CONFIDENTIAL

          International Bank for Reconstruction and Development
                   International Development Association                                                  87150
                      International Finance Corporation
                 Multilateral Investment Guarantee Agency
                                        FOR OFFICIAL USE ONLY


                                                                                                                 EDS97-158
                                                                                                                May 15,1997


Board Meeting of May 15,1997
Statement by Eugene Miagkov

                               Argentina - Country Assistance Strategy

        We support the proposed Country Assistance strategy for Argentina as appropriate for the
country's current goals and objectives. We would like to congratulate the Argentine authorities
on continued strong performance of their reform effort which allowed the country to overcome
the recent crisis and achieve economic growth. However, much is yet to be done in order to
sustain this growth, and the proposed Country Assistance Strategy is designed to help the
Government in this endeavor. I would like to address two areas in more detail, financial sector
development and social sector strategy.

Financial sector. The effects of the recent regional crisis demonstrated the inherent instability of
the currency board regime and its vulnerability to external shocks. One of the major tasks facing
Argentina is to address this vulnerability and prevent the repetition of the unfortunate events of
the recent past. The report does not do justice to the scope or the consequences of the financial
crisis nor to the international effort required to overcome it. We would like to hear the staffs
comments as to the lessons from the crisis and their incorporation into the Strategy. In particular,
we would like to know more about the steps taken or planned to improve the supervisory
function of the Central Bank designed to prevent crises in the future.

Furthermore, while the Strategy includes financial sector development as one of its elements, it
remains very sketchy on the subject. What is proposed in the area of improved banking
supervision? What has been done to date? What is being done to restructure and recapitalize
provincial banks, which are major borrowers of resources in international markets? The
experience of such reforms in Argentina is going to be important in many other countries facing
similar problems.

Social sectors. We particularly welcome the importance given in the new CAS to the issues of
poverty alleviation and social development. Increased welfare of the population is both the goal
of economic reforms and a necessary prerequisite for their success, and in this context the
emphasis on social development is crucial for sustained growth. In addition, since the country's
access to the world capital markets is improving, the involvement of the World Bank should




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concentrate on areas where it has a comparative advantage, of which human development and
poverty aiieviation are examples.

One of the important tasks facing Argentina is to improve the quality and access to basic social
services. Disappointing record of education on all levels may become a major deterrent to growth
if it is not addressed. We support the proposed projects in secondary and higher education, and
welcome the coordination with the IDB which carries out projects supporting primary education
and vocational training.

Poverty remains a serious concern in Argentina despite recent macroeconomic improvements. In
our view the close link between poverty and unemployment warrants special attention to labor
market reform and programs of selective employment support. However, both increased labor
market flexibility and temporary employmer.t schemes are likely to benefit only part of the poor,
those whom the report calls the vulnerable, or cyclical, poor. We would like the staff to comment
on the measures which could be taken to improve the position of the other categories, the
stagnant poor and the indigent. In particular, we would like to know whether programs of
education and/or vocational training are seen as a promising solution to this problem, and if so,
whether these programs should be targeted or universal. If possible, we would also like to hear
about the recent trends in the structure of poverty, i.e. about the movements among the various
categories of the poor as a result of macroeconomic reforms.

We welcome the growing role of support to provincial reform in the Bank's program in
Argentina. Local capacity building is an essential condition for the success of decentralization
and effective service delivery in the social sectors, and we believe this is an area where the World
Bank could play an important role. The proposed mechanism of transfer of funds to the regions
strikes a good balance between selectivity based on performance (rewarding strong performers
designed to encourage emulation) and need-based assistance in social sectors. We would like the
staff to clarify whether it is planned to lend any money directly to provinces, and if so which
projects have this provision.

Finally, we would like to support the proposal of agreeing with the Government on a set of
monitorable indicators necessary for graduation. We agree that the per capita income alone does
not suffice and that terms of access to capital markets and social indicators should also be taken
into account.