Transcript of meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, May 9, 1978 : Argentina - Agricultural Credit Project

SM:lmv STRICTLY CONFIDENTIAL INTER.NATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Washington, D.C. Tuesday, May 9, 1978 A meeting of the Executive Directors of the International Bank for Reconstruction and Development and the International Development Association was convened at 10;01 o'clock, a.m. in the Board Room, 1818 H Street, N.W., Mr. Roberts. McNamara, President, presiding as Chairman. STRICTLY CONFIDENTIAL 2 C O N T E N T S -------~ page 4. Proposed Loan - Argentina (Agricultural Credit Project} 41  41 STRICTLY CONFIDENTIAL MR, McNAMARA.; Are there other comments or questions with res~ect to this? If not, we will move to the next item which is a proposed loan to Argentina in the amount of $60 million equivalent for an agricultural credit project. I will ask Mr~ von Loehneysen to present this to us. M~~ VON LOEHNEY~EN; Thank you, Mr. Chairman. Mr, Chairman, members of the Board:  42 STRICTLY CONFIDENTIAL The Argentine Government has made impressive prog- ress in stabilizing the economy. Facing economic and fin- ancial chaos of unprecedented magnitude, it succeeded in reac- tivating the economy and rebuilding foreign reserves. Unemployment has been kept at an impressively low level and the rate of deflation has accelerated greatly, albeit less than had been hoped. The government is now addressing its attention increasingly to the implementation of longer term strategies. The agricultural sector is playing a critical role in its efforts to improve the efficiency of the country's economy and to open up the economy to outside competition. Aware that a strong foreign exchange position is a precondition to this objective, the government has adopted a comprehensive package of tax credits, marketing and tariff policies which a~gurs well for dynamic performance of the sector. Particu- larly notewort17is elimination of the differential exchange rates and substantial reduction of export taxes on agricultura products, the almost complete removal of domestic price controls and public monopolies on trade of agricultural pro- ducts, and introduction of a land tax intended to increase land use intensity. ~rgentina's agricultural resource base is comparable STRICTLY CONFIDENTIAL 43 to only a few countries in the world. Abundance of fertile land in relation to the size of the population has favored the development of relatively large market-oriented farms, and widespread rural poverty and land pressure, common problems of most developing countries are virtually nonexistent in Argentina. Agriculture is organized on a truly commercial basis and labor productivity is nearly as high as in the rest of the economy. The income differential between agriculture and the other sectors of the economy is, as a consequence, small and the income distribution in rural areas closely resembles the one of urban areas. Indeed, Argentina's income distribu- tion profile as measured by the GNP coefficient resembles the countries of Southern Europe more closely than it does the rest of Latin America. The government's agricultural policy is now geared predominantly to increasing output for the domestic and export markets. The prospects for rapid agricultural growth are favorable. As a result of past policies, bias against agriculture and in favor of the short-term interests of urban consumers!' output per hectare is still low compared to standards in the United States and Canada. Large areas in som of Argentina's most fertile regions are used only as natural  ,, I l 44 STRICTLY CONFIDENTIAL pastures for extensive grazing but could be used for intensive I cropping! Large areas in the north of the country, although i suitable for cropping and livestock production, are not cultivated at all. However, crop cultivation and livestock production are far less intensive than potentially possible. Little of the available modern research has been adopted in current production technology. With the reversal of policies that has taken place, Argentina is well placed to exploit its natural resource · advantages to a greater degree than hitherto. The project we are presenting to you today will ease the present scarcity of long-term credit for agricultural production and help finance structural reforms to increase productivity. The soundness and importance of the project is evidenced by its high economic and financial rates of return. Additionally the project would have important benefit which we have not quantified. The project would serve as an example to demonstrate to the Argentine farmers at large the profitability of more intensive production methods apply- ing modern technology and at the same time strengthen the role of provincial banks as suppliers of agricultural credits for extended operations in the future. We also believe that the project, because of its STRICTLY CONFIDENTIAL 45 demonstration effects, would enable Argentina eventually to I play a more important role as a low-priced supplier for food- importing developing countries. Thank you, Mr, Chairman. MR, McNAMARA; Thank you, sir. Mr, Cassou. t MR! CASSOU: Mr. Chairman, ;('his project has many interesting aspects tt especially since it is designed to ' - ~ increase exports of agriculture projects, and therefore to improve the balance of payments situation of this country. However, we wonder whether a policy essentially based on agricultural credit is sufficient to achieve the results mentioned in this report. We observe that the previous livestock development project hasn't been a success, especially because of a lack of I I consistent price policy, so we would like to know whether there is a commitment of the Argentine Government to implement an ade~uate price policy in the next years in order to achieve the various objectives of this project. Thank you, Mr. Chairman. MR. McNAMARA; Thank you. That is a very good ques- tion, Mr. von Loehneysen. In view of Argentina's past experience on macroeconomic policy and the effect it has had STRICTLY CONFIDENTIAL 46 on our projects, why do you think this will succeed? I I MR. VON LOEHNEYSEN: Well, I would like to refer thi~ l ·1 1 question to Mr. Scherer, please. ii MR,. McNAMARA: Mr. Scherer. I MR. SCHERER; As is evident from the description in the President's Report, the policies in agriculture in the past have been swung very heavily in favor, but most of the time against agriculture, and the te~ms of trade as a conse- quence have deteriorated. Now this government has established clearly the agricultural sector as a priority sector for its policy, based on the understanding that this is the sector it depends on to generate foreign exchange and the mode of its economic recovery. At a given point in time the World Bank can only--the World Bank deals with and on the basis of the declared policy of the government, and we are very confident that this government as pronounced--that this policy as pronounced by the present government will be continued in the future, MR. McNAMARA: Thank you, sir. Mr. Magnussen. MR, MAGNUSSEN: Mr. Chairman, I would like to a:>mment on the Bank's priorities in its lending program to Argentina. STRICTLY CONFIDENTIAL 47 I have read the papers and I mow the macroeconomic strategy of the Argentine Government. If you abstract the social implications of it, it seems basically rational. But my question is whether it is satisfactory for the Bank to limit itself to support this strategy in view of the Bank's commitment to social justice, equality of income, and concen- trating on improving the lot of the poor. I am aware also that the income distribution in Argentina, according to the last figures available, is not skewed to the same extent as we find it usually in Latin America, but according to information that I have seen--I may be incorrect on that of course~-there has been in the last couple years a reduction in wage earners' real income of more than 50 percent, so they cut down to less than 50 percent, but even if that is not the easer if it hasn't happened that we have had such a cut in real income, still I would have liked and I expected to see more of a social aspect in the role of Bank projects in Argentina. In the previous project we had on Argentina, not the previous one but the highway project; where we had it sometime ago, it said the shift from the urban to the agricultural sector means concentration of development resource to that portion of the country where a very substantial number  48 STRICTLY CONFIDENTIAL of low-income strata of the population are concentrated. I asked one question on that project at that time, and it was then explained to me that that project and future projects would help the strata of the population that were poor. We later on had a project on grain storage where the Canadian Executive Director asked questions on how this would benefit those groups that we would like to see benefited. We then have the answer that we had to now limit ourselves to the macroeconomic strategy of the country. In paragraph 27, when I read this I am a little puzzled, based on what I just said about turning to low- income strata, when one comes to the agricultural sector. It says, ''Moreover, average productivity in agriculture is virtually at the same level as in the rest of the economy; with 15 percent of the labor force, agriculture contributes 14 percent to GDP." On the average then it should be about I equal. Then one should expect that if we get into the agricultural field, then we should direct ourselves to the low-income strata. The present project seems to me not at all to direct itself to the lower income strata. There are a lot of figures, and I appreciate that in the appraisal report as well as the  ii I• Ii 49 STRICTLY I\CONFIDENTIAL I President's report, so it is possible to evaluate the project, what the effect is on various income strata~ For example, if you take the percentage of owners according to the size of the farms, you find that 19 percent of the owners with the largest farms, they will get 77 percent of the investment, total investment, while the 78 percent, with lower income, will get 23 percent only. If you take the richest farmers, which will receive close to 30 percent of the total investment, their average income at the time when the project is completed, will be about $130,000 per head, up from, if there had been no project at the same time, around $50,000 per head. When returning to paragraph 27, and it has also said in the statement here that Argentina's agriculture is org~n- ized on purely commercial basis, and thus is quite different I from most of the other developing countries, I accept that but still you have large groups of poor farmers also in Argentina. ~he social data are, as quite often, much older than the economic data, so you don't have such up-to-date figures ithere. But in the Corrientes Province where a lot of this activity is concentrated1 these investments are concentrated, we find as late as 1968 there was an illiteracy rate in that area of more than 20 percent. Housing figures are very old;  I, 11 50 STRICTLY CONFIDENTIAL I am sorry to say they are back to 1960. But still almost 60 percent of the farmers in that area have mud floors in their houses. I don't think that $50,000 to $100,000 group has mud floors. I can see that there is a need for concentrating~- for the Argentine Government to concentrate a lot of its activity on restructuring the economy, and promoting exports, getting their own economy competitive again. But I would thin that in a country like Argentina, where per capita income is about the same level as in a country like Spain, to the extent that the Bank should take part in the activity of such a country, then we should much more than has been the case so far in Argentina, concentrate our activity to help the poorer segments of that country and not to the extent as here disregards that as I see it. I regret we really don't have the opportunity, I would say realistic opportunity to discuss this strategy of the Bank before the projects are presented to us completely wrapped up, because this puts us in an unnecessary, I think, adversary position to staff and management because we have to criticize something that already has been done, rather 1 than being able to contribute to the strategy for something th t we are going to do.  51 STRICTLY CONFIDENTIAL But I would now appreciate hearing the explanations for not giving any or I would say extremely little emphasis on social aspects of development of Argentina, and I am in no need of hearing explained why we support the macro- economic strategy; I know that, and I am aware of that. i And I am also aware that the next couple of projects coming up, as far as I can judge, are not better in this respect. Thank you, Mr. Chairman. MR~ McNAMARA; Thank you, Mr. Magnussen. Mr. Scherer, what is the explanation as to why this project or for that matter, the Bank's program in the Argen- tine has not had the same sharp focus on rural development, addressing the problems of low productivity elements of societ as, let's say, our program in Nigeria or Mexico or other programs we've had. MR, SCHERER; As was mentioned directly, while there are some areas, as in any country, with low productivity, with differing productivity and living standards, these pockets in Argentina by no way have th'fi? size and magnitude of a country, for example, like Nigeria. So they are compara- tively small in the Corrientes Province, and while the per capita income in this province, to take up on this specific example, is not as high as in the ?ampa, and the housing standards are M>t as high as in the Pampa, this is clearly  I STRICTLY CONFIDENTIAL 52 i ;I II related to the economic base of this province, and it would I not be an economic proposition for the government to bring 11 d / I the standar 1 up to those of the Pampa. Now why has the World Bank not focused as sharply on poverty oriented programs as it has in other countries? The economic and financial situation, when the government came to power, was very desperate as we have mentioned before, and in close cooperation with the World Bank the government decided that the impact we could have on economic stabiliza- tion and recovery program is highest in those projects which we have financed. The government at the same time has not reduced its budget allocations for the social sector. In fact after taking office the government has slightly increased its contribution to the social sector, but it thought that it could do this without the assistance of the World Bank. I The assistance of the World Bank wa~t as critical in these~ sectors as it was in fact in the directly productive sector, the economy had to be growing again, and in sectors of productive support where a clear erosion of institutional and technical capacity had prevented these institutions from making the contribution to economic growth. Now as the situation is being stabilized and the government makes progress, it has contacted the World Bank STRICTLY CONFIDENTIAL 53 to inquire whether we would be willing am capable of ass.iS::- ing in sectors which it now wants to focus on. This is primarily housing and water supply and sewerage, and so we had some discussions and I think in due time according to the priorities the government has and our assessment of the situation, there is a possibility that the Bank shifts slowly its focus according to the changing situation in Argen- tina. MR. McNAMARA; We might have been wrong in our judg- ment, Mr. Magnussen, but that is the basis for it. You yourself pointed to really the uniqueness of the Argentine situation, and it is shown in the annex I think here in terms of income distribution. I am always skeptical of these income distribution figures; we all know how subject to error they are, but Argentina, if you look at the top 20 percent versus the bottom 20 percent, it has one of the most favor- able averages of any developing ~untry, which doesn't mean they haven't the problems that you pointed to, and it does not mean that we should overlook those. But as Mr. Scherer said/ the government's first piriority and we thought it was a reasonable one, was to address these macroeconomic matters, and we have been doing so. Now we are beginning to shift to look at some of the social problems.  54 STRICTLY CONFIDENTIAL Mr. Thahane. MR. THAHANE; Mr. Chairman, I support the project bu I would like to have a little bit of information on the prospects for the beef exports, I think that in the report we have a general projection of 6 percent in the world growth, but how much of Argentina's -- how much is likely to be ArgentinA's share, given the rather difficult international market relating to the exports of agricultural commodities and livestock products? Even on the grain side, I notice Argentina does depend very heavily on export of grain as well, and even there there is just a 7 percent projection. That is my concern with respect to this. MR. McNAMARA: Mr. Scherer, the project is quite optimistic about the expansion of world beef consumption. What basis do we have for believing that the Argentine exports will expand at anything like that rate? Would you or one of your associates comment on that. Yes, Mr. Bazo. MR, BAZO; Originally Argentina had been exporting ~bout 20 percent of its total production; about 80 percent ~s consumed in the country. Now what we are basing projections f the Commodity Department of the Bank on is the consumption  55 STRICTLY CONFIDENTIAL of food in developing countries will be increasing l think at a rate of around 6 percent a year, if I'm not wrong, and countries like Argentina and Uruguay have been very actively seeking markets where now consumption is higher, like some of the other countries such as Spain, Brazil, so on this basis we have figured out there will be room for production of Argentina, if I got your question clearly. MR~ McNAMARA: Mr. Thahane. MR~ THAHANE: I notice, Mr. Chairman, given the difficulties of exporting to the EEC market and some other countries, even in Africa, which are expanding their livestock projects, they are also exploiting more or less the same markets, I just wondered, more an assessment of this success, rather than the global side. MR, M~NAMARA: Yes, exactly. Mr. Bazo or Mr. Scherer, the fact is that the World Bank is financing projects in Africa to expand livestock production. Others are expanding liv - stock production in Africa. Can Argentina penetrate that marke in the future? What reason do we rave to think that it can-- that is really Mr. Thahane's question. Mr. Scherer. MR~ SCHEREl:It is basically a cost comparison. Cattl ./" production in Argentina is done on a low-cost basis, and  56 STRICTLY CONFIDENTIAL Argentina probably more than any other major cattle producer in the world can produce at low cost, so it is competitive advantage as against other countries which is very strong, MR~ McNAMARA: Plus the fact I think, and correct me if you think I a~ wrong, Mr. Scherer, but I think as of today the other countries are not expanding their domestic production as rapidly as we estimate that their domestic demand will expand, but this is something, Mr. Thahane, that I think we have to watch very carefully. There are many ~ countries, particularly in 1,/rica, where livestock production is a great potential importance, and we are stimulating them to expand their production and we must be sure that their costs will be in line and that their markets will be avail- able and not penetrated by some other producer. At the moment we believe that our financing of live- stock is well justified. As a matter of fact, I think the probabilities are that real prices, livestock prices in real terms will increase, which is simply an indication of supply expanding less rapidly than demand. Mr.Janssen. MR. JA't{SSEN: I would like to follow in a very gen- eral way, Mr. Cahirman, on the question raised by Mr. Magnusse . The first one is, are there social problems in Argentina; and if so, what are their nature? And how can they be overcome if STRICTLY CONFIDENTIAL 57 they exist? Reading the report I was under the impression that apart from a high inflation rate and perhaps reduction in real wages to which Mr. Magnussen has already referred, the overall performance seems to be really outstanding, so I was just wondering what has caused all the unrest particularly in the urban areas. Where do the urban poor come from? Evidently not from all areas. Perhaps a little more explana- tion could be given to the three specific questions. Thank you. MR. McNAMARA: Yes, surely. Mr. Scherer, would you comment on it, To use Mr. Janssen's terms, are there social problems in the Argentine and if so, what are their nature, how can they be overcome. If your answer is no, there aren't social problems, at least not in the same type as we see in so many other developing countries, what has caused all the political disorder and unrest? Yes, Mr, Lerdau? MR. LERDAU; There are social problems in Argentina, Mr. Chairman, as well as in all of our other countries, but they are very special in Argentina certainly, derived in part precisely from the rather urban nature of the society, and from its history, but at present the most acute problems are  11 58 CONFIDENTIAL STRICTLY I. ,J ,, I certainly those derived from the economic situation, from the efforts of the government to bring economy back into some sort of equilibrium which has involved a series of measures which have hit all classes of society, but which includes also the reduction in real wages which Mr. Magnussen alluded to, although as far as our best estimates are concerned, it is not as high as 50 percent. It is very difficult to get very precise data on that. It seems to be the situation in the case that wages at present are of the order of 80 percent of what they were on an average during 1970-72 0 If one takes a different base, naturally one comes to a different comparison. But one of the results of the decline, or one of the con- comitants of the decline in real wages has been the stabiliza- , tion program has caused far less unemployment than has happene in other countries which have gone through a similar situation. At present there is a quite serious recession in the industrial sector in Argentina. Nevertheless, all indications are that the unemployment rate has not risen sig- nificantly. In fact in some areas, particularly in the construction industry, there is a distinct labor shortage. I believe the other part of the question was what can be done to overcome--  59 STRICTLY CONFIDENTIAL MR. McNAMARA: Yes. iJ MR. LER.DAU; Well, our view is that in the main, I\ support has to be given to the government to succeed with !' its stabilization program at present. In the general areas of traditional social expenditures, social programs, social activities the problem of Argentina is not neglect; it is if anything traditionally very well attended. The govern- ment's expenditure in social sectors, including health, education, and what is referred to as social welfare have been traditionally, all through the seventies, been on the order of 30 percent of the total budgetf which is high by comparative standards. And this has not declined, the share is still 30 percent of the budget~ The main thrust of policy now has to be to bring investment up, back up in the productive sectors where it has gone down rather disastrously in recent years, and to strengthen the balance of payments to such an extent that the restrictive measures on demand are no longer so pressing, no longer so necessary. This the government is achieving. The wage scale in national income in Argentina as far as we know--well, we don't have the more recent data-- but again in the seventies it has fluctuated and is around 50 percent of the national income, which is fairly high for Latin American standards.  60 STRICTLY CONFIDENTIAL MR. McNAMARA~ Thank you, sir. I Mr. Magnussen. :I i MR! MAGNUSSEN: Mr. Chairman, I am not going to enter I into Ji discussion about how much the real wages have been decreased, but of course we come to different conclusions when one compares with 1976 and other one compares with 1970-72. I don't think there is any conclusive evidence in that. But I would go to one very important aspect here of the presentation to the Board in such an economic report. That is the same thing Mr. Janssen takes up and makes him ask the question are there any social problems in Argentina? Okay, we have followed the strategy of supporting the macro- economic strategy of the Argentine Government at present, and 1, you, Mr. Chairman, say that might have been wrong and we will 1 now slowly shift, make a shift. But should we wait to hear 11 about the social problems in the country until that shift hasJ/ been made or should it be mentioned here? I think that althou h we are pursuing this strategy, I still think that we should hear that there are social problems, and that we should not be given the impression that they are of very little importanc because that is the impression you get when you read this report. I think that is wrong.  61 STRICTLY CONFIDENTIAL Okay, we make a clear choice that at present we aren t II I doing very much in that field, but we should then accept that I the problems are there, because although I accept the social 11 problems in Argentina, they are nothing like they are in Bangladesh or some other countries, but they're still there. But when you look at those various groups that will benefit from this project, why the discrepancies in income between is placed those groups? It is quite clear that emphasis/on those that have the higher income. MR. McNAMARA: Yes, I think, Mr. Magnussen, when Isa we may have made an error in our judgment, I don't believe we have, but if the Board thinks we have, we are prepared to shift for the future. What we have tried to say in the President's Report, and I accept your point that we in the process of saying that may not have presented you with suffici nt information on the social development, but what we tried to say is that this country has suffered a very severe loss of real income, and has faced near bankruptcy, and the govern- ment believed it needed to address those macroeconomic ~roble~s first, We agreed with that, and we have been doing so. We think it was the right judgment! It might have been the wrong judgment; I don't believe so. Now in the process of saying that, and therefore  q 62 STRICTLY\\ CONFIDENTIAL II ll giving the background for this particular project, I think we did skip over a discussion of the social problems that exist. I think that is a perfectly reasonable comment. We should address it in the future. Mr. El-Naggar. MR, EL-NAGGAR: Mr. Chairman, I agree completely with the position of the Bank on this question and with the view that you have just expressed now. I have great respect fo the concern of Mr, Magnussen and Mr, Janssen with the social problems, with income distribution, and with poverty. But I think we have still to maintain a sense of proportion also. I am one of those also who supports strongly the position taken by the Bank on many occasions to try to improve, to increase the productivity of the lower income strata of the population, for all projects of rural development, on population, on nutrition. I have taken the stand always tha this is a very good development on the part of the Bank. 1Rowever, we have to be a little bit clear about this,because we can very much end, instead of serving the cause of income distribution an~overty, we can end by ~;t;{jg the cause of development without serving the cause of income distribution 1 and that is what worries me. I \ I think, Mr, Chairman, the social dimension and concern with poverty is of course important, but only important  63 STRICTLY CONFIDENTIAL in certain projects. There are certain projects which have different criteria and should be judged on different grounds. There are projects which will address themselves to the ques- tion of increasing the comparative advantage of the country and removing the strain on the foreign exchange shortage in a country~ There are criteria where the question of increas- ing productivity in general would be very important, reducing dependence as we just have done now on the question of the petrochemical industry in Brazil. What has this to do with poverty? I would be sur- prised on the question of pet~ochemicals, what is the question of poverty and social implications? It is for these reasons, Mr. Chairman, that we have to maintain a sense of proportion, raise the question of income distribution, social implications, on the occasion of those projects which have as an explicit dimension the question of economic distribution and poverty. For other projects which have as explicit purpose increasing the foreign exchange earnings of a country, this should be the criteria by which we should judge, unless such projects have the consequence of making worse a certain rattern of income distribution. I think this is very important, Mr. Chairman, becaus  64 t CONFIDENTIAL STRICTLY \1 l 11 our concern should be with economic development and with pover y \· \ and economic distribution where that is proper, but if we 11 are indiscriminately to raise the question of poverty, social implications, and all that, on the occasion of every project, I am afraid this may influence our outlook, may influence the criteria by which projects are chosen, and in so doing, we may not serve the cause of development, and in that case we may also not serve the cause of income dis- tribution and poverty with which my friend Mr. Magnussen is so concerned, In this particular case, in this particular project obviously the basic criteria here is that Argentina has a very strong comparative advantage in the agriculture sector, and the Bank is trying to develop and increase productivity in this very important sector for Argentina. Generally speaking it has been mentioned in the report, and in the course of this iscussion that Argentina, on the criteria of income distribu- ion, has one of the best patterns in Latin America. On the question of social serv res, Argentina also as a very good record indeed. On their economic performance criteria, I think verybody around this table will agree that the present govern- .ent in Argentina has done a remarkable job in getting the STRICTLY CONFIDENTIAL 65 country out of a very difficult situation. For that reason l think I would give my full support to the project and I hope that we raise questions of poverty and income distribution when that is justified by the nature of the project. Thank you. MR, McNAMARA: Mr. Magnussen, on this point. MR, MAGNUSSEN: Mr'. Chairman, I have very little \' disagreement with what Mr, El-Naggar said when he talked in general terms about that we should take the whole approach into account to discuss the problem of income distribution and social justice; that we shouldn't approach it by individual projects, because we can't expect that to be taken into account in every project. That is why I am in favor that we should discuss more on that basis the whole approach to a country, and not to individual projects. I hope I will get his support on that. And also in this particular project, or this particu- ar program for Argentina, I said that I find the strategy here basically rational, the macroeconomic strategy. What I ound was that in the whole strategy I find a total absence · f any consideration for the poor, and if you go back to the iscussion we have had and the papers we have read so many times  \\ 66 STRICTLY CONFIDENTIAL \\ i '1 here, we see that in the papers we find that increasing the productivity of the poor gets very high benefits. That is what I have seen in paper after paper~ Then I would ask the question why doesn't that work in Argentina? MR. McNAMARA: On this point, Mr. Thahane. MR.. THAJIANE ; Mr , Chairman, I don't know whether I should answer Mr. Magnussen's last question, why doesn't it work in Argentina, but there are some elements in Mr. Magnussen's presentation and Mr. '1-Naggar's presentation whic I share, but I would like to approach it differently. I think the problem that we face is not one where the Bank's resources are the only resources in a country. I think it is important to appreciate that the country does have a certain allocation of investments by sectors--social, otherwise, and so on. And what I thought Mr. Magnussen's I point was, is that in the economic presentation or even in the annex, in the statistics we do not have a total picture of what the investment allocation perhaps by sectors, if one can use the word, is in Argentina; to what extent are the questions of, to use his words, social justice addressed, because a county bay be addressing those, using its own resources. The question is, if the country is already investing enough resources and  llI i CONFIDENTIAL STRICTLY 67 1\1 it has reached the limit of its absorptive capacity in a given sector, the question then arises/ how should the Bank's assistance in such a country be given? I think we would find the situation changing country by country. We may come to cases like Brazil where we have to support petrochemicals, because in that country perhaps the attention to the poor has been sufficient-~sufficient attention has been paid to the poor. So I would think a little improvement in the presen- tation of the President's Report·could help to avoid some it supports impressions that when the Bank report says/stabilization progra or reconstruction program at a given time, that it is at the expense of those programs that are directed to increasing the productivity of the poor. I think somehow you might wish t 1 look into what could be a more satisfactory presentation of the total picture, in order to avoid giving an impression that there is a deviation between the Bank's objective at a given point in time in a country. MR~ McNAMAR.A: Yes, I think in this case we could have been more expressive than we wer~ of the government's priorities on social objectives, and the action they were taking to meet it~ of the kind both Mr. Lerdau and Mr. Scherer have pointed to already, and we will try to do that in the futu e.  68 STRICTLY CONFIDENTIAL On the same point, Mr. Narasimham. MR~ NARASIMHAM: Thank you, Mr~ Chairman. I only I wanted to intervene very briefly to say I fully endorse the points made by Mr. El-Naggar on this. I think we all around this table are deeply concerned with the need for the Bank as it is now doing, happily to involve itself much more in amelioration of the social economic conditions of the poorer sections of the population in most of the developing countries. I think on that there could be no dispute. At the same time I think the phrase he used was we should keep a sense of proportion, and I would humbly suggest that we always ought to do that, because we see that there are many problems that come up before the Board which may not directly im~inge on social economics, for instance transport projects. Not all of them are urban transport projects like the one we discussed today, but a railway project, for instance, or power project or even port development, which may not directly have any bearing on the socioeconomic development, in the larger context cannot but improve conditions of the people in the country. I think while certainly w~ught to emphasize new style projects, we shouldn't by any means de~emphasize infra- structural projects and things of that type which at the  69 STRICTLY CONFIDENTIAL same time a:-e necessary for the overall economic growth and development. I think, Mr. Chairman, we all share Mr. Magnussen's concern that the Bank should also take into account the social conditions, but at some point social conditions blow into political aspects" 1 and I do not know how far this Board or this Bank can really go into the area where decisions are sometimes political. At ·the same time I do wish to say we should continue to pay emphasis on projects which are directly concerned with amelioration of social and economic conditions, but at the same time let us not make the mistake of de- emphasizing infrastructure and other :i;rojects. Thank you, Mr. Chairman. MR. McNAMARA: Thank you. Mr. Janssen. MRt JANSSEN; Mr: Chairman, it is always difficult to argue with Mr 1 ' El-Naggar; he is always so eloquent and well founded in his arguments. I have no problem with the project as such. I think it has great economic impact/ and that is evidently what it is addressing. This is absolutely in line with the Articles of Agreement of the Bank. The only thing I had in  j! I STRICTLY CONFIDENTIAL 70 mind when I raised the question is, I was trying to sharpen my sense of proportion, which Mr. El~aggar referred to. .if" I In other words, I just wanted to know out of sheer ignorance I what is causing the unrest about what you read so much, in particular in urban areas in Argentina. The question is not so much that this project should have a social component in it; the question is how does/ it fit into the overall situation of the country economically and socially, and it is my opinion, I agree entirely with Mr. Thahane it should have come out better in the report. That is the background of the question. Thank you. MR! McNAMARA,; Yes, I think it is a quite reasonable question. I think we could well have answered it more fully in the report. Mr. Razafindrabe. MR~ RAZAFINDRA,BE: .Mr~ Chairman, r thank you for giving me the floor. The position expressed by Mr. Magnussen is for us a very interesting one, because where do we talk of poverty? We can't be against that. But one thing, I am not afraid on the behalf of the struggle against poverty, we can't present some projects, some larger scale projects because it is not oriented to the poor people, and so we are only confined to small-scale projects, because it is oriented toward poor people. It for me is exactly like the colonial  :1 !I STRICTLY !ICONFIDENTIAL 71 II pact of the 19th century when we are only for raw materials, because raw materials are for the poor people, and the poor people of that time are everybody. So I am a little worried about that matter. We would like to do some now, some larger scale project like the petrochemical project in Brazil and not only some agricultural small-scale rural project. But we welcome on that matter -· Mr. McNamara in Nairobi said what is exactly the cone ern of that matter over absolute poverty, but please not on behalf of this principle, we oppose to the financing of large~scale projects because it doesn't concern the poor people. Thank you. MR~ McNAMARA; Thank you, sir. Mr. Magnussen. MR, MAGNUSSEN: Mr. Chairman, I feel the need for repeating myself once more. I said I think very clearly that I preferred a discussion of the total problem because I am aware that you have to have a ca:unbination of various projects'..' and that in some of them you will not be able to take into account those aspects we are now talking about. I am aware of that and that is why I wanted to discuss the whole program. When I raised the point here, it was not because  72 STRICTLY CONFIDENTIAL this aspect is not in every project in Argentina~ I said I found it absent from the whole program in Argentina. What is what I said. I can't see that what Mr. Narasimham or Mr. Razafindrabe or Mr. El-Naggar said is any argument aga.nst that position. Thank you, Mr. Chairman. MR~ McNAMARA: Thank you. Mr. Wijenberg. MR. WIJENBERG; I don't want to prolong this dis- cussion too much, Mr. Chairman, but my sense of harmony in this discussion is still a little distorted. Let me make clear right away, and I think this Chair believes that large projects in terms of infrastructure are highly important for a bank like the World Bank and the regional banks. For one reason, technical reason, if I may, and that is these are unique institutions to combine and to help countries coordinate very complex technical and financial matters ·'i Therefore I am also in favor of this project. But there has been a very general discussion in the recent years that is importantf and several Directors have referred to it, which I think I would like to express in the following way, and that is after all we have realized that  73 STRICTLY CONFIDENTIAL economics is a social science, and that economic policy is Ii social policy of a government, and that it has its direct i l \ impact on the government--not only on government, but on the population in a certain way, and that is important. 1 When you act economically in your own responsibility as a country, you act socially, and it has very well-known effects, and they are also political but you can escape that these are simply aspects cf the same issue. Now the World Bank naturally, and many developed countries in their contributions to the development of the poor countries want to help in economic sense. Therefore we cannot justify, as an international institution, that we just give for a petrochemical plant, because it is an infra- structure thing. It should be embedded and it should be seen in a much wider context of social strategy of a government as e~pressed in its economic policies anJng others. Therefo:t:'E! J think even the project discussed for Brazil, capital intensive, there is a social component and we should therefore never forget that these are an integral part of the total. Thank you. MR, McNAMARA: Thank you, sir. Mr. El-Naggar. MR, EL-NAGGAR: Mr. Chairman, I am sorry to take the  74 STRICTLY CONFIDENTIAL floor again but if I understand Mr, Magnussen and Mr. Janssen well, they have nothing against this project as such. But I understand they want to take this occasion to raise 1 some questions relating to the social situation and social policies of the borrowing country .. In this case I would oppose this question. To what extent is this Board really equipped and capable of a general discussion of the social policy of any country on the occasion of a project which is acceptable on economic criteria? And to what extent, as Mr. Narasimham has said, can we conduct such discussion without becoming a little bit of a political discussion, without raising some matters which pertain to their domestic policy, to the soveteign policy o f t e I country concerned? It is for this very reason, Mr. Chairman, that we at :east, some members of the borrowing countries have been opposed to country discussion. It is for this very reason because it is very easy that one slides.into a discussion of the political policies of the country concerned. That is why I say that for a project whose economic criteria are good, which addresses itself to economic aspects, it has no social dimension,to take this opportunity to speak about the general policy of the country in a discussion here is a question which  iIi 7s STRICTLY CONFIDENTIAL I' i' is very difficult to keep away from the political aspect of things. And it is for this very reason, Mr. Chairman, that we are opposed, and I am speaking in the name of many of my colleagues, to attempt a country discussion that will take this character. MR. McNAM.ARA: Gentlemen, we are straying from the issue before us, which is this particular project. I would like to call on three additional Directors who have asked to speak, and then suggest unless there are project-related questions that we move on. The three I'd like to call on are Messrs. Pesqueira, Franco and Fried in that order. MR~ PESQUEIRA: Thank you, Mr, Chairman. Most of what I was going to say has just been expressed by Mr. El-Naggar. For Mr. Janssen it is very ifficult to argue with Mr, El-Naggar, and for me it is very asy to agree with him. (Laughter) MR. PESQUEIRA: I just wonder what would happen if country decides not to ask for an international financing or poverty~related problems? Would it be a condition not o have social problems within our countries? I think the World  76 STRICTLY CONFIDENTIAL Bank would run out of customers, and maybe run out of donors also. Thank you, Mr. Chairman. MR. McNAMARA: Thank you, sir. Mr~ Franco. MR. FRANCO: Mr, Chairman, when I asked for the floor I did not know some of the things which have been said, particularly by Mr, El-Naggar, Mr, Narasimham, Mr. ~esqueira, and Mr. Razafindrabe. I thoroughly agree with thei positions and my main concern is the latest one made by Mr. El-Naggar, There is a very grey area between the social question and political aspect of things. We are treading on very dangerous ground where we may easily fll within the political aspectyof things which I don't think this Board is qualified or should get into, MR. McNAMARA: Mr! Fried. MR~ FRIED; That is quite an introduction. This discussion causes me, Mr. Chairman, to think that it would be worthwhile treating on its own, not as part ofthis project. I am not merely talking about the kinds of questions that Mr. El~~aggar has alluded to. I think there are many other questions that are involyed and they pose serious issues for the Bank for its lending program, and as far as I am concerned'l in fulfilling my responsibilities on STRICTLY CONFIDENTIAL llthis Board. :1 The point has been made that a program or concern wit, I social issues, with poverty, with all the things that are ssociated with the new emphasis in the Bank's program, omehow means we shouldn't be supporting or we are opposed o the construction of the petrochemical project in Brazil. happen to believe that is very wrong. I don't believe that s the interpretation at all. In my mind the question that came pin the Brazil project is not whether the project should come orward, but whether there was any requirement for Bank funds, ot that, because there are other uses to which those funds can e placed. Resources are scarce and in these terms we always ave to face the question of what in the total development terms owever we choose to define them, what is the best allocation f those scarce resources? not only .. an economic problem, it's also a problem. I think we do ourselves a disservice by slogans of one kind or another that really distort e whole discussion. ~ow having made my statement in general terms as part the discussion which I just haven't been able to resist, I uld just like to say as far as this project is concerned, I am  i 1: 78 STRICTLYI\ CONFIDENTIAL I' !]under instructions to abstain from it, and I wish to be so I recorded. Thank you, Mr. Chairman. (Laughter} I MR, McNAMARA: We will so record Mr. Fried and I 11 ! would like to have the last word, if I may. I think I under- stand what Mr. Magnussenr Mr. Janssen and some others were saying, and I think I also understand what Mr. El-Naggar, Mr. Pesqueira, and Mr~ Franco were saying, and I really think we can bridge this. There was almost unanimous, and I would say probably unanimous approval of the project. I think what we didn't do to the satisfaction of some was put it into full context of economic development program of that country and our relation to it. So we accept that, and we can, l think, bridge these positions in future presentations. With respect to Mr. Fried's last comment, I think it is a perfectly reasonable question, which Mr. Cassou I think it was, or perhaps Mr~ Deare-~it was Mr. Deare I guess .who started with what is the justification for the Bankfs financing of a particular project. Not questioning the merit of the project, but why should we in our role as a financing source of last resort participate in that? I think we have  79 STRICTLY CONFIDENTIAL an obligation to explain that to you. We will endeavor to do so.