DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

ARGENTINA

IDB COUNTRY STRATEGY WITH ARGENTINA (2004-2008)

This document was prepared by the project team consisting of José Seligmann-Silva (RE1/OD1), Project Team Leader; Claudia de Colstoun (RE1/OD1); Carolin Crabbe (RE1/FI1); Gustavo Zuleta (RE1/SO1); Francisco Mejía (RE1/SC1); Mario Yano (RE1/EN1); Claudete Camarano (CAR); Alejandro Izquierdo (RES); Fernando Quevedo (INT); Marcelo Cabrol (RE1/SO1); Luis Estanislao Echebarria (SDS); Leandro Medina (RE1/OD1); Rachel Robboy (PRI); Sotero Arizu (CII); Alfredo Giro Quincke (MIF). Also participating were: Jorge Febres (RE1/SC1); Nybia Laguarda (RE1/SC1); Héctor Salazar (RE1/SC1); Emilio Sawada (RE1/FI1); Rafael Acevedo (RE1/FI1); Flora Painter (RE1/FI1); Gabriel Casaburi (RE1/FI1); Pedro Martel (RE1/EN1); Francisco Basilio de Souza (RE1/EN1); Mabel Martínez (RE1/OD1); Viola Espínola (SDS); André Medici (SDS); Eduardo Rojas (SDS); Juan José Listerri (SDS); Pablo Angelelli (SDS); Betty Rice (DPP); Alvaro Flores (HRD); Cristina Velásquez (RE1/OD1); Nicole Fragano (RE1/OD1); and María Victoria Cabo (RE1/OD1).

CONTENTS

EXECUTIVE SUMMARY

I. KEY DEVELOPMENT CHALLENGES ................................................................................ 1

A. Toward sustainable and more equitable growth..................................................... 1 B. Greater stability and overcoming the effects of the crisis ....................................... 3 C. A stronger institutional framework for better governance and fiscal sustainability 7 D. A more favorable climate for investment and productivity growth, to enhance

competitiveness................................................................................................... 10 E. Poverty reduction, rebuilding the human resource base, and promotion of

sustainable development ..................................................................................... 13 F. The government’s program and medium-term economic prospects..................... 16

II. PAST STRATEGY AND PORTFOLIO ISSUES: LESSONS LEARNED ..................................... 19

A. Strategic programming cycles ............................................................................. 19 B. The Bank’s response to the crisis ........................................................................ 20 C. Portfolio issues.................................................................................................... 22

1. Composition................................................................................................ 22 2. Outcomes .................................................................................................... 23 3. Age.............................................................................................................. 24 4. Net flows..................................................................................................... 25 5. Factors affecting execution.......................................................................... 25 6. Lessons learned ........................................................................................... 26

D. Implications for the future strategy...................................................................... 28

III. THE BANK’S STRATEGY 2004-2008............................................................................. 29

A. Principal areas of strategic focus ......................................................................... 30 B. Strategy implementation ..................................................................................... 38 C. Loan scenarios .................................................................................................... 40 D. Strategy implementation risks ............................................................................. 41 E. Description of the consultation process ............................................................... 42 F. Coordination with other multilateral agencies ..................................................... 43 G. Monitoring of the strategy................................................................................... 44 H. Agenda for country dialogue ............................................................................... 44

STRATEGY MATRIX: IDB COUNTRY STRATEGY WITH ARGENTINA

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ANNEXES

Annex I Operations program and linkage with IDB sector strategies Annex II Program of nonfinancial products Annex III Description of the consultation process Annex IV References Annex V Status of Millennium Development Goals in Argentina Annex VI Main economic and social indicators Annex VII Management’s actions on the recommendations contained in OVE’s

“Country Program Evaluation (CPE) Argentina : 1990-2002” Annex VIII Profile of Argentine Public Debt Service Payments to Multilateral

Organizations

INFORMATION AVAILABLE IN THE TECHNICAL FILES

1. Active Portfolio Matrix

2. Sector diagnostic studies (Poverty and Governance)

3. Document on key development challenges

4. Minutes of consultation workshop

5. Relationship between the target areas of the IDB Country Strategy with Argentina

and the areas of action of the Bank’s sector strategies

6. Note: The IDB Country Strategy with Argentina and gender issues

7. Web page containing preparatory documents for the IDB Country Strategy with

Argentina

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ABBREVIATIONS

AFIP Administración Federal de Ingresos Públicos [Federal Public Revenue Administration]

AFJP Administradora de fondos de jubilaciones y pensiones [Retirement and pension fund management company]

ANA National Customs Administration ANSES National Social Security Administration [Administración Nacional de

Seguridad Social] CAPI Componente de Apoyo a la Población Indígena [Indigenous Population

Support Component] CPE Country Program Evaluation CPI Consumer price index CSO Civil society organization DGI General Tax Directorate ECLAC Economic Commission for Latin America and the Caribbean EPH Permanent Household Survey FTAA Free Trade Area of the Americas GCBA Government of the City of Buenos Aires GDP Gross domestic product IDB Inter-American Development Bank IFC International Finance Corporation IIC Inter-American Investment Corporation IIRSA Initiative for the Integration of South American Regional Infrastructure IMF International Monetary Fund INDEC Instituto Nacional de Estadística y Censos [National Institute of Statistics

and Censuses] MECON Ministry of Economic Affairs MERCOSUR Southern Common Market MIF Multilateral Investment Fund MSME Micro, small, and medium-sized enterprises OVE Office of Evaluation and Oversight PRI Private Sector Department PROSAP Programa de Servicios Agrícolas Provinciales [Provincial Agricultural

Services Program] SEP Social Entrepreneurship Program SIEMPRO/ PROAME Programa de Atención a Niños y Adolescentes en Riesgo [Program on At-

Risk Children and Adolescents SME Small and medium-sized enterprises UNDP United Nations Development Programme

EXECUTIVE SUMMARY

Introduction: Argentina has gone through a political, financial, economic and social upheaval on a scale unknown in its recent history, as a result of factors that rendered its economy highly vulnerable to changes in the international economic environment and its own internal dynamic. In late 2001 and early 2002, the then administration implemented a set of measures that paralyzed the financial system and led to a suspension of service on public debt with private-sector creditors and the abandonment of convertibility. This heightened uncertainty in the legal and regulatory framework, with major repercussions for the production of goods and services, and extremely high social costs. By late 2002, Argentina’s gross domestic product (GDP) had shrunk by a cumulative 20% over a four-year period, leaving more than half of the population below the poverty line.

Once the most acute phase of the crisis had been overcome, from the second quarter of 2002 onward the country has been striving to restore confidence in its institutions and to formulate a macroeconomic framework capable of guiding the economy onto a sustainable recovery path. The national government elected in May 2003 has managed to assert its leadership, thereby facilitating decision-making and making it possible to restore confidence in the country’s institutions and strengthen governance.

Development challenges:

The key medium- and long-term challenge facing Argentina is to achieve sustainable and more equitable economic growth. The economic recovery seen since late 2002 may well run out of steam and become unsustainable, unless the country can meet a set of key challenges. These include: (i) maintenance of macroeconomic rules and policies capable of making the economy less vulnerable to domestic and external shocks; (ii) building sound public institutions that guarantee governance through more stable rules, legal certainty, and transparent and efficient public administration; (iii) financial sector restructuring to provide adequate services that are accessible to a broader range of economic agents, thereby promoting intermediation between saving and investment; (iv) formulation of a national competitiveness strategy founded on a broad consensus among the public sector, business and civil society; (v) promotion of an open and regionally integrated economy that encourages competitiveness and innovation; (vi) creation of a highly skilled and integrated society, capable of enhancing productivity and social welfare; (vii) promotion of effective, efficient and fiscally sustainable social development policies that address social problems.

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The government’s program:

The government is committed to a policy of promoting sustained growth with social equity, for which it needs to implement a broad range of economic, social and institutional reforms. To help overcome the crisis, the government agreed to a medium- and long-term program with the International Monetary Fund (IMF), which includes a fiscal framework to meet growth, employment and social equity targets, while also providing a basis for normalizing relations with creditors and assuring sustainability of the public debt. The program contains a strategy for strengthening the banking system and institutional reforms to facilitate corporate debt restructuring, help resolve outstanding issues with public utility firms, and, crucially, to improve the investment climate. In late August 2004, the IMF agreed with the Argentine authorities to resume the Third Review of the program once the public debt in arrears with private creditors had been restructured. At that time, the results of the debt restructuring and the advances made in implementing the program’s agenda of structural reform will be evaluated.

Placing emphasis on strategic programming and mindful of the regional differences that exist in the country, the government is seeking to improve the investment climate so that the public and private sectors can pull together. This entails strengthening SMEs and technological innovation; promoting technical education; fostering intensive use of human resources, more open trade practices and greater regional integration; and guaranteeing the quality of public utilities and infrastructure. The government also aims to consolidate a sound fiscal framework and restore governance capabilities at all levels. At the same time, it intends to consolidate a targeted, comprehensive and efficient social safety net, to increase social inclusion.

Objectives of the Bank’s strategy:

The main objective of the Bank’s strategy for 2004-2008 is to help the country achieve sustainable and more equitable growth.

Main strategy: The strategy agreed for 2004-2008 aims to concentrate the Bank’s action on the following areas:

• Institutional strengthening for better governance and fiscal sustainability, targeted on enhancing legal certainty and the technical skills for public administration at the three levels of government, through support for more streamlined rules and regulations; greater transparency in administrative procedures and public policies; and strengthening of the functional and technical capacity of the civil service, together with its fiscal sustainability and capacity for program planning, monitoring and evaluation.

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• A more favorable climate for investment and productivity growth, to enhance the country’s competitiveness, focusing on support to the productive sector to revive investment, creation of positive incentives for a reduction in informality and creation of formal jobs, by supporting reform of Argentina’s productive development and export framework; modernization of innovation and technological development systems; reform of the financial structure in relation to credit and nonfinancial services to microenterprise and small businesses, together with projects to reduce informality; and reactivation of the existing infrastructure project portfolio (of more than US$1.2 billion). A major goal will be to re-establish conditions for financing new private sector projects (PRI).

• Poverty reduction, rebuilding the human resource base, and promotion of sustainable and inclusive social development, prioritizing actions that lead to crosscutting consolidation of social safety net programs by enhancing the connection between these programs and interventions of a universal nature, and their institutional strengthening. These actions will focus on social safety nets (targeted subsidy program for poor and indigent families that will help unify existing subsidy programs, complementary efforts to re-engage heads of household in productive activities, and reduction of food vulnerability among children and the elderly); education(improvements in educational quality and implementation of evaluation systems, reform of secondary and vocational education); and health (strengthening of primary healthcare and mother-child coverage).

Operations program and nonfinancial products:

Two loan scenarios were prepared for implementation of the 2004-2008 strategy. The target scenario, which would enhance the Bank’s impact in targeted areas, represents US$5 billion in new approvals. In this scenario, to which efforts to implement the current portfolio and identify new projects are turned, the Bank’s exposure in the country would remain virtually unchanged. If these efforts proved insufficient, a second scenario envisaging new approvals of US$4 billion would come into play Both scenarios assume a framework of macroeconomic stability in keeping with the government’s medium-term program agreed with the IMF, which entails neutral loan flows between the country and the Bank while the IMF program is in force (September 2003 to September 2006). During this period, one major source of disbursements will come from execution of the current loan portfolio.

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To achieve the target scenario, the following conditions would have to prevail: (i) a significant improvement in the implementation of projects currently in execution; (ii) new structural reforms that would create additional financing needs in key areas for sustaining growth and economic stability; and (iii) the establishment of sector investment programs. These conditions would be evaluated at the end of the year two of the Strategy when a midterm review will be conducted to analyze portfolio performance, the government’s policy and reform program, and the appropriate level of approvals and target areas for the 2006-2008 operations program.

The Bank will also need to monitor government policies closely in order to identify possible effects on the country’s vulnerability to the types of potential shocks that have occurred in the recent past. Such monitoring would enable the Bank: (i) to incorporate proposed actions to mitigate such vulnerabilities into its policy dialogue and support for the country; and (ii) to anticipate potential risks that might adversely affect the Bank’s action in the country.

Risks: The main risk for implementation of the Bank’s country strategy with Argentina would be a failure to maintain macroeconomic, social and political stability, jeopardizing the sustainability of the country’s economic growth. Implementation of the government’s program, including the component of the agreement with the IMF calls for complex political decisions, where postponement could undermine the climate of trust needed to attract new investment to the country, and jeopardize the implementation of strategies agreed with multilateral institutions, including the IDB. Steps being taken by the government on economic and social issues and support from international financial institutions seek to minimize this risk.

There is also a risk that the country may fail to achieve levels of growth and fiscal management that enable it to generate the resources envisaged in its financial program, undermining its relationship with multilateral institutions 1. Through implementation of its strategy, the Bank will continue supporting the country to minimize this risk to aid productive sector development, increasing its competitiveness and improving governance.

Another risk is failure to satisfy the assumptions behind the loan scenarios, relating firstly to portfolio execution capacity and, secondly, to the need to approve new investment loans. The Bank and the government have been making significant adjustments to the

1 See Annex VIII, Profile of Argentine public debt service payments to Multilateral Organizations.

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active portfolio and closely monitoring its performance, so as to take timely corrective action. To help mitigate the institutional weakness of some executing agencies, one of the strategy’s key areas of action involves strengthening public administration. In terms of new operation approvals, the Bank and the country will focus efforts and resources on identifying new approvals at the start of this strategy cycle.

As several of the risks mentioned are outside the sphere of Bank action, they cannot be significantly mitigated or prevented by any specific actions it might take. A case in point is the risk generated as a result of high expectations attaching to the Bank’s action in the country. Although the Bank can significantly affect key issues for the country’s development, mainly through its action in certain subsectors or at the subregional level, its actions have a relatively minor direct impact on the formation of saving or total investment in the country.

Agenda for country dialogue:

The main areas of dialogue are:

Crosscutting issues:

(i) Further restructuring work and streamlining of execution of the undisbursed portfolio.

(ii) Identification of specific actions to be funded by the Bank within the priority areas established in the Country Strategy, agreeing on eligibility criteria and the sequence and scale of operations, and mindful of the capacities of executing agencies and their monitoring systems.

(iii) Identification of areas where the Bank can contribute through nonfinancial products, and specific actions in which these can be employed, such as studies, workshops and expert support for local teams.

Governance and fiscal sustainability:

(i) Joint monitoring with the government of implementation of Argentina’s program with the IMF, and support for the analysis of fiscal sustainability in the framework of the government’s medium-term program.

(ii) The Bank’s contribution to enhancing management capabilities in the public sector, both generally and in critical areas for the definition, implementation and evaluation of public policies. In particular, consideration

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will be given to development effectiveness and institutional integrity and transparency, including government procurement and the systems of budget, accounting, financial and asset control, and audit.

(iii) Criteria for Bank support to subnational governments, in a framework that contributes to fiscal sustainability and productive and social development, particularly in its support for the less developed provinces.

(iv) Support for reforms aimed at improving legal certainty, and the judicial system in particular.

Competitiveness:

(i) The Bank’s contribution to the country’s productive development in order to faciliate a recovery in public and private investment in infrastructure, and to explore new alternatives for supporting private-sector development and making credit more readily available to microenterprises and small and medium-sized businesses, science and technology development, and technical education.

(ii) The Bank’s contribution to deepening the process of regional integration, particularly in infrastructure development (IIRSA) and access to new markets. The relatively less developed provinces will be watched closely.

Social development:

(i) Social and labor market policies in a context of more inclusive economic growth and transition to a post-emergency phase projected into the medium and long term, including transfer programs for human resources development and the employability and productivity of vulnerable population groups.

(ii) Actions to promote faster progress on the millennium development goals, and monitoring of their indicators.

I. KEY DEVELOPMENT CHALLENGES2

A. Toward sustainable and more equitable growth

1.1 Argentina has gone through a political, financial, economic and social upheaval on a scale unknown in its recent history, as result of factors that rendered its economy highly vulnerable to changes in the international economic environment and its own internal dynamic. The interruption of foreign capital inflows following the Russian crisis of 1998 put great pressure on financial and foreign exchange equilibria, with repercussions on the level of economic activity and fiscal balance. In 2001, the steady loss of credence in economic policy and its sustainability could not be reversed. Massive withdrawals of bank deposits forced the government to adopt a set of measures, which all but paralyzed the functioning of the financial system. This was compounded by a suspension of service on public debt with private creditors and the abandonment of convertibility, which heightened uncertainty in the legal and regulatory framework, had serious consequences for the production of goods and services, and entailed extremely high social costs. By late 2002, Argentina’s gross domestic product (GDP) had shrunk by a cumulative 20% over a four-year period, leaving more than half of the population below the poverty line.

1.2 Once the most acute phase of the crisis had been overcome, from the second quarter of 2002 onward the country has been striving to restore confidence in its institutions and to formulate a macroeconomic framework capable of guiding the economy on to a sustainable recovery path. Stabilization efforts and adjustment to the new socioeconomic circumstances have generated an economic recovery based on bringing idle capacity into use through import substitution, exports and a revival of domestic consumption, resulting in GDP growth of 8.7% in 2003 and inflation of just 3.7%. This has triggered an improvement in employment levels and a reduction in poverty indices.

1.3 The key medium- and long-term challenge facing Argentina is to achieve sustainable and more equitable growth as a way of reversing the deterioration in the social situation. Economic recovery in Argentina since 2002 risks running out of steam and becoming unsustainable unless a set of key challenges that will help restore market confidence and increase investment and the productivity of physical and human capital. . These include: (i) maintenance of macroeconomic rules and policies capable of making the economy less vulnerable to domestic and external shocks; (ii) building sound public institutions that guarantee governance through more stable rules, legal certainty and transparent and efficient public administration; (iii) financial sector restructuring to provide adequate services that are accessib le to a broader range of economic agents, thereby promoting intermediation between saving and investment; (iv) formulation of a national

2 The studies and notes made while preparing the IDB Country Strategy with Argentina are quoted

throughout the text and referenced in Annex IV. They can be consulted on the EPBA web page.

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competitiveness strategy founded on a broad consensus among the public sector, business and civil society; (v) promotion of an open and regionally integrated economy that encourages competitiveness and innovation; (vi) creation of a highly skilled and integrated society, capable of enhancing productivity and social welfare; and (vii) promotion of effective, efficient and fiscally sustainable social development policies that address social problems.

1.4 The presidential elections of May 2003 resulted in a new administration taking office, which has been consolidating its position ever since. This has enabled the authorities to take action to promote economic recovery, while at the same time addressing outstanding issues. These include correction of the imbalances generated by the crisis, and completion of pending structural reforms or review of past policies on a case-by-case basis. Such efforts will call for great political will, as well as judgment and discipline in the use of scarce resources.

1.5 Action areas to enable Argentina to meet its challenges can be organized around four major themes, which are closely interconnected and display mutual synergies:

1. Greater stability and overcoming the effects of the crisis;

2. A stronger institutional framework for better governance and fiscal sustainability;

3. A more favorable climate for investment and productivity growth, to enhance competitiveness; and

4. Poverty reduction, rebuilding the human resource base, and promotion of sustainable social development.

1.6 The first of these themes involves shorter-term measures that would lay the foundations for medium- and long-term actions on the others, to underpin more equitable economic growth. The following paragraphs describe the key development challenges facing Argentina, organized under these headings, along with possible ways of meeting them.

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Figure 1Poverty and Indigence

010

20

3040

50

60

1998 1999 2000 2001 2002 2003

Poverty IndigenceSource: INDEC.

B. Greater stability and overcoming the effects of the crisis

a. The social emergency

1.7 Argentina is recovering from a profound crisis that has required emergency action. In 2002, the economy suffered a 10.9% drop in GDP for a cumulative reduction in per capita GDP of about 24% since mid-1998.3 Unemployment rose from 12.4% in October 1998 to its highest-ever level of 21.5% in May 2002. Poverty and indigence rates hit historical highs in October 2002, affecting 57.5% and 27.5% of the population, respectively. Informality in the labor market reached a level of 45% in 2002, and the gap between formal and informal wages widened from 55% in 1994 to 120% in 2002.4 At the same time, inflation mainly affected the lowest income groups, given that between late 2001 and late 2003 the consumer price index (CPI) rose by 45.8% while the cost of the basic basket of food items rose by 74.1%. Lastly, the social security system suffered from uncertain coverage of the elderly, expansion of the informal labor market, and a rise in the number of workers not making contributions, compounded by financial crisis among retirement and pension fund management companies (AFJPs). Also badly affected were indigenous population groups, who tend to be concentrated in departments with the highest indices of unmet basic needs (UBN).5

3 In purchasing power parity terms at constant prices, the reduction was 20%. 4 Between late 2001 and late 2003 the erosion of real wages in the public and informal sectors (-27% and

-29%, respectively) was greater than in the private formal sector (-8%), which had already suffered reductions in earlier years.

5 Indigenous peoples are mainly located in the provinces of Chaco, Salta, Formosa, Jujuy, Neuquén, Río Negro, La Pampa, and Chubut, where indices of UBNs, illiteracy, precarious housing and coverage of health services are worse than the national average, according to INDEC data. Although census data do not distinguish between ethnic groups, estimates made by the INAI and the World Bank suggest approximately 1 million inhabitants, in other words 3% of the total population of the country, and 25% of the rural population. This population represents 19 different indigenous groups, each with its own sociocultural and linguistic characteristics. See IDB. OVE (2001) and World Bank (2000).

Figure 2 GDP growth and unemployment

-15.0-10.0-5.00.05.0

10.01994 1995 1996 1997 1998 1999 2000 2001 2002 2003

(%)

0510152025

(%)

Real GDP Var.%.Unemployment rate Source: INDEC.

- 4 - 1.8 The government’s initial efforts were directed toward the emergency aspects of the

crisis. In addition to actions to reduce unemployment, steps were taken to protect the most vulnerable segments of the population, seeking to avert intergenerational transmission of poverty by protecting social spending, while also trying to guarantee poor and indigent people fair access to public services and benefits. Progress was also made in implementing mechanisms for regulation and control of social policies, particularly through incentives for citizen participation and oversight.

1.9 In 2003, vigorous GDP growth (8.7%) and a lower inflation rate (3.7% compared to 41% in 2002) allowed for a gradual rise in the number of jobs, a reduction in unemployment, and recovery in the purchasing power of wages. The unemployment rate recorded in August 2003 was 14.3%. In addition to job creation fueled by economic revival, the lower unemployment figures reflect increased coverage of heads of household programs, which at the time had almost two million beneficiaries. Nonetheless, from a medium-term perspective, the August 2003 unemployment rate was at the same level as in May 1999, which was already structurally high.

b. Lay the foundations for a sustainable recovery

1.10 The flipside of the severe deterioration in social conditions was a collapse in economic activity and profound macroeconomic instability. Net capital flows into Argentina contracted sharply following the Russian crisis of 1998, and the consequent adjustment in external accounts required a substantia l reduction in aggregate demand, since exchange-rate parity with the dollar under the Convertibility Law ruled out any adjustment in the exchange rate, thereby fostering deflation and recession. Argentina's vulnerability to shocks, particularly the sudden stop of capital flows, was the result of three key factors: low levels of trade liberalization, dollarization of liabilities, and high levels of debt. Although the main triggers of the Argentine crisis were external, these three sources of vulnerability are linked to domestic policies (trade, fiscal, and monetary), such that a major component of the country’s capacity to confront the crisis depended on domestic factors.6

1.11 A jump in the value of public and private debt caused by devaluation was the prelude to dispute over the distribution of the costs of the crisis. From the public-sector standpoint, the scale of the adjustment required overwhelmed any primary fiscal surplus in the country’s recent history. The high risk of nonrecoverability in the portfolio held by the banking system, consisting basically of dollar loans extended to nontradable sectors and public-sector bonds, compounded by the perception that the convertibility system was about to be abandoned, precipitated a run on banks and resulted in the government’s decision to freeze deposits.

6 There is a wide-ranging literature on the factors associated with the crisis. See, for example, Calvo,

Izquierdo and Talvi (2003); IMF (2003a); Mussa (2002); and Perry and Serven (2002).

- 5 - 1.12 Crisis on this scale provoked major political and social upheavals in late 2001.

Early 2002 saw a steep devaluation of the peso, followed by an easing of exchange restrictions. Initially the task of overcoming the crisis was not approached within an orderly political and legal framework. This led to breaches of contract, resulting in the suspension of service on external debt with private creditors, asymmetric conversion into pesos of loans and deposits denominated in dollars, curtailment of creditors’ rights and the imposition of controls on capital outflows.

1.13 Against a backdrop of public-sector insolvency with no access to credit markets the government announced a timetable for the return of deposits. As this appeared tantamount to a program of monetary expansion, strong expectations of devaluation and inflation were generated, forcing the exchange rate to an all-time high of four pesos to the dollar in May 2002. Cries for assistance from the private sector, owing to the effects of devaluation on business finances, further fuelled inflationary expectations, given the projected fiscal cost of such a measure and the predictable monetization of such requirements. Nonetheless, there was no explosive growth of monetary aggregates and Argentina suffered neither hyperinflation nor additional overshooting of the exchange rate. This was the result of a better fiscal position, supported by strong inflows of foreign currency from trade surpluses and the Central Bank’s stated intention to make more active use of the interest rate and exchange reserves and controls to contain pressures on the currency. 7

1.14 At present, Argentina’s key macroeconomic variables can be analyzed from two possible perspectives: in flow terms or in terms of stocks. If flows alone are considered, the macroeconomic context is promising: the public sector is generating primary surpluses; the private sector is profitable in both export and import-substitution activities; the banking system has abundant liquidity; and the Central Bank is accumulating reserves in a context of exchange rate recovery and stabilization. In addition to these factors, the international situation has a number of favorable features such as high prices for agricultural products, a weaker United States dollar, and low international interest rates. However, slowdown in the regional economy, particularly in Brazil, has been pointing in the opposite direction. Other factors include partial suspension of service on debt with private creditors,8 a declining trend in private capital outflows, and underutilization of factors of production. When these idle factors are eventually assimilated and the

7 Another factor that may also have contributed was the announcement of early presidential elections,

which reduced uncertainty regarding the political transition process. 8 The suspension of payments affected about 55% of Argentina’s public debt, whereas it continues to

service the other 45% on a normal basis, especially its debt to international organizations, making large net payments in 2002-2003.

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economy reaches full capacity,9 economic agents both national and foreign will need to make critical investment decisions.10

1.15 Under such circumstances, stocks will become decisive for sustainable growth. Financing requirements are one factor necessary for a robust recovery of net investment. Long-term credit, both external and domestic, has not yet recovered. Public debt restructuring, which has been an outstanding issue since the default, has also made it hard for the private sector to obtain credit abroad.

1.16 Similar reasoning applies to the behavior of domestic credit, bearing in mind that the way in which convertibility was abandoned seriously aggravated problems in the country’s banking system. The two most important types of asset in the banking system were loans in dollars to the private sector and bonds issued by a practically insolvent public sector. Asymmetric “pesoization” of loans and deposits generated losses on the banks’ balance sheets. Furthermore, asymmetric indexation of assets and liabilities,11 compounded by rulings in amparo proceedings that forced the banks to repay some deposits in their original currency, worsened their accounting and financial results still further. This problem is further complicated by the fact that, prior to the crisis, both banks and AFJPs were holding large quantities of government bonds.

1.17 Public debt restructuring is an immediate priority, given its broad impact on the economy. It affects access to credit in the public- and private-sector alike, and hence the prospects for future investment and sustained growth. Solving the public-sector debt problem will assist in financial sector restructuring (through the valuation of public bonds held by banks) and in the rescheduling of corporate debt, and will enhance pension system solvency and management of exchange-rate policy. 12

9 In fact, the economy’s capital stock has been shrinking, since net investment has been negative.

Installed capital utilization in industry was 68.7% in April 2004, compared to 63.2% in the same month of the previous year and 55.1% in April 2002. Some sectors are already producing near capacity (basic metal industries 90.8%, oil refining -85.1%, and paper and paperboard -85%). In addition, given the lack of profitability in nontradable sectors as a result of the new configuration of relative prices, one can assume a high degree of obsolescence in this sector, making it unlikely to recover quickly.

10 Between 1993 and 2000, average total saving in Argentina was equivalent to 20% of GDP. Out of that, 4% of GDP represented saving by the rest of the world (see Ministry of Economic Affairs, 2003).

11 Mortgage loans were indexed to average wages, while deposits were indexed to the CPI. The subsequent behavior of both indices reversed the initial negative impact.

12 Artana and Navajas (2003); and Izquierdo (2003).

Figure 3Gross domestic investment and installed capacity utilization 1997-

2003

10.012.014.016.018.020.022.0

1997 1998 1999 2000 2001 2002 2003

(%)

55.0

60.0

65.0

70.0

75.0

80.0

(%)

Gross domestic investment % GDPInstalled capacity utilization

Source: MECON

- 7 - 1.18 In addition to solving the public-debt problem, financial sector restructuring

needs to go deeper, to enable it to efficiently provide relevant services to a broader base of society. This would include reforming public-sector banks to place them on a technically sound footing. In addition, although this process is progressing independently, it might be helpful to establish institutional mechanisms that do not involve fiscal costs, but which facilitate the ongoing corporate debt restructuring process, in particular among firms engaged in nontradable activities that were directly affected by the devaluation. An additional factor requiring attention in the short term is the need to avoid deterioration in public service delivery and infrastructure during the process of renegotiating concession contracts, an issue that also has medium- and long-term impacts.13

1.19 Maintenance of a prudent monetary policy is another key challenge for reducing vulnerabilities in the long term. Policies that help restore confidence in the domestic currency should be supported, so as to gradually erase the memory of the recent dollarization. The central bank has been moving in this direction by strengthening the market for treasury notes and monetary control instruments. The monetary authorities’ medium-term objective is to establish a transparent system of inflation targets.

1.20 In addition to restoring confidence among economic agents, appropriate savings instruments need to be created,14 supported by a prudent monetary policy that provides long-term disincentives to private capital outflows while encouraging capital repatriation. Also, assets currently outside need to be incorporated into the financial system. These resources will have a major role to play in restoring the level of investment in the country.

C. A stronger institutional framework for better governance and fiscal sustainability15

1.21 Neither domestic fiscal deficits nor external shocks can fully explain the magnitude of the crisis that hit Argentina in late 2001. Policy decisions reflecting adverse institutional incentives also aggravated domestic and external imbalances. This led to a crisis of governance that initially made it difficult to implement the changes needed to successfully overcome the political, social and economic problems of the last few years.

13 The energy supply problems seen in late March 2004 highlight the importance of re-establishing

effective incentives for the functioning of these sectors. 14 Such as bonds and bank deposits indexed to inflation, along with other capital market instruments. 15 This section summarizes the diagnostic study covered in the thematic note on governance produced as

an input for preparation of the IDB Country Strategy with Argentina. Also included are the results of technical notes on fiscal sustainability, fiscal federalism, the pension system, the civil service, and other collected studies (see IDB Country Strategy with Argentina).

- 8 - 1.22 Alongside its acceptance of democracy as system of government that is well above

the regional average, levels of trust and satisfaction with the functioning of institutions in Argentina are among the lowest in the region.16 Although this is part of a regional and worldwide trend, there are nonetheless specific and more glaring features in Argentina. The country’s political institutions have eroded governance, creating incentives that undermine political cooperation and weaken social responsibility. Argentina has a very high public-private corruption perceptions index; and comparative indices (Transparency International) suggest that restoring credibility is one of the key challenges in rebuilding the Argentine State. In 2002, Argentina was ranked 70th out of 102 countries, slipping to 92nd out of 133 in 2003.

1.23 Despite this, the national government elected in May 2003 has managed to consolidate its leadership over the ensuing months, thereby facilitating decision-making and making it possible to restore confidence in the country’s institutions and strengthen governance.

1.24 A strengthening of provincial power and a weakening of the party system have caused a redistribution of political forces with major consequences for the governance of the country in situations of institutional crisis. At such times, subnational power has become essential for governance as a result of the set of incentives created by the electoral system and effective transfer of spending power to the provinces, but without corresponding autonomous financing capacity. Moreover, amid glaring inequalities in terms of political and economic representation among the four largest jurisdictions 17 (which represent 64% of the population and account for 74% of GDP), a national development agenda is needed that takes account of the territorial dimension from a broad standpoint of economic development policies and strengthening of social cohesion. 18

1.25 In addition, the structural changes that have occurred in Argentina over the last decade have involved steady decentralization and loss of power for the national State. The changes that have occurred, reflecting a vision of government downsizing and transfer of public-sector functions, have not produced the expected results, and the task remains unfinished.

1.26 In particular, difficulties in fully achieving the goals of the deep reform of the pension system, which began in 1994, have been aggravated by the economic, social and fiscal crisis.19 The rise in unemployment and informality not only

16 Surveys conducted by Latinobarómetro 2001, 2002, 2003, publis hed in The Economist. 17 The provinces of Buenos Aires, Santa Fe, Córdoba and the autonomous city of Buenos Aires. 18 In addition to economic and representational imbalances between provinces, it is also important to note

that the same feature is present within the provinces themselves, even the wealthiest ones. 19 In particular the lack of social safety nets and the share of pensions in the public debt. For an analysis of

this problem, see San Martino (2003); Grushka (2003); Colina (2003); Beccaria and Cetrángolo (2003); Medici (2003); and Cetrángolo and Curcio (2004).

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reduced the revenue potential of the public pension system, but also prevented sustainable growth of the individually funded pension system. The pension shortfall in 2002 accounted for 60% of the federal public deficit, and the pension liabilities of the provinces, especially those whose pension systems are not part of the National Social Security Administration (ANSES), remain one of the major fiscal problems to be addressed.

1.27 Another key challenge relates to extent of intertemporal fiscal sustainability. On the one hand is the public expenditure needed to meet the State’s own obligations, which forces such spending to be more efficient and effective. On the other, efforts are being made to generate resources with a tax burden that allows for economic growth and seeks to reduce distortions and informality in the economy. The gradual reduction of distorting taxes must go hand in hand with a process aimed at reducing evasion. 20 Attempts should be made to institutionalize fiscal accountability mechanisms that take account of and restrict incentives arising from the political cycle.

1.28 Against a backdrop of recovery in growth, social equity and state capacities, the modernization of the State strategy in Argentina must address challenges in four areas: the democratic system; the rule of law and justice reforms; State and market; and public administration.21 The following paragraphs highlight actions that would help to overcome these challenges, and strengthen the institutional environment for better governance and fiscal sustainability:

(i) Guarantee independence and strengthening of the three branches of government, by improving their technical and administrative capacities for greater transparency, efficiency and effectiveness.

(ii) Implement the reforms needed to establish rules for sustainable fiscal federalism and strengthening of budgetary institutions at the different levels of government, through a new federal revenue-sharing law and a compatible tax system.

(iii) Improve governance, seeking greater effectiveness, efficiency and transparency in the preparation, execution, monitoring and evaluation of public policies at each level of government.

(iv) Restore state capacity to support the productive sector, seeking, among other aims, quality and responsiveness in public interventions and reductions in the State’s cost burden on the private sector through

20 Export-withholding taxes will also have an important role to play in avoiding the major disincentives to

export activity that are bound to occur as the real exchange rate converges toward sustainable levels. 21 IDB. RE1/SC1 (2003).

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rationalization of the regulatory/administrative environment and other measures.

(v) Promote a strengthening of human resource management at the municipal, provincial and federal levels, both from a fiscal expenditure standpoint, and in terms of the functional capacities of the public sector.

(vi) Promote a review of current regulations to reduce the pension deficit and increase coverage in the public and private pillars of the pension system. Account should be taken of pension system features in terms of their incidence on the cost structure, incentives for job creation, and functionality of the domestic capital market; and the potential for improving coverage for excluded groups, especially women, by providing incentives to mainstream them into the formal labor market and noncontributory pensions, in a sustainable fiscal environment, also including indigenous peoples. It should be emphasized that lack of coverage for a large part of the population implies future pressure on public expenditure to address their needs.

(vii) Consolidate management capabilities in the public sector and its role as promoter, regulator and enforcer in natural resource management and environmental issues in particular; catalyze private-sector support and investment, and promote civil society participation.

D. A more favorable climate for investment and productivity growth, to enhance competitiveness22

1.29 The structural and sector reform process, together with foreign direct investment and the opening and integration of the economy are factors that have promoted technological modernization of the Argentine system of production over the last decade. In several cases, privatization and modernization of the infrastructure of transport, telecoms and other public utilities helped to improve the country’s competitive position. The growth of the Argentine economy, particularly during the first half of the 1990s, can be directly traced to these reforms and to a favorable international climate.

1.30 For all intents and purposes, however, reforms involving the policies and institutional capacity-building on which development of a more competitive and socially more inclusive market economy depend have been neglected. Problems of regulation, economic advancement and weak social partnerships still

22 The content of this section summarizes the diagnostic study covered in the thematic note on

competitiveness, prepared as an input for preparation of the IDB Country Strategy with Argentina. It also includes the findings of technical notes on the financial system, territorial competitiveness, agriculture and tourism sectors, and other collected studies (see the IDB Country Strategy with Argentina).

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persist.23 There are many administrative and economic barriers that provide disincentives and raise the cost of doing business, including the heavy burden of the business tax and registration system for small-scale businesses, and the low level of corporate involvement in the social responsibility process.

1.31 To summarize, it is a priority for the country to develop a national competitiveness strategy that pursues a shared vision for the future of its economic system in the global economy framework, allowing for economic development with equity and regional balance. The following paragraphs highlight the main actions that would help meet these challenges and lay the foundations for growth of local and foreign investment, thereby raising the productivity and competitiveness of the Argentine economy:

(i) Strengthening of the institutional capacity of the State to support the development and implementation of national and local development strategies and policies through closer national/provincial/municipal coordination; stronger regulatory bodies, ensuring regulatory compliance; promotion of transparency; a stronger system to support the system of production; removal of administrative barriers; and review of incentives to stimulate entrepreneurial activity and enable greater formalization of the economy and make domestic industry more competitive.24 Glaring interprovincial disparities in development levels suggest that a geographic approach should also be taken to the government’s program.25

(ii) Restructuring of the financial system, including public sector banks, to re-establish financial intermediation, provide suitable services at costs that are within the reach of a broader segment of society, and bring financial system regulations up to international standards. In this context, instrume nts should be developed to underpin the growth process and provide greater protection for the rights of consumers of financial services.

(iii) Design and implementation of a technology policy centered on mechanisms for the development, transfer and assimilation of technology as a way of making technological development and

23 The present government has recently made progress in this area by eliminating competitiveness plans

and a number of industrial promotion programs. Nonetheless, the impact on the country’s competitiveness of the special programs still in force should be reviewed.

24 Fuchs (2003). 25 In indigenous areas, while recognizing their rights over land and natural resources as enshrined in the

1994 Constitution, there is great undervalued potential for indigenous peoples to expand their income sources and raise their living standards, in fields such as ecotourism, environmental services, handicrafts, management of cultural heritage, and so forth.

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investment a top priority through an institutional support structure that encourages participation by the business and academic sectors.

(iv) Training of human resources and their adaptation to the country’s competitiveness challenges, by making the educational system more efficient and promoting training opportunities aimed at increasing employability, thus permitting effective redeployment of workers from declining sectors to those that are more dynamic.26 The needs of segments of society subject to low coverage and quality of educational services, including indigenous peoples, should also be addressed.

(v) Guarantee the quality of public services and infrastructure and establish an enabling environment for investments to address the requirements of medium- and long-term growth. In terms of renegotiation of concessions , the economic and financial balance of concession contracts, and the rights and obligations of the parties need to be redefined with a long-term view. This should include a review of the pricing structure, together with redefinition of investment requirements and the duration of concessions, among other quality and coverage elements.

(vi) Continue to deepen liberalization and integration agreements, with a view to expanding access to new markets, coordinating the implementation of regional infrastructure plans, harmonization of regulations, and greater convergence of macroeconomic policies in such agreements. These policies will also be consistent with the need to reduce vulnerabilities to external shocks. Furthermore, the challenge of broadening regional integration will place increasing demands on the infrastructure of integration with neighboring countries. Argentina’s participation in the Initiative for the Integration of South American Regional Infrastructure (IIRSA) thus assumes major importance.

(vii) Achieve greater diversification and sustainable expansion in the supply of exportable products. Concentration of the supply of exportable products (agriculture and agribusiness exports today account for about 50% to 55% of total export value) renders exports more vulnerable to fluctuations in international prices. Although the vigorous expansion of exports of oilseeds and their derivatives was accompanied by the international market debut of various nontraditional products, the country requires more concrete actions to mitigate the risks of concentrated supply. The main challenges in this regard are as follows: (a) to consolidate existing markets; (b) to continue improving government support for export promotion; (c) to enhance utilization and properly manage natural resources, deepening production linkages

26 IDB (2003), Report on Economic and Social Progress in Latin America 2004: Good Jobs Wanted:

Labor Markets in Latin America.

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and strengthening the country’s competitive advantages; and (d) to modernize and strengthen the agricultural health process.27

E. Poverty reduction, rebuilding the human resource base, and promotion of sustainable development28

1.32 Sustained economic growth is the key to long-term poverty reduction, which means that the actions mentioned in relation to increasing investment and competitiveness form the basis for viable social development. Argentina’s elasticity of poverty with respect to income for 1990-2000 is estimated at -1.3, indicating that GDP growth produces a more than proportional reduction in poverty. It also means that the poor are most affected at times of macroeconomic crisis, thus suggesting the need to maintain targeted social safety nets.

1.33 Thus, even in a future scenario of gradual economic recovery, the country must continue to prioritize social investments to reduce poverty and indigence, together with policies in the domains of education, health, housing and basic sanitation that benefit lower- income groups proportionately more, taking account of the specific requirements of ethnic groups and us ing socioculturally relevant approaches. These investments would be supported by labor policies consistent with increasing the employability of the poorest of the poor and raising labor productivity.

1.34 The crisis had a direct effect on changing the poverty profile in Argentina. If the poverty index is broken down and the figures for 1998 are compared with those for 2003, major changes can be seen at the regional, socioeconomic and demographic levels. Although all regions of the country were affected, the Greater Buenos Aires region suffered most from the crisis in relative terms. Whereas in 1998 Greater Buenos Aires accounted for 42% of all indigent people, by 2003 the proportion had risen to 50%. Families whose heads of household had least schooling (primary or incomplete secondary) were the worst affected by the crisis, and between 2002 and 2003 there was a significant increase in the percentage of poor families whose heads are unemployed. Lastly, the crisis affected young people disproportionately. In the crisis context, not only did the likelihood of being poor increase among those with least schooling, but the range of probabilities of being poor has widened considerably between the most educated population segments (university education complete) and the least educated (incomplete secondary schooling or less). This represents a genuine education gap, which, if not addressed, will serve to maintain or even worsen inequality in the medium term. In the 0-12 and 13-19 age brackets poverty increased by 28% and 32%, respectively, compared

27 Trigo, Martínez Nogueira, Piñeiro, and Manciana (2003). 28 This section summarizes the diagnostic study covered in the thematic note on poverty and inequality,

produced as an input the preparation of the IDB Country Strategy with Argentina. It also includes the results of technical notes on social spending and fiscal sustainability, the pension regime, and other collected studies (see the IDB Country Strategy with Argentina).

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Figure 4Gini Coefficient 1999-2003

40 42 44 46 48 50 52 54 56 58 60

Weighted avg.

Unweighted ave.

Venezuela

Uruguay

Peru

Mexico

Honduras

Chile

Brazil

Argentina

Source: World Bank

2003 2002 2000 Mid-1990s Early 1990s

to 22% among individuals between 50 and 64 years of age. At the same time, one of the most significant phenomena of the crisis is the greater incidence of “displaced” youth, in other words those who are neither enrolled in school nor working, especially among women. 29

1.35 In addition to economic recovery, poverty reduction and social relief in Argentina also depend on a better income distribution. Although inequality in income distribution has declined sharply (19% between May 2002 and May 2003), its current level is such that the percentage of total income received by the highest decile is 24.7 times the proportion received by the lowest decile. The 2001 crisis merely intensified the longer-term trend toward worsening income distribution; during 1992-2001 Argentina was the South American country that displayed the sharpest deterioration in income distribution, with its Gini coefficient rising from 43.7 to 51.3. Between 1995 and 2001 increasing inequality was attributable to unemployment and a reduction in the labor market participation rate; whereas wage erosion largely explains the increase in inequality after the crisis. The importance of improving income equality becomes even clearer in light of the relationship between growth and inequality: for every 1% of growth in GDP, inequality declines by just 0.2%, which suggests that growth by itself not a cure-all for this problem, and targeted policies are needed to promote human capital formation and equal opportunity.30

1.36 In keeping with the fiscal sustainability approach, the social strategy in Argentina should address current challenges through policies designed to: (i) create conditions for consolidation of the network to protect and build human and social capital, supported by mechanisms for greater activation in times of crisis, and adjustment towards more permanent objectives once economic growth recovers; (ii) promote better policy targeting in order to concentrate efforts on overcoming indigence and poverty in the country, taking into account indigenous peoples that have a preponderant presence among poor and indigent sectors; and (iii) reduce social and

29 Cabrol (2004). 30 Birdsall and Szekely (2003).

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economic inequalities through policies that promote equal opportunity, productivity gains and employability of the country’s labor force.

1.37 Within this policy framework, programs and lines of action that could help meet these social challenges should aim to:

(i) Bolster job creation capacity and promote a flexible supply of job skills training. Unemployment should continue to be reduced through a sound educational base and adequate job training to achieve greater geographical, sector, national and international competitiveness.31

(ii) Promote the pursuit of greater social equity in a scenario of fiscal constraint—a situation that will require effort to make spending and revenue collection more efficient. Greater coordination is also needed among programs.

(iii) Consolidate a comprehensive and sustainable social safety net strategy that promotes human and social capital development among the poorest of the poor, with automatic mechanisms for adjusting to economic conditions. In addition, the scope and targeting of noncontributory pensions should be regulated to guarantee minimum incomes to older adults who do not satisfy current eligibility conditions.32

(iv) Facilitate political consensus and coordination among national, provincial and municipal governments and civil society organizations, for more effective decentralization of social policy monitoring, combined with measures to increase the transparency with which it is administered.

1.38 Lastly, and no less importantly, the current status of the Millennium Development Goals (MDGs) is another major social challenge for the country, since several of the relevant indicators diverged from their 2015 targets during the crisis.33 It is also important for progress to be made on goal 8, designed to create an international economic environment that is favorable for poverty reduction, which largely depends on improvements in the trade and financial policies of industrialized countries.

31 Marquez (2003); and Beccaria, Altimir and González Rozada (2003). 32 Braun, Díaz and Kweitel (2003); and Beccaria, Cetrángolo and Jiménez (2003). 33 Office of the President of Argentina and UNDP (2003); IDB, RE1/SO1 (2003); and IDB, SDS (2004).

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IMF STAND-BY ARRANGEMENT WITH ARGENTINA Access: On September 20, 2003, the IMF Executive Board approved a SDR 8.98 billion three-year Stand-By Arrangement (SBA) for Argentina. With this access, Fund exposure would stay broadly unchanged over the period September 2003-September 2006. Strategic objectives: (i) begin restoring fiscal solvency within a fiscal framework that includes the provinces and makes room for adequate social and infrastructure spending; (ii) implement a credible sovereign debt restructuring; (iii) strengthen the soundness of the banking system; (iv) improve the framework for restructuring corporate debt, including that of the utility companies; and (v) instill legal certainty to improve business confidence and growth. The program was carefully sequenced to allow sufficient time for developing support and implementation.

F. The government’s program and medium-term economic prospects

1.39 Following the deep economic, social and political crisis experienced in Argentina, the government elected in May 2003 is committed to a policy aimed at sustained growth with social equity, which will require implementation of a wide range of economic, social and institutional reforms .34

1.40 To help overcome the crisis and meet these objectives, in September 2003 the government agreed to a medium-term program (September 2003 to September 2006) with the International Monetary Fund (IMF). This program includes a fiscal framework to meet growth, employment and social equity objectives, while also providing a basis for normalizing relations with creditors and ensuring the sustainability of the public debt. The program contains a strategy for strengthening the banking system and institutional reforms to facilitate corporate debt restructuring, to help resolve outstanding issues with public utility firms and, crucially, to improve the investment climate.

34 Lavagna (2003); Tangelson (2003).

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2004 2005 2006

Real GDP growth 5.5 4.0 4.0 Consumer prices 10.5 8.0 6.5 Nominal GDP (US$ billions) 146.5 160.8 175.9

Exports 29.7 31.7 33.8Imports -15.4 -17.9 -20.6Trade balance 14.2 13.8 13.2Current account 7.3 8.0 7.2Capital account -18.6 -14.8 -9.0International reserves 15.7 16.7 18.4

Real sector (annual percentage growth)

MEDIUM-TERM PROSPECTS

Balance of payments (US$ billions)

Main planks of the Original Program

- Growth was targeted at 5.5 percent in 2003 and around 4 percent in 2004-06. Core inflation was expected to be maintained in the single digits.

- In light of various uncertainties, monetary policy was to be reviewed periodically to achieve low inflation. Base money growth would be driven mainly by international reserve accumulation within a flexible exchange rate policy. A move to an inflation targeting regime by end-2004 was envisaged along with amendments to strengthen the central bank charter.

- The consolidated primary surplus was targeted at 2½ percent of GDP in 2003 and 3 percent of GDP in 2004. For 2005 and beyond, an extension of the rising trend for the primary surplus was envisaged so as to produce levels sufficient to cover net payments on performing debt and obligations resulting under a debt restructuring agreement.

- A number of measures were envisaged during 2004-06 to underpin fiscal consolidation and facilitate the phasing out of distortionary taxes, including reforms of tax administration and tax policy, the introduction of a new fiscal responsibility legislation and a strengthened federal-provincial revenue-sharing agreement.

- The early completion of an orderly and comprehensive restructuring of Argentina’s public debt that would facilitate the elimination of external arrears and the achievement of medium-term debt sustainability was another core plank of the program. To this end, the authorities committed to engage in constructive negotiations with all representative creditor groups, and endeavor to avoid a piecemeal approach to debt restructuring.

- The program included measures to strengthen bank soundness, including (i) the gradual removal of regulatory forbearance; (ii) the completion of compensation payments to banks for losses arising from the asymmetric pesoization and indexation of their balance sheets; (iii) the periodic updating of business plans to ensure compliance by banks with regulatory standards, and (iv) the restructuring of the largest public banks.

- The program also included specific steps to improve the investment climate and ensure legal predictability, including the development of a supportive regulatory framework for the utility companies, and measures to foster private corporate debt restructuring.

1.41 The economic growth targets set for 2003 were easily surpassed, as Argentina’s GDP grew by 8.7% compared to a target of 5.5%. The annual growth rate expected for 2004 is 5.5%, with 4% rates forecast for subsequent years. In the fiscal domain, the consolidated public sector fulfilled its program targets, achieving a primary surplus of 2.5% of GDP (compared to 0.9% in 2002), with 3% expected for 2004. Fiscal targets for the ensuing years will be agreed as

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the IMF program unfolds. The exchange rate and inflation are expected to remain stable during the period, whereas international reserves, which total roughly US$18 billion, should increase in the coming years. In late August 2004, the IMF agreed with the Argentine authorities to resume the Third Review of the program once the public debt in arrears with private creditors had been restructured. At that time, the results of the debt restructuring and the advances made in implementing the program’s agenda of structural reform will be evaluated.

1.42 The government aims to consolidate a sound fiscal framework at all levels. At the same time, it has raised the need to restore governance capacities, both at the federal level and in provincial and municipal governments.

1.43 In its strategic programming, the government is taking a medium- and long-term view, bearing in mind that investment processes must take account of existing regional differences, the economy’s greater competitiveness, and its participation in the world economy. The government is also seeking to improve the investment climate, so that the public and private sectors can pull together. This entails strengthening SMEs and technological innovation, promoting technical education, fostering the use of human resources, together with more open trade practices and greater regional integration. The vital importance of guaranteeing the quality of public services and infrastructure is recognized, together with the need to strengthen mechanisms for encouraging investment and reporting requirements. To ensure resources are used more efficiently, the government is promoting the use of technical criteria to consistently and harmoniously guide project selection.

1.44 In the framework of the country’s social development challenges, the Argentine government’s medium-term strategy aims to promote economic growth by increasing levels of production and employment. At the same time, it proposes to consolidate a targeted, comprehensive and efficient social safety net, to increase social inclusion. The crux of this policy would be a program that unifies conditional transfers to poor and indigent families (Social Income Plan) and seeks to share responsibility with beneficiary families in promoting investment in education and healthcare for their children. This plan would be supplemented by three other initiatives: (i) The Local Development and Social Economy Plan, which will stimulate productive outlets to overcome poverty once and for all; (ii) The Food Security Plan, which will reduce nutritional vulnerability among families with children under 14 years of age, in addition to pregnant women, the disabled and older adults; and (iii) The Human Development and Family Program which will serve the needs of the socially most vulnerable groups (children, adolescents, women, the elderly, disabled, etc).

1.45 With regard to more universally oriented programs and policies, the main priority in education would be to ensure that children from the poorest areas receive an education of comparable quality to that of their peers in wealthier areas, completing at least 10 years of schooling. Secondary and vocational education represent a special reform topic that is a top priority for increasing the employability and competitiveness of the labor force. In the health sector, priority has been given to

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implementing nationwide mother-and-child health insurance in order to guarantee access to health insurance for mothers and their children under six years of age. In the housing sector, priority has been given to investments for neighborhood improvement, to alleviate sanitation problems and overcome insecurity of tenancy among families living in slums, who face serious difficulties in building human and social capital.

II. PAST STRATEGY AND PORTFOLIO ISSUES: LESSONS LEARNED

A. Strategic programming cycles

2.1 The programming cycle that preceded the present Country Strategy ran from March 2001, following approval of the Country Paper for 2001-2003 (document GN-2140-1). This section deals with the analysis of the period covered by that strategy. Nonetheless, given the magnitude of the crisis that afflicted the country from 2001 onward as described in the previous chapter, and its inevitable influence on the Bank’s action, it is worth setting this in a broader context by providing a summary of the Bank’s strategies between 1992 and 2002, in order to draw the most important lessons for the new strategy.

2.2 In the 1992-2002 decade, the Bank’s Country Strategy with Argentina remained largely unchanged and was based on three key priorities: (i) support for structural reforms in the public sector; (ii) increased competitiveness in the private sector, including a deepening of trade integration; and (iii) poverty reduction. The specific emphasis on each of the three priorities varied from one subperiod to another, and was heavily influenced by the various crises through which the country passed during this period. The Bank’s areas of action during this decade were framed by these three key priorities.

2.3 During the 1992-1995 subperiod, the Bank’s Country Strategy very closely targeted and tracked the priorities set by the Government of Argentina. During this initial period, the Bank’s operations program concentrated on structural reforms, with less emphasis being placed on the productive and social sectors. Average annual approvals reached US$1 billion, and sector loans accounted for 90% of total disbursements. As part of the Bank’s response to the 1995 crisis, which reflected the aftermath of crisis in Mexico, two sector projects were approved for a total of US$1.2 billion. The IDB’s actions, coordinated and agreed with the IMF and World Bank, were timely and enabled the country to rapidly overcome a massive withdrawal of deposits from the banking system, and the sharp reduction of foreign capital flows to the country.

2.4 During the 1996-1998 subperiod, the Bank responded to priorities that were less clearly defined by the Argentine government, implementing a more scattered program. The Bank approved a large number of projects in these years, but the

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fiscal constraints that were building up meant the portfolio eventually proved too large. During this period, the emphasis of structural reforms shifted toward the subnational levels of the public sector—mainly provincial and municipal authorities. The Bank’s incipient experience with these authorities led it to underestimate institutional issues (execution problems and difficulties in implementing the reforms), even when an excessive number of conditionalities were attached to the loans. In retrospect, the heavy emphasis placed on social sector projects during this rapid-growth period was justified by the deterioration in poverty indicators during those years. The period ended with a new financial crisis in 1998, following the shock of the Russian default. Approval of a special US$2.5 billion structural adjustment program by the Bank in December 1998 came just at the right time, before the shock of the Brazilian devaluation in January 1999, which exacerbated the risk of rollover and the debt dynamic.

2.5 The 1999-2002 subperiod was dominated by the effects of convertibility in a recessionary framework and deteriorating terms of access to external financing. The new IDB strategy underwent considerable adjustment following the approval of a US$1.6 billion financial program in January 2001 in the context of financial armor-plating led by the IMF, in conjunction with the World Bank, the Spanish government and private contributions totaling US$40 billion. Significantly, the private sector made a majority contribution to the program linked to a renewal of maturities. The active portfolio was once again subject to fiscal constraints and insufficient budgetary appropriations, in terms of both local counterpart and external funding. The political, economic and social crisis of late 2001, together with its implications for budgetary allocations, the underexecuted investment loan portfolio, and the number of institutional changes associated with it, made it impossible to approve new investment projects in 2002, and the Bank focused its activities on reformulating and redirecting its social portfolio to support the new government’s social emergency plan, with very positive results as analyzed below.

2.6 Throughout the period, the Bank responded to the country’s requests, approving an operations program framed by the action areas agreed in each country strategy. As seen below, the Bank adjusted its action as circumstances required and in agreement with the country, presenting each operation to its Board of Executive Directors for approval.

B. The Bank’s response to the crisis

2.7 Starting in late 2001, implementation of the current strategy and the performance of the Bank’s portfolio were undermined by the crisis that engulfed the country, and as a result, the Argentine authorities and the Bank, by common agreement, began the task of reorganizing the use of available resources, in order to help the country respond effectively to the crisis and mitigate its effects on portfolio execution. Initially this effort included cancellation of financing and the redesign of programs. By agreement, loans totaling US$402 million were cancelled in 2001 and US$80 million in 2002, together with partial cancellations in 2002 of

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US$312 million, in loans to finance projects that were no longer a priority or had been rendered unviable by the crisis.

2.8 The Bank also redirected its resources toward various social emergency programs, achieving positive results very quickly. In March 2002, the Board of Executive Directors of the Bank approved the reorientation of uncommitted loan funds (document PR-2656), channeling resources from lower priority projects toward five social programs in execution that targeted the most vulnerable groups. This involved a total of US$694.2 million in support of social emergency projects (including the balances of recipient projects in execution plus funds diverted from other loans), and the cancellation of balances on loans financing projects of low priority or unsatisfactory execution. By the end of the first half of 2003, the five projects included in the social emergency plan were displaying average progress of 89% with respect to their physical targets for the year, providing a satisfactory response to the emergency by addressing the needs of nearly 1.5 million low-income families in diverse areas.

2.9 Using similar methodological criteria, in November 2003 reallocation of resources to the productive sector portfolio (PR-2797) was approved, assigning priority to such areas as support for microenterprise and small businesses and small-scale rural producers. In this case, the amount of funding reassigned was US$296 million, making a total of US$414 million including balances available in projects receiving these funds.

2.10 Both initiatives, in the social and productive domains, illustrated the Bank’s responsiveness to the social and economic crisis in Argentina, helping to ensure efficient and effective utilization of IDB loans. These initiatives have also contributed generally positive experiences for the design and execution of future projects.

2.11 The Bank also decided to allocate emergency loan funds to provide liquidity for the country’s external accounts, and to support Argentina in its efforts to combat poverty and maintain its social policy during the economic and financial crisis. In 2003, US$1.5 billion was assigned to the program for social protection and mitigation of the impact of the crisis on the poor I (1452/OC-AR) and program II (1517/OC-AR), the latter approved and disbursed in December 2003 in the amount of US$400 million to maintain continuity with program I. In addition, the final tranches were released on two sector programs approved in 2001 and reformulated in 2003; and two investment loans were approved for the provinces of Salta and Río Negro, for a total of US$86 million.35

35 The Bank submitted periodic reports on its actions in Argentina to the Board of Executive Directors in

2003 (CS-3487 and CS-3487-1).

- 22 - 2.12 In the context of preparing its new strategy for 2004-2008, the Bank conducted a

series of studies aimed at developing constructive dialogue with the authorities, and providing useful tools for identifying the challenges facing the country in the short and medium term. Through this set of actions, in the most recent period the Bank showed speed and flexibility in its responsiveness and support to the country, making a major contribution to gradually overcoming the crisis.

2.13 It is hoped that the current context of institutional normalization and economic recovery in Argentina will make it possible to extend the work horizon between the Bank and the country within the guidelines proposed in this strategy. In keeping with the priorities of the new government and as indicated in the OVE country program evaluation (CPE) for this period, this is a good time to refocus the Bank’s action on targeted financing of investment projects as part of a longer-term strategy. Nonetheless, sector loans have played a positive role in funding reforms. It is hoped that this more stable situation will also produce more predictable portfolio execution.

C. Portfolio issues

1. Composition

2.14 As of 31 July 2004, the Bank’s active portfolio in Argentina amounted to US$4.934 billion in approvals, of which US$2.458 billion had not yet been disbursed. At that same date, the portfolio was composed as follows (in terms of amounts to be disbursed): (i) US$2.440 billion (99%) in 38 loans financing 34 projects; and (ii) a total of US$18.7 million (1%) in 35 nonreimbursable technical-cooperation projects—national, regional and financed by the Multilateral Investment Fund (MIF)—together with five projects under the Social Entrepreneurship Program. By late 2003, the active portfolio of the Inter-American Investment Corporation (IIC) had eight projects in execution, with loans approved and disbursed totaling US$64.5 million. Of these, four projects are in the process of restructuring, and one is in litigation.

2.15 In the private sector (PRI) portfolio, the Bank approved six loans in dollars to public utility firms supplying energy, transport, communications, and water and sanitation services. These are fully disbursed. In addition, a number of Private Sector Department projects in Argentina were cancelled, having been approved but never disbursed, including Trenes de Buenos Aires, Gasoducto del Mercosur and Puente Rosario Victoria. The six transactions disbursed have mostly been cofinanced with private-sector financial institutions under the A/B loan structure, in which the Bank finances one portion while another is syndicated on the market by selling shares. All IDB borrowers in the private sector have been directly affected by the Emergency Act of January 2002, which, among other measures, immediately froze utility rates and severed their indexation with the dollar. The Bank is in the process of restructuring debt with these borrowers, and continues to work with each of them to establish an interim payments schedule. Several companies have begun discussions on possible restructuring scenarios with the Bank, but finalization

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requires the government to complete its ongoing review of contracts and regulatory frameworks. There were additional problems with the Correo Argentino project, owing to: (i) a number of contractual disputes between the concession holder and the government; and (ii) the weakness of the regulatory framework.

2. Outcomes

2.16 From the entire portfolio two sets of projects performed particularly well: firstly, fast-disbursing operations aimed at responding to the impact of the crisis on macroeconomic variables; and, secondly, Bank-funded projects to support the social emergency plan (see paragraph 2.8).36

2.17 Sector loans. The sector program to support the fiscal balance and social management (1295/OC-AR), approved in December 2000 for US$400 million, had a positive impact especially in the pension and State reform areas. The financial services sector program (1324/OC-AR), approved in 2001 and reformulated in 2003, was successful in supporting the development of a competitive market and financial soundness; promoting delivery of better, cost-effective financial services to individual consumers and firms; improving good governance at institutions and companies; and bringing the functions of regulators and their capacity for action closer to international standards. The year 2001 also saw approval of the sector program in support of the federal commitment to growth and fiscal discipline (1341/OC-AR), which supported the process of public administration modernization and implementation of federal commitment agreements making it possible to achieve growth and fiscal discipline. In this project, a set of reforms was put in place to improve the management of several different national agencies, and structured financing agreements were signed with 15 provinces. Reformulation of this loan was approved in 2003, and late in the year both loans were disbursed in full, having fulfilled their respective conditionalities.

2.18 Two other loans in execution are worth highlighting for their positive impact: The program on at-risk children and adolescents (SIEMPRO/PROAME) (1008/SF-AR and 1111/OC-AR), approved in 1998, helped to create and develop an interinstitutional service network with the involvement of the public sector and civil society organizations, to provide preventive and comprehensive care services aimed at improving the integration and social adaptation of children and adolescents at social risk. This program has fostered a cultural shift in the government’s social action, toward greater transparency in the use of funds and comprehensive development of low-income population groups, mainly “street children” from localities and provinces with the highest levels of unmet basic needs (UBN).

36 This plan also includes loans financed by the World Bank, such as the Heads of Household Program.

- 24 - 2.19 In the current phase of execution of the project for the establishment of the federal

public revenue administration (1034/OC-AR), approved in 1997, and despite the agency not having been fully established as a result of the merger between the General Revenue Directorate (DGI) and the National Customs Administration (ANA) (now the General Customs Directorate-DGA), significant improvements have been achieved in fiscal revenue administration processes. This project has facilitated substantial progress in information management technologies, and major technological progress has been made in human resource management and in taxpayer relations (especially the system for consulting legal information over the Internet.

2.20 In addition, positive outcomes have been achieved from projects in the areas of education (scholarship program), science and technology (reformulation of the sector financing system), and animal health.

2.21 In terms of the outcomes of the overall active portfolio with the public sector, of the 34 projects financed by means of loans, as of 31 July 2004, progress is unsatisfactory in one-third (12); achievement of the development objective is doubtful in 6; and assumptions are unlikely to be verified in 7 (these assessments are made using the Bank’s internal rating system). Notwithstanding the current portfolio rating, it is estimated that operations on alert status have good chances of recovery so as to fulfill their respective development goals. This is largely due to the positive effects of portfolio redirection, greater institutional stability anticipated in the executing teams, and timely budgetary appropriation resulting from greater economic, political and social stability. Nonetheless, in many cases the implementation period will overshoot the original estimate.

2.22 In the case of private-sector operations in Argentina, government actions—including the freezing of public utility rates, among other things—have affected all PRI transactions. This problem is magnified by weak enforcement of regulations and the problematic ongoing renegotiation of concessions aimed at restoring a balanced financial position in the concession contracts. The mismatch between revenues converted into pesos and loans in U.S. dollars faced by many private firms underscores the need to develop loan instruments in local currency and to seek creative solutions to the financial crisis affecting many corporations. The varied interests of stakeholders make the solution complex, however, so coordination among the Argentine government, RE1 and PRI is crucial in restructuring certain sectors and public utility concessions.

3. Age

2.23 Fifty percent of operations and 57.5% of the undisbursed balance correspond to loans that are no more than five years old, and the average age of the portfolio is 5.4 years. The portfolio is divided into two groups: (i) a set of relatively young loans (either recently approved, or forming part of the redirected social portfolio) which in general are executing satisfactorily; and (ii) a group of loans displaying

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slow and unsatisfactory execution, for which the Bank has agreed on an action plan with the government to bring them into compliance during 2004 or cancel them.

4. Net flows

2.24 Financial flows for the period show negative net cash flows with the country in 2002 and 2003. These figures are partly explained by repayments on the emergency loan approved in 1998 (1163-OC-AR: structural adjustment program and strengthening of banking system safeguards), made at a time when the scale and duration of the recession and the closure of financial markets was not foreseen. In addition, the absence of a macroeconomic framework agreed with IMF in 2002 prevented the approval of new loans that would have helped to restore a positive flow with the country. In addition, as a result of the lengthy negotiations with the IMF, Argentina had difficulties in fulfilling its obligations with the Bank, falling into arrears in early 2003. IDB disbursements to the country for 2003 were US$2.64 billion, however, thereby restoring a positive net loan flow. The net cash flow for 1999-2003 was positive by over US$200 million.

5. Factors affecting execution

2.25 The following were the main factors affecting portfolio execution in the most recent period:

(i) Institutional instability, with adverse effects in terms of macroeconomic and sector policies, medium- and long-term priority setting, stability of technical teams, availability of budgetary resources and other consequences. Projects in the Bank’s portfolio in Argentina have been heavily exposed to the impact of political and business cycles, entailing critical changes in content, priorities, technical teams, and other areas.

37 In addition to flows of resources in convertible currencies from public and private sector loans (A loans)

shown in the table, there are other financial flows in the case of Argentina: (1) the conversion of Argentine contributions to the Bank under the local currency conversion program (HIPC I and II) (between 1999 and 2003 amounting to US$126 million in principal and US$47.7 million interest and fees); and (2) the financial flows relating to four Yacyretá loans (US$32.8 in disbursements, US$199.6 million in payments of principal, and US$132.8 million in interest and fees during the same period).

Net Flow of Funds37

(US$ millions)

Item 1999 2000 2001 2002 2003

Disbursements 1,412.6 939.4 1,517.8 407.1 2,639.9

Payment of principal 283.2 261.6 277.8 916.0 2,310.7

Net flow of loans 1,129.4 677.8 1,240.0 -508.9 392.2

Interest and charges 460.8 552.9 499.3 482.0 581.0

Subscriptions and

contributions 16.8 34.8 12.1 0.0 16.3

Net cash flow 651.9 90.1 728.6 -990.9 -268.1

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(ii) Institutional weakness in various areas of public administration, which has worsened particularly over the last few years. It is essential to strengthen the efficiency and effectiveness of Argentine public institutions, particularly those crucial for State administration.

(iii) In the context of the crisis, the excessive short-termism that has been reflected in the priority given to fast-disbursing operations, and also in postponement of the construction of alternative medium- and long-term scenarios, with reforms and investments.

(iv) In the case of private-sector operations (PRI), problems in introducing regulatory frameworks and dispute settlement mechanisms impacted on the progress of various operations in recent years.

(v) The following section, on lessons learned, highlights areas where the Bank’s own action can improve and thus help strengthen the active portfolio.

2.26 It is hoped that the greater institutional and political stability and signs of economic recovery now discernable in the country presage greater predictability in general portfolio execution; and that the coming period will produce policies and medium-term agreements to help reduce portfolio vulnerability and foster a strategic management culture. A positive step in this direction is implementation of the action plan agreed with the government, with principles and criteria that contribute to effective execution of a series of priority projects, safeguarding the stability of technical teams, availability of resources, generalized application of effective oversight instruments (including timely delivery of audited financial statements), procurement and institutional monitoring procedures, and other elements.

6. Lessons learned

a. Design of operations

2.27 The analysis that was carried out highlights the importance of designing, implementing and/or improving supervision systems. An example of good practice in this regard was the Bank’s hiring of a consulting firm specializing in organization and methods, which worked with the executing units of the social emergency projects to identify critical risk areas for project implementation, and formulate an institutional strengthening matrix to monitor actions aimed at addressing the problems. This revealed the importance of having sound institutional, financial and risk analysis in place in the project formulation and startup phase.

2.28 The experience of redirecting resources to support the social emergency plan showed that it is possible to design operations within a short timeframe and minimize, among other things, some of the conditions precedent to the first

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disbursement even when introducing new components, so as to help provide timely financial assistance.

2.29 In the case of direct loans with subnational entities (provinces or municipios), project teams must consider the need to conduct a fiscal analysis of the entity in question, and to have borrowing laws passed prior to loan eligibility. In the past, this legal requirement has caused significant delays in starting loan execution (and even cancellations). Therefore, representatives of the corresponding legislature must also be made aware of the objectives and components of the project, and their receptiveness to the proposal evaluated. In these operations, it is also important to target the design to specific areas or sectors, since this makes tangible outcomes easier to obtain and involves simpler and more effective execution mechanisms.

2.30 The integration of participatory design, embracing all project stakeholders, increases the chances of a project’s success, since it generates ownership among those who are substantive actors in its execution, including the beneficiaries. This can be seen in local development operations, where a commitment from subnational authorities and beneficiaries is essential, and participatory design was lacking in a number of Bank operations that had to be cancelled or redirected. On the other hand, as shown by the CAPI project for indigenous populations in the program in support of vulnerable groups, under which investments in comprehensive local development and strengthening of management skills among indigenous communities have been successful, 38 it is possible to promote local development processes, provided their target populations play a major role in the design and execution of the projects in a socioculturally relevant way. Similarly, in sector loans it is important to agree on a policy and action matrix with the government that will be feasible for those directly responsible for carrying out the necessary actions.

2.31 The execution and outcomes of sector loans benefit from parallel technical-cooperation projects that increase the government’s capacity to implement reforms. Such operations should also include a baseline to enable outcomes to be monitored on a timely basis, and these can serve as a starting point for the design of future sector operations.

2.32 Project execution and design both benefit from rigorous sector and institutional analysis of the country, which makes it possible to deepen dialogue with the authorities and enhance the impact of the Bank’s actions. Also, the Bank could work with the Argentine government to improve the regulatory frameworks governing public services and the investment climate.

38 IDB, OVE (2001a).

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b. Execution of operations

2.33 Experience with reorientation of the social portfolio also demonstrates the usefulness of improving and standardizing tools, such as management oversight systems, through indicator monitoring, annual operating programs and standard bidding documents, and other means as a way of organizing and facilitating project execution. In addition, startup workshops were seen to have a positive impact on project execution, where these have been held.

2.34 This reorientation and subsequent implementation have also required a creative attitude to make the proposed changes, and a flexible stance to meet the challenge of speedy execution without detracting from proper technical, financial, and operational controls on management. These lessons should be taken into account in the design of new operations and review of operational procedures that would lead to substantial improvements in execution and outcomes.

2.35 All satisfactorily executing projects display at least one of the following elements: strong leadership and political commitment from the government and the executing agency; experience and stability in the counterpart technical team; and expenditure priority reflected in the availability of budgetary resources.

2.36 The frequent presence of budgetary constraints on project execution fully justifies the need to analyze and identify with MECON and the Cabinet Office (Jefatura de Gabinete de Ministros), in their annual budget process, items with a multi-year impact for purposes of budgetary allocation and subsequent real availability of resources, in terms of both loan proceeds and local counterpart funding, for projects in execution and in preparation.

D. Implications for the future strategy

2.37 The above analysis shows that the Bank set strategic objectives that were consistent with the challenges identified jointly with the country in its previous strategies, and that it has been able to respond to crisis situations of unforeseen dimensions in a flexible and relevant manner. There have also been periods when the Bank’s action has been less strategically targeted, and in certain cases the institutional capabilities of executing agencies was inadequately assessed, and portfolio growth outstripped their capacity. These factors, compounded by budgetary constraints, institutional crisis and currency devaluation, resulted in a portfolio that was too large, although the rekindling of economic activity has made it possible to partly overcome this problem. These points are analyzed in detail in the CPE for Argentina, prepared by the OVE.

2.38 The Bank has drawn on these lessons in designing the proposed strategy, and has built a transition period into its future program, during which it will focus mainly on restructuring the existing portfolio and regaining precrisis levels of execution and disbursement. During this period, its efforts will also be concentrated on identifying new operations that are consistent with the targeting areas and priorities

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agreed with the government and reflect lessons learned in portfolio execution. The design phase of these operations will seek to deepen institutional analysis of the executing agencies and incorporate flexible execution mechanisms.

2.39 Lastly, during strategy implementation, the Bank will seek to maintain its capacity to respond in a flexible and timely manner to situations as they arise, maintaining a longer-term strategic focus, and preserving its proactive role in preventive and corrective actions in portfolio management, maintaining an appropriate balance in the use of its loan instruments. The Bank will also need to monitor government policies closely in order to identify possible effects on the country’s vulnerability to the types of potential shocks that have occurred in the recent past. Such monitoring would enable the Bank: (i) to incorporate proposed actions to mitigate potential vulnerabilities into its policy dialogue and support for the country; and (ii) to anticipate potential risks that might adversely affect the Bank’s action in the country

III. THE BANK’S STRATEGY 2004-2008

3.1 For Argentina to achieve sustainable and more equitable growth, it will need to raise its investment levels and the productivity of its physical and human capital, so that it can create jobs in the formal sector and increase production levels and the value-added of goods and services. Recovery of investment levels and generation of the necessary national and international savings will depend firstly on maintenance of macroeconomic stability and the existence of a robust and efficient institutional framework with stable and transparent rules. This will enable Argentina’s institutions to regain credibility, reduce uncertainty and create an environment in which economic agents can make long-term decisions. Nonetheless, economic growth alone is insufficient to solve the problems of poverty and income distribution. Policies are also needed that promote human capital formation, equal opportunity, worker productivity gains, and a more formal economy, following the adoption of appropriate tax and pension regulations, among other measures. In addition to policies that attack the causes of social problems, the State must also maintain an effective social safety net to address the needs of populations living in structural poverty (which also tend to be hit hardest by economic crises) through socioculturally relevant measures.

3.2 To address the challenges described above, and in line with the government’s program, the main objective of the Bank’s 2004-2008 country strategy is to support Argentina in achieving sustainable and more equitable growth through actions in three strategic areas: (i) institutional strengthening for better governance and fiscal sustainability; (ii) a more favorable climate for investment and productivity growth, to enhance the country’s competitiveness; and (iii) poverty reduction, rebuilding the human resource base, and promotion of sustainable and inclusive social development. Actions in these three areas will

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include loans to subnational (provincial and local) governments, focusing on the less developed regions . In addition, the Bank will continue to support the country in consolidating stability and overcoming the effects of the crisis—the first challenge identified in chapter I—through execution of the current loan portfolio and monitoring implementation of the government program with the IMF, by providing nonfinancial products and maintaining dialogue with the country authorities (see the Agenda for country dialogue in the final section of this chapter).

A. Principal areas of strategic focus

3.3 This section describes the Bank’s target areas for meeting the challenges facing Argentina, organized under three broad strategic headings that are strongly interdependent and consistent with lines of action for integrated implementation of the Bank’s fundamental objectives and priority areas where its main comparative advantages lie39 (see also Annex I).

a. Institutional strengthening for better governance and fiscal sustainability

3.4 The main target area for Bank action in modernization of the State involves enhancing legal certainty and technical skills for public administration, through support for more streamlined rules and regulations; greater transparency in public actions; and strengthening of the functional and technical capacity of the civil service, together with its fiscal sustainability and capacity for program planning, monitoring and evaluation.

3.5 In view of the challenges facing the country in developing public administration capabilities and strengthening conditions of governance, the strategy’s simultaneous action areas on modernization of the State will be: (i) democratic system, (ii) rule of law and justice reform, (iii) State and market, and (iv) governance.40

3.6 (i) Democratic system. The Bank could provide support in such areas as: strengthening of top-level bodies in the executive branch, the Office of the President of the Republic and the Cabinet Office; modernization of management services in the legislature and establishment of a budget office in particular; improvement of socioeconomic and fiscal information systems at the three levels of government, to facilitate formulation of sustainable development policies; adoption of institutions and instruments aimed at more cooperative federalism; and civil society strengthening, including the establishment of citizens’ oversight bodies, and development of volunteerism as a channel of citizen participation. 41

39 See the table “Relación entre las áreas de focalización de la EPBA y las áreas de acción de las Estrategias

Sectoriales del BID” [Relationship between the target areas of the IDB Country Strategy with Argentina and the areas of action of the Bank’s sector strategies], available in the RE1/OD1 files.

40 IDB, RE1/SC1 (2003). 41 Kliksberg (2003).

- 31 - 3.7 (ii) Rule of law and justice reform. Strengthening and full implementation of the

rule of law are essential for Argentina’s development from the institutional standpoint. They also represent one of the most difficult problems to deal with, given the inherently political conditions surrounding the key issues.

3.8 Possible areas of action are: improvement of transparency in public management (public hearings, control of lobbying, participatory drafting of regulations, rules of access to public information and enhancement of its statistical bases); preparation of corruption maps that identify high-risk areas and serve as a basis for strategic definitions for an anticorruption policy; and the operational and technological dimensions of implementing strategies to combat corruption and money- laundering. The Bank could also support programs to ensure meaningful access to justice, together with more targeted action such as neighborhood and small-claims courts, advice and orientation centers, diversification of alternative dispute resolution methods, projects for transparency and accountability in the courts, preparation and dissemination of judicial statistics, and creation of operational and management oversight standards.

3.9 (iii) State and market. The availability of institutions and policies that are consistent with market development and improvement is one of the strategic areas in which the Bank’s action can be focused. In this domain, more lasting coalitions can be forged between public and private stakeholders, with clearer and more tangible incentives, supporting implementation of a business- and investment-friendly legal and institutional environment.

3.10 In State reform the Bank could support programs to: streamline rules and regulations (processes of regulatory consolidation and simplification, information and publicity mechanisms, procedures for preparing regulations that take account of their economic and social impact and involve the affected sectors); creation of a public-private institutional mechanism that guarantees sustainability and includes quality standards ensuring long-term viability; promotion and development of socially responsible business, focusing in particular on the development of small and medium-sized businesses from the platform of provincial and local governments.

3.11 (iv) Governance. The Bank has been working in this area in Argentina over the last few years at both the federal and subnational levels, supporting the reform of fiscal federalism and modernization of the executive branch (national, provincial and municipal governments), through projects executed both centrally and on a decentralized basis. There is ample opportunity for continuing to work in this domain on crosscutting dimensions of public administration (budgetary, financial and taxation systems; management of assets and liabilities, human resources and others). In addition, the Bank could help in the formulation and evaluation of state policies, through its loan program and agenda for country dialogue.

- 32 - 3.12 The possibilities include programs for strengthening the functional and technical

capacity of the civil service in a context of fiscal sustainability, through policies and techniques to develop professionalism in both access and career promotion, match resources to needs in strategic sectors, increase capacity to provide incentives for professional staff in the public sector, and enhance their program planning, monitoring and evaluation capabilities. This can be done at both the federal and provincial levels. A framework can be set up for joint action in this area (such as through the Federal Civil Service Council (Consejo Federal de la Función Pública)), to optimize investments in systems and other media and provide stronger incentives for their implementation. As part of the modernization of human resource management, support could be given to develop a gender equity policy in the civil service.

3.13 On the issue of fiscal federalism, support can be given for adjustments to reforms already underway, both at the central level and in provinces and municipios. The Bank could also support creation of the Federal Fiscal Agency (Organismo Fiscal Federal), construction of its information systems and development of technical capacities; strengthening of budgetary, tax and financial administration in the provinces to raise their revenue collection capacities and enhance management of expenditure and public debt; strengthening of state capacity to manage and administer tangible assets and liabilities, and also to adopt appropriate information and communication technologies for public administration (such as e-government); institutional development of local governments, linked to a strengthening of their role as actors in economic, social, environmental and urban development; and strengthening of public policy management, introducing considerations of gender equity and rights.

3.14 In the pensions domain, the Bank could assist government efforts to implement changes and improvements to the system. The main areas of Bank collaboration could focus on fiscal sustainability and balance in public pension systems at the national and provincial levels; improvement of regulations governing the individually funded system; and expansion of pension coverage, by strengthening noncontributory pension systems for older adults. The complexity of the problems, together with their crosscutting social, fiscal and financial nature, will require a multidisciplinary and gender-based approach to long-term solutions.

b. A more favorable climate for investment and productivity growth, to enhance the country’s competitiveness.

3.15 Bank actions will focus on support to the productive sector for a revival of investment; creation of positive incentives for a reduction in informality and creation of formal jobs , by improving the institutional apparatus for supporting the productive sector, including a suitable tax structure. The initial areas of action will focus on reform of Argentina’s productive development and export and regional integration frameworks; modernization of innovation and technological development systems; reform of the financial structure of credit and nonfinancial services to microenterprise and small businesses, together with projects to reduce

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informality; resumption of execution of projects existing in the portfolio, and preparation of new infrastructure operations. A major goal will be to re-establish conditions for the Bank to finance new private sector projects (PRI).

3.16 In the light of the challenges facing the country to restore private national and foreign investment and increase the productivity and competitiveness of the economy, it is proposed that the Bank should support development and implementation of a National Competitiveness Strategy that pursues a shared future vision within the global economy. This would give direction to government efforts (both national and subnational), in coordination with the private sector and civil society, in promoting the country’s productivity and competitive positioning. 42 Possible areas for Bank action in support of competitiveness development in Argentina are as follows:

3.17 (i) Reform of the financial structure to support competitiveness. In its most recent loans, the Bank has focused on reform of the regulatory and supervisory aspects of financial services, and on the provision of credit to microenterprise and small business through global credit programs. As part of the reorientation of the Bank’s productive portfolio, the global small business and microenterprise credit program II has been reformulated, expanding its resources and beneficiaries to incorporate medium-sized firms. The Bank’s strategy will highlight the importance of continuing to mobilize funding for businesses. In addition, once recapitalization of the financial system has been achieved, the Bank could continue to support promotion of a reformed financial structure that provides suitable services at reasonable cost to more segments of society, particularly by extending intermediation to bring unserved groups into the formal economy (for example, SMEs and microenterprises that are in this situation). In particular, the Bank could support the development of nonfinancial services in new areas, such as the use of trust funds, microfinance regulation and projects to reduce informality. Moreover, as liquidity in the local market increases, the Bank would consider the use of renewable guarantees to support the restoration of local bond issues, including indexed bonds denominated in pesos. At the same time, the Bank’s strategy for the private sector in Argentina will also assist in identifying mechanisms to support the corporate sector through capital market transactions to address the lack of suitable financing resources. With the MIF, some of the initiatives in preparation and under study for the next few years could support the development of the national financial system with innovative instruments aimed at microenterprises and small businesses, including credit unions. In addition, the PRI is seeking to participate in transactions that help alleviate bottlenecks in obtaining credit for exports from local and

42 The Bank has been contributing to competitiveness development in Argentina through the following

operations: the provincial agricultural services program (PROSAP); the technological modernization program; the business restructuring program; and over 20 MIF projects to support SMEs in such areas as export diversification, promotion of quality standards and certification, business development services, and promotion of territorial competitiveness.

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international commercial banks. The IIC will also maintain an active program targeting SME development and concentrating on the funding of expansion projects in various export-oriented manufacturing, agribusiness and service sectors. The Bank and the IFC are analyzing the possibility of participating in certain debt funds created to provide liquidity to Argentine banks, in order to facilitate private-sector debt restructuring and develop local capital markets still further.

3.18 (ii) Modernization of innovation and technological development systems. In order to continue the support provided over the last decade, the Bank will seek to develop a third phase of the technological modernization program aimed at further embracing technology and innovation, deepening actions to bring services supplied by universities and technology institutes more into line with the business needs, especially those of smaller firms. The MIF will also continue to support initiatives to enhance SME productivity through adoption of new technological tools, particularly information and communications tools.

3.19 (iii) Creation of an enabling environment for productive development and strengthening of institutions responsible for the design and implementation of national and local development policies and strategies. The Bank has provided support for increasing the competitiveness of Argentine firms through actions that seek to improve their access to production factors, infrastructure improvements, access to financing, technology and business development services. To enhance the efficiency and effectiveness of institutions and programs to support the productive sector and eliminate overlapping functions in the financial and nonfinancial, federal, provincial and municipal domains, the Bank’s strategy will assist the government in reforming Argentina’s productive development system. This reform would focus the strategic plan at the federal level, but with execution and direct impact on firms locally, structured around the needs of local production chains and clusters. In addition, through new MIF projects and loan programs, the Bank will continue to support initiatives that promote the formation of production clusters and the competitiveness of local production systems, facilitating joint public-private actions that involve cooperation among firms, workers, civil society organizations and local government agencies.

3.20 In the agricultural domain, support could be given to modernize the country’s agricultural health and food safety services, which require the re-establishment of modern, cost-effective systems of health surveillance and protection that make it possible to minimize the risk non-endemic pests and diseases entering the country and spreading, and preserve disease-free-zone status once declared. Action is also needed on the regulation and design of traceability and denomination of origin methodologies, research in production protocols, product preservation and the enforcement of regulations on food safety and environmental control, including the issue of genetically modified organisms.

3.21 Support could also be given for exploitation of the country’s tourism opportunities, focusing investment and efforts on a number of tourism poles selected for their potential and capacity to complement a specific product/market.

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This is particularly important in indigenous areas, where natural assets and cultural heritage tend also to be areas of tourism interest. In addition, support could be given to improving the competitiveness of tourist destinations with a deeper level of intervention and a cluster approach.

3.22 The Bank could also help in strengthening environmental and natural resource management capabilities, participating in efforts made by the federal government and by provincial and municipal authorities to strengthen and modernize public environmental management bodies. It is also important to support public efforts in land conservation, both to halt desertification and to preserve water resources. Sustainable management of natural resources should be viewed as a strategic production factor for diversification and increasing the value added by the national system of production.

3.23 (iv) Deepening of liberalization and integration agreements in the regional, continental and multilateral domains, to complement efforts in other areas (infrastructure, products, etc); access to new markets and capturing more value-added in exportable products through the following types of action: support for institutional strengthening in the two projects currently underway in the areas of international negotiations and export promotion; simplification of processes to reduce the transaction costs involved in export activity; improvements in the quality, efficiency and international recognition of bodies that certify the technical quality and safety of Argentine products; and better coordination of export promotion activities carried out by public and private institutions, in order to eliminate overlaps among the municipal, provincial and federal levels.

3.24 (v) Support for improving the efficiency and quality of public utility and infrastructure provision by creating conditions for increased public and private investment that responds to demand for greater regional integration and sustainable economic growth. Bank support has been very wide-ranging in projects on drinking water and sanitation, highways, ports, electricity, gas, and the improvement or provision of urban infrastructure. The Bank could help strengthen the regulatory framework and the functioning of bodies involved in regulation, control and defense of competition, guaranteeing transparency and participation of the sectors involved, and in improving the functioning of institutions to develop, execute, monitor and evaluate public policies. At the same time, efforts should be made to expedite the execution of projects already in the portfolio (representing an undisbursed balance of more than US$1.2 billion) as well as the preparation of new infrastructure operations at the nationa l, provincial, and municipal levels, in specific areas that are consistent with the competitiveness strategy being developed, especially those that can be structured as public-private projects. In particular, the Bank could support actions for regionwide physical integration within the framework of the Initiative for the Integration of South American Regional Infrastructure (IIRSA). With regard to the Bank’s private sector operations, a short-term priority is to recover overdue loans from public utility firms. When granting

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new infrastructure loans, the Bank will make sure that this does not interfere with the solution of unresolved problems in concession renegotiations.

c. Poverty reduction, rebuilding the human resource base, and promotion of sustainable and inclusive social development

3.25 This topic will prioritize actions leading to crosscutting consolidation of social safety net programs that demonstrated their effectiveness during the emergency period. Based on enhancing the connection between these programs and interventions of a universal nature, and their institutional strengthening, the country’s social and employment policy is expected to move to a post-emergency phase, projecting into the medium and long term. These actions will focus on social safety nets (targeted subsidy program for poor and indigent families that will help unify existing programs; complementary efforts to re-engage heads of household in productive activities; and reduction of food vulnerability among children, pregnant women and the elderly); education (improvements in educational quality and implementation of evaluation systems, reform of secondary school and vocational education); and health (strengthening of primary healthcare and mother-child coverage).

3.26 The Bank’s strategy in the social sectors to support poverty reduction, rebuilding the human resource base, and promotion of sustainable and inclusive social development, will be concentrated on the following areas:

3.27 (i) Social safety nets. The focus here will be on supporting government plans to consolidate a social safety net to coordinate integrated state and civil society efforts to prioritize the most vulnerable sectors of the population. These will include information systems for outcome monitoring and evaluation, together with mechanisms for reactivation at times of social crisis and automatic adjustment to the revival of growth, for immediate linkage with the supply of more universal services and re-engagement in productive employment.

3.28 In this area, the Bank could support the design and implementation of a targeted subsidy program for poor and indigent families, subject to certain counterparty requirements that contribute to the unification of existing nationwide subsidy programs. This program should combine maximum transparency in resource allocation with an administrative burden that is consistent with the institutional capacity of those responsible for providing matching funds to beneficiary families. The Bank could also support complementary efforts for re-engagement of the heads of such families in productive activities; reduction of food vulnerability among children, pregnant women and the elderly; and the identification of other initiatives that serve the specific needs of socially excluded groups, particularly youth. The Bank could also contribute with a program to support the development of indigenous communities, based on the experience of the CAPI pilot program. 43

43 IDB, OVE (2001); World Bank (2000); and IDB, OVE (2001a).

- 37 - 3.29 (ii) Education. In this sector the Bank is already supporting the reform of

secondary education by updating the curriculum, training teachers and providing inputs. Support also includes actions to guarantee the demand for secondary schooling through corrective actions aimed at improving the preparation of students promoted from primary to secondary, and compensatory measures such as scholarships for students from poor families attending secondary school. The Bank is now also financing priority actions for the education sector in direct operations with provinces such as Córdoba and Buenos Aires. In view of the gap in access to educational services available to indigenous populations, and consistent with their right to bilingual intercultural education recognized by the National Constitution, the Bank could consider specific components to serve the needs of these population groups.

3.30 Over the next few years, the Bank should support government efforts to achieve homogeneous educational outcomes and keep children and young people in school, especially those from the poorest families, promoting reforms at secondary level in particular to produce vocational education that is better suited to the labor market. The above requires emphasis to be placed on reducing grade repetition and school dropout rates, improving the allocation of human resources to the sector, and investing in information systems that include mechanisms for evaluation, student record keeping and other key data on supply and demand that are crucial to effective performance of the school system. In a complementary way, the relationship between the nation and the provinces needs to be improved on the basis of funding that is more closely linked to student attendance and performance.

3.31 In this regard, the Bank is in a position to support the reform of vocational education, focusing on two areas: development of a model for linkage with the labor market; and definition of a pedagogic model that serves the needs of internal efficiency and teacher quality. In both cases, the reform should include gender mainstreaming. Reform of these two areas would be a precondition for investment in equipment and technologies.

3.32 (iii) Health. At present, the Bank is active in the Argentine health sector mainly through reformulation of the social portfolio, prioritizing a program to deliver essential generic medicines to poor families in primary healthcare centers (REMEDIAR). This is rated as highly successful, having kept treatment for the most common illnesses accessible during the crisis on a targeted basis, and having generated incentives for the beneficiary population to prioritize primary healthcare as their gateway to the system.

3.33 Over the next few years, the Bank should support government efforts to progress toward greater integration, expansion and uniformity in health coverage, through a strategy to strengthen primary healthcare. It is also important to close loopholes in the regulations and in the enforcement of existing rules, strengthening the role of the National Ministry of Health and Superintendency of Health Services in this

- 38 -

domain, guaranteeing quality in access to health services and promoting suitable mechanisms for sector policy dialogue and consensus.

3.34 A future Bank program in the health sector could support improvements in health coverage for poor population groups, especially mothers and children, promote retraining of human resources focusing on primary and family healthcare, strengthening capacity to provide primary healthcare, and ensuring a framework of incentives for more efficient management of the private and public health services network.

3.35 (iv) Access to housing and basic sanitation. The focus here is likely to be on helping to solve problems of makeshift housing and basic sanitation conditions among poor households, while also improving housing sector funding mechanisms that promote effective public-private cooperation in the financing and construction of new homes, improving the existing housing stock, and providing the necessary urban and sanitation services.

3.36 A new Bank operation in this domain could support a gradual introduction of provincial programs, in addition to regulatory and financial frameworks at the national level, support for construction and progressive improvement of homes for lower-income households, and improvement of the situation of people living in squatter settlements. Technical assistance could also be provided for more efficient use of resources and strengthening of national policy-making bodies. The current neighborhood improvement program (PROMEBA) could form the basis for larger-scale housing programs in the short-term, with wider coverage of low-cost housing.

B. Strategy implementation

3.37 With the new government taking office in 2003, prospects are more favorable for a resumption of more strategic and longer-term programming, thereby making it possible to achieve effective outcomes in terms of rationalizing the active portfolio, and in identifying target areas for new operations within the three major strategic areas of Bank support for the country. Within this framework, and consistent with the government’s approach, the Bank aims to resume its leadership in the financing of investment loans, an issue that is also highlighted in Argentina’s CPE. 44 Nonetheless, sector loans have played a leading role in funding the cost of reforms. Towards the end of year two, a midterm evaluation of the strategy will be conducted to analyze portfolio performance, the government’s policy and reform program, the appropriate level of approvals, and target areas for the 2006-2008 operations program.

3.38 Over the next few years, a key element of the Bank’s strategy with the country will involve maintaining its support through efficient implementation and additional adjustment of the current portfolio, as required (at the end of July 2004 this portfolio contained US$2.458 billion that was undisbursed). In this regard, seeking

44 IDB, OVE (2003).

- 39 -

to return to historical performance levels and ensure that objectives are attained, an action plan agreed with the government is being implemented, which contains specific execution criteria that allow for timely detection of the need for adjustment and any additional support. At the same time, in the first period of strategy implementation, major efforts are needed to identify and develop new projects in order to target the Bank’s actions to the strategic issues, and guarantee the execution levels and resource flows envisaged in the loan scenarios.

3.39 General criteria for selection, identification and design of future projects and nonfinancial products, to be financed within the strategy framework, stress the need to contribute to economic development with regional equity and balance, and enhance the competitiveness of the economy. They should also make it possible to identify actions that are feasible in the political, economic, institutional and social context prevailing at the time they are identified, and to finance them in a sequence that makes it possible to maximize their timeliness and potential impact.

3.40 The two central crosscutting criteria to be considered in implementation of the Bank’s strategy, in the identification and design of projects and nonfinancial products, are: (i) strengthening of public administration; and (ii) the relation between national government and subnational governments. The aim of the first of these criteria will be to support capacity building of public administration to formulate development policies at the local, regional and national levels, together with their implementation, monitoring and evaluation. With the second criterion, the aim will be to support consistency between national government policies and actions and those of subnational governments, in a framework of stronger fiscal organization and public policy coordination. In addition, the following will also be analyzed as crosscutting criteria: (iii) the institutional capacity of potential executing agencies in selecting future operations and determining their amount; and (iv) priority will be given to actions that promote public-private partnerships .

3.41 The design of future actions in the strategy’s three target areas will also promote gender equity and women’s social inclusion. 45

3.42 Based on lessons learned from the implementation of previous strategies, technical-cooperation operations will be included as necessary, alongside sector loans, to support the institutional process in reform implementation.

3.43 In the case of direct work with subnational governments, special emphasis will be placed on analysis of their fiscal situation, existing institutional capacity, and support for strengthening thereof; and their inherent risks will be evaluated along with their capacity to provide the necessary budgetary resources. Support for resource and public expenditure management, appropriate debt management, and social and productive development will be considered a strategic element. These

45 See specific examples in IDB, SDS (2004a).

- 40 -

operations will target specific areas or sectors that are relevant to each subnational government, making it easier to obtain tangible outcomes and simpler, more effective execution mechanisms.

3.44 These criteria reflect common features to be applied in target areas and loan execution processes, and seek to maximize the impact of the Bank’s actions in the country, and its capacity to absorb new loans. To achieve its objectives, the Bank will also coordinate the actions of its various facilities and available instruments, in order to support the country more effectively. 46

C. Loan scenarios

3.45 To implement the strategy in 2004-2008, two loan scenarios were prepared based on a framework of macroeconomic stability in keeping with the government’s medium-term program agreed with the IMF. This program is expected to enable the country to reach conditions of solvency and public debt sustainability, as a result of renegotiation with private creditors, progress on fiscal reform, financial system restructuring, and renegotiation of public utility contracts.

3.46 Account was also taken of commitments under the IMF agreement with regard to resource flows from multilateral agencies in the medium term, and the active portfolio. In both scenarios, the amounts and dates of new approvals entail neutral loan flows between the country and the Bank while the IMF program is in force (from September 2003 to September 2006). For this period, repayments of principal from Argentina to the Bank are projected at US$2.7 billion, of which US$800 million were paid between September and December 2003.

3.47 Portfolio performance is expected to improve based on a framework of fiscal sustainability and institutional improvements, relying on the necessary budgetary resources and increasing functional capacity to execute investment loans. During first the two years, disbursements from the investment loan portfolio are expected to regain their late-1990s levels of around US$500 million per year. In the three ensuing years, these levels should increase further as new investment projects are executed.

3.48 The target scenario for the period, which would enhance the Bank’s impact in targeted areas, represents US$5 billion in new approvals. In this scenario, to which efforts to implement the current portfolio and identify new projects are turned, the Bank’s exposure in the country would remain virtually unchanged. If these efforts proved insufficient, a second scenario envisages approvals totaling US$4 billion (an annual average of US$800 million), and, according to the assumptions mentioned, this latter scenario would lead to a slight fall in the Bank’s

46 To implement this strategy, the Bank has a series of lending and technical assistance instruments and

nonfinancical products, some of which could be used more widely, as well as new recently approved instruments designed to make the Bank more flexible and enhance its capacity to respond effectively and promptly to the needs of the borrowing member countries.

- 41 -

exposure in the country from US$8.619 billion in late 2003 to about US$8.2 billion by the end of 2008.

3.49 To achieve the target scenario, the following conditions would have to prevail: (i) a significant improvement in project implementation to an average annual disbursement level of US$500 million (capacity to prepare and execute efficiently a larger volume of investment projects, including budgetary resources and borrowing capacity, together with executing-agency implementation capacity will be examined); (ii) new structural reforms that would make room for new loans in key areas for sustaining growth and economic stability, such as the pension system or the financial sector; and (iii) the establishment of sector investment programs. These conditions would be evaluated at the end of the second year of strategy implementation.

3.50 In all these cases, one of the main sources of disbursements during this period will be execution of the active loan portfolio. In addition, both scenarios entail a higher concentration in investment loans. Accordingly, both scenarios involve a major institutional and management effort to continue streamlining execution of projects in the portfo lio, and to identify and rapidly prepare new operations, so that some of them can start disbursement as soon as late 2005 or early 2006. The possible amount of future sector loans will also depend on the availability and allocation of this type of resource among the Bank’s borrowing countries during the period. Lastly, new loans could be made to the private sector through the PRI, depending on improvements in the business climate, particularly in view of renegotiation of the public debt owed to the private sector and settlement of contracts with privatized public utilities.

D. Strategy implementation risks

3.51 The main risk for implementation of the Bank’s Country Strategy with Argentina is the possibility that growth fails to take hold, or economic, social and political stability is not maintained. Implementation of the government’s program, including the components of the agreement with the IMF, requires complex political decisions, where postponement could undermine the climate of trust needed to attract new investment to the country. This, in turn, could impair implementation of strategies agreed with multilateral agencies, including the IDB. Steps being taken by the government on economic and social issues, and support from international financial institutions seek to minimize this risk.

3.52 There is also a risk that the country may fail to achieve levels of growth and fiscal management that enable it to generate the resources envisaged in its financial programming, undermining its relationship with multilateral organizations.47 Through implementation of its strategy, the Bank will continue to help the country

47 See Annex VIII, Profile of Argentine public debt service payments to Multilateral Organizations.

- 42 -

minimize this risk, contributing to productive sector development, increasing its competitiveness and improving governance, including support for fiscal federalism reform at both the national and subnational levels.

3.53 Another major risk involves failure to satisfy the assumptions behind the loan scenarios, relating firstly to portfolio execution capacity and, secondly, to the need to approve new investment loans, to ensure the agreed resource flow. In terms of execution capacity, it should be noted that the resource flow estimated for 2004-2008 involves investment loan disbursement levels (US$660 million per year on average) that are higher than historical values (the annual average for 1998-2000 was US$515 million). Failure to attain the disbursement rates programmed in investment loans could also prevent their development goals from being realized. This risk should be partly mitigated by the fact that the Bank and the government have been making significant adjustments to the active portfolio and closely monitoring its performance, so as to take timely corrective action. In addition, the age of the portfolio and a more favorable economic climate in the medium term are also expected to help achieve a better pace of execution.

3.54 In terms of new operation approvals, the two scenarios assume these will mainly be investment loans, and there is a risk that these may not be identified or prepared as quickly as necessary. In this regard, the Bank and the country will focus efforts and resources on identifying new operations at the start of this strategy cycle, mainly because thus far no major loan program has been identified or is in preparation.

3.55 Institutional weakness in certain executing agencies also represents an obstacle to more speedy portfolio execution and identification of new investment operations. To help mitigate this weakness, one of the strategy’s key areas of action involves strengthening public administration, with the establishment of more stable project execution teams drawn from the permanent staff of the various public bodies. In addition, during strategy implementation, the Bank must ensure continuity in its dialogue with the government, keeping fluid channels of communication open in order to foresee problems and respond to them rapidly and flexibly.

3.56 As shown by the foregoing analysis, the main risks are largely outside the sphere of Bank action and so cannot be substantially mitigated or prevented by any specific actions it might take. Mention should also be made of the risk generated by high expectations attaching to the Bank’s action in the country. Although the Bank can significantly affect key issues for the country’s development, mainly through its action in various subsectors or at the subregional level, its actions have a relatively minor direct impact on saving or total investment in Argentina. Throughout this period, the Bank will adopt a proactive approach to risk management using the mitigation measures described in the preceding paragraphs.

E. Description of the consultation process

3.57 Since the start of preparation of this Country Strategy, the Bank has set in motion a process of consultation with private-sector representatives, civil society

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organizations and academic circles. These activities, which are detailed in Annex III, included organizing a consultation workshop with participation from many and varied social sectors and organizations. This workshop, which was held in February 2004 and attended by 90 participants, enabled the Bank to garner opinions and points of view on its diagnosis of the situation in the country, and on the development challenges Argentina faces in the short, medium and long terms. This enabled the Bank to enhance the strategy agreed with the government.

3.58 The workshop’s main outcomes included the constructive atmosphere in which it was held, and the key role requested of the Bank in supporting the country’s institutional development. The Bank’s role as a major partner in the country’s development process was highlighted, and the group agreed with the Bank’s analysis of the main challenges facing the country for its medium-term development, and on the areas proposed for future Bank action.48

3.59 It is also worth mentioning that the Bank, through its Country Office in Argentina, has collaborated in preparation and discussion of the country’s millennium development goals document, an initiative promoted by the United Nations. The document itself was also the outcome of a lengthy civil society consultation process.

F. Coordination with other multilateral agencies

3.60 The Bank has maintained constant dialogue with the World Bank and the IMF in its support for Argentina’s transition toward sustainable economic growth, and in the formulation of this strategy for the coming five years. The Bank has coordinated its actions with the IMF in keeping with the IMF transitional program for January to August 2003, and with the current 36-month standby arrangement that began in September 2003. Such coordination will be ongoing while the present strategy is being implemented. Once the public debt with private creditors has been rescheduled, the Bank will prepare a fiscal sustainability and debt analysis as part of the process of monitoring the country’s economic situation (see Annex II)49.

3.61 Coordination with the World Bank has also been close and continuous, particularly as regards: social emergency programs, including the joint IDB-IRBD-UNDP social monitor initiative; joint support to the government for consolidation of income transfer programs; concerted action on key issues such as reform of the financial sector, public utility concessions, competitiveness, governance and State reform.

48 Annex III of this document describes the outcomes of this event in greater detail. The minutes of the

workshop, which were circulated to all participants, can be found in the OD1 Division files. 49 The Bank will develop an analysis of debt sensitivity to sudden interruptions in capital flows. The impact of

uncertainty on government revenues (i.e. its effect on the volatility of fiscal revenue) may also be incorporated into the analysis.

- 44 - G. Monitoring of the strategy

3.62 The strategy will be monitored in close coordination with executing agencies and government authorities, particularly with the National Directorate of Projects with International Lending Agencies of the National Ministry of the Economy and Production and the Cabinet Office, together with the respective executing agencies. The strategy contains national performance indicators linked to country goals in each area of the Bank’s influence, as well as to strategy implementation and the millennium development goals.50

3.63 National indicators seek to demonstrate progress on short- and medium-term priorities in the development areas established in the strategy. A second set of indicators measures the Bank’s influence, defined by the intermediate outcomes set in projects and the evolution of portfolio performance. As the new loan program is progressively defined during strategy implementation, new intermediate indicators could be incorporated, or existing ones updated. These indicators will be monitored using parameters established in the calculation sheet prepared for this purpose. On a complementary basis, account will also be taken of progress in meeting the millennium development goals, as an indirect reflection of the Bank’s contribution to achieving these goals in Argentina.

3.64 To monitor strategy implementation, a series of indicators is proposed in the strategy matrix. Progress toward the proposed objectives will be evaluated through the following activities to be carried out periodically by the country and the Bank: (i) midterm portfolio reviews; (ii) annual portfolio review mission; (iii) sector missions and specialized workshops; (iv) project management missions; (v) annual update of the operating program; (vi) periodic reviews of the agenda for country dialogue; and (vii) midterm review of strategy implementation in late 2005.

H. Agenda for country dialogue

3.65 The strategy approach offers a flexible reference framework for identifying future actions in the country, while maintaining more immediate support in priority areas through operations currently underway, for which portfolio monitoring will play a key role. The agenda for country dialogue is expected to be a useful instrument for keeping focus on strategic aspects, while moving forward on operational issues. As regards the latter, as the institutional process consolidates and economic uncertainty continues to decline, the conditions will emerge to identify new operations for the next few years, based on the proposed targeting areas. Future analytical work in the main areas of the Bank’s support will be identified on the basis of progress on the policy and reform agenda implemented by the government over the next few years.

50 Office of the President of the Republic of Argentina and UNDP (2003); IDB, RE1/SO1 (2003); and

IDB, SDS (2004).

- 45 - 3.66 To monitor strategy implementation, the following are proposed as key dialogue

areas, organized by strategic target area without detriment to other issues that may be agreed:51

Crosscutting issues

(i) Further restructuring and streamlining of execution of the undisbursed portfolio.

(ii) Identification of specific actions to be funded by the Bank within the priority areas established in the Country Strategy, agreeing on eligibility criteria and the sequence and scale of operations, and mindful of the capacities of executing agencies and their monitoring and oversight systems.

(iii) Identification of areas where the Bank can contribute through nonfinancial products, and specific actions in which these can be employed, such as studies, workshops, and expert support for local teams.

Governance and fiscal sustainability

(i) Joint monitoring with the government of implementation of Argentina’s program with the IMF, including: debt restructuring, financial system reform, renegotiation of contracts with privatized companies, and a new federal revenue-sharing regime. Analysis of fiscal sustainability in the framework of the government’s medium-term program.

(ii) The Bank’s contribution to enhancing management capabilities in the public sector, both generally and in critical areas for the definition, implementation and evaluation of public policies. Consideration will be given to development effectiveness and institutional integrity and transparency, including government procurement and the systems of budget, accounting, financial and asset control, and audits.

(iii) Criteria for Bank support to subnational gove rnments, in a framework of relations between national government and subnational governments that contribute to fiscal sustainability and productive and social development, particularly in the less developed provinces. Periodically review and agree on eligibility criteria, particularly of a fiscal nature.

51 See Annex II (Program of Nonfinancial Products), which identifies several possible activities.

- 46 -

(iv) Support for reforms aimed at improving legal certainty, and the judicial system in particular.

Competitiveness

(i) The Bank’s contribution to the country’s productive development, especially in resolving outstanding issues in order to facilitate a reactivation of public and private investment in infrastructure, and to explore new alternatives for supporting private-sector development and making credit more readily available to microenterprises and small and medium-sized businesses, science and technology development, and technical education.

(ii) The Bank’s contribution to deepening the process of regional integration, particularly in infrastructure development (prioritization of IIRSA initiative investment plans) and access to new markets. Analysis and regional comparison of logistical costs in Argentina. The relatively less developed provinces will be watched closely.

Social development

(i) Social and labor market policies in a context of more inclusive economic growth and transition to a post-emergency phase projected into the medium and long term, including transfer programs for human resources development and the employability and productivity of vulnerable population groups

(ii) Actions to promote faster progress on the millennium development goals, and monitoring of their indicators.

- i -

STRATEGY MATRIX IDB COUNTRY STRATEGY WITH ARGENTINA

IDB actions Monitoring indicators The government’s strategy Strategies of other

agencies IDB strategy In progress Proposed Implementation of IDB strategy Related country goals

General objective: Toward sustainable and more equitable growth Rebuild an economy that allows for sustained economic growth with social equity, implementing economic, social and institutional reforms with emphasis on strategic programming. Ensure the continuity of the fiscal surplus by curbing expenditure and strengthening revenue collection. Strengthen the banking system and facilitate increased lending. Maintain a prudent monetary policy. Renegotiate the debt so as to make it sustainable over time. Renegotiate contracts with privatized public utilities, and facilitate corporate debt restructuring.

IMF - 36-month standby arrangement starting in September 2003, with the aim of deepening and extending structural reforms to consolidate sustained growth and reduce poverty. WB-IMF - Support for recovery of the financial system and public utility reforms. WB - Modernization of federal public administration.

Support for the country in attaining sustainable and more equitable growth through actions involving: (i) Institutional strengthening for enhanced governance and fiscal sustainability; (ii) a more favorable climate for investment and productivity growth; (iii) poverty reduction, rebuilding the human resource base, and promotion of sustainable and inclusive social development. The Bank will continue to support the country in consolidating stability and overcoming the effects of the crisis.

Reformulation of the social and productive portfolio to respond to the effects of the crisis. Support for reform of financial service regulatory and supervision frameworks. Provision of credit to small and medium-sized businesses and small-scale rural producers. Execution of current loan portfolio with US$2.715 billion undisbursed as of late 2003.

Actions throughout the strategy implementation period for: (i) better targeting in the three strategic areas; (ii) strengthening of management capacity; (iii) maintenance of consistency between policies and actions of national government and subnational authorities; (iv) indirect work with subnational governments, greater emphasis on fiscal position and institutional capacity; and (v) promotion of public-private partnerships. Monitoring of implementation of the government’s program with the IMF, through dialogue with the country’s authorities and supply of nonfinancial products. Monitoring of portfolio execution, making improvements in execution and adjustments as necessary. Midterm evaluation of strategy implementation in late 2005.

Improvement in portfolio performance and achievement of project development objectives by attaining the execution targets set out in the quarterly operational plans for critical portfolio projects. For each strategic area, see corresponding indicators.

Increase in gross domestic investment from 11.3% of GDP in 2002 to 17% in 2005 and 20% in 2008. Formal employment increases at a rate of 2.4% annually. Reduction in the Gini inequality coefficient from 52.5 in 2003 to 49.5 in 2005 and 45 in 2008. Maintenance of primary fiscal surplus and public debt sustainability.

- ii -

IDB actions Monitoring indicators The government’s strategy Strategies of other

agencies IDB strategy In progress Proposed Implementation of IDB strategy Related country goals

1. Institutional strengthening for enhanced governance and fiscal sustainability Consolidate a sound fiscal framework at all government levels, to allow for appropriate fiscal and debt management. Increase the transparency, efficiency and effectiveness of public sector institutions. Restore public management capacities at the federal, provincial and municipal levels. Ensure long-term sustainability and effectiveness of the pension system.

WB - Support for reforms to improve the effectiveness of provincial governments. WB - Support for the fight against corruption, improvements in transparency and strengthening of institutions. WB - Establishment of organizational infrastructure for the administration property rights. WB - Support for judicial system reforms.

Democratic system. Support for greater cohesion in the political system and governance. Rule of law and justice reform. Support for strengthening and independence of the judiciary. Fostering of transparency and the fight against corruption. State and market. Promotion of efficiency and effectiveness in fiscal, monetary and oversight institutions, and implementation of a business- and investment-friendly environment. Governance. Support for strengthening, deregulation and simplification of public administration and human resources. Support for reform of fiscal federalism and modernization of national and subnational executive branches. Support for formulation and sustaining of state policies. Support for implementation of future pension system reform.

Support for reform of fiscal federalism and modernization of the executive branch (national, provincial and municipal) through: 17 loans, including: AFIP establishment support program; GIBA institutional, fiscal and investment plan support program; State modernization program for the province of Córdoba. 2 national and regional technical-cooperation projects, in judicial education and modernization of the Ministry of Labor. 2 MIF operations in the areas of regulatory strengthening of water and sanitation services. Amount approved: US$2.234 billion. Undisbursed: US$410 million (14% of the total)

Assistance in strengthening of administrative bodies in legislative branch. Support for improving institutional capacity in formulating economic and social development strategies and defining economic policy. Assistance in administrative deregulation and streamlining to support business promotion and development in the provinces. Support for strengthening of financial and tax management systems in the framework of fiscal reforms at the provincial level. Support for strengthening human resource management and managerial modernization of the provinces.

Program of professionalization in administration of the National Senate and its capacity to supervise the executive branch, completed by 2008. Program to boost capacity in provincial government institutions on fiscal issues and productive development completed by 2008. Integrated financial administration systems operating in 75% of the provinces by 2008. Implementation of institutional capacity for: Formation of policies, design of economic and social strategies, interministerial coordination, and system for monitoring and evaluation of economic policy completed by 2008.

50% reduction in bureaucratic procedures for SMEs and microenterprise by 2008. Implementation of an information and public consultation system on executive branch performance in 2004-2008 (Decree 1172/03).

- iii -

IDB actions Monitoring indicators The government’s strategy Strategies of other

agencies IDB strategy In progress Proposed Implementation of IDB strategy Related country goals

2. Amore favorable climate for investment and productivity growth, to enhance the country’s competitiveness Improve the investment climate. Achieve convergence between public and private policies. SME strengthening. Promote education with a technical orientation, to satisfy labor market requirements. Promote intensive use of human resources. Achieve balanced and reciprocal trade openness and regional integration. Compensate and recapitalize commercial banks. Guarantee the quality of public services and infrastructure.

WB - Strengthening of the business environment in the context of macroeconomic stability. WB - Promotion of interaction between the public and private sectors. WB - Maintenance and improvement of infrastructure. WB - Support for rebuilding confidence in the private sector.

Support for development and implementation of a National Competitiveness Strategy. Support for productive sector development to revive investment and generate formal jobs by improving the institutional apparatus for supporting the sector. Support for reform of the financial structure, access to credit for microenterprises and small businesses, and development of nonbank services. Support for modernization of innovation and technological development systems. Support for the design and implementation of national and local development policies and strategies. Support for a deepening of liberalization and integration agreements. Support for improvements in the efficiency and quality of public services and infrastructure.

Support for development of competitiveness through: 7 loans, including: Provincial agricultural services program (PROSAP); technological modernization program; and business restructuring program. 16 national and regional technical-cooperation projects to support agricultural cooperatives, sustainable development, financial services, etc. 25 MIF operations to support SMEs in the areas of export diversification, development of quality standards and certification, business development services, promotion of territorial competitiveness, etc. 7 social entrepreneurship programs. Amount approved: US$1.203 billion. Undisbursed: US$504 million (18% of the total)

Technical cooperation from international experts to develop the competitiveness strategy. Completion of a study on financial system regulation and supervision with regard to microcredit. Financing of innovation and technological modernization programs Support for competitiveness improvement through agriculture, tourism and microenterprise and small-business projects. Support for continuity in deepening liberalization and integration agreements. New operations and, in particular, actions to improve transport systems and regional physical integration in the IIRSA framework. Technical-cooperation projects and loans to optimize the cost of services and transport.

Channeling of approximately 10,000 loans to microenterprise and small businesses by 2007. At least 50% progress toward fulfillment of the main outcome indicators of projects included in the productive portfolio reformulated for the end of 2006. At least one (1) new operation in the IIRSA framework by 2008.

Export volume increases at an annual average rate of 5%. Investment in research and development in science and technology increases from 0.44% of GDP in 2002 to 1% of GDP in 2008.

- iv -

IDB actions Monitoring indicators The government’s strategy Strategies of other

agencies IDB strategy In progress Proposed Implementation of IDB strategy Related country goals

3. Poverty reduction, rebuilding the human resource base, and promotion of sustainable and inclusive social development Increase the efficiency and impact of the social safety net. In education, ensure that students from the poorest areas can obtain comparable educational outcomes to those enjoyed by their peers in wealthier areas. In addition, promote vocational education related to labor market needs. In health, ensure access for mothers and children under six years of age to reproductive health services, pregnancy control and prevention, professional assistance at childbirth and preventive health check-ups. In housing, improve poor neighborhoods to alleviate sanitary shortcomings and overcome the insecurity of tenancy that affects families living in slum areas.

WB - Promote social inclusion, encompassing the most vulnerable population groups (indigent, rural poor, older adults, indigenous and unemployed youth). WB - Improve coverage and quality in social sectors represented by education, health and housing.

Support for national and subnational efforts aimed at: Consolidating a social safety net that coordinates integrated efforts by the State and civil society to target available resources on the most vulnerable sectors of the population. Achieve homogeneous educational results and permanency of children and young people in school, especially among the poorest sectors, and promote efforts aimed at a vocational education. Move toward greater integration, expansion and uniformity of coverage in health services for the poor, through primary healthcare. Solve problems of squatter housing and basic sanitation among poor households.

37 loans to support, among other things: Administrative consolidation of IDH to improve the flow of subsidy payments and implementation of pilot schemes to engage unemployed youth in productive activity. Reformulation of the operation to reform the third cycle of general basic education (EGB) and poli-modal education to guarantee its impact in raising levels of school success among students from poorer families. Evaluation of the National Educational Scholarship Program. Reformulation of the social package to support the provision of generic medicines that are essential to poor families. Expansion of the scope of the federal neighborhood improvement program. Amount approved: US$4.748 billion Undisbursed: US$1.856 billion (67% of the total)

Support for design and implementation of a targeted conditional subsidy program for poor and indigent families, which unifies existing programs. Consolidation of the educational scholarship program, and possible support for reform of vocational education. Support implementation of national mother-child insurance to improve health service coverage especially among mothers and children. Promote provincial programs to support construction and progressive housing improvement.

Benefit at least 60% of indigenous families with transfers conditional on meeting education and basic health requirements for 2008. Reduce the grade repetition rate by 15% and the dropout rate by 20% among secondary school students from poor families in 2004-2008.

The targets will be established under the Social Sector Program (AR-0290), which will identify the baselines and midterm indicators to be attained for compliance with the country’s MDGs.

Annex I Page 1 of 3

2004-2005 OPERATIONS PROGRAM

1 This amount is preliminary and depends upon the availability and assignment of resource type amongst Bank

borrowing countries for this period.

Lending Program (in millions of US$)

2004 Governance

AR-L1002 Institutional Improvement Program for Productive Sector & Fiscal Administration in Provinces

18.0

AR-L1001 Institutional Strengthening of the Secretariat of Economic Policy

5.0

AR-L1008 Program to Strengthen the National Senate 4.8 Social development

AR-0290 Sector Program for Social-sector reform 500.0 Total 2004 527.8

2005 Governance

AR-L1009 Institutional Management Sector Loan 300.01 Social development

AR-L1006 Support for the Social Income Plan 490.0

AR-L1007 Education and Health in the Province of Buenos Aires 230.0 Competitiveness

AR-L1004 Enhancing the Competitiveness of the Tourism Sector 18.0

AR-L1003 Support for Productive Development of the Province of Mendoza

70.0

AR-0258 City of Buenos Aires Subway – Phase I 150.0 Total 2005 1258.0 Total 1785.8

Annex I Page 2 of 3

LINKAGE BETWEEN THE 2004-2005 OPERATIONS PROGRAM AND THE BANK’S SECTOR STRATEGIES

Projects Amount (US$ millions) Project objectives Linkage with Bank sector strategies

AR-L1002

Institutional Improvement Program for Productive Sector & Fiscal Administration in Provinces

18.0

The general objective of the program is to improve the institutional context (regulations and organizations) of the business environment in the relatively less developed provinces.

Modernization of the State (State and market). The operational strategy for the Bank’s action involves seeking programs that improve the climate for investment; strengthening of the ties among State, market and society; and strengthening of institutions that promote competition and simplification of mechanisms for registration, control and supervision of private-sector activity.

AR-L1001 Institutional Strengthening of the Secretariat of Economic

Policy 5.0

Improve the institutional capacities of the Department of Economic Policy of the Ministry of Economy in policy formulation, design and implementation of economic and development strategies, and sector coordination with the ministries involved.

Modernization of the State (Modernization of public administration). The operation is consistent with the current Bank strategy on the modernization of public administration, promoting a strengthening of policy formulation capabilities and establishment of systems of control and evaluation by results.

AR-L1008 Program to Strengthen the National Senate 4.8

Modernize the National Senate, to provide it with the institutional capacity needed to carry out its functions more effectively and thus achieve parliamentary efficiency, credibility and legitimacy.

Modernization of the State (Consolidation of the democratic system). The Bank’s growth strategy prioritizes consolidation of the democratic system through modernization and strengthening of representative institutions.

AR-L1009 Institutional Management Sector Loan 300.0

Support institutional strengthening of National Senate to improve its capacity to legislate, supervise and control.

Modernization of the State. Corresponds to the Modernization of State Strategy of the Bank.

AR-L1003 Support for Productive

Development of the Province of Mendoza

70.0 Support the development of productive circuits in the province of Mendoza.

Competitiveness. This project falls under the competitiveness strategy.

AR-0258 City of Buenos Aires Subway – Phase I 150.0

Expansion of the subway network in the city of Buenos Aires, through construction of the northern segment of the new H Line (Once-Retiro), and its integration into the existing system.

Competitiveness (Infrastructure). It is fundamentally important for the Bank’s strategy to improve infrastructure services, such as energy, water, transport and telecommunications, including promotion of efficiency, modernization and expansion of quality and coverage.

Annex I Page 3 of 3

Projects Amount (US$ millions) Project objectives Linkage with Bank sector strategies

AR-L1004 Enhancing the Competitiveness of the Tourism Sector 18.0

Support for exploitation of the country’s tourism opportunities, concentrating investment and effort in a number of tourism poles with a cluster approach.

Competitiveness (Cooperation for competitiveness). Great importance is attached to support for clusters and the strengthening of production chains.

AR-0290 Sector Program for Social-sector reform 500.0 Support for the reform process in social

sectors. Social development –This forms part of the Bank’s social development strategy.

AR-L1006 Support for the Social Income Plan 490.0

Promotion of human capital as a State policy to improve the situation of families living in structural poverty, unifying the income subsidies policy through transfers depending on the number of children, and establishing co-responsibilities for beneficiary families in the areas of education and health that seek to expand and improve the coverage of these services for their children.

Social development (Reduction of inequalities in access to health, education and housing services). The importance of this operation is the fundamental support it provides to basic education and health infrastructure in poor zones. Innovations are made in the provision of these services, and targeted subsidy programs are established depending on the demand for these services.

AR-L1007 Education and Health in the Province of Buenos Aires N/A

Contribute to “education preparedness” (actions in early, preschool and basic education to reduce dropout and improve student performance; strengthening of primary healthcare and social assistance to improve family incomes and nutrition) among poor and indigent children and families in the province.

Social development (Reduction of inequalities in access to health, education and housing services). The Bank’s strategic vision includes programs that emphasize human capital development (in the education and health areas) and improve the quality of life for those living in poverty.

Annex II Page 1 of 1

PROGRAM OF NONFINANCIAL PRODUCTS

Dialogue workshops

• Workshop on governance and fiscal sustainability (scheduled for 2005).

• Workshop on competitiveness (scheduled for 2005).

• Workshop on social development (scheduled for 2005).

• Workshop on solid waste management.

For each of these workshops certain specific topics will be identified to ensure dialogue is concentrated in the main areas the Bank wants to support.

Possible Studies

- Studies on transparency and the fight against corruption, e.g. preparation of corruption maps that identify high-risk areas.

- Studies on income distribution policies and growth.

- Studies on the relationships among national governments, and subnational governments and fiscal sustainability.

- Studies and regional comparison of logistical costs in Argentina.

- Studies on fiscal sustainability and debt (once debt renegotiation is settled with private creditors)

- Analysis of institutions and norms that lead to economic informality, particularly

incentives to reduce informality and generate formal employment.

- Studies supporting the preparation of a National Competitiveness Strategy.

Annex III Page 1 of 5

I. DESCRIPTION OF THE CONSULTATION PROCESS

The process of preparing the Bank’s Country Strategy Paper with Argentina 2004-2008 required the Bank to carry out a variety of diagnostic activities on the problems and challenges facing the country, and hold wide-ranging consultations with the government and civil society. As part of this dialogue, consultation and coordination process, and pursuant to its policy on citizen participation in all its activities,1 the Bank held a workshop to consult with various civil society organizations and garner opinions and viewpoints on specific challenges and contributions. This exercise enabled the Bank and the Argentine authorities to fine-tune the analysis and the priority areas to be addressed in the country strategy. This annex summarizes the proceedings of the consultation workshop held in Buenos Aires on 10 February 20042 and other consultation activities held since strategy preparation began.

A. Consultation workshop

1. Main conclusions and recommendations of the consultation workshop

1.1 There was consensus that the key challenge facing Argentina in the medium and long term is to lead the economy onto a sustainable and more equitable growth path, in order to reverse the deterioration in social conditions.

(i) A stronger institutional framework for better governance and fiscal sustainability

1.2 Institutional strengthening and governance are crosscutting issues for the problems facing Argentina. Stability, transparency, predictability and compliance with regulations are necessary conditions for sustainable and equitable growth. Economic growth and democracy are intimately linked; hence the importance of the State for the functioning of institutions and markets themselves.

1.3 It is particularly important to strengthen the country’s public institutions in the context of a much needed, new and effective distribution of cooperation and competencies among the national, provincial and municipal levels. In view of this

1 See documents:

• “Strategic framework for citizen participation in the activities of the Inter-American Development Bank.” November 2000.

• “Country paper guidelines.” IDB. Washington D.C. February 2002. 2 See “Memoria del Taller de Consulta. Documento de Estrategia de País del Banco con Argentina.

Período 2004-2008”. Buenos Aires, 10 February 2004.

Annex III Page 2 of 5

and the re-engineering that the institutional apparatus and the State will have to undergo, it is recommended that suitable public-sector staff be trained to direct and conduct public policies that will enable sustainable and equitable growth.

1.4 On the fiscal front, reform of the tax system—progressive both in revenue collection and in resource allocation—needs to incorporate a framework of stable rules of law, greater fiscal pressure and changes in public attitudes toward noncompliance and evasion, in addition to issues of federal revenue-sharing and the new balance among the nation, provinces and municipios.

1.5 It is recommended that the legislature be strengthened, which is a current priority for Argentina, along with the executive and judicial branches.

1.6 Justice system reform should promote independence from political power, access to justice for all, eradication of impunity, and a culture of obeying the law.

1.7 Given the negative effects of corruption—which is deep-rooted in the country—for development and sustainable and more equitable growth (not to mention its attendant ethical and moral aspects), it is very important to address the issues of prevention and punishment.

1.8 Strengthening of civil society and its participation, particularly at the local level, is intimately related to issues of governance, transparency, the fight against corruption, and institutional development. There is an urgent need to develop and construct mechanisms to ensure transparency and free access to public information at the national, provincial and local levels, to allow for monitoring by citizens in coordination with oversight bodies, and the necessary evaluation of programs and policies. Although civil society strengthening involves creating participation mechanisms, it also, and most importantly, means strengthening civil society organizations.

1.9 The Bank and government authorities are invited to review and draw on the proposals and recommendations made by different sectors of society at events such as the Argentine Dialogue Roundtable, where justice, political reform and political financing were recommended as priorities.

(ii) A more favorable climate for economic growth, to enhance the country’s competitiveness.

1.10 Efficiency and competitiveness affect the public and private sectors alike. In this area there is an urgent need to create an appropriate economic and legal environment for domestic and foreign investment. Policies to support investment should be policies of the State, rather than policies of a given administration, since this makes them long-lasting.

Annex III Page 3 of 5

1.11 Infrastructure works are of the utmost importance in a plan to support gains in

productivity and competitiveness. The Bank should address this with greater emphasis and priority in a context of deepening liberalization and integration and investments that, like railways and transportation, are fundamental to progress in regional economies and their national integration, and with international circuits. Infrastructure works should also be part of poverty reduction strategies, since they make intensive use of labor.

1.12 Achieving efficient regional economies and strengthening regional supply chains and value chains are seen as strategic priorities. It is recommended that a more comprehensive view be taken of the national territory by simultaneously strengthening its productive potential and reintroducing fiscal federalism with efficient execution of social policies by the provinces responsible for them. There is a need for introspection, emphasizing local development as a self-contained space in the economic, social, cultural, productive and ecological domains. The strategy should include local and regional development.

1.13 It is important to make the most of natural resources that strengthen the country’s competitive advantages by deepening productive linkages and new services such as tourism, health and cultural assets, which have a major impact on employment. The essential elements of a sustainable development model include the environment, in conjunction with social and economic variables. It is suggested that greater emphasis be given to this.

1.14 In an increasingly open economy, science and technology should be seen as key strategies. Higher productivity in general also includes SME strengthening, which in turn relates to poverty reduction and socioeconomic policies. Programs should help organize supply chains, and assist SMEs to acquire technology and enter export markets.

1.15 It is proposed to identify and promote specific actions on competitiveness, such as improving technological linkages and the functioning of support areas such as customs, airports, ports, etc. Emphasize macroeconomic policies and exports in the manufacturing and services sectors.

1.16 There was consensus on the need to attach greater importance to specific actions that lead to the creation of decent jobs in the formal economy.

(iii) Poverty reduction, rebuilding the human resource base, and promotion of growing, sustainable social development.

1.17 It is thought prudent to consider changes in welfare policies for poverty relief, which are valid in times of emergency, together with structural policies and programs to reduce such poverty. Education is a basic priority in this scenario, both as a strategy in its own right and in the context of the poverty reduction strategy. Investing in human capital is a central issue and top priority for the

Annex III Page 4 of 5

country. Education should be seen in two dimensions: (a) values of freedom and innovation; and (b) technical and vocational skills and capacities.

1.18 Another challenge concerned the formulation of better social policies and poverty reduction, and the need to overcome existing fragmentation. The existence of numerous projects and programs is aggravated by differences and overlaps prevailing today among the national, provincial and local jurisdictions, and among government agencies and ministries. This fragmentation is being further encouraged by loans from international agencies. A strategy of simplification and coordination is recommended that would eliminate bureaucracy, simplify implementation, reach beneficiaries directly, and help to eliminate political patronage.

1.19 A major concern among participants is that these plans need to support and promote a culture of work rather than welfare. Plans are needed and a social safety net is required; but both must include and promote the values of dignity and work. The design of assistance projects should provide exit and self-development strategies; otherwise they become permanent programs.

1.20 The issues of targeted versus universal social programs needs to be addressed.

B. Other consultation activities

1.21 Since preparation of this country strategy began, the Bank has held consultations with the private sector, civil society, academic circles and the country’s specialized institutions, pursuant to guidelines for the preparation of country papers, approved by the Board of Executive Directors in March 2002.

1.22 Within this framework, dialogue missions have been held with the country, which included consultation meetings with civil society and academia. The Bank has also used preinvestment funds to finance the government’s commissioning of ECLAC to prepare a set of studies entitled “Guidelines for strengthening the sources of economic growth in Argentina,” which was widely discussed in late 2002 with the private sector and the Argentine government. The Bank has also commissioned a number of studies from academic and research centers to study competitiveness, poverty reduction and governance. These studies include alternative macroeconomic scenarios; feasibility and costs of fiscal solvency in Argentina; social spending and fiscal sustainability; current threats and opportunities for the reform of fiscal federalism; and new conditions for micro/macroeconomic consistency: prospects for the productive sectors. The process of formulating the Country Strategy has thus involved wide-ranging participation by the country’s professionals and specialized institutions.

1.23 Through its Country Office in Argentina, the Bank has participated in preparation and discussion of the country’s Millennium Development Goals document, a UN-led initiative that itself grew out of a lengthy process of civil society consultation.

Annex III Page 5 of 5

The status of the Millennium Development Goals can be consulted in the OD1 files, and in most cases they will be supported by the Bank’s country program, as established by the Board of Executive Directors to contribute effectively to their accomplishment.

1.24 An internal workshop on social capital, civil society and volunteerism in Argentina was also organized by the Bank’s Inter-American Initiative on Social Capital, Ethics and Development, to consider the importance of these issues with the team responsible for preparing the strategy.

1.25 In terms of activities to implement the current strategy, one of the indicators for monitoring the Bank’s strategic action in the country, which has been fulfilled, relates to better dialogue and greater civil society participation in evaluating the quality of public services.

1.26 As part of the task of redirecting the social portfolio, participation by civil society organizations has been strengthened by incorporating specific social oversight and monitoring mechanisms adapted to each program. In addition, the National Social Sector Forum (a consortium of 53 civil society organizations) has been hired to independently monitor progress and outcomes in targeted social programs, including aspects relating to transparency, impact and beneficiary satisfaction levels.

Annex IV Page 1 of 4

REFERENCES

Anlló, G. (2003); Notas sobre escenarios macroeconómicos alternativos para la economía argentina [Notes on alternative macroeconomic scenarios for the Argentine economy], IDB study.

Artana, D. and Navajas, F. (2003); Factibilidad y Costos de la Solvencia Fiscal en Argentina [Feasibility and costs of fiscal solvency in Argentina], IDB study.

Ascua, R., Cetrángolo, O.; Gatto, F.; Ramos, A. (2004); Marcos Regulatorios y políticas de incentivos al desarrollo empresarial en Argentina [Regulatory frameworks and incentive policies for business development in Argentina], IDB study, preliminary version.

Bartolomé, L. J., Rodríguez, F.R. and Badie, M.V. (2001); Componente de Atención a la Población Indígena (CAPI): Evaluación de Medio Término. [Component on care for indigenous populations (CAPI): Midterm evaluation], final report.

Beccaria, L. and Cetrángolo O. (2003); Sistemas provinciales de pensiones en Argentina: diagnóstico y alternativas [Provincial pension systems in Argentina: diagnosis and alternatives], IDB study.

Beccaria, L., Altimir, O. and González Rozada, M. (2003); Economía laboral y políticas de empleo [Labor economics and employment policies], IDB study.

Beccaria, L., Cetrángolo, O. and Jiménez, J. (2003); Estudio síntesis de lineamientos al desarrollo económico y social de Argentina. Gasto social y sustentabilidad fiscal [Summary study of guidelines for economic and social development in Argentina. Social spending and fiscal sustainability], IDB study.

Birdsall, N. and Szekely, M. (2003); Bootstraps, Not Band-Aids: Poverty, Equity and Social Policy in Latin America. Working paper. Center for Global Development.

Braun, M. (2003); Amenazas y Oportunidades actuales para la Reforma del Federalismo Fiscal en Argentina [Current challenges and opportunities for the reform of fiscal federalism in Argentina], IDB study.

Braun, M., Díaz, L. and Kweitel M. (2003); Estrategia Social para Argentina. Lineamientos para desarrollar una Estrategia de Protección Social [Social strategy for Argentina. Guidelines for developing a social protection strategy], IDB study.

Cabrol, M. (2003); Argentina. Poverty and Inequality 1998-2003. IDB working paper.

Calvo, G., Izquierdo, A. and Talvi, E. (2003); Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina’s Lessons. NBER, Working paper No. 9828.

Annex IV Page 2 of 4 Calvo, G., Reinhart, C. and Vega, C. (1994); Targeting the Real Exchange Rate: Theory and Evidence. MIF working paper No. 94/22.

Cetrángolo O. and Curcio J. (2004); Sistemas provinciales de pensiones en Argentina: Diagnóstico y alternativas [Provincial pension systems in Argentina: diagnosis and alternatives], IDB study.

Colina, J. (2003); Las AFJPs y las Compañías de Seguro de Retiro en la Argentina. Un Estudio Comparativo [AFJPs and retirement insurance companies in Argentina. A comparative study], IDB study.

ECLAC (2003); Síntesis del Panorama Social de América Latina 2002-2003 [Summary of the social panorama of Latin America 2002-2003], Santiago, Chile.

Fuchs, M. (2003); Las nuevas condiciones de consistencia micro-macroeconómicas en la Argentina. Perspectivas para los sectores productivos [The new conditions of micro-macroeconomic consistency in Argentina. Prospects for productive sectors], IDB study.

Grushka, C. (2003); Perspectivas del Sistema Previsional y Evaluación de Políticas para expandir la Cobertura para el Sistema Público de Reparto [Prospects for the pension system and evaluation of policies to expand coverage of the public pay-as-you-go system], IDB study.

IDB (2003); 2004 Economic and Social Progress Report on Latin America: Good Jobs Wanted: Labor Markets in Latin America.

IDB. OVE (2001); Project Evaluation Report CAPI, Rodríguez, Francisco.

IDB. OVE (2001a); Evaluation of ten projects with indigenous populations.

IDB. OVE (2004; Country Program Evaluation (CPE) - Argentina 1990-2002, (RE-299).

IDB. RE1 (2004); Minutes of the IDB consultation workshop held in Buenos Aires on 10 February 2004.

IDB. RE1/FI1 (2004): Competitiveness study, IDB study, preliminary version.

IDB. RE1/SC1 (2003); Governance study, IDB study, preliminary version.

IDB. RE1/SO1 (2003); Status of the Millennium Development Goals in Argentina.

IDB. SDS (2004); The Millennium Development Goals in Latin America and the Caribbean: challenges, actions and commitments

IDB. SDS (2004a); SDS/SDC notes on the Bank’s country strategy with Argentina, as it relates to gender

Annex IV Page 3 of 4

IMF (2003). The Role of the IMF in Argentina, 1991-2002. Draft Issues Paper for an Evaluation by the Independent Evaluation Office (IEO).

IMF (2003a). Lessons from the Crisis in Argentina (SM/03/345, October 2003).

INDEC; (2003); Boletines estadísticos del Instituto Nacional de Estadística y Censos; Ministerio de Economía y Banco Central [Statistical bulletins of the National Institute of Statistics and Census; Ministry of the Economy and Central Bank].

Izquierdo, A. (2003); Argentina: How it got there, where it stands, and challenges ahead. IDB paper.

Kliksberg, B. (2003); Ethics, social capital and volunteerism, PowerPoint presentation.

Kritz, E.; El Cronista, 10/06/03.

Kuczynsky, P. and Williamson J.(2003); After the Washington Consensus: Restarting Growth and Reform in Latin America.

Lavagna, R. (2003); Tiempo de ideas y de acción [Time for ideas and action], Ministry of Economy and Production of the Republic of Argentina.

Marquez, G. (2003); Argentina, mercado de trabajo y competitividad [Argentina, Labor market and competitiveness], IDB working paper.

Medici, A. (2003); Avaliando a reforma da Previdência na Argentina durante os anos 90 [Evaluating pension reform in Argentina in the 1990s], IDB study.

Ministerio de Economía (2003); Componentes Macroeconómicos, Sectoriales y Microeconómicos para una Estrategia Nacional de Desarrollo. Lineamientos para fortalecer las fuentes del crecimiento económico [Macroeconomic, sector and microeconomic components for a national development strategy. Guidelines for strengthening the sources of economic growth], Executive Summary. Work coordinated by the ECLAC Office in Buenos Aires, Argentina.

Mussa M. (2002); Argentina and the Fund: From Triumph to Tragedy, IIE.

Office of the President of the Republic of Argentina and UNDP (2003); Argentina: La Oportunidad para su Reencuentro [Argentina: A chance to get back on course].

Perry, G. and Serven, L. (2002); The Anatomy of a Multiple Crisis: Why was Argentina special and what can we learn from it. World Bank paper.

Reinhart, C., Rogoff, K. and Savastano, M. (2003); Addicted to Dollars. Working paper No. 1005. National Bureau of Economic Research.

Annex IV Page 4 of 4 San Martino, J. (2003); Proyecciones de Ingresos del Sistema Previsional Argentino [Income projections of the Argentine pension system], IDB study.

Tangelson, O.(2003); Argentina frente al siglo XXI. Reflexiones, políticas y acciones. [Argentina in the twenty-first century: reflections, policies and actions], Ministry of Economy and Production of the Republic of Argentina.

Teunissen, J. and Akkerman A. (2003); The Crisis that was not Prevented: Lessons from Argentina, the IMF and Globalization.

Trigo, E., Martínez Nogueira, R.; Piñeiro, M. and Manciana, E.; (2003); Institucionalidad en la provisión de bienes públicos para reducir la vulnerabilidad en el crecimiento agropecuario de Argentina [Institutional framework for the provision of public goods to reduce the vulnerability of agricultural growth in Argentina], IDB study.

Van Ryckeghem, W., Martín, M. (2003); Lessons Learned from IDB Lending to Argentina. IDB study.

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STATUS OF THE MILLENNIUM DEVELOPMENT GOALS IN ARGENTINA1

Goal Target Status Challenges in meeting the 2015 target

1. Reduce extreme poverty and hunger by half.

Halve the proportion of people living in extreme poverty between 1990 and 2015.

Although extreme poverty or indigence had increased slightly from 7.9% of the population in 1990 to 9.7% in 2000, the worsening economic crisis raised this indicator above 25% of the population in 2002, basically as a result of the substantial increase in unemployment.

A necessary condition for fulfillment of this goal and its specific target is restoration of a sustained growth path. Yet economic growth is not sufficient. It is crucial to adopt policies to attain a growth model that includes all the country’s sectors and regions through more equitable distribution of income, allowing for full utilization of local resources, which in turn are capable of achieving higher levels of employment, monetary stability and sustained development.

2. Achieve universal primary education.

Ensure that, by 2015, all children will complete a full course of primary schooling.

In early 1990, Argentina extended compulsory Basic General Education (EGB) to 10 years. There are no recent data on net primary school enrolment rates, but the proportion of students that start the initial level and complete the third level of EGB increased from 60.2% in 1996 to 75.3% in 2000, and the figure is projected at 99% by 2010. These trends suggest that the country is on course to meet the target. On the other hand, the situation is less favorable in the poorer provinces, such as Misiones where one third of all children do not complete the initial EGB cycle, and in Chaco, Formosa and Santiago del Estero where one quarter of children are in the same situation.

Challenges in meeting this target require reversal of the segmentation process, and making education more available in the most underserved provinces, municipios and areas. Initiatives to improve the efficiency of the system need to be strengthened, with a view to reducing grade repetition and school dropout.

1 Source: Office of the President of the Republic of Argentina, Objetivos de Desarrollo del Milenio: Argentina, la Oportunidad para su Reencuentro, October 2003. World Bank, Country Assistance Strategy for the Argentine Republic, Annex D: Status Report on Milennium Development Goals, 20 November 2003.

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Goal Target Status Challenges in meeting the 2015 target

3. Promote gender equality and empower women.

Ensure gender equality at all levels of education by 2015.

Argentina has already achieved the gender equality target at all education levels and literacy, where there is no difference between girls’ and boys’ indicators. Nonetheless, there are still gender gaps in the civil, political and economic domains. For example, in 2000, only 35.2% of persons employed in the metropolitan area of Buenos Aires were women, and there was a 30% wage gap in favor of men. Recent legislation requires at least 30% of all elected posts to be held by women, and this has encouraged greater civic participation by them.

The main challenges in this area relate to finding new strategies to promote gender equality, especially in women’s civic and economic participation. Among other initiatives, this would require greater social oversight of compliance with current laws, together with more training options, both public and private, in order to increase women’s participation in higher-quality jobs.

4. Reduce mortality among children under five years of age.

Reduce the under-five mortality rate by two thirds between 1990 and 2015.

This indicator includes infant mortality (children under one year old) and mortality among the under-fives, measured as the number of deaths per thousand live births. Both indicators display a reduction of about 33% between 1990 and 2000, reaching rates of 16.6 and 19.3, respectively. Nonetheless, there are significant disparities among regions; in 2000 for example, the rates in Chaco and Jujuy were about three times those prevailing in greater Buenos Aires.

The economic crisis is seriously threatening the chances of achieving this target, owing to increases in poverty and worsening malnutrition. Both factors increase the prevalence of low birth weight, which heightens the risk of infant mortality. In addition, budget cutbacks at the national and provincial levels, together with increases in the prices of imported medicines and inputs, reduce the chances of providing adequate services and medical care to prevent infant mortality.

5. Reduce maternal mortality

Reduce maternal mortality by three quarters between 1990 and 2015.

The maternal mortality rate declined by 33% between 1990 and 2000, dropping from 52 to 35 per 100,000 live births during those years. Nonetheless, the rate needs to be lowered more rapidly if the target is to be achieved. Once again, this national average conceals significant regional disparities, with some poor provinces displaying rates up to 20 times higher than elsewhere.

Underlying the maternal mortality rate are factors such as unregulated abortion and complications in pregnancy. Abortions account for about half of all maternal deaths, which makes it essential to carry out actions in the family planning domain. It is also important to expand health services to improve prenatal care and the general health situation of women.

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Goal Target Status Challenges in meeting the 2015 target

6. Combat AIDS, malaria and other diseases.

Halt and begin to reverse the spread of AIDS by 2015. Reduce the incidence of tuberculosis by 8% per year, and certify the elimination of vectoral transmission of chagas disease throughout the country by 2015.

The AIDS incidence rate rose from 1.5 per 100,000 inhabitants in 1990 to 7.9 in 1996. The trend has reversed since 1997, when highly effective combined treatment began to be tested universally. Since then, the incidence rate has fallen to levels estimated at 5.1 per 100,000 in 2000, and 3.7 in 2001. As malaria is not a public health problem in Argentina, tuberculosis and chagas were identified as diseases to attack for 2015. The incidence of tuberculosis has declined from 38.1 per 100,000 inhabitants in 1990 to 31.8 in 2000, while its fatality rate has fallen by 50% in the same period. The prevalence chagas disease has declined significantly among children under 15 years of age, and among pregnant women, but the risk of infection has not been entirely eradicated in provinces such as Santiago del Estero, Formosa, Chaco and La Rioja.

A priority challenge in continuing and intensifying the process of reducing AIDS incidence that began in 1997, is to maintain timely and regular provision of medicines and other inputs. Testing for women during pregnancy is important to reduce infection of their children, as are social communication campaigns to prevent the disease. In the case of tuberculosis, effective testing will be needed to detect and continue reducing the proportion of positive cases that abandon treatment before completion. In the case of chagas disease, experience suggests that it is possible to achieve the target of eliminating vectoral transmission by 2015, through appropriate supervision and control, and adequate communication among the National Ministry, provincial ministries, local governments and community-based organizations.

7. Ensure environmental sustainability

Halve the proportion of people without access to safe drinking water or basic sanitation by 2015.

According to 2001 Census data, roughly 89% of the population had access to safe drinking water in that year, compared to 78% in 1990. Meanwhile, 42.5% had access to safe basic sanitation compared to 36% in 1990. The lack of adequate basic sanitation is most severe in Misiones, Greater Buenos Aires, Formosa, Salta and Jujuy. The spread of squatter settlements and slum dwellings during the crisis has probably aggravated the situation.

The key challenge in this area is to maintain and increase infrastructure investments to expand access to the sewerage and drinking water networks, particularly in the poorest provinces and areas, and small towns; in addition to implementation of individual infrastructure improvement plans for homes. At the same time, it is crucial to continue with urbanization projects and the eradication of squatter settlements and slum dwellings.

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Goal Target Status Challenges in meeting the 2015 target

8. Build a global partnership for development

Develop a trading and financial system that supports good governance, development, and poverty reduction. Deal comprehensively with the debt problems of developing countries. Provide access to essential drugs in developing countries. Make available the benefits of new technologies, especially information and communications.

These issues relate especially to economic, trade, financial and technological conditions worldwide, which are mainly determined by the policies and behavior of industrialized economies.

The main challenges for Argentina are: (a) to complete the Doha Round and other trade negotiations with a major component on reducing distortions and protectionism in world agriculture markets, especially in relation to industrialized countries; and (b) to ensure sustainable negotiation of the public debt.

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003GDP (millions of current US$) 236,505 257,440 258,032 272,150 292,859 298,948 283,523 284,204 268,697 102,011 129,743GDP (millions of current pesos) 236,505 257,440 258,032 272,150 292,859 298,948 283,523 284,204 268,697 312,580 376,232GDP (millions of pesos at 1993 prices) 236,505 250,308 243,186 256,626 277,441 288,123 278,369 276,173 263,997 235,236 255,751Real GDP (var. %) 6.5 (1) 5.8 -2.8 5.5 8.1 3.9 -3.4 -0.8 -4.4 -10.9 8.7GDP in PPP (millions of current US$) 339,430 366,369 368,852 393,476 424,585 439,346 434,416 446,560 432,765 401,817 n.a.GDP per capita in PPP (thousands of US$ at constant 1995 basis) 10,459 10,912 10,609 10,958 11,451 11,556 11,127 11,047 10,338 9,378 n.a.

Household consumption with VAT (millions of pesos at 1993 prices) 163,676 173,608 166,008 175,196 190,922 197,557 193,610 192,332 181,290 155,267 167,918Household consumption with VAT (Var. %) 5.8 (1) 6.1 -4.4 5.5 9.0 3.5 -2.0 -0.7 -5.7 -14.4 8.1Public consumption (millions of pesos at 1993 prices) 31,953 32,095 32,339 33,041 34,104 35,249 36,173 36,382 35,629 33,820 34,314Public consumption (Var %) 5.6 (1) 0.4 0.8 2.2 3.2 3.4 2.6 0.6 -2.1 -5.1 1.5

Gross domestic investment 45,069 51,231 44,528 48,484 57,047 60,781 53,116 49,502 41,750 26,533 36,652Gross domestic investment (% of GDP) 19.1 20.5 18.3 18.9 20.6 21.1 19.1 17.9 15.8 11.3 14.3Gross domestic investment (Var. %) n.a 13.7 -13.1 8.9 17.7 6.5 -12.6 -6.8 -15.7 -36.4 38.1

Inflation (CPI, dec/dec, Var %) 7.4 3.8 1.6 0.0 0.3 0.6 -1.8 -0.7 -0.5 40.0 3.0Money (millions of pesos) (M1=BM + sight deposits (excl. savings banks)) 16,914 17,175 16,519 19,359 22,908 24,583 23,986 23,592 20,309 29,165 41,907 Money and quasi-money (millions of pesos) (M3*=BM + sight deposits (in pesos and US$) + Fix 43,886 53,418 50,431 60,325 74,415 86717 91372 94743 86919 n.a (8) 94193Money and quasi-money (millions of pesos) (M3=BM + sight deposits (in pesos) + Fix term depo 29,107 32,118 28,469 33,778 41,750 46,888 45,743 44,840 36,662 67,753 90,087Interest rate (on 30-day deposits in local currency, %) (2) 8.67 9.55 9.16 7.60 8.28 8.05 10.28 12.26 7.42 20.72 3.71Credit to the nonfinancial private sector (millions of pesos) n.a 43,307 45,848 48,184 55,201 64,033 65,703 63,367 55,896 n.a. 31,277Credit to the nonfinancial private sector (Var.%) n.a n.a 5.9 5.1 14.6 16.0 2.6 -3.6 -11.8 n.a. n.a.

Current account (millions of dollars) -8,163 -11,100 -5,159 -6,810 -12,224 -14,521 -11,960 -8,984 -3,906 9,627 7,941Current account (% of GDP) -3.5 -4.3 -2.0 -2.5 -4.2 -4.9 -4.2 -3.2 -1.5 9.4 6.1Exports f.o.b. (millions of US$) - merchandise 13,269 16,023 21,162 24,043 26,431 26,434 23,309 26,341 26,543 25,709 29,375Exports f.o.b. (millions of US$) - merchandise and nonfinancial services 16,339 19,387 24,987 28,394 30,943 31,154 27,883 31,111 30,950 28,684 33,231Exports f.o.b. (Var %) 6.2 18.5 28.8 13.6 8.9 0.6 -10.4 11.0 -0.5 -0.7 15.0Imports c.i.f. (millions of US$) 16,872 21,675 20,200 23,855 30,450 31,377 25,508 25,281 20,320 8,990 13,813Imports c.i.f. (Var %) 12.6 28.4 -6.0 18.0 27.6 3.0 -18.0 -0.8 -19.0 -55.0 53.0

Total external debt (millions of US$ at year-end) (3) 72,425 85,908 99,146 110,614 125,051 141,929 145,289 146,575 140,214 134,147 145,583Total external debt (% of GDP) 30.6 33.4 38.4 40.6 42.7 47.5 51.2 51.6 52.2 131.5 112.2External debt of NFPS and Central Bank (millions of US$ at year-end) (4) (5) 53,606 61,268 67,192 74,113 74,912 83,111 84,750 84,851 88,230 89,241 103,824External debt of NFPS and Central Bank (% of GDP) (3) 22.7 23.8 26.0 27.2 25.6 27.8 29.9 29.9 32.8 87.5 80.0External debt of nonfinancial private sector (millions of US$ Dec.) (6) 9,938 13,842 18,203 20,841 29,551 36,512 36,911 36,949 35,261 32,133 31,869External debt of nonfinancial private sector (% of GDP) 4.2 5.4 7.1 7.7 10.1 12.2 13.0 13.0 13.1 31.5 24.6Public debt service (% of GDP) 1.8 1.7 2.2 2.2 2.6 2.7 3.5 4.2 5.3 2.5 n.aPublic debt service (% of exports and services) 26.8 23.3 23.1 21.2 25.3 25.8 36.2 38.9 46.1 27.6 n.aPublic debt service 4,372 4,511 5,777 6,012 7,828 8,049 10,107 12,117 14,264 7,927 n.a

International reserves (millions of US$ as of Dec. each year) 17,223 17,929 17,592 19,296 24,308 26,524 27,831 26,491 19,425 11,498 14,288Nominal exchange rate (peso/US$) 1 1 1 1 1 1 1 1 1 3.06 2.90Real exchange rate (CPI with USA) (2001=1) 0.88 0.87 0.86 0.87 0.89 0.89 0.92 0.96 1.00 2.44 2.11Real exchange rate (WPI) (7) (2001=1) 1.11 1.12 1.08 0.89 0.89 0.91 0.96 0.96 1.00 1.71 1.42Terms of trade index (1993=100) 100 101 102 110 108 102 96 106 105 105 113Terms of trade index (Var %) 2.9 1.4 0.2 7.8 -1.2 -5.5 -5.8 9.9 -0.6 -0.3 7.9

NFPS primary surplus (millions of pesos) 5644.5 3066 2710.2 -906.5 1468.4 2586.8 5888 2864.4 1455.3 2260.2 8688.1NFPS primary surplus (% of GDP) 2.4 1.2 1.1 -0.3 0.5 0.9 2.1 1.0 0.5 0.7 2.3NFPS Primary surplus excl. privatizations (millions of pesos) 5121.2 2333.1 1539 -1281.4 1446.9 2490.5 3305.4 2719.7 1395.1 2255.7 8676.9NFPS Primary surplus excl. privatizations (% of GDP) 2.2 0.9 0.6 -0.5 0.5 0.8 1.2 1.0 0.5 0.7 2.3Consolidated public expenditure (% of GDP) 31.6 31.7 32.5 30.5 30.3 30.9 34.2 33.8 35.8 29.1 n.aPublic expenditure of provincial governments and GCBA (% of GDP) 12.4 12.4 12.6 11.8 11.8 12.3 13.6 13.4 14.5 11.8 n.a

Sources: MECON and Banco Central, except **World Bank and ***IMF.e. Estimate.(1) Methodology Base=1986.(2) December each year.(3) As from December 1999, figures include locally issued securities, used by the banking system in reverse repo transactions(4) NFPS: Nonfinancial public sector.(5) Does not include interest accrued but not overdue at the reference date.(6) Does not include liabilities to parent companies included in estimates of direct investment.(7) As from March 2002, figures excluded all institutions for which the Central Bank of Argentina revoked authorization to operate in 2002.(8) The Central Bank has not officially set the value of dollar deposits corresponding to 2002, so oficial figure currently exists.

Main Economic Indicators

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200321.5 20.1 26.1 30.1 30.0 28.8 31.3 33.4 35.9 53.0 51.74.7 4.3 6.8 8.2 7.3 7.1 8.9 9.0 11.6 24.8 25.29.9 10.7 18.4 17.1 16.1 13.2 14.5 15.4 21.5 15.68.8 10.2 7.0 8.1 8.4 8.2 8.9 9.5 9.6 12.7 13.48.8 10.2 4.3 4.5 4.8 5.1 4.8 5.0 5.3 5.9 5.417.0 16.4 21.2 20.5 21.3 24.3 22.6 26.1 28.7 29.8 n.a.21.47 20.52 22.24 24.40 26.27 28.11 27.89 30.31 36.81 46.75 38.010.420 0.431 0.461 0.458 0.457 0.477 0.465 0.480 n.a. n.a. n.a.0.451 0.453 0.459 0.472 0.475 0.486 0.478 0.489 0.499 0.510 0.510

Consolidated public social expenditure (% TPE)10 64.0 66.0 65.2 65.7 65,1* 64,4* 63,2** 62,8** 61,5** 66,7** n.a.

6 Data correspond to Greater Buenos Aires. Source 1992-2000: Gasparini, Sosa Escudero, Marchionni (2001). Distribución del ingreso en la Argentina: perspectivas y efectos sobre el bienestar .

8 Data correspond to Greater Buenos Aires. Source 1992-2000: Gasparini, Sosa Escudero, Marchionni (2001). Distribución del ingreso en la Argentina: perspectivas y efectos sobre el bienestar .

10 Consolidated Social Expenditure Directorate, Ministry of the Economy. www.mecon.gov.ar/peconomica/basehome/series_gasto.html

(*) Preliminary data.(**) Estimate.

9 Data correspond to the average beween May and October of each year, Greater Buenos Aires. Calculated on the basis of per capita family income, including family members with zero income. Source: National Directorate of Macroeconomic Policy Coordination.

3 Data correspond to May of each year, total urban agglomerates. Starting with the EPH of October 1994, the underemployed have been divided into two different categories depending on whether they are seeking employment or not. The term "Jobseeking underemployment" refers to underemployed persons who are also actively searching for another job. Source: EPH-INDEC.4 Does not include the Greater Santa Fe agglomerate.

5 Data correspond to may of each year, total urban agglomerates. Starting with the EPH of October 1994, the underemployed have been divided into two different categories depending on whether they are seeking employment or not. The term "Non-jobseeking underemployment" refers to underemployed persons who are not actively searching for another job. Source: EPH-INDEC.

7 Data correspond to the average beween May and October of each year, Greater Buenos Aires. Calculated on the basis of per capita family income, including family members with zero income. Source: National Directorate of Macroeconomic Policy Coordination.

Income inequality8 (Gini coeficient)Income inequality9 (Gini coeficient)

1 Data correspond to May of each year, total urban agglomerates; except 2003, where figures correspond to Greater Buenos Aires. Source: EPH-INDEC.

2 Data correspond to May of each year, total urban agglomerates. Figures for 2002 and 2003 include the Unemployed Heads of Household Plan, whose beneficiaries are counted as employed. Source: EPH-INDEC.

Jobseeking underemployment rate (%)3

Non-jobseeking underemployment rate (%)5

Income inequality6 (decile 10/decile 1)Income inequality7 (decile 10/decile 1)

Main Economic Indicators

Persons below the poverty line1

Persons below the indigence line1

Urban unemployment rate (%)2

Annex VII Page 1 of 11

MANAGEMENT’S ACTIONS ON THE RECOMMENDATIONS CONTAINED IN OVE’S “COUNTRY PROGRAM EVALUATION (CPE). ARGENTINA: 1990-2002”

Recommendations Management’s actions

I – ANALYTICAL WORK: There is room for the Bank to improve its analytical work and its economic, sociopolitical and institutional diagnostic work—integrating efforts made by the country, the Bank’s departments and specialized organizations—in order to reduce the constraints imposed by reliance on analyses performed in the context of other strategic objectives. It is crucial to promote discussion of major issues at key moments.

This recommendation is being implemented as follows: Preparation: The Bank’s Country Strategy with Argentina 2004-2008 (BCSA) contained far more analytical work than previous country strategies (economic analysis and sectoral studies, national and international consultancies, and ECLAC was engaged initially for the diagnostic stage). A multidisciplinary team from different departments was formed. Credit Review Groups (CRGs) were held to discuss the strategy’s three major pillars (competitiveness, modernization of the State, and social development). Internal workshops were held to discuss each stage of the document (dialogue document); Dissemination: This point was not raised by OVE, but one of the innovative aspects of the BCSA was that it was broadly disseminated within the Bank, with all baseline studies being made available as were workshop results, including a workshop to consult civil society in Argentina (a website was created to facilitate access to all documentation, along with a Bank-wide publication to report on the status of the BCSA). Implementation: The BCSA includes an agenda for maintaining dialogue with the country (Chapter II, Section H) and identifies possible workshops and studies to promote timely discussion of key issues in the future (see Annex II). The idea is that it be a “live” document that serves as a basis for dialogue on programming in the future.

1. ... an economic and contextual analysis that is more autonomous and open. Issues of political economy, together with the way they influence the Bank’s role and interventions, need to be analyzed in greater depth. [FN10: In emergency loans coordination is necessary with the IMF and other multilateral agencies, but in the case of PBLs the Bank should have a justified opinion of its own, rather than delegating this power to other agents.]

The Bank is continuing to deepen the economic analysis and to develop a justified opinion of its own that is generally applicable to all PBLs. The Bank does its own analysis on all matters that affect its country programming, and continually coordinates with the IMF and the World Bank. The international financial architecture, however, of which the Bank is part, assigns the IMF responsibility for verifying that macroeconomic policies are consistent and sustainable.

2. Promote the use of nonfinancial products and technical cooperation for the purposes stated above.

The BCSA includes these points in the following paragraphs: 2.31 “The execution and outcomes of sector loans benefit from parallel technical-cooperation projects that increase the government’s capacity to implement reforms.”

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Recommendations Management’s actions 3.42 “Based on lessons learned from the implementation of previous strategies, technical-

cooperation operations will be included as necessary, alongside sector loans, to support the institutional process in reform implementation.”

3. Improve the analytical work applied to programming and projects, in order to identify optimal solutions, incorporating alternative scenarios for achieving the established aims and the treatment of risks that affect the attainment of development goals.

This recommendation was incorporated into the design of the present BCSA and will continue to be applied to project designs. Risk analysis is an essential part of the BCSA (see Chapter III, Section D) and of all projects. Also included in the Strategy are two loan scenarios (Chapter III, Section C). With respect to projects, the BCSA notes: 2.27 “the importance of having sound institutional, financial and risk analysis in place.” 2.29 and 3.43 In the case of direct loans with subnational entities, a fiscal analysis of the entity in question and its institutional capacity needs to be performed. 2.30 and 3.42 sectoral loans “benefit from parallel technical-cooperation projects that increase the government’s capacity to implement reforms”. 2.32 “Project execution and design both benefit from rigorous sector and institutional analysis of the country.”

II – PROGRAMMING: Programming must be based on a strategy that is better coordinated and more consistent with the Bank’s mission, with a view to minimizing the impact of institutional risks. To that end, the Bank should concentrate on addressing the dynamic of its debt with the country, prioritizing resource allocation to optimize the efficiency of the country’s program of investments and reforms, and not simply providing balance-of-payments financing.

Management is convinced that a strategy consistent with the Bank’s mission was implemented during the period under review (92-02), and in the present BCSA. The Bank did not lose sight of its mission since it provided financial support to the country in times of crisis, nor did it let “the strategic objectives of other agents and their distinct roles impose constraints on the effectiveness of the Bank’s contribution.” During the turmoil in international capital markets in the second half of 1998, the Bank was quick to come to the assistance of Argentina, and of other countries in the region, as part of the international effort headed by the IMF. In this context, taking into account the considerable strategic risk the emergency posed to development objectives, the emergency loans became a major value added, consistent with the basic objective of helping countries to manage the effects of the international financial crisis on their economies and on the most vulnerable population groups. (See Annex I of the Minutes of 16 September 2004 of the Programming Committee of the Board of Executive Directors, PGA/04/23.) The BCSA says that for the post-crisis period: “consistent with the government’s approach, the Bank aims to resume its leadership in the financing of investment loans, an issue that is also highlighted in Argentina’s CPE. Nonetheless, sector loans have played a leading role in funding the cost of reforms....” (3.37)

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Recommendations Management’s actions 1. The basic task should be to restore the Bank’s mission,

reestablishing a virtuous circle between a programming for long-term growth that is consistent with fiscal risks, the country’s financing needs—without increasing the debt-to-GDP ratio, which would depress investment—and the development effectiveness of the Bank’s operations. This is not an easy task and is subject to operational constraint.

The BCSA pursues this objective, with the exception of the term “restore”, as explained earlier.

2. To accomplish this goal, programming should be subject to constraints: first, support for flows linked to the medium-term program agreed between Argentina and the IMF; and second, the maintenance of neutral capital flows with the country, which will require loans to cover the demanding schedule of maturities. This in turn would significantly curtail the allocation of new development resources. Both constraints will be present throughout the next programming period.

The BCSA mentions that there are constraints, but also that these issues are not necessarily mutually contradictory: With respect to constraints, it is pointed out that: (3.46) “...account was also taken of commitments under the IMF agreement with regard to resource flows from multilateral agencies in the medium term, and the active portfolio. In both scenarios, the amounts and dates of new approvals entail neutral loan flows between the country and the Bank while the IMF program is in force (from September 2003 to September 2006)”. Moreover, the BCSA does not envisage the option of “significantly reducing new resources to development”: In fact, the Strategy seeks to do the exact opposite (3.38): “Over the next few years, a key element of the Bank’s strategy with the country will involve maintaining its support through efficient implementation and additional adjustment of the current portfolio, as required. In this regard, seeking to return to historical performance levels and ensure that objectives are attained, an action plan agreed with the government is being implemented, which contains specific execution criteria that allow for timely detection of the need for adjustment and any additional support. At the same time, in the first period of strategy implementation, major efforts are needed to identify and develop new projects in order to target the Bank’s actions to the strategic issues, and guarantee the execution levels and resource flows envisaged in the loan scenarios loan scenarios.”

3. Footnote 18: “Although programming should be coordinated with other multilateral agencies, it is worth remembering that the Bank’s contractual relationship with the country is unique and must be consistent with the strategic objectives of both the institution and the country. This would minimize the risk of the Bank being constrained by the operations of other institutions, or being seen as an efficient source of funding in times of crisis.”

The Bank coordinates continually with other MLAs. However, the record of lending to Argentina shows that the Bank has not been constrained in its actions only in times of crisis. In terms of the risk of the Bank being constrained by the operations of other institutions or being seen as an efficient source of funding in times of crisis, the Bank’s actions in such circumstances are set out in its mandate, established by the Committee of the Board of Governors (See Response to Recommendation II.)

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Recommendations Management’s actions 4. Project designs (PBLs and investment loans) should

demonstrate the project’s consistency with macroeconomic constraints, turning these into eligibility criteria both for operations per se and to justify their inclusion in the program.

The macroeconomic constraints have been incorporated into the possible loan scenarios and are always incorporated into project designs. In the case of loans to subnational governments, an individual analysis of their fiscal situation and institutional capacity is performed (paragraph 3.43.)

5. The eligibility criteria should prioritize at least four aspects, stemming from this evaluation: generation of foreign currency, fiscal impact, creation of formal employment, and improvement in the distribution of income.

Each criterion is directly associated with the areas targeted in the strategy and is consistent with the Bank’s objectives. However, it is not considered technically feasible to apply it generally to all Bank operations. Improvements in income distribution are a crosscutting issue that is prioritized in the BCSA, and a project’s fiscal impact is taken into account in the loan scenarios based on the framework of the medium-term program agreed with the IMF (paragraph 3.45). Generation of foreign currency and creation of formal employment is linked to competitiveness and the areas targeted (paragraphs 3.15 and 3.23). Going any further in applying the general eligibility criteria would remove operational flexibility.

6. The net future benefits from the corresponding actions should be measured and be at least equal to the costs of the debt taken on.

This is a basic principle underlying all project analysis. It should be noted though that in certain cases exact calculations cannot be made. Emergency loans are an extreme case.

7. With respect to activities aimed at the creation of assets and at improvements in the efficiency of both investment and structural reform policies, the Bank’s portfolio should concentrate on optimizing resource allocation and thus helping to raise the rate of return of programs.

This, too, is a basic general principle that is applied.

8. (i) migrate from a concept of isolated projects within development topics to one that directly supports the public investment program and structural reforms in the country’s national and subnational budgets;

This recommendation is valid and applies to all borrowing member countries. The BCSA emphasizes that projects always need to be included in the country’s reform programs and budgets, and each programming exercise verifies that this is so before projects are added to the program of operations.

9. (ii) the investment loan instrument to make it more compatible with the execution conditions that the country requires, and introduce a streamlined system for justifying disbursements based on efficiency indicators that take the Bank’s contribution to development into account.

Implementing this recommendation depends on the circumstances in which it is applied. In the present case of Argentina, the country’s existing risks and deteriorating institutional conditions do not appear to have been taken into account. Some of these risks are mentioned in the CPE itself in Footnote 20 (absence of a public investment program to provide programming support). Also, the BCSA cannot propose new investment loan instruments that have not been established or approved by the Board.

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Recommendations Management’s actions 10. Disbursements for sector loans would be tied to results

linked to recovery of the projected costs of the reforms, rather than fulfillment of policy conditions. In other words, they would focus more on the net benefits of the policies than on the policies per se (Footnote 15).

Not applicable. This recommendation is not part of the current regulations related to PBLs.

11. The Bank should help the country improve its project cycle process so that designs [The Bank could support this process by generating guidelines on content that would help adapt the variety of projects in standardized documents in order to facilitate their consideration by the Bank.] that can be evaluated and that are based on their respective budgets are developed. These designs should also be in line with the net annual capital inflow requirements from the Bank.

Should be presented for discussion and analysis in another context, since it applies to all countries.

12. It is important to use nonfinancial products to promote generational accounting in budgeting by the country (Footnote 18).

In accordance with the new Fiscal Responsibility Act, the country will develop proposals with a three-year time horizon at the national and provincial level. The BCSA notes: (3.11) “...There is ample opportunity for continuing to work in this domain on crosscutting dimensions of public administration (budgetary, financial and taxation systems; management of assets and liabilities, human resources and others). In addition, the Bank could help in the formulation and evaluation of state policies, through its loan program and agenda for country dialogue.” (3.13) “On the issue of fiscal federalism, support can be given for adjustments to reforms already underway, both at the central level and in provinces and municipios. The Bank could also support creation of the Federal Fiscal Agency (Organismo Fiscal Federal), construction of its information systems and development of technical capacities; strengthening of budgetary, tax and financial administration in the provinces to raise their revenue collection capacities and enhance management of expenditure and public debt; strengthening of state capacity to manage and administer tangible assets and liabilities.…”

13. This approach would considerably reduce transaction costs because it would: (i) not require the establishment of ad-hoc executing units; (ii) use the internal oversight system, which would make management of fiduciary risks more reliable; and (iii) not demand local counterpart funding, which would reduce the fiscal impact of the investment loans on nonregular public spending.

Permanently reducing transaction costs is a general objective. The BCSA notes: (i): 3.55 “..., one of the strategy’s key areas of action involves strengthening public administration, with the establishment of more stable project execution teams drawn from the permanent staff of the various public bodies.” (ii): Here, in the case of Argentina, the BCSA recommends: 2.26 “...implementation of the action plan agreed with the government, with principles and criteria that contribute to effective execution

Annex VII Page 6 of 11

Recommendations Management’s actions of a series of priority projects, safeguarding the stability of technical teams, availability of resources, generalized application of effective oversight instruments (including timely delivery of audited financial statements), procurement and institutional monitoring procedures, and other elements.” (iii): As to “not requiring or demanding local counterpart funding,” the Bank does not yet accept this policy in the case of investment loans.

14. These actions would be more viable to the extent that the country can agree with the IMF that fiscal expenditures on investments with the characteristics mentioned above should not be included in the fiscal target when calculating the primary surplus.

The IMF pilot project to permit greater flexibility in accounting standards for public investment financing does not include Argentina.

III – COUNTRY STRATEGY: In the design of the country strategy, the following items need improvement: (i) a better definition of indicators to monitor both strategic programming objectives and the products to achieve these objectives; (ii) a better stock-taking of lessons learned from previous cycles; and (iii) a better assessment of the strategy’s efficiency, particularly regarding: identification of results achieved and obstacles encountered; efficiency of the instrument mix used; and analysis of the impact on programming outcomes, due to changes in the approval and execution of operations, highlighting the role of risks therein (counterfactual analysis).

(i) Currently, available indicators cannot be expected to cover all potential Bank actions in the next five years. Considering the indicators in the summary matrix, insofar as is possible, a baseline, a midpoint, and a target for 2008 have been established. The formulation and quantification of additional indicators will be based on future dialogue on policy and programming, and the design of new projects and programs. A core element of the Bank’s strategy with the country will be its continued support through efficient implementation of and additional adjustments to the current portfolio. To accomplish this aim, the Bank has been implementing an action plan agreed with the government, with specific execution criteria that make it possible to detect in advance the possible need for adjustment and additional support, by means of a specific set of indicators to monitor the results of current portfolio execution. When the midterm evaluation of the strategy is performed, conditions will be more favorable for reviewing and refining the indicators. (ii) Incorporated in Chapter II of the BCSA on lessons learned.

(iii) This would be done once the BCSA is implemented. A midterm review of implementation is envisaged. According to the evaluations, a counterfactual analysis should be performed, and this would also enrich the analysis of OVE’s country program evaluations.

1- The strategy will be more effective if it takes all contingent liabilities into account, be it as a development issue or as a risk.

On this point, there is disagreement. The idea that the strategy should take into account all contingent liabilities would be difficult to put into practice. Some contingent liabilities are more amenable to evaluation than others (e.g., “foreseeable” liabilities, such as compensation to banks for asymmetric pesification). However, the CPE defines contingent liabilities as “the possible future fiscal cost from risks stemming from a failure to take a necessary action, nonfulfillment of a commitment, or the occurrence of a predictable exogenous event.” (Footnote 4, Annex D- RE 299). This is a virtually unending task, since it would mean taking into account not only the risks mentioned (and not mentioned) in the CPE, but also numerous other potential contingent liabilities,

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Recommendations Management’s actions whether or not the result of past or future actions or liabilities on the part of the Argentine government. This also calls for assumptions involving an element of subjective assessment, without a methodological framework to assure uniformity of treatment. Nevertheless, the contingent liabilities listed in the first chapter of the CPE, understood to be challenges to development (paragraph 1.28), are discussed in the proposed Country Strategy.

2- Given the magnitude of the challenges and the significant amount of time needed to resolve them, the strategic programming exercise should reach beyond the next CP. This programming exercise should establish precise targets to be fulfilled during the period. These targets should be in line with the Bank’s specific contribution to development issues.

The proposed Strategy presents a longer-term strategic view of the challenges facing the country, and even uses the Millennium Development Goals as a benchmark. The program of operations covers the period 2004-2008 (i.e., it includes the first year of the administration that will be elected in late 2007, in order to ensure the continuity of the strategy, while agreement is reached on the strategy for the following period. (See BCSA paragraphs 1.38, 3.59, 3.62, 3.63, 3.66, Annex I and Annex V). It notes: (3.62) “The strategy contains national performance indicators linked to country goals in each area of the Bank’s influence, as well as to strategy implementation and the millennium development goals.” (3.63) “...account will also be taken of progress in meeting the millennium development goals, as an indirect reflection of the Bank’s contribution to achieving these goals in Argentina.”

3- Programming will become more effective to the extent that it provides for targeted interventions that can be replicated on a larger scale once their success has been established. The Bank’s contribution will be greater to the extent that it participates in projects with few components, with technical assistance aimed at producing ownership, that are focused on solving tangible and verifiable problems, and whose amounts are adequately dimensioned.

This recommendation is incorporated into the BCSA as follows: (3.65) “The strategy approach offers a flexible reference framework for identifying future actions in the country, while maintaining more immediate support in priority areas through operations currently underway, for which portfolio monitoring will play a key role.” In dialogue agenda (3.66): “...Identification of specific actions to be funded by the Bank within the priority areas established in the Country Strategy, agreeing on eligibility criteria and the sequence and scale of operations, and mindful of the capacities of executing agencies and their monitoring and oversight systems.”

4- Programming should make explicit a strategy for working in a highly decentralized framework that is heavily reliant on central government revenues. This aspect should take into account regional asymmetries to improve the targeting of loans and technical cooperation, abandoning the not very useful criterion of “first come, first served,” and improving understanding of the problems of subnational governments through the use of nonfinancial products. This more “bottom-up” orientation, aimed at the subnational level

There is disagreement as to the statement included in the recommendations section, that the Bank insisted “on the unhelpful criterion of ‘first come, first served’ ” in its relations with subnational governments in Argentina. In reality, the actions of the Bank have evolved from large-scale provincial loans to smaller-scale and more targeted loans as a result of the learning process and adaptations that are to be expected when dealing with a new area of work. It notes: (3.2) ”... Actions in these three areas [targeted by the strategy] will include loans to subnational (provincial and local) governments, focusing on the less developed regions.”

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Recommendations Management’s actions would need to include a process for consultation with beneficiaries. Naturally, the recommendations that apply to the central government (eligibility criteria, multiyear investment plan, and so forth) also should be applied at the subnational level.

(3.43) “In the case of direct work with subnational governments, special emphasis will be placed on analysis of their fiscal situation, existing institutional capacity, and support for strengthening thereof; and their inherent risks will be evaluated along with their capacity to provide the necessary budgetary resources. Support for resource and public expenditure management, appropriate debt management, and social and productive development will be considered a strategic element. These operations will target specific areas or sectors that are relevant to each subnational government, making it easier to obtain tangible outcomes and simpler, more effective execution mechanisms.” The BCSA dialogue agenda establishes as a priority periodically reviewing and agreeing on “criteria for Bank support to subnational governments, in a framework of relations between national government and subnational governments that contribute to fiscal sustainability and productive and social development, particularly in the less developed provinces” (paragraph 3.66).

5- The same reasoning applies to other areas of the Bank’s action: (i) lack of achievement in the competitiveness area where diagnostics did not always result in viable operations; and (ii) obtaining lessons learned from successes achieved in a number of State reform issues that the Bank has since ceased supporting. These elements should form part of the terms of reference for nonfinancial products that support programming.

During the implementation of the strategy and the design of new projects and programs, consideration will be given to the recommendations to use nonfinancial products and prepare assessments that will translate into viable operations and continue support for State reform that show promise based on successful past experiences.

6- Rather than being confined to merely overcoming disbursement obstacles, the monitoring of programming should concentrate on analyzing the evolution of assumptions and project targets, as well as the project’s impact in terms of results. In this regard, the programming documents should include appropriate monitoring and outcome indicators, together with a discussion on the risks of operating in alternative strategic scenarios, and on how the objectives and purposes being sought will be attained. Programming should avoid simply consisting of list of general and specific objectives that arise from a diagnostic; the project list should not be viewed as products within each development challenge.

The Bank’s monitoring instruments are moving increasingly in that direction. This is an area with room for considerable improvement in the Bank, and work in this area is continuing. In terms of results indicators, intermediate outcome indicators must be utilized, given that final outcomes may only emerge years after the operation has been completed.

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Recommendations Management’s actions IV – EXECUTION: In terms of project execution, improvements are needed in following areas: (i) the level of evaluability in project design; (ii) self-evaluation based on results and their sustainability; and (iii) greater commitment among project designers to participate in supervision activities, promoting the incorporation of specialists in this activity and the formal design of supervision activities, so as be useful at the institutional level.

This applies to the Bank’s actions in all borrowing member countries. Thus, it would be useful to discuss this in another context in order to agree on specific measures/actions.

1- Project designs and their logical frameworks will produce verifiable results if they include: (i) outcome indicators; (ii) execution mechanisms that involve career civil service officials in the executing agencies, and that take into account symmetries in institutional capacity; (iii) in each budget, a clear detailing of costs at the product level; (iv) risk analysis that goes beyond minimizing risks to explore alternative solutions in response to an actual event; (v) justification and quantification of the net benefits of the Bank’s interventions on the key development variable identified (previously the evaluation proposed that each project should specify its impact on foreign exchange accumulation, fiscal outcomes, employment and income distribution); and (vi) a discussion on the time needed to achieve eligibility for disbursement, as estimated by the project team.

Applies to the Bank’s actions in all borrowing member countries and could be discussed in the framework of the ARPRE. In designing projects, the advances of recent years in refining outcomes indicators need to be continued, so that the impact of the Bank’s loans on development can be effectively evaluated. Point (v) would appear to be more difficult to implement and less realistic.

2- Sector loans should regain their role in promoting structural reforms and reduce that of simply furnishing liquidity to alleviate short-term problems. Investment loans should minimize their current expenditure components and, when related to decentralization, should consider institutional issues and regional asymmetries when defining the execution mechanism.

Sectoral loans: The primary function of these loans is to promote reforms. However, this instrument has also been designed to provide liquidity (3.37 “...sector loans have played a leading role in funding the cost of reforms.”). “Regaining this role” would not seem to be the most appropriate term, given the results of sectoral loans, despite the period of crisis in which these were implemented. Investment loans: The concern for minimizing current spending components in loans is correct, particularly given the fiscal constraints the country will have in the coming years, added to the neutral loan flow commitments between the Bank and the country until at least September 2006. However, this would be somewhat difficult to follow in some cases, especially in the social sector. Nevertheless, what the CPE considers to be current spending should be better defined. In the social area, this is not simple “welfarism,” but protection of the country’s stock of human capital. One

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Recommendations Management’s actions important effect that reallocation of the social portfolio had on development objectives was having managed to maintain the social investment levels necessary to prevent the previous achievements from being lost amidst the crisis. Not only in the short term (during social emergencies), but also in the medium term and with a view to the future of Argentine social policy, the restructured programs constitute a major pillar in developing a social protection network, along with investment in the human capital of the very poor. The current state of knowledge indicates that there is room for a social protection network in a poverty reduction strategy.

3- Enhancement of the self-evaluation system in terms of outcomes will help maximize the Bank’s contribution to development, by improving monitoring and making it possible to identify lessons more easily. Notwithstanding its limitations, the methodology used in this report can serve as an empirical reference to illustrate the improvement of outcome frameworks and evaluation of the achievement of aims and their sustainability.

Applies also to the Bank’s actions in the other borrowing member countries.

4- Management should conclusively verify that changes in contracts or in the execution of components reflect lessons learned and are intended to enhance efficiency in achieving products, purposes and objectives, rather than being dominated by non-substantiated flexibility criteria or mere facilitation of disbursements. Likewise, reformulations aimed at increasing current expenditure to the detriment of sustainable investment should be minimized.

These have been the basic principles of recent reformulations of projects in the Bank’s portfolio for Argentina, taking into account the country’s economic and social crisis (paragraphs 2.17, 2.20, 3.32 and Matrix.)

5- The evaluation raises the point that the Bank needs to concentrate its work on the supervision rather than on execution. To accomplish this it should: (i) prioritize support for the country’s internal oversight mechanisms; (ii) improve the institutional analysis of projects; and (iii) incorporate successful or innovative experiences that improve execution.

Among the central crosscutting criteria to be considered in implementation of the Bank’s strategy, in the identification and design of projects and nonfinancial products, are “the institutional capacity of potential executing agencies in selecting future operations and determining their amount” (paragraph 3.40). (3.42) “Based on lessons learned from the implementation of previous strategies, technical-cooperation operations will be included as necessary, alongside sector loans, to support the institutional process in reform implementation.” (3.43) “In the case of direct work with subnational governments, special emphasis will be placed on analysis of their fiscal situation, existing institutional capacity, and support for strengthening thereof; and their inherent risks will be evaluated along with their capacity to provide the necessary budgetary resources.”

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Recommendations Management’s actions In terms of the auditing of financial statements in Argentina, the Bank has been helping to strengthen the AGN, which still needs further work in order to be in a position to audit all of the Bank’s loan contracts. (More details in the BCSA, Chapter II, Section C.6, with the summary of lessons learned.)

6- Supervision needs to improve risk-based analysis of the progress of operation implementation. To this end, the Bank should incorporate lessons learned arising from the use of informal or ad hoc tools into its standard risk management processes, also reporting the results of their application.

This recommendation applies to the Bank’s actions in all borrowing countries. In the case of Argentina, based on the successful experience with the redirected social portfolio in evaluating institutional risk, this element has been incorporated into the design of all new operations. This recommendation applies to the Bank’s actions in the rest of the borrowing countries and should therefore be analyzed in a broader context.

7- Supervision should also stress the anticipation of risks rather than merely reacting to events once they have materialized. For this purpose it is suggested that participation in supervision activities by headquarters design teams be diversified, by increasing the number of supervision activities that involve these teams in the projects.

This recommendation applies to the Bank’s actions in the rest of the borrowing countries and should therefore be analyzed in a broader context.

Anexo VIIIPágina 1 de 1

2004 2005 2006 2007 2008 ACUMIDB 1/ Principal 455,626 546,021 1,252,144 1,516,732 1,233,631 5,004,153

Interest 408,490 471,542 462,972 413,721 346,507 2,103,232

Total 864,116 1,017,562 1,715,116 1,930,452 1,580,138 7,107,385

WB Principal 697,158 932,420 1,059,049 1,090,158 982,092 4,760,876Interest 209,619 230,401 199,474 158,395 120,247 918,137

Total 906,777 1,162,821 1,258,523 1,248,553 1,102,339 5,679,013

IMF 2/3/ Principal 5,600,000 3,200,000 2,000,000 4,600,000 5,500,000 20,900,000Interés 600,000 600,000 800,000 700,000 400,000 3,100,000

Total 6,200,000 3,800,000 2,800,000 5,300,000 5,900,000 24,000,000

TOTAL Principal 6,752,784 4,678,441 4,311,193 7,206,889 7,715,723 30,665,030Interest 1,218,109 1,301,943 1,462,447 1,272,116 866,754 6,121,369

Total 7,970,893 5,980,384 5,773,639 8,479,005 8,582,477 36,786,398Sources: Inter-American Development Bank, World Bank, and International Monetary Fund.

2/ Payment schedule established in EBS/04/38, 15 March 2004. The repurchases correspond to liabilities.3/ Assuming an exhange rate of US$1.4994 = 1 SDR (as of 26 October 2004).

Profile of Argentine Public Debt Service Payments to Multilateral Organizations(in US$000s)

1/ Private and public sector debt service payments made in convertible currency (A Loans). These payments do not include Yacyretá loans (555/OC-RG, 583/OC-RG and 760/OC-RG) amounting to US$246 million in principal and US$76 million in interest and charges for the period.