Sustaining reform in Argentina

6c / NUMBER 137 Oprtin E D Precis Mac19 ons Evaluation Department March 1997 Sustaining Reform in Argentina A recent OED study reviews the the Bank, that means concentratinlg strengthen the export capacity of ag- World Bank's evolving relationshiip assistance onl improving provincial fi- riculture and industry, rationalize with Argentina over the 1985-95 pe- jiances, controllinig the cost of social se- the energy sector, liberalize trade, riod. The first half of this period zwas curity, and strengtheniing the banking strengthen public sector manage- marked by hesitant and eventually un- system. In turn, these objectives are in- ment, reform the banking sector, successful government attempts at re- tertwined with the continultinig need to and make some improvements form followed in the second half of the address health and educationi services in infrastructure and human re- decade by a highly successfil program and the welfare needs of the poorest. source development. The Bank of structural reform. The Bank's per- correctly judged that Argentina's formance evolved through a similar pat- By the early 1980s, Argentina future growth and development de- tern. High levels of Bank lendinig in faced serious macroeconomic in- pended on the government's ability extremely poor economic conditions stability, with a huge fiscal deficit to achieve stabilization. Thus it had led to poor outcomes in 1985-89. and a seemingly unsustainable linked lending disbursements to As macroeconomic stability returned debt problem. In those years, Bank progress on stabilization. Zuith new reforms, Bank lendinzg perfor- assistance to Argentina averaged matice improved as well, aided also by about $160 million a year, a com- Between 1985 and 1989 the Bank better project preparation and im- paratively modest amount given approved $3.2 billion to Argentina, proved portfolio managemenit. the country's size and importance. about half for structural adjustment. But when a new democratically But none of the three economic re- Bank support during 1990-95 was elected government came to power form programs the Alfonsin govern- very fruitful. It helped Argentinla im- in June 1983, pledging economic re- ment attempted during those years plement a comprehensive privatization form, international financial institu- achieved stabilization. The pro- program, restructure its external debt, tions stepped up their support. The grams shared a major flaw: they and restore access to private capital International Monetary Fund (IMF) failed to address the fundamental markets. The reforms, initiated in 1989 responded immediately; increased causes of the fiscal deficit. Although and culminiatinig in the Convertibility Bank lending followed. Total Bank Bank studies correctly identified the Plani of 1991, brought Argentinla its lending exceeded $7 billion over main sources of the deficit-public first period of price stability and the 1985-95 period. enterprises, provincial governments, grozvth in decades. Given the success and the social security system- of the reforms, Argentinla is more likely World Bank strategy Bank recommendations fell short to achieve sustained economic grozoth of proposing fundamental changes and poverty reduction now than it did 1985-89: relevant strategy, to the structures governing them. in 1991. Yet, the recovery is still vul- inadequate treatment nerable to reversals. And delayed action on severalfronits-namely, in reininlg Over 1985-89, the Bank's assis- *"rAt enltih,a Comnlry Assistance in the fiscal deficits of provincial gov- tance strategy was relevant, but Review," by Luis Ramirez and ernmenits and the social security sys- the effectiveness and efficiency of otli 'i Report No. 15844, June tem; reforming the strained finanzcial its support was poor. In 1985, Bank 1996. Available to Bank executive system; and correcting the neglect of strategy gave priority to supporting directors and stalt through the In- social services-can undermine the government efforts to stabilize and ternal Documents Unit and from sustainiability of reforms. The OED reactivate the economy by promot- Regional Information Services study concludes that for the recovery ing export-led growth and increas- Centers. Pr& . is ;e) itten by Farah to continuiie, Argentina needs to focus ing the availability of foreign ex- Ebrahimi. on completing the reforml agenda. For change. Bank assistance sought to ._I  Primavera, the new government Box 1: Poor fiscal management leads to trade policy reversal initiated deep-seated reforms immediatelv on taking office in Tho edin 19o.le s;ouh ta p. most fiscal measures at the heart June 1989, with the approval of aroned in brize exought to promte of compliance with the maeruelo- two laws: the Law of the Reform an.l IibMeraliie exports Durin>g nomic programo were merely prom- of the State and the Law of Eco- 1987,. the government mlet its ised. In the ensuinig months. Argen- seCtOral policy cncndirions: it e\- tina's fi-;ca1 situation steadilv dete- nogrc Emergency.rThenore panded and increeed the etti- riorated. By February 1989, the ad- program was a comprehensive rioratediBy February 198, t. t drivatization agenda inflation- cienc, o f a temporar\ admis ions Iustnlent program collapsed, due p a , i reginme tr e\purters; eliminated primarily to an untenable fiscal reduction and price stabilization e\port ta\e'; on manutacture,, and situwation. In April 1,4Sq. an e\plicit measures, and tax reform, all of broladened an indirect ta\ reim- across-the-board export tax of ' which culminated in the govern- bursement scIheme. in etiect grant- percent was introduced, and prior ment's Convertibility Plan of 1991. ing free tride status to industrial appro\val of adv'ance import decla- After a difficult first year, the re- e\porters Compliance with loan rations as a condition tor import forms arrested inflation, which |onditions. together ivith initial financing was reintroduced. Major in turn boosted confidence in the s-tabilization eIforts. led the Bank progress, under the loan% was thus economy, attracting a large influx to approve the relea-e of the sec- nullitied. (See also, St1 ila l 17ilI ion l of private capital. ond tranche. The loan *as fullk Adjustment in Argentina, Prect, No. disbursed by the end ot 19_S. .Yet 69, June 1994.) During the first two years the _ _ _ _ _ -_ ___ Bank actively supported the re- forms through intense policy dia- logue, economic and sector work, The first of the programs-Plan refused to back the new package and technical assistance rather than Austral, approved in 1985-sought because of the Plan's weak financ- lending. The Bank returned to a to improve public finances, prima- ing measures. Although the Plan large lending program in late 1992, rily with emergency measures to Primavera focused on rationalizing after the government had demon- increase fiscal revenue and reduce the public sector, the fiscal package strated clear ownership of a highly overall expenditures, and to control was not strong enough to address successful reform program. inflation, mainly through an unor- short-term internal and external fi- thodox program of foreign exchange nancing problems. The program's The Bank recognized that sus- controls and price freezes. But none failure led to the worst episode tained stability and growth re- of the measures targeted the struc- of hyperinflation in Argentina's quired continued attention to fiscal tural deficit-that is, the deficit history and an early exit for the fundamentals. It thus focused its that remains after transitory fac- Alfonsin government, in mid- early operations (in 1991) on re- tors in fiscal revenue and expendi- 1989. That failure also led the forming public enterprises, the tures are adjusted for. In particu- Bank to adopt a cautious lending most pressing of those problems, lar, they failed to change the major strategy in 1990-92-when a new and as fiscal conditions improved, culprit of the public sector deficit: government initiated broader re- financial sector reform and later, the inefficient public enterprises. forms-intensifying instead the on improving social services. In the end, Plan Austral was too economic dialogue and provision narrow and poorly implemented of technical assistance. (See also, The Bank's public sector man- to bring about meaningful change. Stabilization and Adjustmnenit in Ar- agement loans helped the govern- As economic conditions worsened, gentinia, Preicis No. 69, June 1994.) ment carry out the most far-reach- the climate for successful lending ing privatization program ever deteriorated. (See Box 1.) Yet in- In the face of the government's attempted in any country (see Box stead of reducing lending as the history of unfulfilled reforms, 2; also see Privatizing Argenitina's assistance strategy had planned, the Bank should have been more Public Eniterprises, Precis No. 100, the Bank increased lending in sup- cautious in continuing lending in December 1995). They also helped port of another reform program, 1985-89. At a minimum, it should reorganize the central bank, mobi- Plan Australito in 1987, and again have required upfront actions as lize revenue, and reduce expendi- for Plan Primavera in 1988. demonstration of government's tures, measures that proved instru- capacity to carry out the reform mental in helping the government Coming on the heels of two program. implement the Convertibility Plan. failed economic reform programs, A large financial package, intro- Plan Primavera was particularly 1990-95: good ialihi- anid policy duced in 1993, included a debt re- controversial, both inside the Bank dialoguie, buit slow start in leniding duction component that helped and between the Bank and the Argentina to reduce its debt and IMF. The Fund, which had also fi- Contrary to the Bank's low ex- debt service obligations, enabling nanced the two previous attempts, pectations following the failure of the country to regain access to pri- March 1997  vate capital markets. These opera- Bank advice during the early years the country policy dialogue was tions plaved an important role in failed to recommend fundamental fruitful. But the final outcome of effecting Argentina's economic re- structural change. Recommenda- Bank operations for this period is covery, but the program also had tions often validated existing poli- still to be determined since most several weak links. cies or focused on making the insti- projects are ongoing. tutional frameworks work better. For example, the Convertibility Yet, the early studies, particularly Recommendations Plan, which had curbed spiraling those of trade policy, public expen- inflation, had also made the econ- diture management, and fiscal Suistaitnability of reforms hiinges on omy highly vulnerable to move- prospects, helped to lay the foun- conztinuilation of the reform agenda. ments in capital flows. While the dation for the reforms of the 1990s. Bank's risk analysis in the 1992 And later studies on agriculture, strategy pointed to this possibility, industry, and finance contributed . 2 it offered no contingency action plan directly to the economic reforms Box 2: Argentna's to protect against it. Despite such of the Menem administration. privatization program weaknesses, by 1993 Argentina's Much of the better economic ad- reforms had brought the country vice came from studies financed In 1989, when the Menem gov- growth and price stability for the through project preparation and ernment launched its privatiza- first time in decades. Success led technical assistance, or in informal tion program, public enterprises to overoptimism, however. Even discussions and policy dialogue, accounted for about 50 percent of though the economy remained The latter, for example, proved es- the public sector's total deficit. highly vulnerable, the Bank's 1994 sential to the success of the privati- The privatization program was strategy paper proposed to phase zation initiative. unique in the world since it cov- sutradtegymper propose tod phe z ered all major enterprises and it out adjustment lening and pre- was accomplished in record time. saged the reduction of Bank assis- Quality ot lenldinzg imnproves The major shortcoming was an tance. But by late 1994, the Mexico absence of a regulatory frame- financial crisis had induced a major Lending volume during 1985-89 work to govern the monopolistic reassessment. This time, the Bank was high, at about $3.2 billion, but behavior of the newly formed en- reacted quickly: within four months of poor quality, the result of macro- terprises. Nevertheless, it was im- a new country assistance strategy economic instability, inadequate at- portant for the government to go and lending program had been for- tention to the quality of project through with privatization, since mulated aimed at helping Argen- preparation (quality at entry), and waiting until the framework was tina complete its structural adjust- weak portfolio management. Can- established would have resulted ment program. cellations were high at $0.8 billion in lost momentum to the detri- or 26 percent of the total amount ment of the program. Sustained economic growth and approved during the period. And poverty reduction remain uncer- the proportion of unsatisfactory In just four years, the program tain, however. Sustaining them outcomes was among the highest privatized banks, the national will depend on how quickly the in Latin America and Bankwide airline, railways, fuel, natural government can make headway (7 out of the 12 projects evaluated, gas, electricity, telecommunica- on the remaining economic agenda: representing more than 80 percent tions, ports, water and sewerage alleviating poverty; improving the of commitments). services, and manufacturing, in- financial performance of the social cluding steel, various assembly security system and of the provin- During 1990-94, lending re- operations, and defense-related cial governments; restructuring the mained high at $4.1 billion, and industries. By 1993, the program banking system, particularly that of quality at entry improved. More had produced a significant im- the provinces; and improving social than 70 percent of the portfolio more than $8 billion in cash and sector expenditures. approved during this period was reduced public external debt by assessed as having good quality at more than $10 billion at face value Bank instruments entry compared with less than 45 and over $4 billion in cash equiva- percent in a prior cohort. The com- lents. The program elimninated the Usefiul nonlending services position of lending proved espe- bulk of subsidies and resulted in cially attuned to reform priorities. higher tax revenues, greater in- Throughout the ten years, well- About 70 percent of lending was vestment in infrastructure, and targeted economic and sector work for adjustment or technical assis- improved quality of public ser- helped shape a constructive policy tance linked to structural adjust- vices. But the need for establish- dialogue. The Bank's early eco- ment. Technical assistance loans, ing the legal framework remains nomic and sector work provided among the most problematic in a priority issue requiring both detailed analysis of Argentina's Bank portfolios, proved remarkably Bank and government attention. major economic constraints. But successful-another indication that OED Precis  For the Bank, this means continued ing, conditionality should be trans- ments to assist countries with trans- support for policy reform to help parent and adhered to. fer of resources, particularly in the Argentina achieve full access to the shiort term, is more appropriately the institutional financial markets. Portfolio management requires con- Fund's responsibility. tinued improvement. As part of this The Bank should complement local effort, the Bank should focus on im- The Committee on Development capabilities and focus the bulk of its as- proving quality control of projects Effectiveness, in its comments on sistance strategy on areas in which it at entry and strengthen supervision the study, found the report's findings has a comparative advantage. Given by using performance indicators, relevant for other countries in transi- the high levels of technical capabili- especially to monitor the structural tion and for guiding future opera- ties in Argentina, the Bank should fiscal deficit. Finally, it should pilot tions in Argentina. It agreed with concentrate its assistance on the new lending instruments better OED that the Bank needs to improve highest priorities for reform: the adapted to risk management. its assessment and management of banking sector, provincial finances, risk and address the issue of overopti- and social security. These, however, Bank management, in its response mnism in Bank rating of projects and are intertwined with the continuing to the study, agreed with most of OED's in economnic projections. Neverthe- need to address health and educa- concluisions and accepted the proposed less, it also noted the importance of tion services and the welfare needs recommendations regarding the priori- judicious risk taking in development of the poorest groups. ties for the Bank's country assistance programming. The committee ex- strategy, greater focus on1 the fiscal pressed concern about the transfer of The Bank shiould avoid changing the performance of the provincial govern- responsibilities to provinces without focus of its lending strategy too often. ments, the level and efficiency of social adequate assessmenit of their instifu- In particular, the areas of concentra- sector spendinig, and the financial sec- tional capacities, noting that With1 tion should not oscillate in response tor. And it agreed on the importanice of greater focus on provinces, the Bank to fluctuations in the flow of private improved quality at entry and better will need to strengthen its field pres- capital. The increase in Bank com- portfolio management. It noted that ence in those areas. It emphasized the mitments to Argentina in 1995 (a the Bank is actively supporting efforts need for a regulatory framework to direct consequence of the financial to expand the reform agenda into the guide privatized firms. And while it crisis in Mexico) was both appro- provinces. And it will continue to acknowledged the clarification offered priate and essential for enabling implemnent and expand coverage of the by Bank management on the timing Argentina to balance accounts and growin1g portfolio of operations at the of Bank assistance to the Menem ad- restore confidence in private finan- province level, seeking to enhance the ministration, it also agreed with cial markets. But the remaining de- quality and efficiency of education and OED that there was a potential conI- velopment agenda for Argentina in health services and supporting poverty flict between the objective of resource 1995 was not significantly different reduction. In three areas, however, transfer to achieve macroeconomic from that in 1994 or in 1992, while management ,iff. ,,d with OED: First, purposes and sectoral reform objec- the focus and composition of the it thought the study overplayed the tives. Finally, the committee sug- Bank's assistance strategy changed importanice of the Bank's financial as- gested that fiuture country assistance significantly. Flexibility should be sistance relative to that of policy advice reviews assess the roles of bilateral allowed in the margin-possibly and economtiic and sector work. Second, and other multilateral agencies, through lending instruments that while it agreed that the Bank needs provide more analysis of ongoing make funds readily available in t L'. Ilia. j't 1: i plans to deal with risks, projects, discuss environmental is- emergencies-but continuity in it cautioned against ex post judgments sues, and examine the adequacy of terms of issues addressed should tlhat could discourage all risk taking. the Bank's field presence and of the be at the core of the strategy. If the Finally, it noted that OED's sugges- interactioni between headquarters strategy requires conditional lend- tion that the Bank develop newv instrit- and the field. OED PreMs is produced by the Operations Evaluation Department of the World Bank to help disseminate recent evaluation findings to development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. This and other OED publications can be found on the Internet, at http:/ / www.worldbank.org /html /oed. Please address comments and inquiries to the managing editor, Rachel Weaving, tel: 1-202 /473-1719, fax: March 1997