Statement by Marc-Antoine Autheman at the Board meeting of May 15, 1997

CONFIDENTIAL International Bank for Reconstruction and Development International Development Association 87149 International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY EDS97-157 Mayl4,1997 Board Meeting of May 15,1997 Statement by Marc-Antoine Autheman Argentina- CAS e ECONOMIC SITUATION Thanks to the Argentine authorities' determination to safeguard macroeconomic stabilization, the country successfully overcame the 1995 crisis which led to a recession. Today, Argentina tends to return to the levels of sustained growth it had enjoyed in the first part of the decade. Furthermore, the progressive build-up in external confidence has allowed Argentina improved access to international capital markets, another very encouraging outcome. Nevertheless, some structural weaknesses of the economy, underlined during the recession, are still to be addressed, and require further reform efforts. In my view, two of the main obstacles to maintaining the pace of progress are, on the one hand, the risks of external financing instability, and, on the other hand, the high level of unemployment reached in a relatively short period. The latter, in particular, has clearly become a threat to continued implementation ofthe reform agenda, and a major obstacle to poverty reduction. Staff rightly points out the main causes of unemployment in Argentina. I think they should be at the core of our assistance strategy. e BANK'S STRATEGY I find the assistance program proposed by staff not clear-cut enough, and I would like to suggest some significant adjustments. (i) The graduation issue Our assistance strategy should aim at helping Argentina graduate from Bank's support in the foreseeable future. Graduation is not justified only by the level of Argentina's per capita GOP (above 8,000 USD). More importantly, it would signal confidence that This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. It should not be distributed without the consent of the Executive Director concerned.  2 Argentina can rely on market financing. The proposed CAS seems largely incompatible with such a strategy: maintaining high lending volumes for the next three years would indicate a lack of confidence in Argentina's prospects. But the reduction of lending should be implemented with caution, in particular by establishing: triggers, to allow increased adjustment lending in case of exogenous shocks. In light of the 1995 financial crisis, this would offer a welcome "financial safety net" in conjunction with IMF support; clear priorities, in order to channel the remaining investment lending activities in accordance with our analysis of the present main challenges for Argentina. (ii) The lending program I would like to mention briefly other matters of concern on the proposed base-line lending scenario: the social lending program would amount to half of the Bank's new portfolio. First, it appears that this type of lending does not perform well in Argentina due to --among other things-- insufficient ownership and inefficient delivery mechanisms at the provincial level. Second, and more generally, I think that IBRD lending is usually not an appropriate means to finance projects in social sectors --like education or health. A condition of success for such projects is the authorit~es' commitment to mobilize adequate fiscal resources, a proof of much sounder financial management. Accordingly, in these areas, Bank assistance should be articulated around the design of a social safety net to mitigate the short-term impact of reform and better address the issue of unemployment; adjustment lending would remain another important component of the proposed lending program. This is not consistent with the fact that Argentina, today, has no major difficulty in reaching a sustainable balance of its external accounts; several more specific lending operations proposed by staff also seem questionable. For example, I do not consider that the Bank should get involved in the reform of Argentina's judicial system. Finally, I would advocate a reduction in Bank's lending in order to offer a more tailor-made and high-quality assistance, i.e., focused on a few investment projects. Meanwhile, we should maintain a high level ofESW, in order to help the authorities design a "second-generation reform agenda", including the modernization of the financial sector in connection with IFC's interventions.