Statement by Enzo Del Bufalo at the Board meeting of May 15, 1997

CONFIDENTIAL International Bank for Reconstruction and Development International Development Association 87147 International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY EDS97-155 May14, 1997 Board Meeting of May 15, 1997 Statement by Enzo Del Bufalo ARGENTINA- Country Assistance Strategy I would like to commend the staff for this excellent Country Assistance Strategy that reflects very clearly the current situation of Argentina's reforms and proposes a coherent strategy for the forthcoming years. Argentina's recent economic performance has been satisfactory. The country has achieved a macroeconomic stability and it also includes a set of structural reforms in order to increase long-term competitiveness. The appropriate reaction ofthe government to the 1995 regional crisis has reinforced the international credibility of the authorities' commitment to attain economic reforms and have obtained immediate results in terms of economic growth (4.4 % in 1996 vs. a decrease of 4.6 the previous year). Nevertheless, there are three main challenges to be faced in the short and in the medium-term: To increase employment opportunities; to reinforce the capacity of provincial entities; to improve the delivery of social and health services; and to consolidate financial sector reforms. If those aims are met, the risk inherent in the strategy will be minimized. 1. Special attention must be paid to unemployment which is, in our opinion, the main cost of structural reforms and adjustments and the main source of social unsuitability in Argentina. The current rate of 17% unemployment is very high, but it is worse if we analyze the poorest regions with unemployment rates close to 60%. These are exceptionally high rates for a country that has traditionally enjoyed low rates of unemployment. It seems plausible to ask to what extent this high rate of unemployment is somehow related to the monetary and foreign exchange rate policies. Could it be that this unusually high rate is due primarily to high minimum wages that have been raising since the fixed parity of the peso and the dollar was established? In this case, it seems that the traditional inflationary pressures that no longer show in the peso vis-a-vis the dollar show up in the relationship between real wages and labor productivity measured in dollars. If this is so, a trade-offbetween monetary inflation and unemployment is at the bottom of the present situation, with no change in Argentina's endemic structural problem; i.e., high pressure of income claims with a low productivity. In this instance, it is difficult to understand the meaning of liberalization of the labor market, since the high wages are not due to institutional This document has a restricted distribution and may be used by recipients only in the performance of their official duties. It should not be distributed without the consent of the Executive Director concerned. I.  2 constraints but rather to a peso overvalued by an artificial parity with the dollar. I would like to hear some comments on this issue. Long·term measures such as promoting vocational education and training, upgrading basic and secondary education, and fostering private involvement at universities will be important. There is some room for EDI in all these issues. 2. We support the Bank's strategy to enhance the capacity of provincial entities. Moreover~ we support the idea of providing direct assistance to these sub· national governments and to create a framework of competitiveness among them to obtain World Bank funds. We also agree that triggers must be based on progress by local governments in implementing reforms, although perhaps some poverty indicators could also be included. This initiative will increase ownership of local institutions and will improve portfolio performance. In our opinion, there is no doubt that the implementation of social and health services by local governments will be more effective in reaching the more disfavored people (empoverished sectors) of society. We are sure that this strategy of the Bank will help reduce regional disparities and improve (eliminate, diminish) social unrest. Due to the fact that provincial governments have no access to capital markets and the importance of those entities to provide social assistance to the poorest, we support the distribution of portfolio between the federal and the local governments (2,5 out of 4 million $ to local level). A key element to ensure the success of the decentralization process is the financial capacity of local governments to face social and health expenditures with its own resources and with revenues shared with the federal government. We would want more information on it. 3. The consolidation of reforms in the financial sector will also be of the utmost importance. The privatization of provincial banks must be a priority. These banks could play an important role channeling resources to small and medium·size enterprises and in promoting the creation of employment. On a national level, strengthening financial market institutions will be also important. The role that IFC could play in this area is enormous. We support IFC's support to SMEs and its focus of on-lending programs in the least-developed regions of Argentina. These activities, together with measures to improve the economy labor capacity absorption, will be the best way to avoid a reversal of economic reforms and to minimize the risk of the Bank's portfolio. In conclusion, we support the US$ 1.500 million lending program for the next three years. The success of the strategy and the risk of the portfolio will depend largely on the capacity of the economy to create employment; in achieving the reform the financial sector in order to create small businesses; and, in the reform of local government programs.