 3.2 4.7 14.8 38.8 5.0 . - Books and Graphics 9.3 10.6 14.7 13.7 16.7 23.9 22.2 22.9 Leather and Leather Products 3.5 9.4 48.4 42.6 99.5 128.7 128.9 81.9 170.0 5.5 12.5 69.0 28.6 Of Which Skin and Tan Leather 3.1 8.6 35.2 36.3 89.9 97.6 87.4 61.9 , Chemicals and Pharmaceuticals 21.6 22.5 38.6 39.4 51.8 64.8 91.5 89.0 109.0 18.7 9.5 12.3 23.1 Plastics and Rubber Products 1.9 3.5 10.7 8.9 11.8 20.1 33.6 10.0 8.0 2.3 1.7 41.3 -6.0 Plastics 1.6 2.6 2.9 3.4 5.0 8.1 6.8 4.3 i Rubber Products 0.3 0.9 7.8 5.5 6.8 12.0 26.8 5.7 ,, . Nonmetallic Minerals 0.4 0.5 2.3 2.7 3.8 9.1 12.9 5.7 11.0 0.4 1.0 41.9 36.7 Of Which Glass 0.2 0.2 1.6 2.0 3.0 .4 9.6 3.2 Metal Products 9.3 11.9 38.2 46.1 53.2 134.4 177.8 61.2 100.0 9.0 11.1 5.0 21.6 Of Which Iron and Steel 9.3 11.9 38.2 39.6 44.9 124,2 161.2 48.9 - Machinery and Transport 16.0 22.0 66.2 82.4 117.5 252.8 368.9 396.5 445.0 16.2 39.7 32.9 46.4 Machinery 14.7 19.8 54.5 63.4 82.3 147.9 207.4 221.4 215.0 - - - Transport Equipment 1.3 2.2 11.7 19.0 35.2 104,9 161.5 175.1 230.0 Other Manufactured gxports 0.5 0.9 3.4 4.2 5.1 119 14 - 11.5 18.2 0.6 1.5 46.9 39.9 Total Manufactured Exports /a 96.6 138.8 336.9 366.2 487.6 889.9 1151.3 799.9 1093.5 100.0 100.0 28.3 27.5 International Price Index of Industrial Goods 87.9 89.9 100.0 106.2 115.4 136.8 167.6 189.3 192.2 Manufactured Exports in 1970 Prices 109.9 154.4 336.9 344.8 422.5 650.5 686.9 422.6 568.9 , 25.1 9.1 /a This manufactured exports follows ISIC classification in contrast to Table 3.2 which classified industrial exports according to SITC classification. Source: Central Bank of Argentina  ARCENTINA 1NI)USTRIAL CREIDIT PROJECT - BANCO NACIONIAL DE DESARROLLO Table 1-5: Exports from Argentina to LAFTA 1/ CuP..oItiu l ut KP0.t. C .4o.919n, oL EP.or