Transcript of meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, March 22, 1977 : Argentina - Fourth Highway Project

STRICTLY CONFIDENTIAL 1 PS/er INTERNATIONA;;L BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Washington, D. c. Tuesday, March 22, 1977 The meeting of the Executive Directors of the International Bank for Reconstruction and Development and the International Development Association was convened at 10:05 a.m., in the Board Room, 1818 H Street, N.W., Mr. Roberts. McNamara, President, presiding as chairman. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 2 C O N T E N T S Agenda Item HOOVER REPORTING co. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  9 STRICTLY CONFIDENTIAL We turn next then to agenda items 4 and 5, in one case -- Oh, I beg your pardon. The secretary reminds me that HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  10 STRICTLY CONFIDENTIAL we have a carryover item from our last meeting, the proposed loan to the Argentine. I will ask Mr. Segura to present this to us. It's a proposed loan in the amount of $105 millio equivalent for a highway project. Go right ahead, Mr. Segura. MR. SEGURA: Mr. Chairman, Members of the Board: The project presented for your consideration today is designed to assist the Argentine Government in upgrading the country's highway infrastructure necessary to ensure the smooth and rapid evacuation of expected increases in agricultural produc- tion for exports. The Government has taken broad measures to stimu'late increases in agricultural production and hence in agricultural exports in order both to strengthen the balance of payments and bolster Government revenues. Agricultural production has alreagy responded. Grai exports reached a record level of about 10 million tons in 1976, and are expected to continue to increase during the next decade. The road sections included in this project are located in regions which export, and are expected to continue to export, a significant portion of their production. Such roads are presently in poor condition mainly because they have been supporting an average daily traffic substantially h~avier than the traffic for which they were originally designed. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, O.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 11 Therefore, the project is needed to move the increasing volumes of agricultural goods from the areas of production to the ports. The proposed project would also support Government's efforts to prepare a national transport plan, which would lay the foundation for future planning and coordination in th sector. A complementary regional agricultural development study would assist in preparing programs in some areas of Northern Argentina which have considerable development potential, and where the lack of secondary and feeder roads is a major constraint for development. Similarly, a pavement overlay study would determine the optimal timing for renewal of road pavements and thus allowing rationalization of road maintenance and reduction of reconstruction costs. Finally, the proposed traffic safety program would greatly contribute to a reduction in the high accident rat es on Argentine roads, thereby yielding important economic and social benefits to road users. In view of these considerations, we believe that the proposed project warrants your support. Thank you. MR. McNAMARA: Thank you, sir. May I have your questions and comments? HOOVER REPORTING CO. INC. 320 Massachusetts A venue, N.E. W ashington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 12 Yes, Mr. Franco. MR. FRANCO: Thank you, Mr. Chairman. I just very briefly would like to support this project of Argentina. The loan I am sure will enable the a Government to push through a project which is/very important component of a package of measures designed to obtain not only the immediate rehabilitation of the economy, but also to enable it to expand agricultural production and exports, improve regional development, and create additional institutio s for better resource management, factors which are most import t if self-sustaining growth is to be achieved. I only have one general question, which relates to / the portion of the project relating to the regional agricul- tural development study. I wonder whether consideration has been given to expanding that component to make it a comprehen- sive lanGi- use and classification study and not just to concentrate on agriculture. The reason I say that is because I feel it could pinpoint the most suitable activitiesfor the different regions of the country -- agriculture, industries, tourism, and so for The comprehensive information that could be obtained in that fashion would, of course, be much more complete and usef_ul for the national transport plan which is also included in the HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  13 STRICTLY CONFIDENTIAL roject. MR. McNAMARA: Yes. Mr. Segura, would you respond, or, if you wish, call on one of your project associates? . MR. SEGURA: I will make some comments, and then I will. MR. McNAMARA: Yes. All right. MR. SEGURA: The regional agricultural development. _ study -- actually, one of the first things we have to do is to define the scope of this study and at that time we will consider the extent to which this study would concentrate on other areas than in agriculture per se. MR. McNAMARA: so that the possibility of a regional land use study is still open. MR. SEGURA: That's right. It is still open. MR. McNAMARA: Mr. Bilget. MR. BILGET: Thank you, Mr. Chairman. I support this project. Your report makes it quite ~ clear that the factors that led to sporadic Bank lending to this member country in the past has started to disappear at the resent time. The Government's recent performance on the 'nflationary front is nothing less than rema~kable. The recent alance of payments measure, on the other hand, is highly· onducive to promote a much-needed adjustment as well as to .~ fe t HOOVE RREPORTING CO~ INC. 320 Massachusetts Avenue, N.E. W ashington, D.C. 20002  14 STRICTLY CONFIDENTIAL / an improvement in the maturity structure of the Argentinian debt. The long-term growth and export prospects of the count are decidedly favorable. Therefore, it follows that the country is creditworthy for Bank lending. Turning to the project itself, it commands a rm~ respectable rate of return on its le4Jlt:1_ component where it- · v" was possible to calculate a rate of return. It was identified on the basis of a comprehensive review of the sector itself, which is a strong point for the project. There are no special risks involved. The quality of highway.engineering iuihnstruction in Argentina is reportedly v good. The Bank has considerable previous experience with the transportation sector in Argentina. And, finally, the principal objective of the project is closely connected to one of the Bank's principal lending objectives in Argentina, narne l , that it will facilitate the expected expansion of the agricultural export traffic. For these reasons I also am fully satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. Thank you, Mr. Chairman. MR. McNAMARA: Thank you, sir. Mr. Reynolds. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. W ashington, D.C. 20002 (2 02) 546-6666  STRICTLY CONFIDENTIAL 15 MR. REYNOLDS: Mr. Chairman, I support this proposal. My authorities have recently expressed concern on the matter of human rights in Argentina, and I wouldn't wish my support of the project to be interpreted as any lessening of that concern. But I do look upon the project as economically justified and supportive of general economic policies aimed at restoring stability and sound economic growth to the Argentina economy. It promises a high rate of economic return as well as significant benefits and higher incomes and improved employment to a large number of poor and isolated people. So for all of these reasons I support the project. As a general point, Mr. Chairman, applicable to the future and applicable generally to our operations here, I would state that I think the goals and purposes of the Bank properly encompass a broad range of human concerns, including freedom from physical and mental abuse as .w ell as freedom from economic privation and want. And in that respect, I would express the strong hope that other members of the Bank will be prepared to join with the United States in exploring and s e eki g ways of giving effect to that view. Thank you. MR. McNAMARA: "Thank you, Mr. Reynolds. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. W ashington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 16 Mr. El-Naggar. MR. EL-NAGGAR: Mr. Chairman, I would like to suppor this project. I think the transport sector in a country like Argentina is very important for the development of the country as a whole and for the strengthening of its export potential. I also would like to commend the staff for a well- /.tl,~~ prepared project and good agcornmedatiert:. However, I have a few observations. -rd The first relates to the ~ a a l agricultural development component of the project. I look at this componen of the project in a way different from the way Mr. Franco looks at it. I have no doubt at all that regional development study whether agricultural or no agriculture in Argentina is very important itself. My observation on this point is not questioning the importance of this particular appect, but the relevance of this component to the transport project. I think we should be 4 a little bit strict, Mr. Chairman, in our definition of-a11111\ Q..., '--' project. What is a~project. And here we have a transport project. Three components of it are all transport, but this particular component is agricultural development. I have read the material related to this component, and I find it all agricultural elements. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  17 STRICTLY CONFIDENTIAL It is true that the amount allocated for this study is only $700,000, which is a tiny fraction of a big project like that. But the method here is a matter of principle, and I think on a previous occasion I did mention that we should adopt a definition of project which does not allow the inclusio of foreign elements. As a matter of fact, this method may do injustice to the question of regional development in Argentina because being part of a project with the transport, we are bound to allocate a minimal sum to it, which is $700,000 although in itself it certainly would justify a much more allocation in a country like Argentina. I therefore would hope that at least in the future we should adopt a coherent strict definition of what is core progect and does not allow foreign elements into it. This is the first observation. My second observation, Mr. Chairman, relates .to our hope, to my hope, that in this particular project we shall avoid some of the problems which beset transport Bank operation in Argentina. As you may recall, Mr. Chairman, the record on the question of highways and transport is not very good, to put it quite mildly. Jt may be recorded that the first highway e.-- project was reduced in objective from $48 million to $30 millio because of problems affecting the project, that the railway HOOVER REPORTING CO, INC. 320 M assachusetts Avenue, N.E. Washington, O.C. 20002 (202) 546-6666  18 STRICTLY CONFIDENTIAL project was cancelled altogether, that the third highway project, which is still under implementation, ran into severe problems which delayed its completion. The problems connected which affected these previous projects were all probably related to the fact tha~ we did not allow enough to deal with an inflationary situation probab y. Also, because of labor shortage and because of the general difficulties which the country experienced during the period 1973-75. It is hoped that with the corrective measures adopted by the Government after March 1976, that these problems will be avoided. But this is a big project. As a matter of fact, the amount allocated to this project is only slightly less than the amount allocated to all highway projects of the Bank. Highway projects of the Bank with allocation of $124 million, and this allocation is $105 millio, so it is quite a big project, and I think it is legitimate to mention that we should be careful to avoid some of the problems which affected -the . previous projects in Argentina, all the more so since this projeqt is not just a single highway, but it is a large number of segments spread over a very wide area, and in that sense it may require much more attention than probably is given by what I read in this documentation. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 19 The third observation, Mr. Chairman, relates to the executing agency of this project. The executing agency is a-ldiJ .F.aliaa& which is suffering from overstaffing at the lower levels and from severe understaffing at the managerial .and high technical levels. It is also not quite as strong on its road maintenance capacity which has been seriously impaired during the period of 1973-75, as in the document. I would hope that these two aspects, since this will be the executing agency, will be well taken care of. These observations, Mr. Chairman, do not in any way · minimize my support for this important project. On the contrary, I would like this project to record success much more than the previous projects. MR. McNAMARA: Thank you, Mr. El-Naggar. I am going to ask Mr. Knapp in a moment to address the first point Mr. El-Naggar made, and then Mr. Wiese· to comment on past problems and future prospects of transport ~rejects q in the Argentine, and finally, Mr. Segura can comment on the executing agency. First, Mr. Knapp, will you address the basic point. ·1s this a distortion of the definition of a project to include in it the regional development study of agriculture? MR. KNAPP: I want to express strong agreement with HOOVER REPORTING co~ INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 20 Mr. El-Naggar's principle, but to say that in this case we think the proper application of the principle would justify this study. We have many occasions on which people propose to us to incorporate in a project things which are really not germane. They want to use the loan as a matter of administrative convenience, to use it as the vehicle for carrying out studies or even other subprojects in areas that are not germane to the central purpose of the project. And we do follow the policy that Mr. El-Naggar advocated. There are other ways of handling it. We can set up add~tional operations to take care of these nongermane subjects. But in this case, I would submit, Mr. El-Naggar, we feel there is a very close link, indeed, between the construction of these highways and the development of the agricultural potential of the Northern Argentine area. Indeed, some members of this Board and our distinguished Director-General for Evaluation has at times criticized the Bank for not incorporating - in transport projects some element s for assuring the development of the areas to be served. And in this particular case, there is really a very close link. The transport is a means to an end, and the end is to develop the agricultural potential of this region. So I think -- I certainly aqcept the princi~. I ~ HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  21 STRICTLY CONFIDENTIAL think in this case we have acted appropriately. MR. McNAMARA: Mr. Wiese, on the issue of past transport projects and the problems with them and the future prospects, would you respond? MR. WIESE: It is indeed true that we have had considerable problems with all of our transport projects in Argentina, but the~e problems have all been due to one particular reason, which derived from macro-economic policy. The problems we encountered were not of the kind where misjudgments were made about the physical quantities that would have to be moved in order to achieve a certain extension of the road network. They were not due to judgments in terms of the physical necessities of rehabilitation of railway lines. They were not even due to incompetence as far as the management of these institutions were concerned. They were due to the fact that contrary to early expectations, the various gov~rnments that were in power whenever the projects were executed were unable to extract a sufficient amount of public sector savings from the budget in order to finance a development program that they had embarked upon and therefor thare were very substantial deficits developing. And as these deficits developed in the public sector, the Government was unable to accomplish a number of things. It was first of all HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  22 STRICTLY CONFIDENTIAL looking for ways of reducing the deficit. It was unable for political reasons to raise additional resources or, for instance, in the case of the railway, to maintain the tariffs at levels which would have generated sufficient resources for the maintenance of the pace of the investment program. At the same time it didn't do anything on the revenue side. It was trying to deliberately slow down the physical execution, or it just simply didn't have the resource for maintaining it. At the same time often policies were Pursued which resulted in a very sharp decline in public sector salaries, which resulted in the mass emigration of upper stratum engineering talent from the highway and the railway administrations. Now, this Government has so far achieved impressive results in terms of going into the opposite direction which have inspired us with confidence that these problems will not repeat themselves. It inherited a public sector deficit of 15 per~ent of GDP. It .reduced it within about one year to about 8 percent of GDP, and it is targeting for this year a further reduction, not easy to achieve, of course, to about 3 percent. Now, another factor that I would like to venture was sort of tied in with the problems was our loans, of course, . HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  23 STRICTLY CONFIDENTIAL are made in dollars and they assumed the maintenance of a certain purchasing power relationship between the external and internal purchasing power of the foreign exchange funds which we provided. As the inflation progressed, often previous governments did not adjust the exchange rate. That meant that the dollars we disbursed in terms of local currency of course fell very short of what was needed or what they woul have been in real terms. Again, this Government has pursued a policy of frequent adjustments in the exchange rate. But I am the last not to concede that there is a possibility that our project particularly in the transport sector will be disturbed by these macro factors. Transport projects derive almost all of their resources usually from budget revenues, and if the budget management of the general budget runs into difficulties, then so will the project. Let me make a final point on what you said. You sai, well, of course, you hoped that we would provide more copious reserves than we did in the past. We always provide our contingency reserves, of course, in terms of foreign currency dollar equivalent. And the judgments we make about inflation are not related to the inflation within the country where the project is located, but are related to the world inflation HOOVER REPORTING CO. INC. 320 Massachusetts A venue, N.E. W ashington, D.C. 20002 (202) 546-6666  24 STRICTLY CONFIDENTIAL in general. Of course, this allocation is made on the assumption that they maintain a reasonable relationship by means of the exchange rate between the two currencies. MR. McNAMARA: Mr. Segura, would you comment on the executing agency? As Mr. El-Naggar pointed out the report itself states that it is overstaffed at low levels and under- staffed at high. How is it going to be capable of carrying out the project under those circumstances7 MR. SEGURA: In the last few years the National Highway Authority suffered from a lack of management at decision-making levels, and also a lack of funds to carry out maintenance operations. This~was in part because the previous government diverted funds that were supposed to be allocated for the National Highway Authority to the general budget. But the present Government has reversed this trend and has been successful in reinstating them. Thar~ are now capab~e staff at decision-making level and also it is now proyiding adequat.e funds for maintenance so that we ao.,riot believe that this is a problem· with the National Highway Authority as it is operating now. MR. McNAMARA: Thank you, sir. Mr. Islam. MR. ISLAM: Thank you, Mr. Chairman. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 25 The project has our support, and we very much welcome its principal objective to assist the expected expansion of the agricultural export traffic. I think that this linkage between a road project and the increased potential for agricultural exports is import t and gives added justification for further Bank involvement in · such projects. Regarding inclusion of the study on agricultural potential as a part of this project, I, like Mr. El-Naggar, initially must say I wa~/a little uneasy, - but · apart from the linkage -- as pointed out by Mr. Knapp and looking at the provision for this purpose, a mere $300,000, I thought that this was possibly the best and the quickest way to get the study completed and pave the way for initiating another project. So we welcome this approach, this pragmatic approach, and I wouldn't be so strict and so particular as Mr. E1-Naggar is in respect of a different component of the project so long as this expedites action and paves the way for the further development of the country. We always welcome a flexible approach on a regional project in this respect. I have one last comment to offer. That is on Annex IV on the supplementary data sheet. It appears that the project took about five years to prepare, and the HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. W ashington, D.C. 20002 (202) 546-6666  26 STRICTLY CONFIDENTIAL first Bank mission that considered the project was in 1971. It took about six years to bring the project to the Board. I think some sort of explanation possibly would be in order about inordinate delay in this respect. It is also not quite clear if there has been any Bank input in the preparation of _t!j_ . . / the project, and if so, whether this time gap.would not be V" further shortened or reduced. Thank you very much. MR. McNAMARA: Mr. Segura, would you comment on why the delay? MR. SEGURA: The project was delayed in 1974 because of a combination of macro-economic and project-related considerations. In the macro-economic a:ea, the fiscal/moneta foreign exchange policies that the Government was following at that time led us to believe that the country was being propelled to major macro-economic difficulties. And the events up to March 1976 demonstrated that our appreciation of the economic situation at that time was correct. At the project level, some of the projects supported by the Bank, like the highways and railways, were experiencing delays in execution and also the Government failed to satisfy some of the project conditions that were in our loan agreements. I mentioned before the VJ JI,Lo.J. Naci onal ,. the HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, O.C. 20002 (202) 546-6666  27 STRICTLY CONFIDENTIAL managing of this entity was weakened during thatperiod and we maintained a continuous battle with the Government during this period. We were not satisfied that the Government was going to be able to solve its problems. The Government was in fact not very responsible. Because of these factors, the project was kept in abeyance during all this time. MR. McNAMARA: Yes, Mr. Knapp. MR. KNAPP: I just want to say I think Mr. Islam's point is perfectly well taken. We are trying in this Annex IV to provide explanations when there has been this kind of a delay, and it was simply a mistake. We should have done it. MR. McNAMARA: I think we could have added this. Some Board members know we had a total hiatus in our lending operations in the Argentine for five years, the five years that intervened between 1971 and the present time. And that hiatus was a result of the factors that Mr. Segura has pointed out, principally unsatisfactory performance in the direction of the economy. Now, on the second point, Mr. Segura, did we contribu e to the formulation of the project? MR. SEGURA: Yes. We have been maintaining discussio s with the Government since that time, and we were with the HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 28 Government since July '76, the last appraisal mission, and we worked very closely with the National Highway Authority in preparing this project. So the Bank's input in the preparation and the formulation of this project was substantia. MR. McNAMARA: Thank you, sir. Mr. Pesqueira. MR. PESQUEIRA: Thank you, Mr. Chairman. I also support this project. I believe it is technically and economically feasible and its implementation will produce important be~efits, mainly to the agricultural sector and to the transport sector as well. I welcome also the fact that there are several projects in the Bank's pipeline which are trying to improve transport in Argentina's economy. As it is explained in the report, the Government has faced and is still facing economic problems, but I think that remarkable improvement has ·already been achieved during the last several months in industrializin the economy, and with the support of the International Moneta Fund have taken some economic measures to lay the basis for long-term economic growth. The future outlook is supported by some facts and achievements, some of which I would like to underline. Financial performance of the fiscal sector had been improved. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. W ashington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 29 Inflation has been considerably reduced. A sharp improvement in the balance of payments. Maintenance of the previous high level employment, and increased output in some sectors as the mining sector and an important recovery in growth of agricul- ture. The project will form part of the national transport plan. It has been agreed that no disbursement will be made for the project unless measures satisfactory to the Bank will have been taken to ensure the continuing participation of different concerned agencies to encourage the national transport plan. Argentina, Mr. Chairman, has been improving its organization by the preparation of this national transport plan with high level staff for the regional agriculture development, and as your report says, Argentina is one of the few countries in the world that still has abundant untilled lands available that could be brought into agriculture production if adequate transport and complementary investments are provided. Lacking of adequate incentives, the agricultural sector in Argentina has produced in the past few years below its potential, and we have noticed that this agriculture outpu has been .' improving . The project links now exports and outlets HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (2 02) 546-6666  STRICTLY CONFIDENTIAL 30 with regions which produce substantial agriculture surplus and storage of grains and improve the access to regions in which production has been constrained because of formerly poor transport infrastructure. That is why, Mr. Chairman, all these factors are taken into consideration, the country's creditworthiness. We may think that this is going to be a good Bank operation. Thank you very much. MR. McNAMARA: Thank you, sir. Mr. Magnussen. MR. MAGNUSSEN: Mr. Chairman, last time a project loan to Argentina was discussed by the Board, this chair questioned whether the situation in that country warranted resumption of World Bank lending. Although we are still left in some doubt on this Point, we will not oppose the present loan proposal. The strategy which this loan is supporting that an increased emphasis should be given to development of the agricultural sector seems a rational and sound one from a general economic viewpoint. However, we are not fully convinced that this project and the development policy that it is a part of benefits the poorer segments of the farm population to the extent that we HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  31 STRICTLY CONFIDENTIAL would have liked to see. I would appreciate to hear the staff's conunents on that aspect of the resumed lending program to Argentina. Regarding the question of human rights, nobody here Would doubt that the Nordic countries have sympathy and understanding for the views expressed by the U.S. Director. - But I also agree with him that this issue should not be stressed as an argwnent against the present loan proposal. Thank you, Mr. Chairman. MR. McNAMARA: Thank you, Mr. Magnussen. Mr. Segura, would you conunent on the extent to which this project will or will not benefit the poorer elements of the Argentine society, and also the degree to which future projects will address that problem. MR. SEGURA: In general as these road links are spread throughout the country, they are not concentrated in the principal cities which have a substantial portion of Argentina's wealthy population, we believe that since· the ? roads are located in different parts, it will help the rural population to a great extent. MR. McNAMARA: Mr. Wiese, would you conunent on that? MR. WIESE: The Argentinian stabiiization program has two very important characteristics which have really bee n HOOVER REPORTING co~ INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  32 STRICTLY CONFIDENTIAL imbedded in other stabilization programs, certainly the many that I have had an opportunity to closely observe. In the first place, the program of the Government tried to revert the problems of the economy without creating any significant untoward effect on the number of people gainfully employed., in other words, without creating unemployment. It did so essentially by holding nominal wages at a level somewhat lower than might have been the case in other stabilization programs but encouraging the private sector to maintain as many people on the payroll as possible despite theiainfwl adjustment process through which the economy was passing. At the same time it maintained a level of public ~ employment even though that level had been substantially increased during the preceding years and, so to speak, used the public payroll to avoid increasing the number of those deriving unemployment benefits. Now, within tjlis -framework, the Goverru:nent 'decided .,,,..... that i ~ would in its public sector investment program commence with projects which were considerably labor- intensive and it made an inventory of the opportunities available to it and it discovered that this highway program would lend itself exceedingly well to supporting this objectiVi •. HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  33 STRICTLY CONFIDENTIAL So this highway program will result in maintaining employment at previous fairly high levels in the construction sector, particularly in the subsector which deals with highway construction. Now, the second aspect that is very noteworthy of the Argentine stabilization program in comparison with others·, ., that it incorporates a very substantial shift in development priorities as compared with a number of its predecessor governments. It is a shift in giving emphasis to agricultura~ development and taking away or rever~ng the previous heavy ~ emphasis on developing industrial potential not so much for exports, but for import substitution. Over a long period of- years now,this long period = of years, as you know, the agricultural sector has been starved for resources at the expense of the development of e· a large industrial sector, substantial parts of which 'are not ... : able to be competitive on an international cost comparison basis. It so happens that this shift from the urban to the agriculture sector in priority represents a shift, the concentrating of development resources to that portion of the country where a very substantial number of the lower income strata of the population are concentrated. HOOVER REPORTING CO, INC. 320 M assachusetts Avenue, N.E. W ashington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 34 So from these two aspects, one, the maintenance of employment in the construction sector, which employs certainly many people in the lower strata of the society incomewise, and from the point of view of shifting resources into a construction program largely outside the big cities, the Government will make a contribution to its social objectives which it has proclaimed, but of course it has stated that it needs a recovery in the economy first, a reconstruction process to get things out of economic chaos before increasing emphasis can be given to the distributive aspects of its development objectives. MR. McNAMARA: Mr. Thahane. MR. THAHANE: Thank you very much, Mr. Chairman. I support the project, and I think it is a fairly good one. And it brings me to a point which unfortunately or fortunately on which I have to disagree with Mr. El-Naggar and that will be the substance of my comments. On the project itself, to start with, Mr. Chairman, •nd on the President's report, I found the President's report to be quite strong in giving the sort of macro side, especially with respect to balance of payments and the money side. But I didn't quite get a feel about the government's development priorities. I mean, it is fine to restore external HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. W ashington, D.C. 20002 (202) 546-6666  35 STRICTLY CONFIDENTIAL balance, but I think the Bank is concerned about the long-term development of the country and somewhere along the line perhaps a little bit of an indication in terms of the Government priorities. I have noted what Mr. Wiese has just said, which does fill up that gap. I hope in the future perhaps that balance could be struck. Perhaps this may be due to the fact that I did not have time to go back and read throu h the economic memoranda on Argentina of last September. Nevertheless, I think it would be helpful to always look for the balance to give us a bit of a feel about the developmental policies of the Government. Now, with mspect to the point about the definition of the project, I think here this chair has always taken a vie a that our concept of a project should be/comprehensive one taking into account that the ultimate objective of our efforts is to help the people in a given country. That being · the case, human activity cannot be split so neatly into just either transport or water or health or such particular thing. In fact, the concept of a project we have always sort of embraced or had in mind is one which takes us more into a region where you take the whole region and take all the activities within that region to ensure that there is a balanced development. So that while I agree in terms of HOOVER REPORTING CO~ INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  36 STRICTLY CONFIDENTIAL principle, we should be clear on what the definition of a Project is. But I would submit that we are more interested in a rather comprehensive concept relatively broad in scope. The limits that we would put on a given project would be determined by management efficiency. As long as the efficiency considerations in the management and execution of · the project are observed, we would certainly not object to inclusion of other elements which may not be called germane to say what we call a transport sector. In this context, I share Mr. Franco's views on the regional agricultural study. In fact, I would have preferred to see the terms of reference perhaps in some annex somewhere because I am more interested in a much broader survey. Howeve , that is a personal interest, and I wouldn't hold that to be a strong point. Thank you, Mr. Chairman. MR. McNAMARA: Thank you, Mr. Thahane. Mr. El-Naggar on this point. MR. EL-NAGGAR: It is just, Mr. Chairman, I want to make clear that my concern about the definition of the project is not a question of taking a narrow view of what the project is; it is a question of to what extent if we do not achieve a coherent concept of a project, to what extent HOOVER REPORTING CO~ INC. 320 M assachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 37 we will be doing justice to the elements which do not ~long to the project by their very nature. This particular point is a case in point, this question of regional agricultural development study. Mr. Franco rightly says .why limited to agricultural development? Why not widen it into regional land use in general? And he is definitely justified in thts. By having a small element like that included in a project which does not belong to it we may not allocate, we may not give it the importance that it deserves. In this particular case I happen to believe that the question of regional development in Argentina, agricultura and otherwise, is a very important element and could in itself constitute a separate important project. By having just this put, and putting it in a transport project, we are allocating only $700,000. 'l:his fails to do justice to an important problem like that. And if we adhered to a more coherent definition of a project, I would have the transport project judged as such, and then a regional development study project and judge it as such. But now this is something which is just a byproduct and we do not give it the importance that I think it deserves. This is the first one. The second point, Mr. Knapp says that in this HOOVER REPORTING CO~ INC. 320 Massachusetts Avenue, N.E. W ashington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 38 particular case while he agrees with the main principle, he says that in this particular case there is a relationship between regional development, agricultural regional development, and transport. This is true in a sense, but there is also a relation ship between transport and any other type of economic activity. And on that basis we can include any other element and say it is related to transport, because transport by its very nature is an infrastructure which affects a wide range of economic activities • So, I still believe, Mr. Chairman, that I think in the future we should face a position of coherent definition and strict definition of the project without prejudice to the but comprehensiveness of ·a project/as a p r ~ t in this sense and not by having elements which do not bed.ollg to it. MR. McNAMARA: Thank you, Mr. El-Naggar. Mr. Razafindrabe. MR. RAZAFINDRABE: . Thank you, Mr. Chairman. The conunents I would like to make have been made by my friend, Mr. Thahane, so I will be very brief, and also Mr. El-Naggar has given some clarification. So I would like only to give my support to the projects.· Thank you. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546,6666  39 STRICTLY CONFIDENTIAL MR. McNAMARA: Thank you very much. Are there others who wish to speak to this? Yes, Mr. Conesa. MR. CO~ESA: Mr. Chairman, first of all I wish to thank all my colleagues for the support given to this project. However, I feel forced to answer the reference made by my distinguished American colleague on human rights. My Argentinian authorities, Mr. Chairman, are second to none in the defense of human rights. Precisely the first goal of my authorities is to establish human rights in Argentina. In order to do that, we have to eliminate terroris both from the left and from the right. Terrorists are the violators of human rights in my country, not my Government. Misplacing the attack on the Argentine Government instead of on the terrorists is a tragic mistake. Mr. Chairman, the World Bank has gained over the years a tremendous prestige among developing countries. This prestige is based in the seriousness of the Bank econ.omic and technical analyses and the professional excellency of the Bank staff. In order to permit this high standard to be a realit, the Executive Directors have traditionally refrained from letting the discussion of the Board to go into the political HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 40 arena. This was then in strict observance of Article IV, Section 10 of the Articles of Agreement of the Bank which established. "The Bank and its officers shall not interfere in the political affairs of any member, nor shall be influenc d ( in their dec:sion by the political character of the member f'\ or members concerned. Only economic considerations shall be relevant to their decisions, and this consideration shall be weighed impartially in order to achieve the purpose stated in .Article I." This text deserves some comment, Mr. Chairman. The • Article says the Bank and its officers shall not interfere .. in the political affairs of a member. This refers obviously to the Executive Directors and Alternates as wel1 as the President of the Bank and the staff. This is precisely the meaning of the words the Bank and its officers. The Executiv Directors are not represented by the word . "officer" but are .. certainly part of the Bank. Therefore, the Executive Directors and Alternates shall not interfere in the political affairs of any member. This means that the Executive Directors cannot judge whether a given country respects human rights or is engaged in a flagrant denial of the right to life, liberty, or secur.ity . of the person. These are not legally competent to judge such HOOVE RREPORTING CO~ INC. 320 M assachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  41 STRICTLY CONFIDENTIAL matters, nor are they technically equipped to do so. Mr. Chairman, history tells us that all the preliminary legal work on the Articles of Agreement was done within the u.s. Goverrunent by U.S. lawyers. In recognition lit~ of this merit, Lord 'Peellf"s, who served as the chairman of the Special Commission on the World Bank at Breton Woods said in his opening remarks, and I quote: "I believe we have before us a proposal, the origin of which we owe primarily to the initiative and ability of the United States ? Treasury that is conceived on sound and free put lines." So the Articles of Agreement, and particularly Article IV, Section 10, was a U.S. proposal, and therefore we would expect that the United States again under a Democratic administration, as in 1944, will be now the strongest supporter of these Articles. Mr. Chairman, everybody knows that the United State was also the main force in drafting the united Nations Charter. Well, the second· Article, first section, of the UN Charter established clearly that the foundation of inter- national law is that nations are both equal and sovereign. This means that no country, no matter how powerful it may be, cannot direct itself as a judge or tribunal of internal political situations of . other countries. This attitude will HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 42 inunediately allow other countries to issue and publish reports on the human rights internal situation of the country that intends itself to be the judge. This will threaten international relations under the United Nations Charter that the United States so skilfully helped to draft. It is self-evident that legally and morally the duty of protecting human rights belong to each nation or to the United Nations in some extreme casesp but never to a foreign nation. It is also obvious that the World Bank who belongs to the UN family and has specific economic and financial duties is not the proper forum for analyzing human rights. It is clear that using the World Bank as a political whip for influencing the political organization of any particular member country constitutes a violation of the international law. In addition, Mr. Chairman, the Articles of Agreement establish that the decision of the Bank should not be influenced by the political ch~racter of the member or members concerned. This means that the developing countries could be republics or kingdoms, authoritarian regimes or democratic . regimes, capitalist kingdom or socialist republic. The variations and shades and combinations can be infinite. But whatever they are, they · are irrelevant of the World Bank's HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  43 STRICTLY CONFIDENTIAL Executive Directors so long as the country in question is a member of the Bank and respects the Articles of Agreement. Nobody questions, Mr. Chairman, the undisputable right of any Executive Director to vote for or against any given loan, but such a vote must be cast on economic grounQs, not on political grounds. Any order or instruction of any member country directing his own Executive Director to vote in the World Bank on political grounds is illegal and unconstitutional. In accordance with world-established principles of international law and international treaties, such as the Articles of Agreement of the World Bank accepted by law.in every member country takes precedence over internal orders of instruction contradicting the treaty. And what is more important, the Executive Board of the World Bank is empowered to declare null and void any vote cast on political grounds. Of course, in this case I will not ask that the vote of my distinguisheq American colleague, Mr. Reynolds, · be declared null and void. On the contrary, I thank him for his support. In addition to a legal question, there are economic and practical grounds to keep the political neutrality of the Bank. As an illustration, it is convenient to quote Mr. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  44 STRICTLY CONFIDENTIAL secretary of Health, Education, and Welfare, former u.s. Ambassador to the United Na t· . ions, and now Senator representing the State of New York in the U.S. Senate. Senator Moynihan published an important article on page 27, section C of the New York Times of January 4, 1977. In this article he reports that the Freedom· . House survey found that there are only 41 free nations in the - world, out of which two are in South America, two in Africa, and two in Asia. Thus, the implication of Senator Moynihan's article is that only six countries would deserve the World Bank loans, and, of course, the world Bank with 4900 employees 'I ~would not have reason to exist if it can only lend to six I .countries • It must be understood that the more pressing the · Western style, however ~ it may be sometimes doesn't V work well in developing countries. Mr. Chairman, let me be clear. We are the strongest ·supporters of democracy,. and the first goal, as I said in the beginning of my Government is to restore democracy in Argentina. Moreover, Mr. Chairman, I wonder if developed countri s will accept to put money and give their guarantee to World Bank operations in order ·to let their money and guarantee be HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  45 STRICTLY CONFIDENTIAL used by some other developed country for internal political purpose. It is self-evident that the future role of the Bank in international economy will be destroyed if we do not remain politically neutral. I also wonder how Wall Street and the capital markets of the world would rate World Bank bonds if we abandoned economic performance criteria to approve loans and change it by human rights performance criteria. My own feeling is that the interest rate that the World Bank would have to pay will go up and sooner or later a call on the capital will have to be paid in in order to make up for the losses of the human rights policy. ? Developing countries would prefer unilateral conunercial loans that do not imply humiliation, and the only alternative left would be then to apply Article VI, :: Section eB that calls for permanent suspension of Bank ' operations. Mr. Chairman, we, ·the developing countries, are poor countries, but equal, sovereign, and proud. It is very hard for developing countries to accept the humiliation of a political examination by a developed member country in order to be entitled to receive or not loans from this institution. This is in contradiction with the spirit of cooperation and HOOVER REPORTING co~ INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  46 STRICTLY CONFIDENTIAL peace of Breton Woods under which this institution was Created at the proposal of the United States, and I repeat, under a oemocratic administration. Finally, Mr. Chairman, I would like to make a questio to my distinguished American colle~gue. Why is the u.s. po licy with regard to human rights different in the World Bank from that of the IMF? Is it because developed countries are lso borrowers of the IMF? Thank you, Mr. Chairman. MR. McNAMARA: Thank you, Mr. Conesa. We will proceed w~th the Argentine loan and move agenda items No. 4 and 5. HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666