Statement by Jan Piercy at the Board meeting of May 15, 1997

CONFIDENTIAL International Bank for Reconstruction and Development International Development Association 87144 International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY EDS97-150 May 13,1997 Board Meeting of May 15, 1997 Statement by Jan Piercy ARGENTINA- Country Assistance Strategy 1. We are encouraged by recent developments in the Argentine economy. As the CAS notes, Argentina has clearly come out of recession. It is particularly noteworthy that economic growth is taking place in conditions of relative price stability and that the financial sector is stronger now than it was before the regional financial crisis of 1995. The process of privatization has been very successful and Argentina's climate for foreign investment is among the most favorable in Latin America. We agree with the CAS that economic restructuring should enable the Argentine economy to achieve growth of at least 5 percent annually over the next few years. 2. Nevertheless, as the CAS emphasizes, social performance has been disappointing. Social programs appear to have had minimal impact on the very poorest. The unemployment rate is high and increasing. And the quality of education and health services is below that of other countries with similar income levels. The need to improve the level and efficiency of expenditures in the social sectors, particularly by the provinces, was one of the highlights of the 1996 OED Country Assistance Review. There is clearly a pressing need for determined action to lay the foundation for sustained poverty reduction. 3. The current economic recovery provides Argentina with a good opportunity to solidify and deepen economic reforms and to address difficult but essential social development issues. We welcome the strong role the Bank envisions playing in supporting the reform process. The most likely lending scenario will place Argentina among the top recipients of IBRD financing. We believe the Bank's heavy emphasis on poverty alleviation/social development and provincial reform is appropriate. These twin objectives --social and provincial reform-- are very closely linked given the fact that provincial governments account for more than 80 percent of social expenditures. We also recognize that these inter-related objectives are easy to prescribe, but very difficult to implement. 4. While we agree that provincial reform, with improved fiscal performance as a particular priority, is key to Argentina's long-term economic stability and growth, we are concerned-- as the CAS also recognizes -- about the provinces' implementation ability. In addition, the commitment to reform among the provinces is mixed. The "weak borrower ownership and poor implementation capacity" which has plagued the Bank's provincial portfolio provides This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. It should not be distributed without the consent of the Executive Director concerned.  2 ample grounds for caution. The time required to build effective, long-standing working relationships with provincial officials and institutions, poses an additional challenge. 5. It is therefore very important to ensure that Bank's provincial strategy is highly · selective, and that the provinces' commitment and capacity to reform be monitored very closely, especially as local government officials change. We support the Bank intention to focus on the poorer, less developed provinces committed to reform and we agree fully with the CAS view that good performance on the Bank's existing portfolio should also be a condition for access to new loans. We would also encourage more direct involvement of community based NGOs in project preparation and implementation. And we urge the Bank to continue working closely with the IDB, which is also lending significant amounts to the provinces. 6. We would like to single out the special importance of the Bank's assistance strategy in the health sector. As the CAS points out, health profiles in the poorer provinces are substantially worse than in the rest of the country and warrant priority attention. 7. Two years after the fallout from the Mexican peso crisis jeopardized Argentina's financial sector, most Argentine banks seem to have recovered. Several state banks have been privatized, although there are still some notable exceptions such as the provincial bank of Buenos Aires and the two Cordoba provincial banks. We believe that the financial sector can be strengthened further and we welcome Bank plans to support financial markets by further reducing the role of the public sector in banking, sh·engthening bank regulation, and improving the access to credit by farmers and small businesses. 8. The CAS highlights the seriousness of Argentina's structural unemployment problem. This is a major destabilizing factor, both politically and economically. The poverty assessment for Argentina also establishes the high correlation between unemployment and the incidence of poverty. With the significant growth in the work force expected to continue, labor market reform assumes even more critical importance. We encourage the government to sustain the priority they have been giving to reducing the institutional rigidities that discourage labor force expansion and to promote needed labor market reforms in accordance with core labor standards. We agree that the labor market reforms discussed in the CAS are crucial. 9. While the proposed Employment Support Projects may be necessary to provide temporary employment for poor workers, we did wonder whether a stepped up program for educating and training un-employed workers would provide greater long-term benefits for poor workers. 10. While Argentina may not experience the acute environmental problems found in many developing counh·ies, the CAS acknowledges that it is still in the early stages of establishing appropriate environmental regulations and standards. We agree with the CAS that an improved regulatory framework and strengthened public sector oversight is needed to address emerging and potentially serious environment problems, and we support planned Bank lending to help reduce pollution and conserve natural resources. 11. In conclusion, we welcome the Bank's intention to work with the Government on a set of monitorable measures, including social sector indicators, relevant to graduation.