Transcript of meeting of the Executive Directors of the Bank and IDA, held on Thursday, April 25, 1996

NM INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Thursday, April 25, 1996 Washington, D.C. The meeting of the Executive Directors was convened at 10:05 a.m. in the Board Room, 700 Eighteenth Street, N.W., Washington, D.C., Mr. James D. Wolfensohn, Chairman, presiding, followed by Gautam Kaji. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] nm CON TENT S ITEM PAGE 2 Proposed Loan - Argentina (Health Insurance Reform Loans) (including country assistance strategy - progress report) 3 Proposed Loan - Argentina (Health Insurance Technical Assistance Project) 44 Ms. Cordeiro 48 Mr. Tamaki 52 Mr. Rill 54 Mr. Alyahya 58 Mr. de Paiva 61 Mr. Good 65 Mr. Evans 72 Mr. Jalan 78 Mr. Fischer 79 Mrs. Jacoby 83 Mr. Jimenez 84 Mr. Zhu 89 Mr. Chneiweiss 90 Mr. Nogues 107 [--- Unable To Translate Graphic ---] nm MR. WOLFENSOHN: [--- Unable To Translate Graphic ---] nm That leads us to items two and three on the agenda, which I would suggest that we take together since, as you know, they are linked. They relate to Argentina. The first is the Health Insurance Reform Loan in an amount of $350 million U.S. equivalent, which is accompanied by a progress report on the country assistance strategy. Item three is a proposed Health Insurance Technical Assistance Loan in the amount of $25 million. We are pleased to welcome Mr. Traa, who is the Senior Economist from the Western Hemisphere Department of the IMF, who is just entering. I am also pleased to note that Messrs. Suwan, Nogues, Gerber, Miagkov and Ms. Piercy circulated their statements in advance for which I am grateful. We are joined by Mr. Leipziger, Mr. Levy, Mr. Hecht from the LAC Division and Mr. Bulmer from IFC. And I would like to ask Mr. Nankani, who is the Director of the Country Department, to present the two proposals. MR. NANKANI: Thank you, Mr. Chairman. Mr. Chairman, Members of the Board: Thank you for the opportunity to brief you on the progress of the country assistance strategy and to present the proposed Health Insurance Reform Loan. [--- Unable To Translate Graphic ---] nm As the update indicates, Argentina appears to have weathered the worst of the crisis, but the adjustment has not been without costs in economic activity, the fiscal balance and employment. Most provinces, hit by a decline in revenues and rigid spending, experienced difficulties with their public finances in 1995. Many are now showing a willingness to reform, which the national government is supporting very actively. In response to this reform opportunity, the CAS Progress Report before you recommends that the Bank increase its planned lending to the provinces with $1.2 billion in additional adjustment lending during the 1997-99 period. To help accommodate this, we would trim about $300 million from the investment lending, mostly from infrastructure operations where a resurgence in privatization would reduce public investment requirements. We would not reduce our support for the social sectors. This additional adjustment lending would be in conjunction with the balance of payments support being provided by the Fund. We would follow up the ongoing Provincial Reform Loan. It supports the reform efforts of eleven provinces, as compared with the eight anticipated at appraisal, in increasing local resource mobilization, [--- Unable To Translate Graphic ---] nm downsizing bureaucracies, and privatizing public enterprises. In addition, we would also recommend Bank support for a national program to transfer insolvent pension funds for provincial public employees to the national system. This will help to improve the structural deficits of the provinces and to unify the social security system of the country. The FY97 CAS next year would provide a more in- depth review of the situation in the provinces and an assessment of the Bank's strategy to support reform. The opportunities for reform and the government's commitment are vividly illustrated by the program to be supported by the proposed Health Insurance Reform Loan before you today. These reforms are designed to improve health insurance covering about 60 percent of the population, through increased competition and regulation resulting in savings of about $450 million annually. Further, health care would improve for the majority of Argentina's population covered by the insurance system, of whom about 5 million with low incomes would be guaranteed more and better health services. In response to written comments from the Thai Chair, both domestic and national savings have indeed been growing under the convertibility plan since 1991. [--- Unable To Translate Graphic ---] nm National savings have been complemented by growing foreign savings, before the 1995 crisis. However, we share the view that national savings should continue to grow to meet the investment needs of an expanding economy. Improvement on Argentina's debt service will also require an export led growth primarily as a result of productivity gains. In addition, prices for Argentina's main commodity exports, which have increased in recent years, are expected to be sustained over the short to medium term. In response to specific questions from the Swiss Chair, the Argentines are testing the financial markets on lengthening the maturity of the country's debt, but there is no official proposal at this stage. Still, there has been an improvement in this area during the past twelve months. Regarding bank reserve requirements, there has been a substitution for differential requirements and there is now a uniform 15 percent liquidity policy. A portion of such reserves are now being remunerated. As regards the Social Protection Loan, the government is meeting its commitments under that operation. Both the U.S. and Dutch Chairs have raised questions regarding the federal/provincial relationship in [--- Unable To Translate Graphic ---] nm Argentina to which staff would be prepared to respond based on a number of studies and ongoing work. Finally, the U.S. Chair also raised concerns regarding the Yacyreta II Project, and I would like to note that we have seen progress on this loan since the status note was sent to the Board. Thank you, Mr. Chairman. MR. WOLFENSOHN: Thank you very much. Are there any observations on these two? Ms. Cordeiro. MS. CORDEIRO: Thank you, Mr. Chairman. I can be very brief because we have a lot on the table already. Some of the points that were raised have been already addressed, and I am grateful for that. I think that we are very pleased to see that the Argentine economy reaction has been on the deep side and it is moving positively and reacting to the different problems and crises. We are very pleased to see that, in fact, the government is not only taking stock from the experience but taking advantage of the opportunity to deepen the reform process. And I remember that Julio Nogues last year precisely indicated that somehow the crisis had the advantage of creating an opportunity for further deepening [--- Unable To Translate Graphic ---] nm of the reforms. And that actually is clearly perceived, despite the costs that are being suffered by the people. We are ready to support the adjustment in our strategy, especially that concerning the lending approach. We believe that is what is needed to provide the maximum support to the Argentineans at this stage. We still feel that some vulnerability and fragility remains. There is a clear recovery of exports but, as I think Mr. Gerber indicated, there is still considerable concentration and the sustainability of the progress might remain a concern. So, we believe that support for further restructuring of the productive sector is necessary. I would like only to address one aspect that I believe is definitely at the top of our agenda, based on what Mr. Nankani just said, what Julio Nogues indicated and what the documentation before us presents, that needed support for the reform program at the provincial level. I think the Bank has a lot of knowledge in dealing with the difficult situation that such a system requires. But we are encouraged by the implementation of the ongoing project. We are convinced that the consolidation of the fiscal adjustment that has taken place necessarily requires further and sound adjustment at the provincial level. [--- Unable To Translate Graphic ---] nm So, the upcoming operations seem to us fitting this in this context. One aspect that comes to mind in view of the comments made is how can we help to address the particular problem raised by the high indebtedness of the provincial governments? We believe that there are signs of commitment to further reform the public finance, public spending and the overall public sector management at the level of the provincial governments. But, I must say that I was quite puzzled by the comment made by Julio Nogues about the level of interest rates by the provincial governments in view of the perceived risk as a result of the public finances. So, I am wondering if management is thinking in exploring ways to provide additional support that will address particularly the problem that the structure of the provincial indebtedness and the cost that has been perceived by the short-term commercial lending that has been provided is, in fact, putting an additional burden on the adjustment reform. One could even speculate if an interpretation of the guarantee instrument would be available in this particular context. And I am wondering if there is any thinking along those lines that could be shared with us. [--- Unable To Translate Graphic ---] nm But to summarize, we strongly support this package of projects before us today, and also the adaptation of the strategy to deal with the Argentinean needs. Thank you, Mr. Chairman. MR. WOLFENSOHN: Thank you very much. We are very closely involved with the provincial issues and I will ask management to respond. Mr. Tamaki. MR. TAMAKI: Thank you very much. I have very little to add. So, I can be very brief. I very much welcome the CAS update and I praise the Argentina Government's strong structural reform and stabilization efforts. There are excellent results so far under such a difficult situation. I continue to support the Bank's lending strategy, increasingly focusing the reforms operated with sub-national governments. I have two specific comments and inviting staff's view. One is the CAS financial sector. In paragraph 5 of the document, it says the staff refers to the slower pace of private bank restructuring, even with the Bank's support and reform loan. [--- Unable To Translate Graphic ---] nm I think the key issue here is how to keep the private players' momentum for restructuring which was formed during the past crisis and how to encourage them to engage in the restructuring process or, in other words, maintaining this momentum. One idea is to strengthen the supervision by the Central Bank. And I am inviting any other ideas from the staff. The second question is on the Health Insurance Reform Loan. Though I fully support the concept of the loan, I am not convinced why this loan has to be a quick disbursement basis. Argentina seems to be back generally to the situation in late 1994 except, of course, economic activity trends. It has recovered bank deposits and foreign reserves to a pre-crisis level. In late 1994, Argentina agreed with the Fund to cancel the projects under its EFF agreement and then the provincial reform loan would be the last adjustment lending with quick disbursement procedure, if I remember it all correctly. So, I am wondering if we need some strong rationale for application of quick-disbursing loans at this stage. So, I would welcome some comments by the staff. Thank you. [--- Unable To Translate Graphic ---] nm MR. WOLFENSOHN: Thank you. I will ask staff to comment on both those two very interesting points. They are, of course, deeply involved in the banking sector, as you point out, and I think are on top of the situation and I will have them deal with that, as well as the question on quick disbursement. Mr. Rill. MR. RILL: Thank you, Mr. Chairman. I would associate first myself with those who commended the Argentinean authorities for their commitment and efforts to stabilize the macroeconomic environment and for the implementation of really drastic structural measures. Despite the 1995 economic crisis, the export GDP ratio and the balance of payments have been improved while, on the other hand, unemployment remains very high, despite the small decrease from 18 to 16 something percent. And if one takes into account that unemployment occurs usually on an regionally unequal distribution, there may be some regions where the picture could be more depressing than the average shows. Despite Mr. Nogues' mentioning and I should say the strategy mentions it not at all -- it was Mr. Nogues who hinted to the reduction of the incidents of poverty from 28, [--- Unable To Translate Graphic ---] nm I think, to 22 percent -- I share the concerns on poverty and social equity of Mr. Gerber in his statement. In this context, I started wondering what the implications of the debt situation on future income distributions are, if you take into consideration that, as Mr. Nogues points out in his statement, provincial authorities pay real interest rates in the neighborhood of 15 to 16 percent plus for their debt and debt service can create quite a burden. And the issue is who carries that burden, given that, on the other hand, services to the population are reduced. I have one question on the economic outlook. I found it interesting to see the increase of the export GDP ratio from 1975 to 1985 to 11, almost 12 percent, while for 1994 and 1995 we see an increase from less than 7 to close to 9 percent, which is still below historical levels. And I would be interested what kind of outlook is expected in this respect or what are the reasons for the reduction in between. On the project, the health insurance project, I have one particular question which caught my mind, and that is the restructuring of the Nacional Obras Sociales and as compared to the restructuring of INSSJP. Both are basically institution's funds to provide health insurance. And these [--- Unable To Translate Graphic ---] nm Obras Sociales seem to have quite a tremendous restructuring needs. There is only point which is interesting. In paragraph 3.16 of the project document, in case of closures FROS, which is the Fondo de Reconversion de las Obras Sociales, will not assume Obras' remaining liabilities in the case of the closures of these as compared to INSSJP, where the government will repay the loans, thereby effectively forgiving debt as part of the restructuring. When one looks into the annex, one sees that these Obras are a quite largely dispersed structure of institutions. And I wonder what the effects are. What is the intention of restructuring some of them, basically closing some of them under the implication of not taking care of the debt of these closed funds, which could have some adverse impact on the whole willingness to restructure. Yacyreta: I found it striking to hear that since April 17, you mention that since the distribution of the report, there has been progress and implementation, and that gives roughly a week. And I would be interested to hear more specifically about what kind of progress that is. And, moreover, I have to add that the kind of picture the summary provides of these progress reports, that, on the one hand, main civil works and supply installation is progressing satisfactorily, while [--- Unable To Translate Graphic ---] nm implementation of resettlement and environmental management programs have been delayed because of administrative bottlenecks and budgetary constraints. This seems to be a picture which is quite familiar in other cases. And I really would like to remind ourselves that at the time when we discussed the loan, some Chairs at least insisted that before the level of this dam would be raised or the reservoir would be raised beyond the 76 or 78 meters' level, we should be involved in that not only after the fact but before it, in order to ensure that we remain consistent on the overall project, and not only on part of it. Because, as we know from other projects, this leads into quite difficult situations. I have been accused on other occasions that I take too many opportunities to talk about the budget, but I have to come back with a small closing remark on that. I observe that Argentina has a per capita income in 1994 of $8,000 plus and I assume in 1995 it is still in the order of some $7,500, if I take into account all the other factors. None of the documents, neither the CAS before nor this document, uses any words about graduation. I am not insisting on that, and I would like to clarify it towards the Argentinean authorities; I am not arguing in favor of graduating Argentina slower or faster or whatever at this [--- Unable To Translate Graphic ---] nm very moment in time. I just would like to highlight that we have other countries, as it is formulated here at the end, that the government is looking to the Bank to help capitalize on a window of opportunity to promote reform and development. I mean, everything agreed, but there are other governments in similar situations where the Bank seems to be, as I said on other occasions, to look into a unilateral graduation decision. And I just wanted to highlight this particular point. Thank you. MR. WOLFENSOHN: Thank you. I think you have got a rich number of questions which I will ask Mr. Nankani to respond to when we have finished the discussion. Mr. Alyahya. MR. ALYAHYA: Thank you, Mr. Chairman. The CAS report gives a useful update on the performance and plans of both the Argentine authorities and the Bank. The circulated statement of Mr. Nogues is also very helpful in setting the issues in a broader context. My own comments, Mr. President, will be quite selective. One general observation that comes to mind is that the experience of Argentina last year fully confirms the appropriateness of having a section on the external [--- Unable To Translate Graphic ---] nm environment in the full CAS documents coming before this Board. Argentina obviously suffered an external shock of classic dimensions, as was recognized last year. On the one hand, it could be argued that the effects of that shock confirmed to some extent the misgivings that had earlier been expressed about the management of volatile capital inflows in the context of the convertibility law. Related points could be made about the weak fiscal situation, especially in the provinces, and the need to increase private savings and indeed domestic resource mobilization generally, an issue which Mr. Suwan has rightly drawn to our attention. On the other hand, there is no doubt that the determination of the Argentine authorities to persist with economic reforms under very challenging circumstances is highly commendable. I concur with the management's assessment that the country appears to have weathered the worst of the crisis. Risks nonetheless remain, and they are familiar ones with the fiscal situation in some of the provinces prominent among them. Turning to the latest assessment of the Bank's assistance strategy, I basically concur with the [--- Unable To Translate Graphic ---] nm management's judgment that Argentina's track record and remaining reform needs warrant continued support. An enhanced lending program is, therefore, appropriate if macroeconomic management continues to be satisfactory and adjustment at the provincial level continues and deepens. As for the rather complex package of loans and conditionalities for tranche release before us today, I can support these as being in line with the overall strategy, and providing significant macroeconomic benefits as well as improved health care protection for much of the labor force. Two areas will, in my view, need careful monitoring during implementation: avoiding over-burdening already weak institutions and assuring that the basic health benefits package is indeed available to the poorer members of the community. With these brief comments, I wish the authorities continuing success with their program of reforms. There is every indication at this stage that there will be further progress to report at the time of next year's discussion of the full CAS. Thank you, Mr. Chairman. MR. WOLFENSOHN: Thank you, Mr. Alyahya. Mr. de Paiva. [--- Unable To Translate Graphic ---] nm MR. DE PAIVA: Well, Mr. Chairman, I would start by making a comment on a point raised by Walter Rill about per capita income. If one looks at the indicators that are described in the World Development Report in the 1990s, one looks at 1992, 1993 per capita income in Argentina, it is $2,300, $2,400. And then, suddenly one opens the 1994 report. It goes to $6,000 and "X". So, you have to understand that there is an enormous fragility in these indicators, and I don't think we should guide ourselves by these indicators that have to do with a number of additional factors. Whatever we decide here in terms of graduation and all of that should not take into account only these indicators because they don't express everything, as we know. About the CAS and the projects, I have three comments. Well, it goes without saying that we are very strong supporters of what the Bank is doing in Argentina. And I think the Bank itself has good reasons to be proud of its good work in Argentina, not only proud of its capacity to respond but proud of the fact that Argentina holds a portfolio that works very well. I understood that the message behind this CAS is that Argentina is entering into a new stage of economic reforms, deepening actually action with provincial reforms. [--- Unable To Translate Graphic ---] nm Argentina expects the Bank to work very closely with the country and Bank is prepared to be supportive of that. It is with this scenario in mind that I have three points. First, on the dimension of the lending program: I saw that there is a certain hesitation to increase lending to Argentina and the reason is the exposure of the Bank in the country and the risk of the Bank's portfolio. That is why we have to explain that to increase $300 million a year in our portfolio in Argentina we have to trim down other parts of the portfolio and this should be a combination of factors instead of a single decision. Well, it is hard to explain that with a country that performs so well and where the country still has so much to do. I think that as an institution that takes risks and very deep risks in so many parts of the world to say that in a country that at a certain stage of its economic management still needs a very strong support of the Bank, we have to balance our action vis-a-vis the portfolio risk as a whole. It seems very strange to me, and I think that this should not be a reason for any decrease in our involvement in Argentina, be it involvement in terms of action, be it involvement in terms of the financial support that we may give to Argentina in response to its requests. [--- Unable To Translate Graphic ---] nm So, this is the first point, and whatever comments you may have on that, I would be glad to hear. My second point is on the use of currency in the loans and, you know, the dichotomy between single currency loans and currency pool loans. We are approving here an operation that involves two loans, one of $250 million in single currency and another loan of $100 million in a currency pool system. Well, I tend to believe that this involves a certain complexity for the financial management of Bank loans in Argentina. And if I remember well, when we discussed at the Audit Committee the single currency loans, the decision was that we would encourage the Bank to work towards eliminating the ceiling for single currency loans. I think that if we can understand cases like this and the difficulties these cases may impose to countries, it may would be easier perhaps on the part of the Board or on the part of management to take a strong decision and eliminating these ceilings for single currency loans. But it looks odd in terms of financial management of the relations with the Bank, and I think that this should be taken into account not necessarily by those who deal with Argentina on a regular basis, deal with the Argentinean portfolio, but with the financial units in the Bank. [--- Unable To Translate Graphic ---] nm My third point relates to the role of EDI. While we are talking of a new area of work in Argentina, provincial reforms, I think there should be a lot to do there not only in terms of financial support but also in terms of strengthening the institutional capacity of provinces to deal with development problems. We understood that from now on CASs would incorporate, you know, some reference to the role that EDI may play in borrowing countries. And I understand from our previous discussions about the budget that there had been conversations between EDI and the department dealing with Argentina about the future role of development training in the country. Whatever you can tell me about that, I would be most grateful. Thank you. MR. WOLFENSOHN: Thank you once again. I think I will get management to handle those questions. Mr. Good. MR. GOOD: Thank you. I would like to say that we support the proposals on the table. The issue I would like to talk about briefly is the health project. I must say I found it an extraordinarily clear, lucid description of the health system in Argentina. And I [--- Unable To Translate Graphic ---] nm was fascinated by it and I read it about as carefully as I have read any document since I have been here. And because it is so clear, I must say though that I started to develop a few questions and concerns that perhaps you can respond to. I mean, what strikes one when one reads this document and the system in Argentina is the complexity of the health care system and in Argentina's case the significant number of problems with almost every component of that system from these very significant Obras Sociales with their debts, with their inefficiencies, with their varying health packages from this Fund which is supposed to equalize revenues across the Obras Sociales, with this INSSJP, all kinds of problems there, the size of its transfers to the Obras, the financing of its non-medical social programs, its own deficits and debts, the problems with its own staff inefficiencies to the regulatory bodies like ANSSAL. I mean, the list goes on. There are just a set of problems after the problems. And I note that, in fact, you describe how several special regulators have tried to address those problems. One of my concerns was I wasn't exactly convinced as I read the document that the Bank itself has 100 percent ownership of the changes to the system that are being [--- Unable To Translate Graphic ---] nm pursued. And if you can assure me that that is the case, then I would feel happy. But I look for little hints in the language. Let me just give you two or three kinds of little sentences that I find bothersome. On page 20, it says, for example, it is thought that after several years of competition, the number of Obras Sociales will decline significantly. Whenever I start seeing the passive voice, I keep saying, well, it is thought by whom. Does that mean it is not thought by the Bank or by someone else? I am not trying to be funny, because the point is serious. On page 23, for example, there is a reference and several times throughout, "the government is trying to decide" and again I don't have a strong sense that the Bank is with it. And finally, just as a final example, on page 26 there is a paragraph that concludes by "In this sense, the Bank strongly supports the approach to reform". And by implication, I have the sense that maybe there are other areas in which the Bank didn't strongly support the approach to reform. So, I really am interested in this question of the extent to which we are supporting what is basically a government driven reform of this whole system. [--- Unable To Translate Graphic ---] nm Now I know we agree at one level, and whenever you say do you agree with it, what I wouldn't like you to do is contravene and say, yes, we agree with the vision which involves universal coverage, which involves a standard benefits package, which involves a single regulatory agency. I think we all agree with that. What bothers me is that the way in which one gets to that may or may not work in such a complex world. There was one part, an important part of the restructuring here that I want to focus on and I would like you to tell me I am not right. It has to do with a very basic premise of the restructuring, which is that these 310 Obras Sociales, which are clearly too numerous, some of which are good, some of which are not, will, in fact, be reduced to a significantly smaller number over time through competition, the competition being that unlike now people will be allowed to choose the particular Obras that they will go to, and the notion being the weak will be driven out and the strong will remain, and we will have a rationalized system. It sounds good. I mean, that is what typically we expect competition to do. In this case, I worry about it, because when you look at the different Obras right now, what you see is that they all have different revenue bases, and they have [--- Unable To Translate Graphic ---] nm different bases in part because they have different numbers but, more importantly, from my point at least they have different revenues because they each respond to the needs of workers in different parts of the economy. And some come from parts of the economy where wages are higher than others, and in terms of the percentage contributions to the Obras, therefore some are going to be significantly better off than others. What is the implication of that? The implication of that is that the poor ones will tend to offer a not so good health package and may tend to get themselves in debt. In some sense, these are the kind of weak ones, but they are not weak because they are necessarily inefficient, but they are weak because they don't have the revenue base. Conversely, the strong Obras which have the significant revenue because they are covering presumably higher paid industrial workers are likely to be strong because of the revenue base. They will offer a better package which is more attractive. But, in fact, because they have the economic rents which permit it, they may well be the ones which are in fact inefficient. Opening up competition in an industrial structure like -- it is an industrial structure -- in an industrial [--- Unable To Translate Graphic ---] nm structure like that may well lead you to quite perverse results. So, the competition in these kinds of complex situations doesn't always lead you where it might go. I thought, well, there has to be a counter to this argument and I think I read what it is. And that is that, as part of the reform, the government will insist -- I won't take too much longer, just a minute, just to make a point -- the government will insist that there be a standard benefits' package, for one; and secondly, that this fund which equalizes the revenue base across the Obras will, instead of as now being kind of politically driven, not being well managed, will be better managed and will generally equalize revenues across these different Obras. And in that situation, if you had done that successfully and if the revenues were truly equalized, then maybe you could have the kind of competition which would lead you to where you want to go. But I don't suspect that that, in fact, will happen to the point where competition will work. And so I continue to be worried. Address that specific point, if you want; I think it is an important one. My general question though is: Are you as Bank officials generally convinced that going along with the [--- Unable To Translate Graphic ---] nm kinds of changes in this very complex system is, in fact, the best direction for that medical system in Argentina? The final point with respect to conditionality, I mean, I know we have to do this, but it just strikes me that in a world like this where we are clearly, in my view, tagging along with a series of a large number of reforms that are being driven by Argentina, then to have second and third tranche releases, each of which have a significant number of quite technical conditions, which are clearly in some sense originating with the government and not with the Bank, strikes me as a little bit odd, but I know that is our convention. But I guess it is just a comment to the effect that I am not sure that in some cases that kind of conditionality does anybody a whole lot of good. Thank you very much. I must say though, although my comments are seen as a bit critical, I really thought this was an extraordinarily good piece of work, and it was only the clarity of it that allowed me to pursue it to this degree. So, thank you very much. MR. WOLFENSOHN: In the future, we will try to be less clear, Mr. Good. [Laughter.] [--- Unable To Translate Graphic ---] nm MR. WOLFENSOHN: It seems to be very troublesome. But we appreciate the days you must have spent on this document. Again, there are a rich variety of questions, but I guess if we didn't think that the approach was sound, we wouldn't have put it up to the Board. But I will ask management to respond in a non-official style. Though I don't think it is the first time from either side of the fence that we have heard statements that are written in official jargon. I wish it were not so, but we will make an effort to get away from it if you do, if everybody does. It would certainly help the dialogue. Mr. Evans. MR. EVANS: Well, let me say that I appreciated the statements that Julio Nogues and others put out. Now the Task Force which were discussing in the Development Committee the other day said the Board's time is better spent discussing strategy than individual projects. I don't think it takes away anything from the valuable comments that Len Good gave us. But I wanted just to focus mainly on the CAS progress report, which I think is a good way of addressing the subject, and I think it is welcome to have a short [--- Unable To Translate Graphic ---] nm paper. But I didn't feel that we had yet got this right and, particularly, I found this document rather a bland one. I would have liked to see a clear focus on what has happened since the last CAS, what this means for Bank operations, how the Bank has changed its strategy and why. And I didn't feel this was adequately dealt with in the paper which seems to me to be limited to what the Bank is doing and not really to explain fully why. Now we discussed Argentina's position in the IMF Board a couple of weeks ago, and there was very strong support, as there has been this morning, for the policies that Argentina is implementing. And we welcome the signs that the economy is beginning to turn around and the financial sector is looking healthier, partly thanks to the help which the Bank is providing. But there was once again widespread skepticism in the Fund Board about some of the projections made by Argentina, particularly with fiscal revenues. And I would encourage the Bank to look carefully at these in assessing the capacity for counterpart funding of Bank projects. Now clearly, the recession in Argentina has been longer and deeper than expected last year. Last year we thought that growth in 1995 and 1996 taken together would come to nearly 6 percent. Now we think it is going to be [--- Unable To Translate Graphic ---] nm minus 2 percent, even though the crisis, the Mexican crisis, the Argentine crisis has been much more localized rather than regional or worse. And I thought the report could have gone into a bit more detail on the implications for the Bank's operations of these economic developments. We know from this separate progress report on the Yacyreta Dam Project that it has suffered severely from a lack of counterpart funds due to the crisis. And perhaps staff could say something about whether this is a more general problem affecting the Bank's portfolio and what can be done about it. And I think the weakened expected economic position also has some implications for the social protection loan which went through under streamlined procedure last November. Mr. Legg then drew our attention to the issue of whether the Bank should be providing support for current budgetary expenditures outside a structural adjustment program. And maybe we could have some comments on that. Now what are the reasons for the changes in the Bank strategy? Last year, the CAS had a high lending case scenario of $2.3 billion over the next three years, and it [--- Unable To Translate Graphic ---] nm was clear that this would only be achievable if the provinces made significant reform progress. Now we understand that only a quarter of the country, that provinces of a quarter of the country are making the CAS effort, and yet the proposed lending is higher at $3.2 billion, directed to provincial reform. And I note from Annex II that disbursements over a five-year period are expected to be 50 percent higher, over $1-1/2 billion, than a year ago. Now I am more than happy to believe that this step-up in lending is a good response to strong policy achievements. But I would like to hear a little more from staff on this. In particular, I think it is important that we be assured that the Bank is responding to an improvement in the prospects for reform in the provinces compared to a year ago and not simply reacting to worsened fiscal positions. And I share Mr. Suwan's concern about the big increase in debt service recently, and Mr. Tamaki's concerns on adjustment lending. I want to take up Mr. Rill's comment about graduation. And like him, I would encourage staff to keep the possibility in their minds when formulating the next full CAS perhaps as one of the lending scenarios in the [--- Unable To Translate Graphic ---] nm event that full market access is restored quickly, as we all hope it will be. I appreciate Julio Nogues' statement that the job of transformation will never be over. But I do see graduation as a success both for Argentina and for the Bank in due course. I cannot, Mr. Chairman, compete on the health projects with Len Good, but I do want to say that we think these are very important and welcomed. I think, as any attempt to introduce competition, it is important to ensure that the inefficient organizations are closed promptly. I was a bit worried by the large sum within the project going to refinance debts of these funds. And I welcome reassurances that these will be used to restore efficient organizations to financial viability rather than bailing out the inefficient ones. Overall, Mr. Chairman, let me be clear that notwithstanding the points I have made, I take a very positive view of Argentina's impressive policy moves in recent years and of the Bank work there. My concern is rather that the paper doesn't do justice to the quality of the Bank's response and Argentina's achievements. And finally, and to take account, to take advantage of Mr. Burki's presence here, and conscious of the [--- Unable To Translate Graphic ---] nm similarities as well as the differences between Argentina and Mexico, perhaps Mr. Burki could tell us what progress is being made on the study of Mexico and the lessons for the Bank, and whether he can tell us now or perhaps have a short note in writing on the scope and coverage of this study, because I think it is relevant to a number of other countries as well. Thank you, Mr. Chairman. MR. WOLFENSOHN: Mr. Rill. MR. RILL: Thank you. Every time I say something, I create a misunderstanding, I have the feeling. I thought I had made it abundantly clear that I don't want the Bank to encourage to go into thinking about graduation of Argentina. I fully agree, on the other hand, with Mr. de Paiva's comments earlier. I just want for the record to have that clear. But I wanted to highlight the fact that everything is relative, as we see even in the judgment of Bank staff on the country. Thank you. MR. WOLFENSOHN: We will make sure that is clarified, Mr. Rill. Mr. Jalan. MR. JALAN: Thank you, Mr. Chairman. [--- Unable To Translate Graphic ---] nm I, of course, support the Bank assistance strategy. I was most impressed, Mr. Chairman, by Mr. Nogues' statement. It provides a longer-term perspective on what is going on in Argentina, as well as raises certain issues of macroeconomic management policy which is of interest to us. I had a question, perhaps either the staff could answer or Mr. Nogues could provide some further guidance on this, which is about the convertibility law. And Mr. Nogues is, of course, right is saying that this was central to the success of the Argentinean experiment in controlling inflation. What I am interested in knowing is about the future of this law in the context of a reduction in the level of investment, as well as the emergence of a trade surplus. I mean, this is a curiosity in the sense that is this law which has a widespread support, which has been central to macroeconomic management equally sort of sustainable in a situation of high unemployment, low decline in the rate of investment and the emergence of a trade surplus, which may be beneficial from the point of view of the overall balance of payments, but is probably exercising now a negative influence? That is that the trade surplus is [--- Unable To Translate Graphic ---] nm exercising a negative influence on import demand and investment demand? This is just a question. I do not know enough about it to be able to take a position on it, but I am most curious to know what was Mr. Nogues' guidance on this whole set of issues. Thank you. MR. WOLFENSOHN: Thank you, Mr. Jalan. Mr. Fischer. MR. FISCHER: Thank you, Mr. Chairman. I was one of the privileged colleagues that could take part in a visit to Argentina a couple of years ago in the context of our regular EDs' trip, and I vividly remember the warm hospitality and the interesting impressions we got from a huge country where the largest part of the population lives in the capital and around it, a particular feature. In the light of all the remarks and circulated statements by colleagues, I can be very short. Just to appreciate that, as a result of the changes in Argentina's reforms, the Bank has adapted to the situation and shifted the focus more on adjustment operations compared to the proposals in the last CAS. We support and appreciate this flexible approach in the present situation. [--- Unable To Translate Graphic ---] nm And we also believe that the increase in the lending volume can be justified. We have been assured in our previous discussion with staff that necessary adjustment in other programs as mentioned in paragraph 12 will not take place in Bank operations related to social sectors. Now this having been said, Mr. Chairman, I would like to agree with Mr. Gerber that the additional volume should be considered as an upper limit under conditions of good macroeconomic management, continued provincial adjustment and satisfactory project performance. With respect to the interesting debate triggered by Mr. Rill's remarks and Mr. de Paiva's and other colleagues' comments, I would also add to this philosophical debate by making a comment on the respective remarks by our trusted colleague, Mr. Nogues. He says that neither the Government of Argentina in this paper nor the Bank Group have concluded that the job is over. It will never be. Now if this is implied that the Bank should permanently and to eternity be a partner in this, I would have my problems, because it should be the Bank's role that in a number of a countries and as part of the successful involvement of the Bank that we become superfluous and withdraw at a given mutually agreeable time. [--- Unable To Translate Graphic ---] nm But if instead, which I think he did, he wants to indicate in his wisdom that the task of adapting to changed circumstances and economic reforms will never end, then he has a point because that applies to all countries, including industrialized countries. And I think it is in that sense that Mr. Nogues made his remarks. Mr. Chairman, one brief remark on the projects that also we could discuss with staff, we appreciate that the experience of European health insurance systems, in particular Dutch and German schemes, have been reflected in the document, and that is also an indication about the advanced states of Argentina, and the staff felt encouraged to look into systems of equally advanced countries. Looking into our systems, of course, is not done and shouldn't be done in the sense of representing model systems, but as the documentation on how reform processes can be initiated and carried through. Mr. Chairman, we have also on April 17 received a progress report on Yacyreta. And, as we visited this impressive project, multi-country project at the time, I would like to make one comment also, since we had an intensive discussion with staff. The main conclusion of this progress report is that special emphasis has to be on the issue of counterpart [--- Unable To Translate Graphic ---] nm funds during the next supervision mission in May, because otherwise important resettlement and environmental components will remain unfinished. We feel that the availability of counterpart funds would also increase the probability to settle outstanding claims of the major contractors -- and I am not going to mention some German contractors -- an issue which has remained unsolved since a very long time. And I am grateful that in paragraph 19 the World Bank did spell out this problem. So, my hope is that my remarks will just encourage the Bank mission to also look energetically into this unsolved business of counterpart funds and the outstanding claims of contractors. Thank you. MR. WOLFENSOHN: Thank you, Mr. Fischer. Mrs. Jacoby. MRS. JACOBY: Thank you, Mr. Chairman. I just want to join others in welcoming this CAS update and also in congratulating the Argentinean Government for its continued and, as I understand to a large extent, successful reform efforts. I also, in particular, would like to thank Mr. Nogues for his very informative circulated statement which [--- Unable To Translate Graphic ---] nm really I think gave a very good picture of the problems Argentina has solved and the problems it continues facing. Mr. Chairman, without competing with Mr. Good, I want to say that we do support the health insurance reform loan and the technical assistance project. I think they are important in supporting and improving the country's social health standards, improving its effectiveness and hopefully also in providing budgetary savings. In particular, I think it is important that there has been strong political endorsement given to the health insurance reform and also the fact that in elaborating the reform, that key stakeholders have been intensively consulted, and that there are incentives to them for participating actively in its implementation. I also believe that the technical assistance project which we have before us can play an important role in smoothing the implementation by assisting in the reform of the legal and regulatory framework and reform and capacity building of the institutions. And I think that the suggestion of making use of technical experience from OECD countries -- I think Germany and the Netherlands was mentioned -- as well as from developing countries is excellent. And there I join other comments which were just made by Mr. Fischer. Thank you very much, Mr. Chairman. [--- Unable To Translate Graphic ---] nm MR. WOLFENSOHN: Thank you, Mrs. Jacoby. Mr. Jimenez. MR. JIMENEZ: Thank you, Mr. Chairman. Needless to say that we also strongly support these two operations that we are presented today. One of the points that the documents did not mention and I think it should be stressed, that one of the reasons of the success in Argentina today is due to the strong leadership, both political and economically. There have been strong determinations to keep the course even in troubled waters. When you analyze the difficulties in pursuing the reforms in a country, when you have a vicious conference, exchanging harsh words against the government, calling attention to the social problems, when you have the labor unions on the streets voicing in a very strong way the voice in the benefit of the reforms, that is something that has to be commended, the strong leadership both in economics and political part of the Argentine Government, that they allow them to overcome what the U.S. Chair said the crisis of confidence. Having said that, let me go to the point of graduation that is an important point that should be said. If there was something that was received in a very cold shower out of the multilateral development banks' report in [--- Unable To Translate Graphic ---] nm the Latin quarters, Mr. Chairman, was this policy relation. It was done in a kind of blanket attitude and in Latin America I am sure that will be an issue that they will take in the future. What the Argentina spirit has showed us is the opposite. We are about to enter in Argentina in the second generation of reforms. It has under cover the fragility of the banking crisis, which is something that is inviting the Bank and go and step inside in the banking crisis to strengthen banking. It has shown also the need to know more about the labor market. You can see the high levels of unemployment in Argentina. You have seen the labor crisis in the experience. It is telling that we needed to know more in order to go to the reforms in more how the labor markets will behave. High level of unemployment is unacceptable. The Argentina experience is telling us that it is requesting more participation of the Bank, especially with the provinces, more involvement to make the provinces aware of the benefits of the reforms. And this is another that I can see for EDI. In the graduation part, let's keep in mind that out of the $15 billion portfolio we are talking about, $5 billion, one-third comes from the Latin American Region. If we keep treating the net income of the Bank as the name "net [--- Unable To Translate Graphic ---] nm income" as abundant pool of resources that we can tap and forget the income comes from the payment of the borrowers to the Bank, if we could burden that income with more claims, believe me that would be the best graduation policy. You will scare away big countries, specifically the ones which have access to capital markets, for them to go and try the capital markets and abandon other clients of the Bank. That would be, I can assure you, the most effective way to scare the big countries and you are burdened with the smaller countries that don't have access to more debt. So, that is something that I wanted just to review when we go into the discussion of the net income. And that leads me to one question that I want to make, Mr. Chairman, which is regarding the counterpart funds. I want to emphasize that Argentina has one of the high quality of the Bank's portfolio. It is good for the net income because it is paying punctually. But the document highlighted -- and some of the colleagues have said that -- about the issue of some counterpart funds. We have noticed specifically in the Central American Region some of our Governors are telling us that we have some approvals in portfolio by the Bank, and the IMF will come to us and under the restraint of the budget they will not allow the governments to spend in those projects. [--- Unable To Translate Graphic ---] nm So, we have here a paradox: A lot of approvals by the World Bank, IDB, but the IMF will restrict the ability of counterpart funds in the national budget. A word from the staff in this regard would be very helpful because it would help to unveil an issue that is very latent and is affecting some of the Central American countries too. Thank you. MR. WOLFENSOHN: Thank you very much. I think on this question of graduation policy, we might at another time have a bit of a discussion on it. I think it is quite obviously something which is important. I feel reluctant to comment on it now because I have no doubt this is an area with a big history. And I would like to find out the history before I enter the debate. I have, of course, my usual note from Mr. Shihata telling me what to say. But on this occasion, I am not going to say it. [Laughter.] MR. WOLFENSOHN: He has encouraged me to say it is for information only, this note. But I will pick it up with you some time in a less specific manner when we can have a discussion. Mr. Zhu. [--- Unable To Translate Graphic ---] nm MR. ZHU: Thank you, Mr. Chairman. I will be very brief. I just have two specific comments on the CAS. Number one, I am satisfied to note the Argentine Government made a lot of effort to keep stability and promote economic development, a very difficult situation. Especially governments catch up the opportunity to deepen the reform and also, like Mr. de Paiva, I am also satisfied that the portfolio of Argentina is good. Number two, I agree with Mrs. Jacoby. The social security system reform is very important. I support this project because I think this project can provide the condition guaranteed for further reform. So, I believe the reform package should be improved and enhance the living standards, not others. So, this project can provide guarantee and precondition for further reform. So I support this project and support the Bank lending policy. Thank you, Mr. Chairman. MR. WOLFENSOHN: Thank you, Mr. Zhu. Mr. Chneiweiss. MR. CHNEIWEISS: Thank you. I want to congratulate the Argentine authorities on two fronts. [--- Unable To Translate Graphic ---] nm First, Argentina has been able to achieve an impressive success in overcoming the financial crisis it experienced one year ago and in sustaining with great pain its efforts toward macroeconomic stability. And in this context, I am sure that Mr. Nogues will convey our congratulations about the fact that Argentina has been able to become a new IDA donor, and we appreciate very much the effort of Argentina in the very tight fiscal context. Considering the special circumstances, I support the proposed lending volume, given the strong commitment to reforms and external financial fragility. I don't want to overwhelm staff with more questions. I think they have already received enough, but, of course, we share the consensus about the main challenges which are now to consolidate the fiscal position of the central and local governments while protecting social programs and to pursue the reform of the financial sector. Like Mr. Gerber and Mr. Fischer, we believe a higher volume of lending would be justified as long as we have proper macroeconomic management, as long as the provinces can prove that they are able to undertake strong adjustment efforts, and as long as we have a satisfactory implementation of the portfolio. Thank you. [--- Unable To Translate Graphic ---] nm MR. WOLFENSOHN: Thank you very much, Mr. Chneiweiss. Before calling on my colleagues to answer, I have to inform you I have to live. I have an acute case of indigestion after the Development Committee meeting which has forced my program to be such that I just have to have a meeting at 12:30 that I have to get to. I have asked Gautam Kaji to take it on. I want you to know that I have been through this morning every one of these recommendations and loans. There are a broad range of interesting subjects which await you. And I do support, as my signature would suggest, each of these loans. Sometimes they are signed before I read them, but I would like to confirm that I have read them, and the signature is meant in terms of recommendations. So, I will pass this on now to Gautam to finish the meeting with my apologies, that it is just not possible to cover everything that I have to do as President of the Bank, meeting people, trying to deal with policy questions and everything else and always be available for the whole of Board meetings. And I hope you will be sensitive and understand that. It is simply an impossibility. Thank you. [Whereupon, Mr. Kaji assumed the Chair.] [--- Unable To Translate Graphic ---] nm MR. KAJI: Javed, would you and the staff like to respond to the questions that were raised. MR. BURKI: Gobind will respond. MR. KAJI: Gobind. MR. NANKANI: Thank you, Mr. Chairman. I would like to begin with the whole question of the provinces, an issue that was raised by many Directors. I think here it is useful to take a minute or two to talk about the extent of reform, the incentives that are being offered for reform and what is actually happening currently in the provinces. We did note that about 25 percent of Argentina's GDP is covered by reforming provinces, using a definition implicit in our provincial reform loan. And this covers some eleven provinces. But we should recognize also that in another four provinces, three provinces which make up 60 percent of GDP, the momentum is picking up. I am referring specifically to Cordoba, where we have recently been engaged in providing economic advice through an economic and sector report to the new Governor for provincial reform. Nothing has come to fruition, but it is active and also the Provincia of Buenos Aires which is receiving similar assistance from the IDB currently. [--- Unable To Translate Graphic ---] nm The other ten provinces which make up 15 percent of GDP are also engaged in beginning to develop reform programs. And I should note that the Ministry of the Economy is proposing a more comprehensive approach to assisting reforms. And we are discussing our assistance efforts for provinces with the Ministry in this context. The incentives are clearly to reward the reformers and to make it possible for those provinces willing to reform to get the assistance they need. And I think this review between the Government of Argentina and the Bank in the coming months will help to sharpen those incentives. As we indicated, the 1997 CAS will provide on the basis of ongoing work the full assessment and rationale for the deepening of the provincial strategy. I will turn next to the question of Yacyreta, the project. We indicated in the presentation that progress has been made. We are referring specifically to an official confirmation we received yesterday from the government about its commitment to providing the counterpart funds required for operation of the dam at 76 meters level, all the counterpart funds at the national level. And that was the major recommendation that we had expected the supervision mission to handle. There are a few other issues and the Board will be informed, as we had indicated, after the mission returns on the entire outcome. [--- Unable To Translate Graphic ---] nm On the question of the banking reform loan, it is true that it is going more slowly than the provincial privatization loan in the sense that for the latter we have disbursed two tranches -- on the banking reform loan one tranche. But I think it is important to look at some numbers because in 1994 we had 200 plus banks; in 1995 this fell to 166. And currently, the number of banks is at 126. So, a great deal of consolidation has already occurred. The loan was prepared to help banks deal with the crisis. And in that sense it has achieved an important step. Its availability is also a source of comfort to the private banks in order to ensure that, should there be the need for some similar support in the future, it exists, it has also supported the setting of a deposit insurance scheme which now exists for deposits up to $20,000. So, I think the fact that it is going slowly is not of concern. The fact that it having performed a function and it is being there to provide comfort is equally important. There was a question on whether this particular loan ought to have been an adjustment loan. And I think there we really refer to the 1995 CAS which was presented as a response to the post-Mexico crisis in which we reopened [--- Unable To Translate Graphic ---] nm the issue of adjustment lending, even though in the 1994 CAS we had indicated that we wouldn't necessarily need to be involved in more of these. And I think the particular operation in hand has some of the features of the provincial privatization loan. It is transactions based. In other words, the disbursements are quick but they are also tied to the specific criteria that the Obras Sociales have to satisfy. And most importantly, the reform is expected to take place over the next eighteen to twenty months, and the funds will, therefore, be disbursed in that period as the Obras Sociales are restructured. There was a question on exports and really the decline in the export to GDP ratio between the 1980s and the 1990s has a lot to do with the appreciation of the peso. What is actually happening with exports today is still very encouraging. We have seen a 35 percent real growth in the last two years. We are anticipating an 8 to 10 percent real growth in exports over the next several years. We are encouraged by the productivity gains we have seen in the economy, the efforts that the government is making to liberalize and make labor markets more efficient and the deepening of the financial sector. We ourselves are helping with the export development loan to encourage small and medium exports. [--- Unable To Translate Graphic ---] nm On the issue of the EDI, we would like to just reassure Directors that we are engaged in developing a work program with the EDI and that the next CAS will reflect that fully. Finally, on the issue of counterpart funds, we ourselves were initially concerned that this might affect Bank projects. In the CPPR we discuss this issue. We were assured that Bank projects were being given priority. Our experience is that discussion has been very positive. The only project in which we have faced this issue is the Yacyreta project. And there it wasn't for lack of funds but it was because of the government's own privatization strategy for Yacyreta which we fully support. And now that we have agreement on their commitment for this project as well, we don't see this as an issue. On the issue of the IMF restrictions, the IMF always puts a global ceiling and does not get into the discussion of individual project ceilings. And certainly in the case of Argentina we have in all of our operations not had any of these difficulties. I would like to turn to Mr. Hecht, Mr. Chairman, for project related questions. MR. HECHT: I wanted to respond to three of the points that were raised during the comments. [--- Unable To Translate Graphic ---] nm I believe Mr. Rill asked why does this operation not envisage the government paying the debts of the health insurance funds, the Obras Sociales, that are closed as part of this consolidation process. And I think that Mr. Evans in his intervention answered that question, in effect, when he made a plea or made a recommendation that the resources, the special resources under this program, which are substantial but are still limited, be targeted, be directed at those Obras Sociales which have viable restructuring programs and not used to pay off the debts of those that are going to close. This is the government strategy and we endorse it quite strongly. We also expect that the Obras that do close their doors, the volume of debts involved there will not be so large that the impact, financially or on the health care providers that would not in effect be paid up, their arrears paid, that this would have a serious disruptive effect financially or on the medical care provision in Argentina. On the point that Mr. Good raised, the sense he had that perhaps the Bank didn't feel comfortable or wasn't fully owning this reform program -- and he pointed at some language that might hint at that in the report -- let me assure you that we, first of all, worked very closely with the Argentines on the development of this strategy. [--- Unable To Translate Graphic ---] nm We were already engaged in policy dialogue, sector work on health financing in Argentina before the prospect of this operation arose about this time, March/April of last year. We worked closely with the government and with these other stakeholders that several of the speakers alluded to. And we feel that the approach that is being taken here is very much consistent, first of all, with the recommendations of the World Development Report 1993 on the reform of social health insurance, and that it is consistent with the analysis of the Argentina situation. So, we think that the Argentines have got it right here, and we don't mean in any sense to distance ourselves from this program. We believe that this approach which involves introducing the competition, the limited competition, and the much stronger regulation within this framework of the payroll tax financed health care is the way to go in Argentina. It very much does look to the Netherlands and Germany as perhaps relevant experiences, if not models, and we are very much behind this program. And finally, Mr. Good asked some questions concerning this process of consolidation within the health insurance fund area, this shrinking of the number of Obras Sociales. [--- Unable To Translate Graphic ---] nm When we said in the report that it is thought that there would be a reduction in the numbers, perhaps we should have said that we expect that this will take place. We have seen this happen, for example, in the Netherlands over the last six or eight years under a very similar set of incentives. And we anticipate very much that this will happen in Argentina. Finally, in that regard, you asked, Mr. Good, I believe, whether in this process the low income Obras Sociales, perhaps well managed but with low-income workers, would somehow be disadvantaged in this process. I think again you answered the question when you said that you found in the report this extensive discussion of the standard benefits package, and the fact that all of the pooled resources that the Central Government receives for redistribution purposes would go to those currently lower income Obras Sociales to make it affordable for them to provide this full set of standard benefits. So, we don't believe that they will be disadvantaged. We think that a number of them, the larger ones which can achieve economies of scale quickly and are well managed, will be among the survivors. Thank you. MR. KAJI: Mr. Rill. MR. RILL: Thank you. [--- Unable To Translate Graphic ---] nm Three points on which I would like to follow up. First on the project itself, I did not have the benefit of reading as carefully as Len Good the document, but when he started explaining his concerns, I immediately felt comfort because the question of who survives and whose debt, therefore, will be taken care of or not is closely interrelated to the concerns raised here. So, I must say I admire you that you can really distinguish this in your answers a little bit and how you are dealing with it, because, I mean, if you provide it, you find a satisfactory answer to the concerns of Len Good, then fine, then I can sleep well as well. But I think if not, then we are in a double jeopardy somehow with regard exactly to the low-income sectors of the health insurance providers. On two other points more generally: unemployment, productivity gains, more efficient labor market mechanisms and still quite high unemployment rate. In addition, I had highlighted the question of regional disparities maybe in this respect. Can you illuminate a little bit what you expect in the future from all these gains on the productivity side and labor market efficiency, in terms of what it means for the people at the end, in terms of their income and their employment opportunities? [--- Unable To Translate Graphic ---] nm My last point has to do with not particularly with this project and this document, but I started wondering when we are talking about decentralization movements in Argentina and elsewhere and still our statistics, for example, on government finance and the revenues and budget balance, are talking only about the Central Government. Just as a hint for the future, if we go more intensely into decentralization, I think we have to take into account then the overall relationship of a consolidated balance of the budget and the revenue side. Thank you. MR. KAJI: Thank you, Walter. Gobind, did you want to react to the last two points, in particular? MR. NANKANI: Yes. On the unemployment issue, it is correct. The unemployment did rise significantly in 1995, but the good news was that it fell from 18 to 16 percent. And we have in the leading increases for the first quarter of 1996 a number of suggestions that the unemployment rate when announced may decline somewhat again. The issue, however, is that we think that the recession in 1995 caused a lot of the structural unemployment to emerge quickly, and we have also seen a [--- Unable To Translate Graphic ---] nm major increase in participation rates over the last two or three years. So, while we expect that labor market reform and the growth of the economy and the recovery of the economy in general will tend to bring the unemployment down over time, we don't anticipate a very rapid fall. It is will be a gradual fall as labor markets function better and growth picks up. And this is an issue that the government is very much aware of, concerned with. We have done economic work on the labor market situation with the government, and policies are being designed basically to work on labor as well as growth prospects. On the regional disparities, it is clear that the regional disparities are severe. Some of the provinces in the northwest have had a great deal of difficulties. And we are hoping and working with the government in terms of the provincial reform package to improve the incentives for reforms and to also bring in an environment in which private sector activity can be encouraged in the provinces to improve that situation. MR. KAJI: Thank you, Gobind. Javed, do you have any closing points either on Argentina or to respond to Huw Evans' question on Mexico? MR. BURKI: Thank you, Mr. Chairman. [--- Unable To Translate Graphic ---] nm Just a couple of points. One, on Argentina, I am looking at the statement circulated by Mr. Nogues, and he has a very interesting chart on open unemployment rates. And if you look at that chart, you will see that unemployment rates had begun to go up quite significantly even before the crisis of 1995. If the peso crisis had not occurred, that notwithstanding we would have seen a further rise in unemployment in 1995. What the crisis of 1995 did was to produce a deep recession and, therefore, a very deep structural change and, therefore, quickened the pace of adjustment. And that is why we have seen a very fundamental increase in the rate of unemployment. We should also be mindful of the fact that there is going to be an asymmetrical behavior insofar as unemployment is concerned. It has risen very sharply in the last twelve months or so, but we don't expect that it will come down equally sharply as the economy begins to pick up. And that is because of the fairly massive adjustments that are taking place in the asset base of the economy. This analysis is covered in the report that Mr. Nankani was referring to. And this will be discussed by us with the Argentine authorities. [--- Unable To Translate Graphic ---] nm Insofar as Mr. Evans' question is concerned with respect to analysis of the Mexican situation, we have done a lot of work in the last one year or so, Mr. Evans, and we are now prepared to present our conclusions. We expect to do that in the context of the next country assistance strategy which we will bring to you in the next few months. This is going to be a very different country assistance strategy in which we will focus a great deal not only on macroeconomic strategies the Mexicans are following and how we are assisting them in the pursuit of those strategies, but we will also go very deeply into the sectors in which we are engaged and define the sectoral strategies. In doing the latter work, we have learned a great deal from the responses that were elicited from the Bank as a result of the crisis, particularly in the financial sector, as well as sectors of social development. So, we will give you a full reading of our situation when we bring our CAS to you in the next few months. MR. KAJI: Gobind, do you want to come back again? MR. NANKANI: There was a question about the deficit and the inclusion of the provincial deficit in the overall deficit. The data on the provincial deficits are very shaky and, hence, their exclusion. [--- Unable To Translate Graphic ---] nm But as an order of magnitude, our estimate is that the consolidated provincial deficit is just below 1 percent, was just below 1 percent in 1995. And the expectation is that it will be halved this year. But the point is well taken that at some point we do need to have a consolidation. MR. KAJI: I think Walter's point is also more general. It goes beyond Argentina. I think it ties up with an earlier discussion we had around this table on issues of decentralization. And I think we agreed that we need to visit it in a much more cohesive fashion, both from lessons of experience, if you want to put it that way, and I think this issue of how do you look at the fiscal situation in the provinces, the quality of the data and their dependability clearly is valid in that case. Walter. MR. RILL: Thank you. I fully agree with you. Just one more question. Since you mentioned the magnitude of the potential deficit of the provinces, what you estimate, can you give me an indication of the order of magnitude of the revenue side of provinces? Sixteen something is the percentage of revenues of GDP on the regular level. If you add in the provinces, where do we stand then roughly? [--- Unable To Translate Graphic ---] nm Thank you. MR. NANKANI: I would be happy to provide that information to you later. MR. KAJI: Perhaps you can do that bilaterally after the meaning. Mr. Nogues. MR. NOGUES: I think I am the last speaker; I am not sure. I want, first of all, to appreciate the support of my colleagues. I want, second of all, before my colleagues to note the tremendous response from management and the way they have worked extremely efficiently in the case of Argentina. On commitment, perhaps I can do that by answering the question raised by Bimal. The convertibility law and the reform program of Argentina is supported by the major political parties, the most prominent economists of those parties and most important of all by the people of Argentina. So, I think the convertibility law will endure the test of time, and backtracking is not at all a consideration in this government. Thank you. MR. KAJI: Thank you, Mr. Nogues. If I might, if there are no other comments, with the help of Shengman and his colleagues try to sum up the [--- Unable To Translate Graphic ---] nm discussion that has taken place this morning on the country strategy update, I believe the Executive Directors welcomed the opportunity to review the progress on the country assistance strategy. And I think the Directors applauded the prompt and effective actions taken by the Argentine Government to confront the regional financial crisis and to deepen its reform efforts. I think there was clear recognition of the importance of the proactive and collaborative response by the Bank and other multilateral institutions. In view of the commitment and Argentina's track record and subject to continued macroeconomic management, willingness to reform, particularly in the provinces, and satisfactory project implementation, I think the Board generally expressed its support for the increase in the planned lending program for additional adjustment operations during the course of the next three years. I think the Directors recognized that adjustment has not been without costs in terms of economic activity, employment and the fiscal balance. And the Directors expressed their concern over the level of unemployment and urged the Bank to continue supporting the government's efforts to improve labor markets and improve delivery of [--- Unable To Translate Graphic ---] nm social services in health and education to the poorer segments of society. I think the Executive Directors expressed their concern that large provincial fiscal deficits are adversely impacting private sector investments. And the government was urged to address these deficits, address the institutional capacity problems and to deepen financial sector and public management reforms. Some Executive Directors did express concern for the Yacyreta project and asked that the availability of counterpart funds be addressed during the upcoming Bank mission. And I think the staff have provided a specific response on that based on recent exchanges with the government. And there was then the issue of graduation which was raised. However, I think there was agreement that this should be a matter which we should discuss in a separate fora as an overall policy issue on which the Board has had significant discussions in prior years. The next full country assistance strategy is scheduled for FY97 and it would provide the Board with a more in-depth review of the reform progress in the provinces and an assessment of the Bank's strategy to support that reform. [--- Unable To Translate Graphic ---] nm If there are no other comments, the formal concluding statement of the Chairman will be circulated, and the two loans are approved on the terms proposed. Thank you very much.