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IqewtNo. 9913

PROJECT COMPLETION REPORT

ARGENTINA

AGRICULTURAL SECTOR LOAN(LOAN 2675-AR)

SEPTEMBER 26, 1991

Agriculture Operations DivisionCountry Department IVLatin America and the Caribbean Regional Office

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY UNIT - AUSTRAL (A)

Rate at Appraisal: US$1 - A 1.0Rate at Completion: US$1 - A 261.0

Glossarv of Abbreviations

AGR Agriculture and Rural Development DepartmentAGREP Agriculture and Rural Development Department, Economics and

Policy DivisionBCRA Central Bank of ArgentinaBNA Banco de la Naci6n ArgentinaCEM Country Economic MemorandumCFI Federal Investment CouncilEC Executive Committee for Implementation of Federal Land TaxEEC European Economic CommunityFLT Federal Land TaxGOA Government of ArgentinaIICA Inter-American Institute for Agricultural CooperationIMF International Monetary FundINTA National Institute of Agricultural TechnologyJNC National Meat BoardJNG National Grain BoardHE Ministry of EconomyOPS Operations StaffPPF Project Preparation FacilityPRONAGRO National Agricultural Development ProgramSAGyP Secretariat of Agriculture, Livestock and FisheriesSOE Statement of ExpenditureTCN National Court of AccountsUNDP United Nations Development Program

ARGENTINE REPUBLIC FISCAL YEAR

January 1 - December 31

FOR OMCAL USE ONMYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Ckg. Of D,tah.CARWAOpHatuns Evautm

September 26, 1991

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on ARGENTINA - AgriculturalSector Loan (Loan 2675-AR)

Attached, for information, is a copy of a report entitled"Project Completion Report on Argentina - Agricultural Sector Loan(Loan 2675-AR)" prepared by the Latin America and Caribbean RegionalOffice. No audit of this project has been made by the OperationsEvaluation Department at this time.

Attachment

This document has a restricted distribution and may be used by recipients only in the perfonnanceof their official duties. Its contents may not otherwise be disclosed without World Bank auth,nzation.

FOR OFFICIAL USE ONLY

PROJECT COMPLETION REPORT

ARGENTINA

AGRICULTURAL SECTOR LOAN(LOAN 2675-AR)

TABLE OF CONTENTS

Paze No.

Preface . . . . . . . . .. .. .. * . . . . . . . . . . .Evaluation Summary . . . . . . . . . . . . .iii

PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE

I. BACKGROUND

The Economy Prior to 1986 . . . . . . . . . . . . . .1The Agricultural Sector. .. . . ....... . .. . 2Constraints on Agricultural Growth . . . . . . .. . 3Government Actions to Stimulate Agricultural Growth . 5Agricultural Institutions and the Policy Relationship 5Bank Group Operations in Argentina . . . . . . . . . . 6

II. IDENTIFICATION. PREPARATION AND APPRAISAL

Introduction . . . . . . . . . . . . . . . . . .. . . . 7Loan Preparation . . . . . . . . . . . . . . . . . . . 8Loan Appraisal . . . . . . . . . . . . . . . . . . . . . 15Objectives and Conditions of the Loan . . . . . . . . . . 20Board Presentation . . . . . . . . . . . . . . . 22

III. IMPLEMENTATION

Effectiveness and First Tranche Release . . . . . . . . . 22Implementation Experience... 22Release of the Second Tranche . . . . . . . . . . 25Disbursement, Procurement and Audit . . . . . . . . 27Compliance with Loan Conditions . . . . . . . . . . . . . 28

IV. ECONOMIC EVALUATION........ ...... 28

V. INSTITUTIONAL PERFORMANCE

The World Bank . . . . . . . .. . . . . . . . . . . 28The Borrower . . . . . . . . . . . . . . . . . . . . . . 30

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Page No.

VI. CONCLUSIONS AND LESSONS

Conclusions . . . . . . . . . . . . . . . . . . . . . 31Loan Design . . . . . . . . . . . . . . . . . . . . . . 31Lessons Learnt . . . . . . . . . . . . . . . . . . . . . 32

PART rI: PROJECT REVIEW FROH BORROWER'S PERSPECTIVE . . . . . 34

PART III: SUPPLEMENTARY INFORMATION AND STATISTICS

Annex I Basic Data Sheet . . . . . . . . . .... . . . ... 35Annex II Compliance with Loan Conditions . . . . . . 37Annex III Export Taxes and the Exchange Rate . . . . . 40Annex IV Borrower's Statement Development Policy . . . . 50Annex V Project-Related Economic Indicators . . . . . . 57

Map: IBRD 19235

PROJECT COMPLETION REPORT

ARGENTINA

AGRICUJLTURAL SECTOR LOAN(LOAN 2675-AR)

PREFACE

This Project Completion Report (PCR) reviews the Argentina AgriculturalSector Loan (2675-AR) for US$350 million. The loan was approved by the Board ofDirectors on April 3, 1986 and signed on June 5 of that year. The originalClosing Date of June 30, 1988 was extended to June 30, 1989 to accommodate delaysin completion of the technical basis for the land tax. Final disbursement wasmade on June 23, 1989. US$0.04 million was cancelled.

The PCR was prepared by the Agriculture Operations Division, DepartmentIV of the Latin America and the Caribbean Region. It is based on the President'sReport, Loan Agreement, Supervision reports, correspondence between the Bank andBorrower, consultant studies, internal Bank studies, memoranda and interviews.

The Borrower did not respond to the Bank's requests for an independentassessment of the operation. The Bank's draft PCR, Parts I and III, was sent tothe Borrower for comments on March 27, 1991, but no response has been received.

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PROJECT COMPLETION REPORT

ARGENTINA

AGRICULTURAL SECTOR LOAN(LOAN 2675-AR)

EVAlIUATION SUMMARY

Backfround and Objectives

1. The Economy. Argentina's decline from one of the richest countries inthe world to one beset by seemingly intractable economic problems can beattributed t' a fundamental reorientation of the economy following the economiccrisis provokeG by the Great Depression of the 1930s. For the next four decadesthe country's development strategy turned inwards, promoting rapid industrializa-tion financed largely by transfers from agriculture, the sector upon which earlyprosperity had been built. However, the exhaustion of import-substitutionoptions led to increasingly frequent balance of payments crises and erraticeconomic growth.

2. Major efforts were undertaken in 1976 and again in 1978 to reverse thetrend, but persistent inflation and failure to contain public expendituresundermined these programs, leading to extreme instability which, in turn,concentrated the efforts of decision-makers on short-terk, speculative operationswhich were unsustainable and perceived as such. A democratically-electedGovernment took office in late 1983, inheriting spiralling inflation and balanceof payments difficulties stemming from unchecked growth of the fiscal deficit,mioguided exchange rate policies and excessive external borrowing.

3. In late 1984, the Government entered into a standby arrangement with theInternational Monetary Fund (IMF), but a deepening recession weakened itsadherence to program targets and draw-down of the first tranche was suspended.Further deterioration led to the Austral Plan of June, 1985, a comprehensiveadjustment program supported by a revised and more stringent IMF standbyarrangement. Political and social support for the Plan was widespread, and theBank believed the Government's initial success in stabilizing the economy auguredwell for improved economic performance.

4. Agriculture. Agriculture bore the brunt of the import-substitutionstrategy pursued by successive governments. Agricultural exporters variouslyfaced export taxes, a lower effective exchange rate than other exporters, orinflated prices for their inputs. This pattern of discrimination againstagriculture penalized the country in foregone production and export earnings, andmore frequent balance of payments crises. In particular, the Government's

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interchangeable use of export taxes and an over-valued currency to extractrevenues from the sector has been a powerful disincentive to productiveinvestment.

5. Influences on the Loan. Several important factors influenced the natureand processing of the loan. First, the promise inherent in fast-disbursing loanscoupled with policy change and the fact that several such loans were alreadyunderway or peniing in other countries in tLa Region created considerableinterest in extending such lending to Argentina. Second, the decision to builda project lending pipeline in Argentina was subsequently reinforced by theexplicit requirement under the Baker Plan for a major Bank role in assistingindebted countries to develop their way out of debt. Lastly, little recentagricultural sector work existed on which to construct an informed dialogue andthus the Country Economic Memorandum (CEM) of 1984 became the principalblueprint, largely pre-selecting the policy issues and loan concept.

6. The Loan Concept and Preparation. The CEM argued that the entireArgentine farming system would be transformed by replacing agricultural exporttaxes and import tariffs on inputs by other revenue measures, preferably afederal land tax (FLT). The latter would be developmentally sound, would be easyto collect, and would transfer the tax burden from exporters to the domesticproducers of high-value products. The CEM did not discuss the complementaritybetween export taxes and the exchange rate in discriminating against agricultureor the central significance of a stable exchange rate as an agriculturalincentive.

7. Loan preparation took almost two years and was characterized bypersistent debate over the loan's feasibility and timeliness, an inadequateanalytical base and an apparent inability to determine the critical path forachieving loan objectives. Resource transfer was a major preoccupation whichundermined the structural objectives and reduced the seriousness of the dialoguewith the Government. It is also evident that the loan's structural requirementslacked a rational linkage to the IMF's stabilizc.tion efforts, and implicitlyinvolved the Government in trying to fulfill conflicting demands.

8. Despite the complexity of loan objectives and the need for unequivocalgovernment support, the Bank's substantive dialogue was limited to theSecretariat of Agriculture, Livestock and Fisheries (SAGyP). The Ministry ofEconomy (ME) and its Secretariat of Finance had little interest in structuralreform. While not opposing a federal land tax in principle, they were stronglyaverse to relinquishing the secure source of income represented by export taxes,and were thus not committed to the loan concept and objectives. The Bank gaveprincipal responsibility for the planning and implementation of the reformprogram to SAGyP despite that agency's lack of control over the policyinstruments and resources most affecting the sector. By contrast, ME's formalrole was largely peripheral despite it being the agency most affected by theproposed changes.

9. Loan Objectives. The Loan was des;igned to increase agriculturalproduction and exports through a structural change in federal taxation away from

export taxes (retenciones), which discourage the production of exportable crops,to a production-neutral federal land tax which would improve incentives and leadto a more intensive use of agricultural resources. The loan is described in thePresident's Report as supporting the following policy reforms and complementaryactivities under the Government's economic stabilization program: (a) asubstantial reduction in agricultural export taxes; (b) fiscal measures tomaintain the fiscal deficit at satisfactory levels, including the introductionof a FLT; (c) modified regulations and tariffs pertaining to imported inputs;and (d) complementary studies and institutional support.

10. Loan Conditions. The tranche release conditions were as follows:

(a) First Tranche. The first tranche of US$170.5 million was to bereleased upon loan effectiveness (and before June 30, 1986) based on:(i) establishment of an Executive Committee; (ii) re-designation oftractors and agricultural machinery to the "prior approval" list forimported goods; and (iii) Government's execution of subsidiaryagreements with the National Grain Board (JNG) and National MeatBoard (JNC) for complementary studies and institutional supportactivities. Disbursement under the loan for studies andinstitutional support was contingent upon presentation to the Bank ofacceptable terms of reference.

(b) Second Tranche. Disbursement of the second tranche of US$170.5million (forecast for January, 1987) required: (i) reduction ofagricultural export taxes to a level not to exceed 70Z of the ratesin force on May 1, 1985 or other levels to be jointly agreed; (ii)implementation of fiscal measures sufficient to compensate forrevenue losses from the export tax reduction, without increasing theoverall sector tax burden compared to its May 1, 1985 level; (iii)designation of tractors and agricultural machinery to the "automaticentry" classification for imported goods, and removal of the 102import surcharge on agricultural chemicals; and (iv) satisfactoryprogress in the execution of the agreed land tax implementationschedule, and in all stud'es financed under the loan.

Implementation Experience

11. The first tranche was released on September 24, 1986, five and a halfmonths after Board presentation due to difficulties in complying with a numberof conditions of effectiveness.

12. Loan implementation was hampered by political and macroeconomicimpediments, some of which might have been predicted. The following summarizesthe main aspects:

(a) The Federal Land Tax. Legislation to establish a FLT remainedstalled in the Congressional committees to which it was firstreferred for debate. Evidence suggests that a progressive breakdownof the Plan Austral and deteriorating conditions in the rural sector

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rapidly eroded the Executive's willingness to pursue the project andprovided the opportunity for earlier opposition to re-surface.Farmer groups argued that reductions in export tax rates at that timecould not compensate them for sharply lower world commodity prices orin any way be accepted as a quid pro qur for future introduction ofa land tax. While the Bank believed it had satisfactory legalassurances from the GOA that export tax rates would be reducedpermanently, farmers ncted that the prerogative of ME to manipulaterates remained intact, and reached the opposite conclusion. The FLTwas perceived by farmers as additional to expc-t taxes, not as areplacement.

(b) Export Taxes. First-stage reductions of export taxes on majoragricultural and agro-industrial products by mid-1986 were marginallybelow agreed levels, reflecting the Bank's considerable effort tosecure real movement on the issue of rates. Subsequent reductions by'ate 1986 to zero (in the case of grains) and to low levels (in thecase of oilseeds) far exceeded loan requirements, but were neces-sitated by the fall in international commodity prices to historicallows, in real terms. These latter reductions were consistent withhistorical patterns of export tax implementation and had little to dowith the loan. Indeed, after the Spring Plan of August, 1988, theGovernment abandoned the IMP's exchange rate regimen, adopting amulti-tiered rate designed specifically to discriminate againstagriculture. In May, 1989 (i.e., before loan closing), with theadoption of a unified exchange rate, export taxes were reinstated athigh levels.

(c) Studies. The five studies and two programs oZ institutional supportwere completed successfully. The special taxation study, whichcombined preparation of the technical basis for the FLT with a studyto determine the appropriate level of taxation for agriculturalactivities and possible alternative measures to the land tax, wasalso completed but with delays. The closing date of the loan wasextended for one year to permit its completion. These high-qualitystudies, elements of which have won several international prizes fortechnical excellence, represent the single success story under thisloan.

(d) Import Liberalization. Tractors and agricultural machinery weretransferred to the "automatic entry" list for imports afterconsiderable delays related to depressed conditions in the domesticindustry. However, deficit reduction requiremenits of a new IMParrangement in early 1988 meant that the Government was unable toremove the import surcharge on agricultural chemicals, which insteadwas raised.

13. Second Tranche Release. The second tranche was released on June 22,1988 following protracted and unusually contentious debate during whichfundamental aspects of the loan's design and feasibility were once again

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questionekL. Acknowledging tne impossibility of imposing an FLT, the Bank agreedto accept flternative revenues proposed by the GOA as compensatlon for export taxreductions, and insisted or compliance with the condition affecting imports oftractors and machinery, which was seen as a key indication of the Government'sseriousness in pursuing a much broader program of trade liberalization then underdiscussion. The Board of Directors approved a decision to waive two loanconditions (i.e., FLT implementation and removal of the import surcharge onegricultutral chemicals).

Economic Impact

14. The loan provided a large, infusion of foreign exchange but achievedno structural reform on the central issue of agricultural taxation. Theunpredictable mixture of over-valued c, rrency, multiple exchange rates and exporttaxes persisted following the Spring Plan of August 1988 and continued to affectproducers' confidence and their ability to plan and make investment decisions.The production response during the perio of low export tax rates and high realvalue of the currency (early 1986 to August 1988) was therefore low; producersclearly and correctly interpreted these moves as mere stabilization measures andnot as the first stage of any long-term effort to improve agriculturalincentives.

Sustainabilitv

15. The preparation phase of the loan did not establish the conditionsnecessary tor sustainability. First, Government support for the loan concept andobjectives was weak and the Bank's efforts to construct the essential dialoguewere not sufficiently forceful or comprehensive. Second, loan design lacked astrategy for locking in export tax reductions and removing their discretionaryuse, leaving ME free to manipulate rates and causing producers to perceive andresist the FLT as an additional measure. Lastly, pending elections and continuedmacroeconomic instability subverted official interest in or willingness to pursuestructural reform.

Conclusions and Lessons

16. Decisions made during both preparation and implementation of the loanwere too often motivated by a need to transfer resources, which subordinatedstructural reform objectives. The reform package was not well designed and itwas superimposed on a difficult political and macroeconomic situation, pre-disposing the loan to failure. The principal lessons relating to this specificloan and its design are as follows:

(a) The fiscal emphasis of the Bank's approach to reducing export taxeswas too narrow, e.g., the industrial protection implicationsreflected in differential tax rates between the raw and processedproduct, which, in the case of oilseeds and their processed products,represents a transfer from farmers to processors of around US$200million per year, did not receive the close attention they merited;

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(b) Export tax rate reductions should have been locked in and theirdiscretionary use controlled through legislative and/or otl,r means,to prevent the oscillation which has been, and continues to be, sopowerful a disincentive to producers. Such action would have greatlyimproved the chances for legislative passage of the FLT;

(c) The anticipated disburseamnt of the loan (as presented in thePresident's Report) was overly optimistic and incompatible with arealistic schedule for achieving its main conditions, making problemswith second tranche release inevitable;

(d) Concentration on one fiscal element in the absence of a coherent andstable macroeconomic environment, especially with respect to exchangerate policy, greatly reduced the likelihood of achieving loanobjectives;

(e) Passage of the land tax legislation should have been a condition ofnegotiations. The extreme riskiness of legislation, its centralsignificance to the reforms sought, and the size of the loan, maderequirement for its passage up-front an entirely reasonablecondition;

(f) In the absence of more significant achievements on the policy reformsthan were actually accomplished, a more appropriate course of actionmight h.-i been to have cancelled the loan;

(g) The institutional scheme was unrealistic. The primary impetus andresponsibility for planning and implementing the reform programshould have come from ME, not SAGyP, since it was the agency mostaffected by the reforms sought;

(h) Loan withdrawal responsibilities and procedures should have beenestablished at negotiations with full BCRA involvement, understandingand agreement;

17. In addition, a number of generic issues should be highlighted:

(a) Sector adjustment must be preceded by and must fit into a broadadjustment program which realistic evaluation shows is workingClose coordination of macreconomic and sectoral lending is essential;

(b) Adjustment lending requires the unequivocal support of Government,leading agencies and important personalities. The Bank needs toaddress dialogue development in a more sophisticated manner if itcontinues to design politically-sensitive operations, and should notbe afraid to halt loan processing if =mmunication with Government isclearly inadequate;

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(c) Greater "front-loading" of conditionality is needed to achieve asmuch as possible early in the loan and mitigate the tendency to giveaway the second tranche when conditionality is not met;

(d) Legislation is an exceptionally risky form of conditionality for afast-disbursing loan, unless it is achieved as a condition ofnegotiations. Government is generally reluctant to support measuresthat are difficult to reverse; the vagaries of the political processcannot reasonably be tied to a schedule; and, since the Bank isprecluded from intervening directly in the political process, itbecomes largely an observer;

(e) Sustaining policy reform is a fundamental and well-recognizedweakness of adjustment lending. The imperative for the Bank, if itis to continue to make these loans, is to develop a broad strategy,including appropriate incentives and mechanisms, for establishingcommitment and sustainability. Legal covenants ace an ineffectivesubstitute for this process;

(f) Clearly-defined objectives are the sine qua non of adjustmentlending. In retrospect, it is evident that this particular operationsuffered from a lack of clear definition between its resourcetransfer and policy reform objectives; and

(g) Agricultural Sector Loans (AGSALs) are not the only loans which havesought to reduce or eliminate export taxes. Many have encounteredthe inherent problem that export taxes are a comparitively simple wayof raising revenue in countries where other forms of taxation are noteffectively implemented. Thus, the lesson for the Bank is thatexport tax reform can only be part of a broad and workable reform ofthe overall tax system.

PROJECT COMPLETION REPORT

ARGENTINA

AGRICULTURAL SECTOR LOAN(LOAN 2675-AR)

PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE

I. Backaround

The Econo2M Prior to 1986

1.01 Argentina was among the richest countries in the world in the earlydecades of the twentieth century, but by the 1980s its per capita income hadfallen far below that of many countries with similar resource endowment. Thereasons for this relative decline have their origin in the 1930s. The GreatDepression severely curtailed exports of the traditional agricultural productswhich had been the foundation of Argentina's earlier development. The ensuingeconomic crisis provoked a reformulation of the country's development strategywhich, for the next four decades, became in varying degrees inward-looking andprotectionist, promoting industrialization financed largely by transfers fromagriculture. However, as easy import-substitution options were exhausted,balance of payments crises became more frequent and economic growth more erratic.The political pendulum between nationalist populist governments emphasizingautonomous development and market-oriented reformists stressing an open economyand world view damaged the productive and financial structure. Increased publicsector spending placed growing strains on fiscal stability, while price, creditand interest rate controls inhibited saving and investment and distorted theallocation of resources.

1.02 A marked change of direction occurred in 1976, beginning with anaustere stabilization program accompanied by a relaxation of price, marketing andfinancial controls, major devaluations of the peso, sharp reductions in thefiscal d4eficit and improved export incentives. The initial results wereencouraging. However, the failure to reduce inflation as expected provokedfurther major changes in macro-economic policy in 1978, involving exchange rateadjustments, import tariff reductions and almost complete abolition of remainingcontrols on credit, interest rates and foreign exchange transactions. Despitethese measures, fiscal deterioration from growing expenditures for debt service,defense and domestic security, and increased public sector wages fed theinflationary pressures which the exchange rate and tar_.ff policies were intendedto diminish. Thus, policies pursued to stabilize the economy and improveeconomic efficiency resulted in extreme instability which, in turn, concentratedthe efforts of decision-makers on short-term, speculative operations. Thepolicies adopted were generally unsustainable and were perceived as such.

1.03 Between 1979 and 1983 there were five changes of leadership inArgentina, the consequences of which were extreme economic and political

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uncertainty which, combined with the unstable international environment, led tothe cessation of commercial bank lending. A democratically-elected Governmenttook office in late 1983, inheriting spiralling inflation and balance of paymentsdifficulties stemming from unchecked growth of the fiscal deficit, erratic andmisguided exchange rate policies, and uncontrolled external borrowings by boththe public and private sectors.

1.04 Towards the end of 1984, the Government entered into a 15 monthstandby arrangement with the IMF designed to lower the rate of inflation andachieve a balance of payments position enabling Argentina to meet its externalobligations while initiating domestic recovery. The Government sought to complywith the conditions of the IMF arrangement despite a deepening recession, but itsadherence to program targets weakened and, in early 1985, the IMF suspended thefirst conditional draw-down until completion of the 1985 first-quarter review ofthe program. A significant deterioration in econxmic conditions by the secondquarter of 1985, with severe imbalances in the domestic and external sectors andvery high inflation, forced the Government to adopt drastic measures designed toprepare the country for a major change in economic policy.

1.05 The Government instituted the Austral Plan in June 1985. This was acomprehensive adjustment program involving an immediate and substantial increasein fiscal revenues, large reductions in public expenditures, a temporary pricefreeze, and monetary reform designed to neutralize inflationary expectations.The program was supported by a revised and more stringent standby arrangement(covering 1985/86) with the IMF and commercial bank creditors. In addition tothe Plan, the Government formulated a medium-term growth strategy for 1985-1989,based on an improved investment climate and the restoration of adequate exportincentives. The overall program received wide political and social supportdespite its austerity, and itf, initial success in stabilizing the economypermitted draw-down of the first tranche under the IMF agreement. The Bankbelieved that the Plan augured well for improved economic performance if effortsto reduce the fiscal deficit could be sustained.

The Azricultural Sector

1.06 Agriculture and agro-industry have been crucial in Argentina'seconomic development and have traditionally been relied upon to lead the countryout of economic crises. Crop production grew rapidly from the early 1970sthrough the adoption of improved seed, chemicals and mechanization which raisedyields and produced high and relatively risk-free returns to investment. Primaryexports rose from about 70% of total exports in the late 1970s to above 802 in1983/84. Argentina was, at What time, supplying about 5% of annual world exportsof wheat and around 12% of maize and sorghum, ranking respectively fifth andsecond among the major world suppliers.

1.07 At the time of loan preparation, cereals (chiefly wheat, maize andsorghum) and oilseeds (soybeans and sunflower seed) were the main cropactivities, accounting for almost 90% of the total crop area. Almost all thearea under these crops was cultivated under rainfed conditions, with little useof fertilizer. The Bank believed that there was substantial scope for greater

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use of fertilizer and other inputs and for investment in infrastructure andequipment to enhance production, if prices could be improved. By 1985, theagricultural sector wac contributing about 15% of GDP, 17% of employment, 75% offoreign exchange earnings and between 14Z and 20% of the Federal Government's taxrevenues, chiefly in the form of export taxes.

Constraints on ARricultural Growth

1.08 Pricinx Policies. Agriculture bore the brunt of the importsubstitution strategy pursued by successive governments. Agricultural exportersvariously received a lower effective exchange rate than other exporters, receivedprices seriously reduced by the imposition of export taxes, and paid inflatedprices for their inputs. Despite technological advances, a well-developed inputdistribution system and a competitive marketing environment, agriculture wasgrowing at a rate well below its potential with vast areas of arable land eitherlying idle or being utilized without modern inputs, penalizing the economy inforegone production and export earnings, more frequent balance of payments crisesand depleted soils.'/

1.09 Price discrimination focussed primarily on the traditionalagricultural exports (cereals, oilseeds and beef), but its consequences affectedthe entire sector. The combination of direct and indirect nominal protection wasstrongly negative for the entire period 1960-1985: agriculture was discriminatedagainst by between 40-50% (i.e., product prices would have been between 80-100%higher in the absence of these distortions). Over the long-term, direct measuresof discrimination (i.e., export taxes) were higher when a competitive rate ofexchange or high international prices prevailed (para 14).1'

1.10 The policies outlined above attempted to satisfy the following non-agricultural objectives: (a) maintaining low food prices in urban markets; (b)protecting domestic industry; and (c) raising fiscal revenues. At the time ofloan preparation (1984/85), most agricultural exrorts were taxed at rates up to25%. Export taxes acted as a price stabilization device which permitted higherreal wages in the politically-active urban sector at the expense of ruralproducers. Intervention in the sector was conservative, aimed at stabilizingfarm incomes rather than prices, and it served to neutralize long-run changes inproductivity." Between 1981 and 1983, export taxes rose steadily; by 1983 theyrepresented about 20% of Federal fiscal revenues, being the third most importantsource of revenue after value-added and fuel taxes. The tax reaped about US$1billion per year in 1983 and 1984 and around US$1.3 billion in 1985 (some 1.8%

11 IBRD, Economic Memorandum on Argentina, Report No. 4979-AR, June 22, 1984.

2/ IBRD, Agricultural Sector Review, Report No. 7733-AR, Volume I, June 30, 1989. In purelyfiscal terms, it is not easy to demonstrate that the agricultural sector pays more than othersectors. Evasion of direct taxes (wealth, income, etc.) is significant. The broader picture,however, shows a pattern of discrimination.

31 Adolfo C. Sturzenegger, A Comparative Study of the Political Economy of Agricultural PricingPolicies, Argentina, January, 1988.

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of GDP). Soybeans, maize and wheat accounted for over 90% of export tax revenuescollected. Buenos Aires, Santa Fe and C6rdoba provinces contributed over 75% ofthose revenues.

1.11 Exiort Taxes -- Origins and Impact. Taxes on exports have a colonialpedigree based on a tributary or extractive relationship between Argentina andits principal collaborating powers and, in microcosm, Buenos Aires and thehinterland. Historically, they were levied not because the producer evaded othertaxes (although this had become a powerful motivation for their continuance) butbecause they are legitimized in the Argentine Constitution and the producer hasalways paid them. In fact, export taxes as they are now administered derive fromlaws passed in the 1930s giving the Government broad, formal taxing authority.In contrast to other taxes, however, which require congressional action tomodify, export taxes are the prerogative of HE acting through its Secretariat ofFinance. Differentiated semantically as retenciones, they are used by theSecretariat of Finance to retain part of the country's foreign exchange earningsto cover current expenses. While their consumption subsidy function (para 12)was deeply-entrenched, increasingly in the 1980s arguments to retain them onprice stabilization grounds have tended to mask their more dominant fiscalpurpose.

1.12 In a country where tax evasion is common, export taxes have severaldesirable characteristics: (a) they are easy to collezt; (b) changes in exporttax rates can be enacted by the Executive without congressional approval,providing flexibility in varying fiscal revenues in the short term; and (c) theyare politically attractive in reducing consumer prices and providing a costadvantage to processors of agricultural raw materials. While such advantages donot compensate for the adverse effects export taxes have on agriculturalproduction and exports, they are vital to an understanding of the GOA's tenaciousattempt to keep them.

1.13 On the negative side, export taxes have been a serious impediment toagricultural growth because they have: (a) penalized productive investment; (b)created unfavorable input/output price relationships, discouraging the use ofinputs such as fertilizers; (c) caused intra-sectoral distortions in resourceallocation by applying different and changing rates of taxes to raw and processedagricultural products; and (d) caused resource allocation out of alignment withinternational market signals by preventing producer access to export parityprices.

1.14 Export Tax or Exchange Rate. Agricultural investment has beendiscouraged not only by the high overall level of export taxe3 but also by theprice uncertainty associated with the Government's interchangeable use of exporttaxes and an over-valued currency. Export taxes have been lowered when thecurrency has been over-valued, and increased when devaluations have taken place(Annex III). For example, over the 1977-81 period, when the Argentine pesoclimbed almost 50% against the US dollar, export taxes on wheat were reduced from482 to zero. From 1982-1984, when peso devaluations took place, the wheat exporttax was raised in stages from 10% to 24%. Restoration of an efficient exchangerate has almost invariably been accompanied or followed by increased export tax

rates designed to confiscate "windfall profits", a punitive pattern which was re-established with renewed vigor even before Ln. 2675-AR was closed.4/

1.15 Input Usafe. Throughout this period, Argentine farmers have also beendiscouraged from adopting some high-yield technologies due to their high costrelative to policy-depressed output prices. Until early 1984, import tariffs onagricultural inputs were substantial, ranging from 25% for urea and veterinarymedicines to 38% for most plant protection chemicals and tractor components.Argentina was a striking example of a relatively advanced agricultural producerwith a generally low level of agricultural chemical usage.

Government Actions to Stimulate Agricultural Growth

1.16 Under the Austral Plan, the Government developed a four-prongedprogram to stimulate agricultural p.oduction and exports based on: (a)significant reductions in export taxes and their substitution by alternative andless damaging fiscal tools (then-recent export tax increases were to be a purelytemporary component of short-term economic stabilization); (b) reducing tariffson imported agricultural inputs (even though reducing the fiscal deficit underthe Austral Plan required a temporary, across-the-board tariff increase on allimports); (c) phasing out all quantitative import restrictions; and (d) acommitment to maintaining export-competitive exchange rate adjustments.

1.17 Complementing the Government's program, SAGyP produced a medium-termNational Agricultural Development Program (PRONAGRO), whose sectoral objectiveswere defined as increased production of cereals and oilseeds; expandedagricultural exports; developing regional economies, especially in the non-Pampazone; generating employment; and encouraging natural resource conservation.Complementary actions were to include gradual replacement of export taxes witha federal land tax based on unimproved market value; eliminating import tariffson agricultural inputs; making herbicide and fertilizer use more economical; andbroadening lines of credit for private investment in the sector.

Aaricultural Institutions and the Policy Relationship

1.18 SAGyP, the Secretariat (now Sub-Secretariat) of Agriculture, Livestockand Fisheries, is a dependency of ME. This has meant that policies affecting thesector have traditionally been based largely on ME (and its Secretariat ofFinance) initiatives, with SAGyP acting as technical adviser rather than policy-maker and planner. Sectoral policies have, as a result, often been subordinatedto short-term macroeconomic expediences authorized by ME. Within the publicsector apparatus, therefore, SAGyP does not reflect the importance which thesector has in the economy, especially in relation to exports.5/

if IBRD, OD cit. Since international price fluctuations have an impact on the CPI and realwages, successive governments have sought to neutralize these changes through the use of exchangerate manipulations and export taxes.

5/ IBRD, Argentina: Agricultural Sector Review, Report No.7733-AR, Volume I, June 30, 1989.

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1.19 Political instability has caused the rapid turn-over of Secretarie8of Agriculture who have tended to be either technically-oriented and independentof sectoral pressures, trying to design policies to improve sectoral incentives,or representatives of the sectoral interests themselves acting as a channel forthe agrarian lobby. The resulting inconsistency of agricultural policy-makinghas contrasted sharply with the constancy of export taxes. This more permanentform of intervention has been due to the presence of pressure groups which havelimited the autonomy of government and placed strong restrictions on theinstrumentation of economic policy.i'

1.20 This relationship had important implications for the preparation andsubsequent implementation of the Agricultural Sector Loan. Its core concept, thereduction of export taxes and their substitution by a FLT, represented a profoundrestructuring of the tax regime initiated and advocated by SAGyP, not ME, andresulted from a long-standing and hitherto sterile debate between the Governmentand interest groups as to how best to tax agriculture. To SAGyP, export taxeswere a malicious measure counteracting other efforts on behalf of agriculture,and needing eventual abolition as part of a long-term rationalization ofagricultural inc ntives. Importantly, SAGyP did not view the land tax as asubstitute for export taxes, but rather as a separate and beneficial measurewhich would bring order to the tax system, i.e., have a range of collateralbenefits. It was supported in this effort by several influential farmer groupsincluding CONINAGRO (the producer cooperative movement) and the Federaci6nAgraria (medium and small farmers), and the policy issue was part of the platformof the Radical Party of President Alfonsin.

1.21 However, in its quest for genuine sectoral reform, SAGyP's trajectorywas very different from ministries whose -ocus was the economy at large, who sawagriculture as the comparatively successful sector, and who had little interestin, or commitment to, structural change. Evidence suggests that the Bank did notfully understand, or was unwilling to address, the implications of thisfundamental conflict, which found SAGyP isolated in the Executive Branch and theBank with only a partially-developed dialogue (mostly with SAGyP) on which tobase major change.

Bank Grouv Operations in Argentina

1.22 Bank lending to Argentina up to 1985 had been sporadic, the result ofrecurring macroeconomic and sectoral difficulties. Between 1979 and 1985, non-agricultural lending comprised ten loans totalling US$1.045 billion, focussed on

61 Adolfo C. Sturzenegger, o2 cit. Sturzenegger describes conflicting interests between theeconomic team of the Government (Minister of Economy and his Treasury, Finance and Domestic Tradesecretaries) and the Secretary of Agriculture. Since export taxes have been seen as a virtuallyirreplaceable instrument to accomplish the objectives of decision-makers, there has been aconstant conflict between governments, who always preferred high export taxes, and rampeaninterests who wanted them reduced or eliminated. As noted above, the more technically-orientedAgriculture Secretaries sought policies to reconcile Pampean development with governmentpurposes.

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major infrastructure projects and credit for the industrial and hydrocarbonsectors. Bank operations in the agriculture sector since the mid-1960s had beenlimited to three projects. The Balcarce Livestock Development Project (Ln.505-AR), approved in 1967, was designed to encourage the adoption of new technologyin pasture production and management and in animal health practices.Implementation spanned 12 years and results were mixed due to high inflation,economic and sector policies non-conducive to sectoral investment, and the cattlecycle. An Agricultural Credit Project (Ln.1564-AR), approved in 1978, was toprovide medium- and long-term credit for on-farm investments. However, anunfavorable investment climate and large inflows of competitive low-cost capitalfrom foreign commercial banks caused its cancellation in 1980 withoutdisbursement. Lastly, the Grain Storage Project (Ln.1521-AR), approved in 1978and reformulated in 1983, aimed at expanding national grains storage capacity,and at upgrading rail and port grain transport and handling facilities. By 1985,disbursements were still only 19% of the loan and implementation was hampered byserious institutional and financial problems.

II. Identification. Preparation and Appraisal

Introduction.

1.23 Several important internal considerations spurred the Bank'sdevelopment of this loan. First, policy-based lending was still a comparativelynew mechanism in the Bank. The dual possibilities of rapid disbursementsupporting major policy change while alleviating acute foreign exchange shortagescreated considerable enthusiasm for such lending. In the Region, Ecuador,Uruguay, Panama and Brazil already had AGSALs underway or pending and Argentinaseemed ready for such an operation. A new democracy in Argentina lent addedimpetus. Secondly, the Baker Plan announced in October, 1985, committed the Bankto a US$9.0 billion share in assisting debtor nations develop their way out ofdebt. Thirdly, agricultural lending in Argentina had been modest and sporadic(para 22) and the Region had taken a decision to develop a lending pipeline. Norecent agricultural sector work existed, however, on which to construct aninformed dialogue, and thus the Country Economic Memorandum (CEM) of June, 1984became the principal blueprint, largely pre-selecting the policy issues and loanconcept.

1.24 Three policy areas were identified by the CEM as being crucial toeconomic stabilization: (_) the chronic causes of the public sector deficit,especially tax administration; (b) export promotion; and (c) weaknesses in thefinancial system. Concerning the agricultural sector, the CEM noted that yieldswere low and that much could be done to improve cost/benefit ratios to promotefertilizer use, especially on grains. Price stability was needed to promotelarge-scale adoption of improved technologies. The CEM's arguments for exporttax and import tariff removal were persuasive. It asserted that the entireArgentine farming system would be transformed, and that overall agriculturalproduction would rise by at least 10-15X (grains by up to 50%), the result of

-8

more intensive use of plant protection materials and farm machinery, as well asmore productive croppino, patterns.

1.25 The CEM recommended gradual replacement of agricultural export taxesand import tariffs on inputs by other revenue measures, preferably a land tax,thereby producing rapid and significant increases in the production ofArgentina's principal export crops. In order to be an effective policyinstrument and to have these desired effects, however, its burden on the taxpayerhad to be considerable. It concluded that a land tax was preferable ondevelopmental grounde to an agricultural income tax or value-added tax, would beeasier to collect, and would transfer the burden of agricultural taxation awayfrom those producing for export and cause it to fall more heavily on domesticproducers of high-value products. Surprisingly, the CEM made no mention of theinterchangeable use of export taxes and the exchange rate (para 14 and Annex III)or the central significance of a stable exchange rate policy to an export-dependent agricultural sector.

1.26 Land Taxes in Argentina. Taxes on rural property in Argentina havebeen viewed periodically as instruments of agricultural policy. Not easilyenacted, they have proved even harder to implement. A preliminary draft law of1964 sought to reform farm taxation by changing the method of calculating farmincome, but was not approved. In 1969, efforts were made to use a proportionalland tax levied jointly by the national and provincial governments, inconjunction with income taxes, to reward efficient agricultural producers andpenalize those who under-utilized their land. After a few years, this system wasabandoned. Again, in 1973, the Congress approved a tax on the potential netincome of land but it was never implemented. A similar draft law in 1974 did notproceed. Rural property taxes devolved once more exclusively to the provinces,where they had become a familiar though modest revenue tool. In a number ofprovinces, notably Buenos Aires, C6rdoba and Entre Rios, well-designed andtechnically well-managed legal and fiscal cadastere exist which were seen as goodmodels for a federal system. In general, however, provincial land taxadministration was poor, collections low and evasion widespread.7'

Loan Preparation

1.27 An exploratory mission in mid-1984 identified a credit project and anextension/research project; it was felt that both could be co-financed with theInter-American Development Bank (IDB) in 1985, if arrangements could be maderapidly. However, the IDB was active in Argentina at this time and ultimatelyproceeded independently with two similar operations which made no demands on theGOA with regard to sectoral reforms. Thus, neither opportunity materialized forthe Bank. The new democratic government under President Alfonsin was str"- ?lingto formulate policy in a deteriorating economy, little sector work ex sted onwhich to base a dialogue, and the results of discussions with the Government were

7/ Under agricultural and livestock emergency laws (Emerpencia Agropecuaria), the Secretary ofAgriculture can declare a district to be in a "state of emergency", resulting in tax forgivenessfor up to five years. Evidently, up to 102 of rural districts are declared tax exempt in thismanner each year.

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inconclusive. Nevertheless, it was tentatively concluded that the Bank's short-term strategy for agricultural development in Argentina could focus on projectswith short gestation periods, rapid disbursement and export bias.

1.28 The early germ of an AGSAL envisaged a modified investment programwith no policy conditionality, focussing on financing imports of yield-augmentinginputs, e.g., fertilizers, agro-chemicals and farm machinery. An AGSAL was seento avoid uncertainties associated with institutional credit at that time. TheCEM went much further, however, urging policy dialogue and reforms as necessaryconditions for Bank lending. The logical step up from removal of import levieswas removal or reduction of export taxes, which clearly needed more time, study,and close consultation with the IMF because of the revenue implications. Furtherexploratory missions in 1984 produced the outline of an AGSAL with policyconditionality to be aimed at promoting increased production and exports.

1.29 In September, 1984, during informal discussions for an AGSAL,Argentine officials asked the Bank to finance a short-term agricultural recoveryprogram, citing bold recent measures to reduce distortions. These includedalmost total removal of fertilizer import levies and other import taxes, majorreductions in ad valorem taxes, and maintenance of positive real interest rateson agricultural credit despite very high inflation. Dialogue was seen focussingon the removal of export taxes on grains and their substitution by an alternativerevenue mechanism. Staff warned of likely delays in implementing such reform,which might necessitate a series of loans.

1.30 Issues Paper. Noting the "long-term commitment" in Argentina toeliminating export taxes on grains, the Issues Paper (November, 1984) outlinedan AGSAL based on export tax substitution with the inclusion of studies designedto guide medium-term policy and institutional reform. Export tax reform wouldtake longer than the implementation period of the loan, but could be agreed basedon a time-bound program. It was decided to leave the matter of an over-valuedcurrency out of discussions with the Government, but to ensure that loanconditionality underscored exchange rate compliance with the existing IMFagreement.

1.31 The Preparation Mission of November, 1984 concluded that export taxesshould be replaced as a source of fiscal revenue, preferably with a land tax,within the context of a complete review of the tax system. It was evident,however, that the GOA was divided on the loan concept. First, the Ministry ofEconomy claimed it had not formally approved the mission, and was both unpreparedand reluctant to discuss substantive issues. Mission plans to meet with theMinister of Economy fell through and senior level staff were not available.Second, during the mission, much-publicized policy reforms were retracted. Mostimportantly, export taxes were raised to help offset the 6.82 devaluationeffected in late October, under the IMF standby arrangement. GOA officials (andthe IMF) stressed that these measures were purely temporary, necessary toalleviate an immediate fiscal crisis.

1.32 Just before the November mission, SAGyP had released a draft of theNational Agricultural Development Program (PRONAGRO) for 1984-87 (para 17). It

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was a coherent policy statement, but was unfortunately explicit in retaining theconcept of a price-stabilizing export tax, stating:

"A stabilization of agricultural prices will be promoted througha flexible policy of export taxes in order to regulate variationsthat the country, as a price taker, does not control. Theflexible use of export taxes means using them as an instrument ofincomes policy for the sector and avoiding their utilization foronly fiscal purposes".

The Bank's Aide Memoire stressed the importance of full substitution to preventreinstatement, pointing out that while it was technically possible to maintainboth taxes, continued discretion in export tax use reduced incentives anddepressed farmer confidence.

1.33 The issue of export tax elimination versus reduction is exceedinglyimportant, and the Bank's attitude on the issue shifted over time. There is nodiscussion of what elimination really entailed; removing them from the statutebooks through congressional action meant something quite different from, say,reducing them to zero with Goverrment agreement to keep them there. Evidencesuggests that SAGyP saw elimination as a distant, ideal goal, with substantialreductions equating with reform in the medium term. SAGyP's real focus, alongwith producer groups, was to remove discretion in export tax use, which was seenas needing legislation. The Initiating Memorandum (para 36) included this aspart of the evolving loan strategy, but no concrete expression followed in loandesign.Y8

1.34 Despite these set-backs, the missior. recommended the Bank's favorableconsideration of a sector loan to Argentina if a policy framework could be agreedwith the GOA. The loan would be around US$200 million for two years, authorizedin tranches, and serviced through a revolving fund. Som" 601 would be disbursedagainst fertilizer imports. Loan size had to be large enough to permit asignificant export tax reduction, not only to motivate policy change but tosubstitute directly for tax revenues foregone. A second loan, or even a seriesof loans, was envisaged to complete the process.

1.35 Loan processing was gathering a momentum not matched by the qualityof the dialogue or by the extent of commitment in Argentina. Telexes of theperiod convey a sense of the Bank pressing the GOA to provide a formal, writtenrequest for the loan. However, economic policy formulation and implementationwere in disarray at the end of President Alfonsin's first year in office,macroeconomic conditions were again deteriorating and the economic team had justbeen replaced.

1.36 The Initiatint Memorandum. The principal elements of the loanstrategy required: (a) a rational statement of agricultural policy (PRONAGRO

Of The issue of elimination was not raised again until the Bank began to assess its options forrelease of the second tranche, once passage of the FLT became unlikely.

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being described as a first, imperfect step); (b) total abolition of export taxeson agricultural commodities as soon as a viable substitute could be found (witha complementary study on feasible substitutes within the context of an overalltaxation review);91 (C) GOA commitment to rational exchange rate policiesbeyond 1985 (the IMF arrangement called for a foreign exchange policy thatgenerated a trade surplus, but only covered 1985); and (d) selective removal ofrestrictions on imported inputs. The two essential steps to land tax enactmentwere to be an updating and upgrading of the cadaster and congressional passageof the required legislation. Importantly, the Initiating Memorandum (IM) statedthat reintroduction of export taxes was to be by congressional approval only.

1.37 Loan funds were to be disbursed to cover revenues lost from export taxreductions, i.e., direct substitution. Guarantees of follow-on loans would beneeded to see the GOA through a program lasting four years or more. The proposedfirst loan amount had almost doubled since the mission of November, 1984 -- fromUS$200 million to US$360-370 million -- in order tos (a) motivate GOA to carryout major agricultural policy reform; and (b) permit a significant and earlyreduction in export tax rates. A second loan of about US$265 million wouldfollow to complete the process, unless the FLT became partly operational in theinterim.

1.38 The strategy assumed that the fear of serious economic repercussionswould deter the Government from backsliding on its program to build producerconfidence. This assumption was dubious in view of evidence that producerconfidence had had short shrift for decades and benefits foregone from misguidedpolicies had long been an accepted cost of economic management. Similarly, apublic statement of policy intent was expected to bind the GOA to sustainedreform, even though widely-heralded measures had been revoked under fiscalpressure just six months earlier.

1.39 Risk Assessment. The strategy was acknowledged to be risky in thefollowing respects: (a) four years might be inadequate to secure the reformssought, miring the Bank in a protracted and costly commitment; (b) unevenprogress in fvture IMF/Argentine agreements could delay second tranche releaseand jeopardize processing and approval of a second sector loan; (c) budgetarypressures might force the GOA to raise export tax rates again; and (d) the US andthe EEC might radically alter their agricultural support programs, adverselyaffecting international markets in which Argentina was operating.

1.40 Reaction of the IMF. The IMF criticized key aspects of the strategyas follows:

(a) It rejected firmly the substitution of borrowed funds for fiscalrevenues, viewing it as extremely risky especially if implementationwere to become protracted. Export taxes might be economically

9/ The land tax was seen as "probably the best substitute" because of its positive impact onproduction. However, studies to confirm this would be carried out simultaneously with a complexseries of actions to enact the land tax and prepare its cadastral base.

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inefficient, but reducing them before instituting a new tax wasbelieved to be unjustifiable, especially in a country with chronicpublic deficit problems, and tax reform could be interrupted at anytime. Further, the agricultural sector would object strongly to theintroduction of a land tax after even partial relief from exporttaxes, seeing it as an additional tax on the sector;

(b) Once reduced to some rational level, the export tax rate needed to belocked in to avoid the historical oscillation which had discouragedproducers, and set at uniform rates for all products. Basing rateson relative supply elasticities, as proposed by the Bank, wasbelieved technically difficult to formulate and hard to explain toofficials and to the public; and

(c) It viewed unfavorably the Bank's suggested collaboration on anexchange rate strategy, citing jurisdictional parameters between thetwo institutions (which meant that the Bank had to fall back on muchweaker understandings in loan conditionality, and hope for the best).

1.41 Loan Viability and Timeliness. The evolving discussion and the IMF'sreaction cast doubt on the fundamental practicality of the central concept in theArgentine context. The Bank continued to assert (despite IMF disagreement) thatthe time was opportune for t&x reform, citing GOA and private support. While itwas agreed that the substitution of a land tax for export taxes would makeArgentina highly unusual in the developing world, it was believed its latentpotential to change rapidly, given the will, made it atypical of most developingcountries. However, IMF objections to the concept of using loan funds tosubstitute for lost fiscal reveslues made it imperative that alternative interimtaxes be found to maintain farmers' tax burden at then-current levels. Whetherthese levels were appropriate or optimal was not kro,wn, and whether such interimmeasures should have any specific relation to agriculture was not discussed.

1.42 Realizing that its knowledge of the proposed loan's wider fiscal andlegal context was inadequate and that the magnitude of the tax changes proposedwould raise questions, the Bank included studies of a revised agricultural taxsystem with submission of terms of reference for the study a condition fordisbursement. However, conducting studies to determine fundamental mattersaffecting policy changes which were themselves the central feature of the programto be supported by the proposed loan merely iilustrated the weak analytical baseupon which the loan was built.

1.43 The evolving design envisaged a two-year operation of about US$300million, to be disbursed against general imports (even though the trend in sector

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loans at the time was to finance imports directly related to the sector)1°' andreform-oriented studies, with tranches to be released in accordance with progressin substituting land and other taxes for export taxes. Reductions in exporttaxes announced in early 1985 would secure first tranche release, with furtherreductions necessary for the second tranche. Importantly, it still called forelimination of export taxesl' over a pre-determined period (most likely twosector loans), despite the statements contained in PRONAGRO. Land taxintroduction was expected to take about one year (presumably from the date ofBoard approval or effectiveness) based on totally unrealistic assurances fromSAGyP regarding the technical base and political acceptability of such a change.Exchange rate requirements were very weak, calling for commitment to theprinciples embodied in the IMF agreement for the duration of the loan.

1.44 Dialogue Development. Despite a formal written request for the loanfrom the Minister of Economy (March 18,1985), and despite the magnitude of theloan and its political sensitivity, the quality of the discussion with the GOAwas inadequate. For example: (a) the Bank had only sketchy information aboutdraft land tax legislation then under GOA review; (b) recent reductions in exporttax rates had occurred without the Bank being informed. The Bank cited thesereductions as evidence of the GOA's commitment to the loan concept. In fact,they were extraneous to the loan context and reflected the GOA's normal responseto the commodity marketing cycle (export tax rates tended to decrease after peakexport periods) and renewed macroeconomic deterioration; (c) the Bank mission ofNovember, 1984, had been told by the Secretary of Agriculture that theintroduction of a land tax would be difficult and protracted, yet by April, 1985,SAGyP apparently saw it as possible within a year to 18 months; and (d) theBank's main contacts with Government concerning the loan were still limited toSAGyP. Despite the majcr fiscal implications of the proposed loan, dialoguewith the Ministry of Economy and its Secretariat of Finance remained minimal andthey continued to act unilaterally on matters central to the loan concept andobjectives.

1.45 Loan Size. Deciding upon and justifying the loan size reflected theBank's preoccupation with resource transfer objectives, 12/ the lack of technicalexpertise in public finance and the loan's inadequate analytical base. For

10/ There were, at the time, no restrictions on the acquisition of foreign exchange for importsof agricultural inputs. The limited volume of eligible agricultural imports would not haveallowed quick drawdown of each tranche.A more important reason riy have been that the IDB was well advanced in its preparation of acredit operation through Banco de la Naci6n (BNA) to finance agricultural inputs and investments.This project threatened to compete with the Bank's proposed AGSAL if it were to finance onlysector-related imported inputs, limiting the size of the Bank's loan to the few items not coveredby the IDB operation.

"Ii "Elimination" meant "near-elimination", in fact, due to the Bank's desire for thecontinuation of the INTA cess, a 1.5Z levy on agricultural exports to finance agriculturalresearch and extension services.

i1V The loan was described at this time as increasing the Bank's exposure in Argentina, which hadbeen declining, and equating to the average lending program then planned for Argentina in each ofthe following five fiscal years.

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example, the following questions were raised: (a) should the loan simply reflectprojected export tax reductions, i.e., directly compensate for the gap; (b)should it be guided essentially by what the Bank wanted to lend Argentina at thistime, as part of an expanded lending program; (c) should it equate to the incomevolume re-distributed from consumers to producers as a result of ,rice increases--a very difficult exercise; or (d) should it be sized according to what wasjudged adequate to make profound policy change palatable in Argentina? There wasno attempt to link loan size analytically to the planned adjustment processexcept for (a), a proposal which was quickly quashed by the IMF.

1.46 Land Tax Legislation. The potential political difficulties ofcongressional approval of federal land tax legislation received little attentionuntil the final version of the Initiating Memorandum and Loan Committeediscussion.-31 Even then, they were downplayed. The Bank saw advantage in theland tax being part of the political platform of the President's Radical Party.As time passed, however, the land tax became increasingly controversial, and withmid-term elections drawing near, the Radical Party was forced to back away fromit. While the Bank clearly could not step directly into the political arena onbehalf of loan objectives, it neglected any serious analysis of the Congressionalprocess and players. Instead, the Executive was entrusted with pushing forpassage of controversial legislation about which it was highly ambivalent.

1.47 Loan Committee Review. The Loan Committee noted, first, thatenactment of legislation as a tranche condition was somewhat unusual but notexpected to pose major difficulty. The GOA (almost certainly meaning SAGyP only)was Ifairly confident" it could get legislative approval. However, when the Banksubsequently sought to hasten congressional passage by proposing it as acondition for first tranche release, SAGyP said the Government covld notintervene in the legislative process.41 Many precedents existed, however, forthe Executive's willingness to push for congressional passage of laws itsupported. Secondly, the Loan Committee questioned the wisdom of substitutingan easily-collected tax at a time of very high inflation and economicdeterioration, but was assured that "revenue neutrality" was an essential featureof the loan, a position which was subsequently reversed (para 55). Lastly, theLoan Committee believed that US$250 million was a more appropriate loan size,although it is not clear why. The committee left the door open to a loan of upto US$350 million, if appraisal showed that the operation would accelerate reformand if upcoming negotiations with the IMF and commercial banks were to bearfruit.

1.48 The strategy assumed that land tax establishment and the shift fromindirect to direct taxation would lock in long-term change and preventreinstatement of export taxes once the loan was fully disbursed. However, since

1 A Nay 16, 1985, memorandum asserts that major emphasis would be given during appraisal to theprocedural implications of the taxation strategy i.e., Congressional approval and central-provincial tax jurisdiction. However, the Issues Paper of July 12, 1985, reporting on theappraisal mission's findings, makes no reference to either.

141 Aide Memoire, June 13, 1985.

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export taxes were to be retained, ostensibly for "income stabilization" purposes,with no provision for fixing reductions, and given the doubts surrounding thedialogue and commitment to the lo. n concept, this was wishful thinking.Reinstatement was not only possible but likely. The Loan Committee neverthelessendorsed the idea of a two-tranche sector loan: the first, in mid-1986, foractions already taken, and a second, in January, 1987, for a 502 export taxreduction and introduction of a federal land tax, the latter action beingdescribed as the main purpose of the loan.

Loan ADvraisal

1.49 During the Appraisal Mission of June, 1985, the GOA again raisedexport taxes (by 8-9%) and tariffs on imported inputs (by 10%), under pressurefrom the deficit reduction requirements of a new IMF standby arrangement(supporting the Austral Plan). Fiscal revenues generated by export taxes roseby 35X, implying that a land tax, according to the parity idea, would also haveto generate more revenue. The mission concluded, in a repetition of November,1984, that these were temporary measures necessary to stabilize the economy andnot prejudicial to the GOA's medium- and long-term strategy regardingagricultural taxation. It recommended that loan processing should continue andthat the new (June, 1985) export tax rates be used as the basis for revenuesneeded from a land tax.

1.50 These events should have halted loan processing, as a prelude to acomplete re-assessment of the operation's feasibility. In particular, the Bankshould have realized that the export tax rate increases were the predictable GOAresponse to then-recent devaluations of the currency and that export taxes anddomestic currency over valuation were, in practice, two sides of the same coin.Further, such fluctuations were always temporary, and not a deviation from somelonger-term strategy, since none existed. The Bank's hands were completely tiedon the issue of the exchange rate, adverse movements in which could wipe out anyachievements the loan might bring.

1.51 The mission proposed several modifications to loan conditionality:(a) the loan should be disbursed in three tranches over two years based on thenew assessment that one year would be insufficient to complete the land taximplementation process;-1 / (b) presentation to Congress of a draft lawacceptable to the Bank would be a condition for negotiations; (c) export taxeswould be rolled back to their May, 1985 (i.e., pre-increase) levels as a firsttranche condition;161 (d) Congressional passage of a land tax would be a secondtranche condition; and (e) the third tranche would require export tax reduction

151 The expectation that a land tax law could be passed, regulated and implemented even inlimited form by 1986 was quite unrealistic. Senior Management and Bank review staff believed 5-6years was a minimum for its basic implementation and that the regulatory process itself waspotentially fraught with problems.

161 May, 1985 became a benchmark for export tax reductions, because under the Plan Austral theGOA began to raise tax rates and the Bank had to pre-empt development of a "moving target" inorder to establish loan conditionality.

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to 50Z of May, 1 levels. Land tax implementation would be effected inJanuary, 1986 (at modest levels) and woald substitute fully for the decline infiscal revenues by the beginning of 1988. The loan size remained at US$250million.

1.52 The mission's Aide Memoire called on the GOA to include in the textof a new land tax law the article of PRONAGRO stating that retenciones wouldonly be used for price stabilization purposes because "producers should feelconfident that the tax on land is not an additional tax on the sector". Such amove would legislatively sanction the continued use of export taxes,contradicting the Bank's urgings for their elimination. Evidence suggests thatthe Bank's thinking had shifted to the acceptance of export taxes at lowerlevels, given the dimensions of the reductions sought, i.e., a drop from 35% to,say, 102 became a satisfactory goal."' Further, the actual level of"stabilizing" export taxes was envisaged as complementing land tax revenues inorder to maintain producers' tax burden at the same level. However, experienceshowed why reassurances about complementarity and restricted use could not beexpected to promote producer confidence. Under such circumstances, the land taxwas an additional measure.

1.53 The Decision Memorandum. The belief that recent increases in exporttax rates were temporary was reiterated in the Decision Memorandum (DM), whichconcluded that incentives for sgriculture had improved owing to a recentdevaluation of the Argentine currency which overcompensated the June, 1985increase in export taxes. On this basis, export tax reductions required forfirst tranche release would roll back rates to those existing in May, 1985, sincethe new rates, if translated into a compensating land tax, might institutionalizean excessive tax burden on agriculture. Several i ues arise here:

(a) Producers' returns undoubtedly did improve from the temporary"windfall" but, inured as they were to such gyrations, it is doubtfulwhether they would have regarded such a windfall as an incentive;

(b) The Bank lacked the data on which to assess the appropriateness ofthe new or previous export tax rate as a basis for the land tax,leading to a decision that the loan should finance a study of theoverall tax incidence in the agricultural sector in order todetermine what farmers were paying and what they should pay (the"tax burden" study).181 This exceedingly important analysis shouldhave been done at the outset, and might have provided a range of

171 Compared to the Uruguay Sector Loan (Ln. 2468-UR), where vigorous efforts were made by theBank to achieve Government compliance at zero, a drop of merely 102.

IA' The preliminary results of that study revealed that agricultural producers were subject to aconsiderable number of tax measures but were only paying a small fraction of them, which tendedto strengthen the hand of those opposed to reducing easily-collected export taxes. Since many ofthase taxes are based on gross revenue and assets, and not on profitability or the ability topay, the study showed that in most cases full compliance with all taxes was simply not possiblefrom the producers' cash flow.

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revenue options to compare with the SAGyP/CEM concept, which appearsto have been adopted without question; and

(c) Export taxes and the land tax arguably had no linkage. This iscertainly a thesis strongly supported by the farmers' groups. Tryingto match land tax revenue capability to export tax reductions was asimplistic, direct exchange approach which failed to understand thedifferent roles of each instrument. Evidence suggests that theMinistry of Economy (specifically the Secretariat of Finance) wasstrongly averse to such a trade-off, precisely because it understoodthe difference, and was probably content to have the two taxes inforce. 19'

1.54 Loan Design -- Technical and Political Feasibility. Important andprescient questions about the feasibility of specific aspects of the program tobe supported by the loan were raised by the Bank's oversight units (OPS, AGR),prompting a post-appraisal mission focussing on the practicality of the land taximplementation schedule. Essentially, they believed that conflicts betweenstabilization and longer-term reform would be resolved by sacrificing the latter(a tendency already demonstrated during loan preparation), and that prudencesuggested waiting to see if stabilization was working before proceeding with theloan. However, the loan's other, competing objective -- rapid balance ofpayments relief -- and its momentum and status in the lending pipeline seem tohave prec.uded such an option. Further, five to six years seemed a morerealistic period for achieving land tax collections replacing one-half of theexport tax, and not the two years suggested. This produced a major shift, withland tax passage becoming a first tranche condition, a more demandingrequirement which could not, subsequently, be sustained.20'

1.55 The Bank made two important changes in project design at an informalmeeting of the Loan Committee just before the post-appraisal mission: (a) a fullroll-back of the June, 1985, export tax increase would be a condition of Boardpresentation; and (b) the land tax would not have to compensate fully for revenuelost from further export tax reductions. An overall assessment of agriculturalincentives and alternative means of either reducing public sector expendituresor raising revenues was needed before stipulating land tax rates. Importantly,the disbursement profile was fixed at two years, already at the limit ofacceptability for a fast-disbursing loan.

1.56 Post-AMraisal. The post-appraisal mission confirmed that theschedule derived during appraisal was feasible "as long as all necessaryorganizational, adLuinistrative and financial requirements are immediatelyattended to and all the necessary federal and provincial support is forthcoming".

M1I A critical difference was that HE would have to share land tax revenues with the provinces,while it had no such constraint with export taxes.

201 The possibility of a prolonged period between Board approval and effectiveness/first trancherelease, to await FLT passage, was unacceptable.

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While true technically, the political obstacles in practice were formidable andlargely insurmountable, at least within the Bank's time-table. For example:

(a) The discoverj that the Constitution prohibited the FederalGovernment from imposing a land tax and the consequent need todisguise it as a pre-payment of income tax in order to preserve itscongressional chances not only illuminated the Region's poorknowledge of the loan's legal environment but further alienated thelarger producers who claimed to be already covered by the generalprovisions of income tax law (which, of course, were heavilyevaded) ;211

(b) Resentment over the Declaraci6n Jurada de Empadronamiento, thelandholding disclosure statement required under the draft land taxlegislation to determine tax rate progressivity and ensure equity,raised the prospect of protracted legal challenges delayingindefinitely land tax implementation; 2/ and

(c) The tax-sharing formula between the provincial and federalgovernments and arrangements for federal transfers to provincesrequired major negotiation at a time of fiscal austerity, andconsiderable tension was evident over tax revenue allocations betweenthe center and periphery.

!.57 Appraisal of Policy-Oriented Operations. The internal review of theproject raised important questions about requirements for staff appraisal ofpolicy-oriented operations. On the one hand, it was suggested that the politicalfeasibility of policy changes -- which, in the case of the Agricultural SectorLoan, included national executive, legislative and provincial actions -- was notpart of project appraisal. It was argued that the Bank should rely on thejudgment of national executive branch officials. On the other hand, such anapproach could jeopardize the effectiveness of policy-based lending, especiallyin countries like Argentina where new democracies had decentralized policy-making. The idea was not that the Bank should become directly involved in thedomestic policy process, but rather that an independent assessment of anoperation's political dimension be made as a normal part of the reviewprocess.-31 As it turned out, the political dimension was a major determinant

211 Under the Constitution, the Federal Government is unable to impose a land tax. In addition,It is only able to impose an income tax through an emergency law of 1930. It Ws thereforeproposed to classify the "land tax" as a pre-payment of "income tax". The GOA could,theoretically, have introduced an emergency law allowing it to impose the proposed tax as a landtax, but Executive branch officials believed its passage would be smoother in the guise of anadvance against income tax using an existing emergency law.

241 It is a truism in Argentina that there are many landholders but few farmers. Owning land hastraditionally been an effective way of evading taxes. The discovery process implicit in theDeclaraci6n aroused images among the susceptible of left-wing intervention and land reform.

23/ Memorandum, August 26, 1985.

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of loan implementation ard dependence on the judgment of a divided executive aserious mistake.

1.58 The President's Report. The draft President's Report reflected aconsiderable shift from the DM. Most importantly: (a) the proposed loan sizehad increased substantially (from US$250 million to US$311 million); (b) therequired export tax reductions had been cut back (from 50% of May, 1985 levelsto 70Z)24 and had moved from a first to a second tranche condition; and (c)there was no longer any clear requirement for legislative approval orimplementation of a national land tax. Legislative passage had moved from beinga first tranche condition to being a vaguely-worded second tranche requirement,now put in terms of "satisfactory progress" on a comprehensive schedule of landtax-related actions. The Loan Agreement is equally unspecific. Apparently,Argentine sovereignty concerns meant that terms like "passage" and precise datesfor such action had to be omitted lest they be construed as pressure on nationaldecision-making.251 No doubt remained, however, following negotiations, as tothe meaning of "satisfactory progress" (para 61).

1.59 Bank review staff perceived such changes as a shifting and unclearapproach to loan conditionality, reflecting pressure to present the loan to theBoard of Directors prematurely. Taking the loan to the Board before land taxpassage risked the final legislation departing significantly from the draftforming the basis of Board approval (para 70), as well as inordinate delays inloan disbursement if the proposed law stalled in the Congress. The AGRmemorandum is quite clear on this, viz: "The standard against which the successor failure of this large operation will ultimately be determined is nothing lessthan a meaningful and productive implementation of this new federal tax". 26/Further, the analytical connection between the structural change proposed and theongoing IMF stabilization effort was vague, as were the effects of proposed taxchanges in the absence of strict revenue neutrality.

1.60 Negotiations. The loan proceeded to the negotiating stage with theloan amount increased again to US$350 million. Based on the post-appraisalmission's favorable assessment of loan feasibility, negotiations were conditionedon: (a) presentation of the GOA's macroeconomic and agricultural policystatement with specific reference to export tax reductions and land taxation; (b)a detailed proposal for alternative interim revenues to maintain IMF fiscalceilings; and (c) verification of federal land tax administrative capacity. Withregard to (b), a package of fiscal measures (initially confidential) was definedas a condition of loan effectiveness, and included increased fuel and tobaccotaxes, a tax amnesty, and a tax on financial transactions.

241 The reduction in export taxes to 702 of the May, 1985, rates, instead of the earlier planned502, was due to the need to keep the stabilization plan in place, i.e., meet the target of apublic sector deficit of 3X of GDP, since export taxes at that time (early 1986) representedabout 1Z of GDP.

251 The Bank no longer allows such concerns to affect the specificity of loan legal documents.

261 Memorandum, October 18, 1985.

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1.61 Negotiations were concluded on January 17, 1986, essentially on theterms and conditions approved by the Loan Committee in December, 1985, but withseveral changes affecting the phasing of import liberalization on tractors,agricultural machinery and chemicals, and of export tax reductions. In the caseof tractors and machinery, the GOA claimed that it needed leeway to avoidpenalizing domestic manufacturers during the stabilization period and to designbetter credit facilities for the local product. However, in the case ofchemicals and export taxes, the Argentine negotiators' principal concern wascomplying with the IMF standby arrangement's fiscal deficit targets which againcan be seen clashing with the thrust of the Bank's loan. Importantly, and at thespecific request of Senior Management, the Minutes of Negotiations stated thatenactment and initial implementation of the federal land tax would be criteriaof "satisfactory progress" under the land tax schedule for second trancherelease.

Obiectives and Conditions of the Loan

1.62 Loan Obiectives. The loan was intended to support the Government'sprogram of actions, objectives and policies designed to improve the macroeconomicframework within which the agricultural sector operated. The Government's letterof development policy (Annex IV) essentially described the main elements of theAustral Plan of June, 1985, (para 5) including the following five majorcategories of complementary agricultural policy reforms: (a) exchange ratepolicy; (b) export incentives; (c) revenue measures; (d) the trade regime; and(e) administrative procedures. The Government viewed these reforms as anambitious, medium-term program designed to have a lasting impact on the structureof Argentine agriculture.

1.63 The fundamental objective of the loan, however, was an increase inagricultural production and exports through a structural change in federaltaxation away from export taxes, which discourage the production of exportablecrops, to a production-neutral land tax which would improve incentives for moreintensive use of agricultur. 1 resources. The loan, as described in thePresident's Report, supported the following policy reforms and complementaryactivities under the Government's economic stabilization program: (a) asubstantial reduction in export taxes; (b) fiscal measures to maintain the fiscaldeficit at satisfactory levels, including the introduction of a federal land tax;(c) modified regulations and tariffs pertaining to the import of agriculturalinputs; and (d) complementary studies and institutional support.

1.64 Loan Conditions. Conditions for the loan were as follows:

(i) Board Presentation. Presentation to the Board was contingent on:(a) submission to Congress of a draft land tax law acceptable to theBank; (b) removal of the temporary increases in export taxes imposedin June, 1985; and (c) presentation of a program, acceptable to theBank, for preparation and implementation of the federal land tax.

(ii) First Tranche.The first tranche of US$170.5 million was to bereleased upon loan effectiveness (and before June 30, 1986), the

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conditions for which were: (a) establishment of the ExecutiveCommittee (para 67); (b) re-designation of tractors and agriculturalmachinery to the '"prior approval" classification for imported goods;and Jc) Government's execution of subsidiary agreements with theNational Grain Board (JNG) and National Meat Board (JNC) forcomplementary studies and institutional support activities.Disbursement under the loan component for studies and institutionalsupport was contingent upon presentation to the Bank of acceptableterms of reference for the five complementary sectoral studies andtwo institutional support components, as well as the agriculturalsector tax burden study (for a listing of studies, see Annex II).Disbursement also required a satisfactory projeet agreement betweenthe GOA and UNDP for executing part (c) components.

(iii) Second Tranche. To disburse the second tranche of US$170.5 million(forecast for January, 1987), evidence was required of: (a)reduction of the export tax rates on agricultural commodities to alevel not to exceed 70X of the rates in force on May 1, 1985, orother levels to be jointly agreed; (b) the Government having effectedfiscal measures sufficient to compensate for revenue losses resultingfrom the export tax rate reduction without increasing the overallsector tax burden compared to its May 1, 1985 level; (c) thedesignation of tractors and agricultural machinery to the "automaticentry" classification for imported goods, and removal of the 10Zimport surcharge on agricultural chemicals; and (d) satisfactoryprogress-27 in the execution of the agreed land tax implementationschedule and in all studies financed under the loan.

1.65 Institutional Arrangements. An Executive Committee (EC), chaired bySAGyP with representatives of the Secretariats of Finance and Interior, was tooversee the preparation and initiation of the land tax and the sectoral taxstudies. Provincial interests would be represented by the Federal InvestmentCouncil (Consejo Federal de Inversiones). In each province, advisory committeesconsisting of the heads of provincial cadastral, tax collection and computercenters would be formed to work with the EC. The EC was to be supported by aworking group on overall sectoral tax policy. A Project Preparation Facility(PPF) advance of US$1.0 million was made to start preparation activities. TheEC was to initiate a series of taxation studies required for full implementationof the land tax proposal, to be completed by the end of 1987. The sectoraltaxation working group would analyze the existing tax burden on the agriculturalsector, recommend the proportion of the total tax burden which the sector shouldcarry, and examine the fiscal alternatives to the export tax.

1.66 The rationale for these arrangements is unclear. Putting SAGyP in thechair and ME in a peripheral role seems to have reflected the Bank's leaningtowards the more cooperative and representative agency. ME, however, held the

L71 "Satisfactory progress" on the Land Tax Schedule called for implementation of the FLT inJanuary, 1988.

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real power and should have been positioned prominently in the planning andimplementation of the reform program to counteract (to the extent possible) itsopposition to loan objectives.

Board Presentation

1.67 The loan was approved by the Board on April 3, 1986. The draft landtax legislation was formally sent to Congress by the Executive on the same dayas Board presentation, with important clauses concerning short-termimplementation in 1986 and 1987 removed at the last minute without Bank approval.The removal of these clauses was an act of bad faith by the Government and a poorprognosis for eventual passage of the land tax. Nevertheless, by the end ofApril, the Bank appeared to be convinced that the main loan conditions would bemet on time, and discussion was already underway seeking funds for preparationof a follow-on loan.

III. Implementation

Effectiveness and First Tranche Release

1.68 Disbursement of the first tranche was delayed by non-compliance witha number of conditions of effectiveness. This caused some friction due to theextreme need for the funds. The first tranche of US$170.5 million was releasedon September 24, 1986, five and a half months after Board presentation.

Imliementation Experience

1.69 Loan implementation was beset with political and macroeconomicimpediments, most of which could have been predicted. A summation of thecritical areas of implementation follows. A detailed presentation of compliancewith specific loan conditions is contained in Annex II, with a summary in para88. The circumstances surrounding release of the second tranche are set out inparas 77-83.

1.70 The Federal Land Tax. Legislation to establish a federal land taxremained stalled in the congressional committees to which it was first refereed(Agriculture and Budget), with attempts being made to modify it to suit everyone,a virtually impossible task. Supervision staff learned that its short-termimplementation clauses had been removed as a result of direct dealings betweenthe President, whose Radical Party faced a difficult mid-term election, theMinistry of Economy and pressure groups from the farming sector, notably theSociedad Rural Argentina.281 SAGyP was circumvented. Evidence suggests that

'I The larger farmers, the so-called "ruralismo" movement, made up of the Sociedad RuralArgentina (SRA) and the Confederaciones Rurales Argentinas (CRA) were totally against land taxintroduction, while the small farmers of the Federaci6n Agraria Argentina (FAA) and thecooperative movement (CONINAGRO) favored it under certain specific conditions..

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the progressive breakdown of the Plan Austral and deteriorating conditions in therural sector caused a change in the Executive's willingness to pursue theproject, and provided the opportunity to re-affirm overtly earlier opposition tothe proposed tax.

1.71 Farmer organizations apparently argued that the reductions in exportduties (which by July, 1986, were a weighted average of 18.92% on the nine majorcommodities, marginally below the level agreed to for this stage of the loan),could not either: (a) compensate them for sharply lower world commodity prices;or (b) in any way be accepted as a auid pro quo for future introduction of a landtax. Producers perceived, correctly, that there was little likelihood thatexport taxes would be eliminated. A proposal by SAGyP to include elimination ofexport taxes in the draft land tax legislation was strenuously opposed by theTreasury, and there was no other mechanism or strategy under discussion orimplementation to assure the sustainability of export tax rate reductions. Theland tax, in fact, was an additicnal not a replacement tax.

1.72 The Political Dimension. The resignation in late 1986 of theSecretary of Agriculture was a fatal blow to the introduction of the federal landtax and its policy anchor, PRONAGRO. His replacement, a former Radical Partycongressman, large farmer and Sociedad Rural member, reflected theAdministration's concern with repairing its political image in the rural sectorafter a year involving electoral losses in key provinces and growingdissatisfaction of farmer organizations with Government policy in the wake ofextremely adverse sector conditions. The Bank believed that the new Secretarywould more readily command support from the rural sector for loan objectives andthus represented a more promising negotiating partner. He did express initialsupport for the land tax proposal, but as a replacement for all other sectoraltaxation (i.e., a unitary tax approach), a move more likely to delay thanfacilitate passage of the law and its regulation. Fundamentally, however, hisresponse to Bank urgings for congressional action was evasive.

1.73 Several other factors were influential. First, supervision revealedthat project preparation had not addressed promotion of the land tax conceptamong farmers despite one of the project's key working papers urging forcefullythat the objectives, advantages and distribution of the proposed land tax bewidely publicized in order to mobilize maximum support.291 This advice was notheeded. Second, larger farming interests had traditionally and successfullyopposed land taxes for a host of reasons, including ideological. While a landtax would not necessarily force larger land-owners to change, nevertheless mostof them believed such a tax would disrupt time-honored arrangements. Thus, theypreferred the status q, using their influence to get export taxes reduced ifthey were pinching. Their response was historically predictable, irrespectiveof macroeconomic circumstances or rational arguments about the benefits whichwould ensue from a land tax.

29/ Dr. Jose Marfa Gimeno, Evaluation of a Future National Land Tax in Argentina, IBRD WorkingPaper No. 10, 1985.

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1.74 Export Taxes. Export tax rate reductions on major agricultural andagro-industrial products by late 1986 far exceeded those required under the loanagreement (i.e., 70Z of May, 1985 levels), but their reduction to zero (in thecase of grains) or to low levels (in the case of oilseeds) was necessitated bythe fall in international commodity prices to historical lows in real terms.These reductions were consistent with historical patterns of export taximplementation and had little to do with the loan, as evidenced by subsequentevents. The reductions and the high real effective exchange rate persisted onlyas long as the international prices of commodities remained at depressed levels.After the Spring Plan of August, 1988, IMF exchange rate strictures, which hadfor some time operated in unusual tandem with export tax reductions, wereabandoned in favor of a dual (and subsequently a multi-tiered) exchange ratedesigned specifically to discriminate against agriculture.301 With theintroduction of a unified exchange rate in May, 1989, (i.e., before loanclosing), export tax rates were raised to very high levels.3'/

1.75 Studies. The five studies and two programs of institutional support(to the JNG and JNC) to provide data and analysis for sectoral policies weresuccessfully completed, with loan funds being administered by the United liationsDevelopment Program (UNDF). The special taxation study, which combinedpreparation of the technical basis for the land tax with the study to determinethe appropriate level of taxation for agricultural activities and alternativemeasures to the land tax, was also completed but with delays. Difficulties wereexperienced in establishing convenios with a small number of the provinces, inorder to produce the unified federal-level cadaster from individual provincialcadasters. The Closing Date of the Loan was extended for one year (to June 30,1989) to permit its completion, further testament to the complexity of the landtax issue. Both the GOA and the Bank should be fully aware of the high qualityof these studies and their potential value to future development in the Argentineagricultural sector. Aspects of the work carried out by the Land Tax Unit inSAGyP to create a technical basis for the land tax have won several internationalprizes for technical excellence. Other studies have led directly to projectpreparation and subsequent loan processing by the Bank. The studies representa rare success story under this Loan.

1.76 Imyort Liberalization. Tractors and agricultural machinery weretransferred from the "prohibited import" list to the "prior approval" categoryas a condition of loan effectiveness. However, their inclusion on the "automaticentry" list for second tranche compliance was delayed by depressed conditions inthe domestic industry, with firms operating at only 20% of capacity, and the lack

301 Government actions under the Spring Plan aroused tremendous resentment in the farmingcomnunity, and provoked the resignation (not accepted) of the Secretary of Agriculture as a showof solidarity vith farmers. Ironically, he subsequently introduced legislation requiringCongressional approval of all increases in export taxes, followed by a bill seeking tax reforms,including elimination of asset and inheritance taxes and their substitution with provincial realestate taxes. The Ministry of Economy predictably opposed the former, while farmers perceivedthe effects of the latter would be similar to the proposed federal land tax. Both measuresfailed.

311 IBRD, 2D cit.

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of long-term financing to support domestic sales to farmers. In addition, as acondition of the second tranche, the GOA was required to remove a 10% importsurcharge imposed on agricultural chemicals in June, 1985. Mhough originallydescribed as a temporary measure to meet short-term fiscal needs, it was extendedand, in late 1987, increased to 15%. Deficit reduction requirements under a newINF agreement in early 1988 caused the GOA to retain the surcharge and the Bankto waive the condition (para 82-83), shifting the issue to a proposed TradePolicy Loan which would, inter alia, review the Argentine tariff structure acrossall sectors. 32/

Reloase of the Second Tranche

1.77 The second tranche was released on June 2, 1988, following protractedand unusually contentious debate which questioned fundamental aspects of the loanand exposed the inherent tension between the structural and resource transferobjectives of this loan and, by implication, other such operations. Thefollowing summarizes the elements of the debate and events leading to secondtranche release.

1.78 Disbursement of the second tranche (US$170.5 million) was originallyanticipated for early 1987. By mid-1987, chances for passage by Congress of landtax legislation, the central (albeit implicit) condition for second trancherelease, were remote. The Bank's initial options included the following: (a) topress for passage of the law through the limited means available, chiefly bymaintaining an open dialogue; (b) to extend the closing date of the loan, whichwould get through the immediate difficulties of an election year, potentiallyencounter improved economic circumstances, and permit completion of the sectortax burden study; (c) to promote farmer acceptance of the land tax by re-openingthe issue of total removal of export taxation from the statute book; and (d) toencourage the Government to request cancellation of the loan if changedcircumstances (including evaporated commitment) meant it could not meet secondtranche conditions. A proposal to enhance the collection of capital and networth taxes was dropped when SAGyP/Bank analysis and discussions with the IMFcast doubt on their ability to garner substantial revenues.33/

1.79 The Land Tax as Loan Objective. Arguments were put forward thatimplementation of the FLT was not an objective of the loan, merely the meansthrough which the real structural objective, export tax reductions, could beeffacted i.e., other means would be equally satisfactory and facilitatedisbursement. However, there are some 47 significant references to the federalland tax in the President's Report, and the central structural aim of the loanclearly was to "improve incentives necessary for more intensive use of

'2/ The first Trade Policy Loan (Ln.2996-AR) for US$500 million.

33/ Jorse Mac6n, Sustituci6n de los Impuestos a 108 Capitales v Patrimonio Neto por un Impuesto ala Tierra, Buenos Aires, August, 1987. (Draft)

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agticultural resources to increase production and 4xports 14/, of which thefederal l,nd tax was seen as an integral part.

1.80 As the impossibility of imposing a federal land tax became clear,doubts about the analytical basis of the original proposal, which had been raisedto no effect during project preparation, began to resurface. These doubtsreinforced the view that, provided other loan conditions were met and providedother revenue sources could be identified (from inside or outside theagricultural sector) to compensate for the reduction in export taxes, a waiverof the specific land tax provision could be justified. Clearly this departedfrom the principle of a growth-enhancing shift of the tax burden within theagricultural sector, but, given the controversy which had surrounded the originalproposal, this departure could be seen as a pragmatic alternative to loancancellation. Therefore, in late 1987, and in the light of explanations providedby the Minister of Economy and Secretary of Finance concerning Argentina's fiscaladjustment policies and economic obstacles to a land tax, the Bank agreed toaccept for second tranche release a package of fiscal measures which were beingsubmitted to Congress at that time as a substitute for the land tax andcompensation for the loss of revenue from export tax rate reductions. Thisdecision was confirmed following congressional passage of the fiscal package inJanuary, 1988.

1.81 Following this decision, considerable effort was required to achieveGOA compliance with several other outstanding conditions affecting tradeliberalization of tractors, agricultural machinery and chemicals. The GOArefused to remove the import surcharge on agro-chemicals imposed in mid-1985,beca-use of IMF standby constraints, and instead raised the tariff to 15% (para76). The Bank decided to pursue the matter through an upcoming Trade Policy Loanand not as a sectoral issue.

1.82 Waivers. The decision to waive the two conditions (i.e., theimplementation of the federal land tax and the removal of the import surchargeon agricultural chemicals) required approval of the Board of Directors due to thesubstantial nature of the modifications being sought to loan conditionality. Therase for seeking a waiver was based, first, on the acceptance of alternativefiscal measures as set out in para 80 above, and secondly, on the urderstandingthat the relaxation of import restrictions on tractors and agricultural machinerywas a significant move within the broader trade policy reform then underdiscussion with the Bank. The Bank also accepted that satisfactory progress wasbeing made in the Program of agricultural sector reform, as set out in a letteraddressed from the GOA to the Bank (April 28, 1988).

1.83 The Board discussion revealed the controversial nature of the subjectand, while the waivers were approved, the number of abstentions indicated thatcancellation of the second tranche might have been a preferred course of actionin the interests of the credibility of the Bank and the Argentine Government.The tranche release secured a resource transfer objective but in an important

34/ IBRD, President's Report, Report No. P-4161-AR, March 14, 1986.

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sense reinforced the Argentine "logic" of the short-term solution. Further,disbursement without significant policy reform burdensd the GOA with additior 1debt without improving its capacity to repay, compounding the policy failure andweakening the Bank's portfolio.3'

Disbursement. Procurement and Audit

1.84 Statements of ExRenditure (SOE) and Disbursement. The loan used astandard SOE approach for loan disbursement under Category I (totalling US$341.0million), but serious difficulties arose prior to first tranche releaseconcerning procedures to be followed in their preparation and presentation. TheCentral Bank (BCRA) was the designated authority for SOE preparation, but it wasreluctant to engage in a protracted exercise with the commercial banks to obtainthe supporting data. Complicating this was the BCRA's justifiable resentment athaving been excluded by the Ministry of Economy from participating in either thepreparation or the negotiation of the loan, and then being given primaryresponsibility for withdrawal of the loan proceeds without a detailed plan ofaction, the latter indicating poor loan design. The process of sorting this outdelayed first tranche disbursement, causing added friction.

1.85 The BCRA proceeded to accumulate all the SOEs for both tranches.Serious obstacles were encountered by Bank supervision staff trying to review theSOEs against which the first trarche was released, the purpose being to ensurethat goods had actually been imported and that over-invoicing had not occurred.The BCRA was unwilling to allow access to supporting documents from thecommercial banks, citing banking secrecy laws. High level official interventionfinally resolved the matter, enabling the Bank finally to undertake theappropriate checks with satisfactory results.

1.86 Procurement. Procurement of goods, which was against general imports,was straightforward. All reimbursements were made for relatively small amounts,none of which triggered the requirement for international competitive bidding.Procurement of consultants was timely and problem-free.

1.87 Audit. Audit compliance under the loan was extremely poor, with cleanaudit reports for 1986-1988 still not received by the Bank by mid-1990. The coreof the problem had similar overtones to the SOE situation -- the BCRA would notallow auditors of the Tribunal de Cuentas de la Naci6n (TCN) access to commercialbank records, and hence the TCN was obliged to issue a d'sclaimer of opinion onloan audits, implying uncertainties regarding use of the funds and jeopardizingthe Bank's accountability. The ME accordingly refused to release the disclaimedaudits to the Bank, in the fear that the Bank might seek restitution of loanfunds released. Since the TCN's disclaimer could not be reversed, a new auditwas designed and carried out under carefully controlled circumstances, and aclean opinion accepted by the Bank in August, 1990.

Ls/ IBRD, Report on Adiustment Lending I1: Policies for the Recovery of Growth, Report No. R90-51, March 26,1990.

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Compliance With Loan Conditions

1.88 Compliance with first tranche conditions was satisfactory, thoughdelayed. In the case of the second tranche, compliance was mixed. Dramaticreductions in export taxes mirrored political and economic realities not loanconditions, and were reversed before the loan had closed. Performance under thefederal land tax condition fell far short of the Loan Agreement, as it did alsoon trade liberalization of agricultural chemicals. In a number of other cases,including the adoption of fiscal measures to compensate for lost export taxrevenues, the Bank accepted GOA measures taken as fulfilling loan conditions, butthe packages (in both 1986 and 1988) had little identifiable relationship to, orimpact on, the agricultural sector. The exchange rate was, of course, notincluded in any quantitative conditionality under the loan, apart from the GOA'scommitment, in its Statement of Policy, "to maintain an exchange rate competitivefor exports"; however, the introduction of a multi-tiered rate under the SpringPlan of August 1988, by definition violated the spirit of the Loan. A detailedsummation of compliance is contained in Annex I.

IV. Economic Evaluation

1.89 The loan provided a large, timely infusion of foreign exchange butachieved no structural reform on the central issue of agricultural taxation.The unpredictable mixture of over-valued currency, multiple exchange rates andexport taxes which persisted following the Spring Plan of August 1988, seriouslyaffected producers' confidence and their ability to plan and make investmentdecisions. The production response to the period of low export taxes and highreal value of the currency (early 1986 to August 1988) was therefore low;producers clearly and correctly interpreted these moves as mere stabilizationmeasures responding to the all-time low points for many commodity prices on worldmarkets and not as the first stage of any long-term effort to improveagricultural incentiv9s.6-1 When the credibility and permanence of reforms arein doubt, desired shifts in the economic structure are less likely to occur. Thepreparation phase of the loan did not establish even minimal conditions forsustainability.

V. Institutional Performance

The World Bank

I 90 The concept underpinning the loan was arguably a valid one. However,the process of re-orientating agricultural taxation from export taxes to a

ml IBRD, Argentina: ARricultural Sector Review, Report No. 7733-AR, Volume II, June 30, 1989.

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federal land tax was not well thought out. The loan was prepared and appraisedat a time when resource transfer and an enhanced lending program to Argentinacompeted in urgency with policy change. Thus, loan size bore no relation to theadjustment process3'/ and resources transferred did not accrue to theagricultural sector. A smaller loan would, in any case, have been moreappropriate for so inherently risky an operation. This undermined theseriousness of the discussion on policy issues and the Government's commitmentto them.

1.91 Loan conditionality conflicted directly with IMF stabilization regimens,implicitly involving the GOA in serious conflicts of interest. The Bank'sexperience with sector loans has shown that they must fit into a broader programof adjustment to have a fair chance of success and sustainability. Stabilizationis not adjustment, but its short-term needs are more compelling and the Bankshould have had a better dialogue with the IMF at all stages, in order toestablish a coherent link between the loan and the IMF's programs.

1.92 Preparation should have been supported by rigorous, operationally-focussed sector work, a sensible period to assess the durability of thestabilization program, and careful attention to dialogue developmene and thepolitical environment. Instead, wishful thinking trod shifting san a. Vitalaspects of the loan's legal, fiscal, political and institutional environment wereonly superficially understood. Sensible advice from the IMF, the Bank's ownreview staff and experts retained to examine loan options and feasibility wentlargely unheeded. Clear signals were disregarded at important junctures in aneffort to maintain processing momentum. The political constituency for the loan,and the Bank's dialogue, were confined to the committed but isolated SAGyP, afact in evidence early on. The Bank gave the principal role in the planning andimplementation of the reform program to SAGyP, when in fact SAGyP had littlecontrol over the policy instruments and resources most affecting the sector,e.g., exchange rates, trade policy, and fiscal and monetary policy.

1.93 The Bank should hare made a much greater effort to establishsustainability, which in this case rested squarely on the GOA's willingness toalter permanently its policies, prerogatives, and importantly, its reliance on,export taxes. The point of sector loans is lost without such an effort, whichshould acknowledge the crucial importance of linking balance of payments supportto sustainable reform which results in productive benefits and easier debtservice in the future. SAGyP and farmer groups already had broad agreement onthe need to lock in export tax rate reductions and/or remove their discretionaryuse, it was advocated as part of the Bank's earlier loan strategy, and urgedstrongly by the 'lM1. The political and economic climate for land taxacceptability might have improved markedly. In fact, the reduction of exporttaxes to minimal levels could have been a critical opportunity to achieve

"/ See IBRD, Report on Adjustment Lending II: Policies for the Recovery of Growth, Report No.R90-51, March 26, 1990. Statistical analysis of adjustment lending revealed that loan size wasgenerally related to country size, especially as measured by GDP. Larger loans tended to begiven to countries already out of the commercial lending system, as was Argentina by the time ofloan preparation.

- 30 -

permanent change. The Bank's Working Paper No.10, prepared in mid-1985 as partof loan appraisal, states: "This is an opportune moment to abolish export dutiessince the decline in world prices will inevitably force their elimination orsubstantial reduction." 38/

1.94 The pivotal importance of the exchange rate was not given sufficientattention in loan preparation, even though the Bank's hands were tied in termsof direct intervention. Exchange rate manipulation retains the power to negatebenefits accruing from an established land tax and low (or abolished) exporttaxes, underscoring the importance of coordinating agricultural sectoradjustment with broader macroeconomic change which includes a fundamentalreorientation of Government's thinking on exchange rate policy.

1.95 Supervision was of a high quality, successfully solving problems asthey arose (SOE arrangements, studies, etc.), collecting intelligence on loanprospects and trying to promote dialogue on loan objectives, the latter effortmostly uphill.

The Borrower

1.96 Although Congressional approval was required for implementation of thefederal land tax, the ME could probably have mobilized the necessary support tosecure passage if it had been willing to guarantee a permanent reduction inexport tax rates. However, it did not have the commitment or the will to do soand the Government was divided from the start over loan objectives. SAGyP wasthe chief proponent and supporter of the proposed reforms, and the principalagency for loan implementation, but seemed to lose influence steadily from aroundmid-1986. The ME seems to have had little interest ir. structural reform and nointention of losing a secure source of revenue. The concept of maintenance ofa "low level" of export duties in SAGyP's PRONAGRO statement was clearly theresult of inter-agency manoeuvreing in which ME prevailed.

1.97 The ME was, at best, ambivalent about the federal land tax itself butwas totally opposed to the substitution idea, preferring two taxes in force ifit came to this. The removal of key clauses (concerning short-termimplementation) in the draft land tax legislation submitted to Congress prior toBoard presentation, was a breach of good faith with the Bank, and appears to haveoccurred with ME support. That ambivalence translated into withholding itsconsiderable weight from support for passage of the land tax legislation whichviolated the spirit of the loan agreement, if not its actual letter (ME's formalrole in the reform program proposed was largely peripheral, despite it being theentity most affected by the proposed change).

1.98 The ME suppressed its overt objection to the loan concept once SAGyPwas able to convince President Alfonsin of its validity, but its oppositionsurfaced again when the political and economic winds shifted. While the Bank'sefforts to construct a dialogue were not sufficiently forceful or persuasive, the

38/ Dr. Joad Maria Gimeno, 22 cit.

- 31 -

HE and its Secretariat of Finance avoided that dialogue. The Bank's transparenteagerness to make this and successive loans reinforced the HE's tendency topromise, but not deliver on, policy change in a single-minded pursuit of newdisbursements.

VI. Conclusions and Lessons

Conclusions

1.99 The loan was propelled as much by the Bank's willingness to lend asby the GOA's need to borrow. The desire within the Bank at the time to implementa quick-disbursing sector loan created a compelling momentum which was notmatched by the Government's willingness to engage in a meaningful sectordialogue, or by the Bank's understanding of the political and economicenvironment. Essential studies were conducted to create an analytical base forpolicy changes simultaneously under implementation as part of the loan. The loanconcept was valid, but represented profound change in an inadequately-designedpackage which was superimposed on a difficult political and economic situation,pre-disposing the loan to failure. While it is a truism that no time is everperfect, nevertheless prudence dictated a more cautious, thoughtful and realisticapproach to the loan's environment and design. A vital opportunity was wasted,one which cannot easily be revived even though the same sectoral discriminationpersists.

Loan Desin

1.100 The continued validity of the concept lends importance to a briefsummary of the more significant flaws in the specific loan and its design, whichincluded the following:

(a) The fiscal emphasis of the Bank's approach to reducing export taxeswas too narrow. For example, the Bank should also have focussed onthe industrial protection implications of agricultural export taxes,and should have insisted on reductions in the differential export taxrates applied to oilseeds and their processed products, whichrepresents a transfer from farmers to processors of around US$200million per year;

(b) Export tax rate reductions should have been locked-in and theirdiscretionary use controlled through legislative and/or otheractions, to prevent the oscillation which has been and continues tobe so powerful a disincentive to producers. This might have been,with the land tax studies, an appropriate first, smaller loan, inpreparation for a second loan addressing land tax legislation;

(c) The anticipated disbursement of the loan was overly-optimistic andincompatible with the likely timing of its main conditions, pre-

- 32 -

disposing the loan to problems with second tranche disbursement,(i.e., export tax reductions could be effected fairly rapidly,whereas the introduction of the federal land tax would almostcertainly take much longer than the time estimated). Further, thisincompatibility created a fiscal vacuum which was "filled" by ad hocmeasures which deflected the loan's adjustment focus;

(d) The loan shied away from the implications of instability in exchangerate policy which remains the "Achilles heel" of even the mostsuccessful program of reducing export taxes and introduc.ng a landtax. Only a broad, pre-established program of structural adjustment(of which IMF stabilization efforts were not the equivalent) couldhave successfully addressed this central problem;

(e) Passage ot the land tax legislation should have been a condition ofnegotiations. The extreme riskiness of legislation, its centralsignificance to the reforms sought, and the size of the loan, maderequirement for its passage up-front an entirely reasonablecondition;

(f) In the absence of more significant achievements on the policy reformsthan were actually accomplished, a more appropriate course of actionmight have been to have cancelled the loan;

(g) The institutional scheme was unrealistic. The primary impetus andresponsibility for the reform program should have come from ME, sinceit was the agency most affected by the reforms sought;

(h) Detailed attention should have been given to loan withdrawalprocedures at negotiations, with full BCRA involvement, understandingand agreement.

Lessons Learnt

1.101 The following lessons emerge from this Loan, adding to and reinforcingconclusions derived from other AGSALs in the past decade:"l

(a) Sector adjustment must be preceded by and must fit into a broadadjustment program which realistic evaluation shows is working.Close coordination of macroeconomic and sectoral lending isessential. Further, the analytical base of the sector loan should bedetailed, comprehensive, and available (to the fullest extentpossible) in advance of loan preparation;

(b) Adjustment lending requires the unequivocal support of Government,leading agencies and important personalities. The Bank needs to

191 See Odin Knudsen and John Nash, ARricultural Sector Adjustment LendinA and AericulturalPolicy, March, 1989.

- 33 -

address dialogue development in a more sophisticated manner if itcontinues to design politically-sensitive operations, and should notbe afraid to halt loan processing if communication with Government isclearly inadequate. Systematic promotion of the loan concept andobjectives is a sine qua non;

(c) Greater "front-loading" of conditionality is needed to achieve asmuch as possible early in the loan and mitigate the tendency to giveaway the second tranche when conditionality is not met;

(d) Legislation is an exceptionally risky form of conditionality for afast-disbursing loan, unless it is achieved as a condition ofnegotiations. Government is generally reluctant to support measuresthat are difficult to reverse. The vagaries of the political processcannot reasonably be tied to a schedule, even (and, some might say,especially) when a large disbursement hinges on legislative action.Furthermore, since the Bank is, by definition, precluded fromintervening directly in the political process it has set in motion,it becomes largely an observer; 401

(e) Sustaining policy reform is a fundamental and well-recognizedweakness of adjustment lending. The imperative for the Bank, if itis to continue to make these loans, is to develop a broad strategyduring the design stage, including appropriate incentives andmechanisms, for establishing commitment and sustainability. Legalcovenants are an ineffective substitute for this process;

(f) Adjustment lending requires clearly-defined objectives, e.g., policyreform, resource transfer, financial support for the sector. Inretrospect, '.t is evident that this particular operation sufferedfrom a lack of clear definition between its resource transfer andpolicy reform objectives. If a primary objective is resourcetransfer, this should be openly declared and the loan designedaccordingly, to avoid the erosion of seriousness and commitment toreform which results from the tacit understanding that finaldisbursement is virtually assured; and

(g) AGSALs are not the only loans which have sought to reduce oreliminate export taxes. Many have encountered the inherent problemthat export taxes are a comparitively simple way of raising revenuein countries where other forms of taxation are not effectivelyimplemented. Thus, the lesson for the Bank is that export tax reformcan only be part of a broad and workable reform of the overalltaxation system.

401 During recent appraisal of the Venezuelan AGSAL, legal advisers to the Government counselledagainst the inclusion of legislative conditionality, citing the experience with Ln.2675-AR.

- 35 -

PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

The Borrower did not respond to the Bank's requests for an independentassessment of the operation. The Bank's draft PCR, Parts I and III, was sent tothe Borrower for comments on March 27, 1991, but no response has been received.

- 37 - Annex IPage 1 of 2

PART III: SUPPLEMENTARY INFORMATION AND STATISTICS

BASIC DATA SWUIARY

(As of September 30, 1990)Original Disbursed Cancelled Repaid Outstanding

Loan: 2675-AR USS350M USS349.96M 0.04M 29.17M 320.79M

Original Loan Dates Actual

initiating Memorandum May 13, 1985Letter of Development Policy February 14, 1986Negotiations December, 1985Board Approval April 3, 1986Loan Agreement June 5, 1986Effectiveness May, 1986 July 22, 1986First Tranche Release Prior June 30. 1986 September 24, 1986Second Tranche Release January 1987 June 2, 1988Loan CLosing June 30, 1988 June 30, 1989Actual Completion June 30, 1988 June 30, 1989

CUIJUATIVE LOAN DISBURSEHENT

1986 1987 1988 1989USSMillion

(a) Planned

?oLicy Component 170.5 341.0Studies/Institutional Support 1.5 5.9 9.0

Total 172.0 346.9 350.0

(b) Actual

Policy Component 170.50 341.00Studies/Institutional Support .33 6.80 8.96

TotaL - 170.83 347.80 349.96

- 38 - Annex IPage 2 of 2

fISSION DATA

No. of No. of Date ofMonth/Year Weeks Persons Manweeks Report

Exploration July, 1984 1 2 2 August 10, 1984Preparatior. November, 1984 2 3 6 November 30, 1984Appraisal June, 1985 3 6 18 July 12, 1985Post-Appraisal August, 1985 1 4 4 September 18, 1985Supervision May, 1986 2 1 2 July 9, 1986Supervision October, 1986 1 1 1 December 12, 1986Supervision (follow-up) November 1986 1 1 1 December 5, 1986

STAFF INPUTS

Stage of Proiect FY85 FY86 FY87 FY88 FY89 FY90

To Appraisal 42.3Appraisal 23.7Post Appraisal 17.0Negotiations 3.0Supervision and Administration 20.0 8.5 33.7 0.7 14.3Total 66.0 40.0 8.5 33.7 0.7 14.3

Total Staffweeks FY84 - FY90:163.2

FOLLOW-ON SAL OPERATIONS

Trade Policy I Loan (Ln. 2815-AR): USS500MTrade Policy 11 Loan (Ln. 2996-AR): US$300MBanking Sector Loan (Ln. 2923-AR): USS400M

39 - Annex IIPage 1lof 3

COMPLIANCE WITH LOAN CONDITIONS

Condition Cconliance Status(mid-1988)

A. Effectiveness and Release of First Tranche

Loan Agreement. Section 6.01(a) (i) Export duties on agricultural commodities Reduced to weighted average of 18.9%, marginally

have been reduced to approximately their May below level required.1, 1985 levels;

(ii) Tractors and agricultural machinery to Compliedbe moved to prior consultation category ofimports.

cb) Borrower to define package of fiscal measures Compliedto compensate for revenue loss from reducedexport taxes without increasing 1985 sectortaxation Levels;

(c) Subsidiary agreements to be executed by GOA Compliedwith JNG and JNC;

(d) Executive Committee to be established; Complied

(e) Federal Land Tax Bill to be under Complied.consideration in Congress. Bill referred to Committees of Budget and

Agriculture but never debated in full Congress.

B. Release of Second Tranche

Loan Agreement. Schedule 1. para 4 1/

1. Progress satisfactory to the Bank must beachieved in the Program:

(a) The real exchange rate will be Weekly devaluations of the Austrat kept the realcontinuously reviewed by GOA following exchange rate, vis-a-vis a weighted basket ofthe devaluation of June 1985, and its currencies, on a par with the June 1985 level.adequacy in maintaining export Exports and imports were made at the "official"competitiveness ensured; rate, and further improvements, including

devaluation under the October, 1987 packagemaintained competitiveness.

(b) Measures to promote fertiLizer use would The total quantity of fertilizer used increasedbe adopted; from 283,000 tons in 1985, to 342,000 tons in

1987, in spite of the decline in commodity prices.An increased role was played by the privatesector, which supplied 66% in 1985 and 87% in1987.

- 40 - Annex IIPage 2 of 3

Condition Co liance Status(mid-1988)

(c) Measures to promote agricultural Improvements made included elimination of somemarketing will be adopted; maximum consumer prices; liberalization of forward

purchase; extension of the export pre-financeperiod from 90-180 days; reduction in costs ofbank guarantees for pre-purchases of grain;construction of new grain storage facilities,public and private, under IBRD Loan;

(d) Government to make adequate resources Average outstanding loan balances of all financialavailable, for short and long-term institutions to the agricultural sector increasedagricultural credit; by 26X between 1985 and 1986, and rose by a

further 5% in the first half of 1987. The thenrecently-negotiated Agricultural Credit Project IIrepresented a significant potential increase incredit resources.

Loan lareement. Schedule 4. pars l(a) and 1(b)

2. Rates of export duties to be reduced to not Export duty reductions went beyond those requiredmore than 70% of levels in force in May 1985, to comply with the condition. Weighted averageor other such level agreed between Bank and export duty for the 1987/88 year was 1.7%.Borrower in light of substitute fiscalmeasures;

3. Compensatory fiscal measures were to be Such measures (confidential at that time) wereimplemented to replace revenues lost from defined to achieve loan effectiveness in Juneexport tax reductions, to be inplemented, 1986. Included tax amnesty (introduced Feb.without raising sector taxation above May 1986); increased fuel and tobacco taxes (adjusted1985 levels; 3 times in 1987); tax on financial transactions

(not inplemented). The fiscal package passed byCongress in January 1988 increased the tax oncheques. Overall effect was to increase revenuesby 10.5X of GDP, exceeding losses from export taxreductions.

4. Progress satisfactory to the Bank must beachieved in the Land Tax Schedule:

(a) preparation of the technical basis of Compliedthe Federal Land Tax (FLT);

(b) Passage by Congress of the Federal Land Bill sent to Congress in April 1986.Tax Law and its subsequent regulation. Studied in Agriculture and Budget committees, but

never formally debated in Congress. Condition notcomplied with and its waiver approved by BankBoard of Directors.

5. Tractors and agricultural machinery must be Transferred from the "prohibited import" list tomoved to the "automatic entry" list. the "prior approval" category as a condition of

loar, effectiveness. Transferred on to "automaticentry" list in May, 1988.

6. Import tariffs on agricultural chemicals to Originally seen as temporary, but later extended,be reduced to not more than their May 1985 and in late 1987 increased to 15X under IMFlevels, i.e., remove 10% import surcharge. agreement on fiscal deficit reduction.

Condition not complied with and waiver approved byBank Board of Directors.

- 41 - Annex IIPage 3of 3

ConditionCmtiance Stat(mid-1988)

7. The Program (see 1 above) and alt studiesreferred to in Section 3.04 of the LoanAgreement must have been completed or underimplementation to the Bank's satisfaction.The studies were:

(a) appropriate level of taxation foragricultural activities and alternativemeasures to the land tax; Complied

tb) technical basis of the Federal Land Tax(see 4(a) above);

Complied(c) marketing and production strategy for

agricultural products;Coptied

5d) technical economic and financialanalysis of supplementary tubewellirrigation of maize; Complied

Ce) structural change in the livestockindustry;

Coamplied(f) development and promotion of

agricultural and agro-industrial exportsfrom non-Pampa areas; Complied

(*) organizational evaluation of JNG,definition of improvements required, anddraft legal instruments; Complied

(h) institutional support to Junta Nacionalde Granos (JNG);

Cooplied(*) institutional support to Junta Nacional

de Carnes (JNC).Complied.

/ Certain conditions are duplicated in the Loan Agreement, in ScheduLe 1, para 4, and in Schedule 4.Where this occurs, the condition is considered in this matrix under ScheduLe 4.

- 42 - Annex IIIPage I of 4

Export Taxes and the Exchanre Rate

Intervention in the Agricultural Sector

The policy bias against agriculture, which the AGSAL attempted toaddress, has its origins in interventions which begar in the 1930s and which bythe 1980s had become extremely deep-seated. As a result of these interventions,agricultural development in Argentina during the 20th century has seen a periodof major growth transformed into virtual stagnation, and the sector has beenprevented from realising its potential in terms of output, employment andexports. The effects of the bias have been apparent since the 1950s, mostobviously in the stagnation (and, in some crops, even decline) of output and theconsequent loss of exports and foreign exchange earnings; however, variousefforts at reform, beginning in the late 1950s, have been short-lived andunsuccessful. The immediate and short-term benefits of intervention to thegovernment and to the other sectors of the economy have proved impossible torelinquish, even though the long-term potential benefits which would accrue fromthe removal of direct and indirect discrimination were recognised. This"inmediatismo"l is a recurring theme in both macro- and microeconomic policymanagement in ArgenF-ir.a, and is by no means confined to the agricultural sector.

A major shift in philosophy occurred during the course of thisprolonged period of intervention. The immediate post-war intervention aimedexplicitly at transferring resources to the other, more "dynamic", sectors of theeconomy where the response *o capital investment was supposed to be higher thanin the agricultural sector, in line with then-prevailing theories of economicdevelopment. The agricultural sector became accustomed to lower relative pricesand to the dislocation between international and domestic prices. In more recentyears, however, these transfers from the sector have become rationalised bygovernment as taxation, justified on the basis that, since the agriculturalsector,in common with other sectors, evades its other tax responsibilities (e.g.,on orofit and capital taxes), the panoply of export and pseudo-export taxes(e.g., the retenci6n, INTA levy and statistics taxes), reinforced on occasionsby explicit exchange rate taxes, must therefore function as a surrogate. Thisjustification has never been accepted by the agricultural sector, and the conceptof a quid pro quo between export taxes and any new tax (e.g., a federal land tax)was and still is seriously questioned by the various farmers' groups.

The relative prices of Argentina's export products fell during theSecond World War because of exogenous factors. After 1945, this shift wasmaintained as a result of policy intervention, preventing the improvement ininternational prices from feeding through to the agricultural sector.Discrimination aga4nst agr.culture was at its strongest during the period 1945-1955; although it was somewhat reduced from the mid-1950s on, by the 1960s the"typical scheme" had become institutionalised: following a devaluation or majorincrease in the international prices of agricultural commodities, export taxeswere increased; when the real rate of exchange or world prices fell, exporttaxes were reduced. The dirincentive effect on agricultural producers was

43 - Annex IIIPage 2 of 4

clearly recognised, and several efforts wer, mode to reform the pattern of policyresponses, especially between 1976-1980, bu, these reform efforts were short-lived and, ultimately, failures. At various t-es, compensating policy measureswere introduced in an attempt to increase farm incomes and profitability,particularly through new agricultural technology, lower input prices andsubsidised credit. The use of these measures and complementary fiscal measureswere far from offering full compensation for the direct and indirectdiscrimination practised against the agricultural sector, and were usedspecifically because they could improve farm incomes without increasingagricultural prices. However, these measures did have a significant role in thecapitalisation of the agricultural sector.

The objectives of intervention can be grouped under five headings forpurposes of description, although in practice these objectives are over-lapping:(a) consumer welfare objectives, maintaining low-cost food for low-incomeworkers, mainly urbanised and in industrial employment; (b) regional eauityobjectives, explicitly putting most of the burden, via export taxes, on theresource-rich Pampas region; (c) government revenue objectives; (d) pricestability objectives, via the impact of intervention on the prices of major wage-goods; and (e) industrial development objectives, via the transfer ofagricultural "surplus" to industry, low wage-good prices, and low raw materialprices for agricultural processing industry. The extent to which theseobjectives have been achieved and the degree of cohesion between theseintervention policies and other macro- and microeconomic policies are highlydebateable. It is important to note, however, that discrimination against theagricultural sector has been, and continues to be, undertaken via multipleinstruments and with multiple objectives.

Obiectives of the AGSAL

The major objective of the AGSAL was to introduce a federal land tax(FLT) and reduce the rates of export taxes (retenciones) applied to the nine mostimportant agricultural export commodities. The FLT was expected to be, at worst,production-neutral and at best to have a dynamic, production-positive impact. Thebasic concept was to replace the revenue foregone (from lowering export taxrates) with revenues received from a phased introduction of the FLT. This wouldhave represented a major shift in the tax burden, particularly of those farmersproducing for export, a fixed charge per hectare being introduced in return fora quantum improvement in product prices. The starting point for the measurementof the extent of the improvement was May 1985, immediately prior to the PlanAustral. Reductions in the weighted-average level of export taxes, combined withthe maintenance of an exchange rate "competitive for exports" in the period post-Plan Austral, were to achieve and maintain an increase in the real value of thefarm-gate price.

Results

In the period since the Board's approval of the AGSAL in April 1986,export tax rates at first declined virtually to zero in the face of a collapsein international prices, and then increased again. Over the same period, major

- 44 - Annex IIIPage 3 of 4

fluctuations have occurred in the real exchange rate. Tables 1 and 2 show thecombined impact of export taxes and the exchange rate applicable to exporttransactions on the prices of wheat and maize in terms of an effective exchangerate (EER) for the period 1985-1990. The level of export taxation applied to theother export products (grains, oilseeds and their processed products) differedfrom wheat and maize but followed the same trend over time. It can be seen that,since May 1985, the level of export taxation (i.e.. retenci6n + INTA levy +Statistics Tax) has varied between 1.52 and 34.5Z in the case of both wheat andmaize. The EER Index (EERI) for both crops includes the effect of changes in theNon-Agricultural Wholesale Price Index, in order to incorporate an indication ofperiodic under- and over-valuation of the currency.

The graphs show clearly the continuation over the period of the"typical scheme" referred to above: the low international prices which prevailedfrom early 1986 until early 1988 were accompanied by relatively high values ofthe EERIs for the two crops. The improved prices which prevailed from early 1988were accompanied by significantly lower values of the EERIs. In the case ofmaize, between April 1986 and June 1988. during which period the price fell toan all-time low in real terms, the level of export tax fell from 22.5% to 1.5%and the EERI was an average of 111.8. Between July 1988 and the end of 1990, asprices recovered, the export tax level rose from 1.5% to 34.5% (before fallingback to 24.5%) and the value of the EERI was an average of 91.3. By the end of1990. the combination of high export taxation and overvalued currency had reducedthe EERI for maize to 59.5 which represented its low point for the whole period.

By concentrating on the narrow fiscal aspect of substituting a FLT forexport tax revenue foregone, the AGSAL ignored the multi-faceted nature ofintervention in the agricultural sector. The improvements initially achieved inreducing export tax rates, which went far beyond the levels agreed with the Bankin large part because of the unprecedented fall in international prices ofagricultural commodities, were later reversed, as international prices recovered,under the demands of short-term fiscal expediency. At the same time, majorfluctuations in the real exchange rate occurred over the period of the loan. Thecombination of these factors caused major changes in the EERI, which with a baseof May 1985=100 has varied between 61.4 and 170.3. One important effect has beento increase the variability of the farm gate price; in the case of maize, thecoefficient of variation of the FOB price of maize rose from 25.5 to 30n.2 whenadjusted by the EERI.

- 45 - Annex IIIPage 4 of 4

REFERENCES:

Trade. Exchange Rate and ARricultural Pricing Policies in Argentina,Sturzenegger, Adolfo et al, 1990.

Poder de Compra de los Tipos de Cambio. Retenciones v T6rminos de Intercambio,Carta Econ6mica, Estudios Especiales. October 1988

El Impacto de las Politicas Macroecon6micas sobre el Sector Agropecuario conE1emplos de la Experiencia Argentina, Fundaci6n MediterrAnea, Estudios.October/December 1986

FIEL Data

- 46 - ANNEX IIITable I

Effective Exchange Rate for Maize

"ex age ate Index Price FOB Price Export Teas A d1usted Exchague h oa-Agric WPI ER l Index ER-Adjusted(A..USSI) 1US$( ton) USS/ton (2) ate. (4WUSS1) index (Hay 1985-100) FOB Price

1985 :1 0.20 138 106 32.5 0.12 29.480 0.40 78.3 85IS85 cb 0.24 135 105 26.0 0.15 35.102 0.44 85.6 90

mar 0.31 111 106 22.9 0.23 45.356 0.51 100.7 107apr 0.40 110 110 22.5 0.31 60.103 0.51 100.4 110

0.53 109 109 22.5 0.41 79.817 0.51 100.0 109fluu 0.74 112 111 27.8 0.53 114,A68 0.46 91.4 101F., 0.80 113 112 30.5 0.55 111.926 0.50 97.4 109

aug 0.80 112 112 30.5 0.56 112.066 0.50 97.6 109Sep 0.80 106 110 30.5 0.57 112.038 0.50 99.1 109Oct 0.80 It0 110 30.5 0.36 112.558 0.49 97.1 L07nTo 0.80 I11 113 30.5 0.56 112,867 0.49 96.9 109doe 0.80 110 116 30.5 0.57 113.382 0.50 98.4 114

1986 1a 0.60 106 122 30.5 0.59 113 462 0.52 101.8 124!eb 0.80 91 88 29.1 0.56 114 139 0.49 96.1 85Ver 0.80 86 84 22.5 0.62 115.770 0.53 104.7 88apr 0.83 86 84 22.5 0.64 119.154 0.53 105.0 a8may 0.85 92 89 22.5 0.65 121.736 0.54 105.3 94jun 0.87 89 89 22.5 0.68 126.751 0.53 104.9 93

3ul-1 0.90 82 82 22.5 0.70 133.522 0.52 103.1 85aug 0.96 80 80 22.5 0.74 143.667 0.52 101.9 81Sep 1.05 89 90 22.5 0.81 151.781 0.54 105.3 95oct 1.09 90 69 22.5 0.77 1568706 0.49 95.4 66no, 1.15 90 71 22.5 0.82 167.604 0.49 96.0 68doe 1.21 78 67 16.5 0.98 176.386 0.55 108.6 73

1967 jan 1.39 67 65 16.5 1.07 186.159 0.58 113.1 73feb 1.38 67 66 16.5 1.15 1981752 0.58 113.7 75mar 1.54 70 69 16.5 1.28 213.398 0.60 117.7 81apr 1.54 74 74 16.5 1.28 217.321 0.59 116.0 86=3p 1.59 82 80 16.5 1.32 226.377 0.58 114.4 92

1.70 82 82 16.5 1.42 242.151 0.59 115.1 94F., 1.89 88 84 16.5 1.56 265,100 0.59 115.7 97aus 2.10 86 86 16.5 1.76 302.115 0.58 114.2 98ON 2.45 84 85 16.5 2.05 354.081 0.58 113.7 97oet 3.21 86 92 16.5 2.70 473,266 0.57 112.1 103nov 3.49 89 84 16.5 2.88 495.094 0.58 114.3 96doec 3.49 88 85 16.5 2.89 505,042 0.57 112.5 96

1988 jau 3.85 86 86 16.5 3.21 564.307 0.57 11L.8 96fab 4.30 87 87 1.5 4.24 642,437 0.66 129.6 113mer 4.A9 85 85 1.5 4.62 751.291 0.64 126.1 107apr 5.8i 82 81 1.5 5.60 883.501 0.63 124.6 101my AS.35 78 77 1.5 6.26 1.096.801 0.57 112.1 86

Run 4.02 114 89 1.5 7.87 1.342.531 0.59 115.2 102I Y.tS 129 130 1.5 9.04 1.665.942 0.54 106.6 139aug 1200 12.5 125 1.5 11.82 2,206.684 0.54 105.3 132sap ... 22 10 118 1.5 11.74 2,305,691 0.51 100.0 118Oct -.14 l 8 115 1.5 11.96 2.402,406 0.50 97.8 112nov 11.5i 1 - 116 1.5 12.40 2.521.977 0.49 96.6 112doe 13.06 115 117 1.5 12.86 2.667.959 0.48 94.7 111

1989 a 13.58 110 l18 1.5 13.37 2 842.360 0.47 92.4 109feb 15.14 il8 !18 1.5 14.91 3.060.163 0.49 95.8 113Mar 20.23 125 121 1.5 19.91 3,604.950 0.55 108.5 131apr 51.00 125 1i7 1.5 50.18 5.789.112 0.87 170.3 199

124.15 125 1!5 22.d 93.38 11.848.102 0.79 154.9 178208.33 125 115 36.3 124.68 27.405.198 0.45 89.4 101

3w1i 563.14 116 11t 34.5 360.11 87,658,542 0.41 80.7 90aug 650.00 105 104 34.5 423.59 94.005.779 0.45 88.5 92aep 650.00 101 Low 34.5 423.51 95,263.241 0.44 87.4 87oct 650.00 104 104 34.5 425.75 96,218,601 0.44 86.9 90uov 650.00 112 108 34.5 417.44 97,994.561 0.45 83.7 90dec 1128.93 108 104 29.6 781.91 145,322,490 0.54 105.4 110

1990 e 1666.25 105 103 16.5 1385.98 236.260.937 0.58 114.3 118feb 3682.75 104 104 16.5 3075.10 454.822.107 0.68 132.9 138mar 4756.19 105 105 19.9 3809.71 782.898,052 0.49 95.6 100apr 4951.57 il1 110 21.5 3677.30 842,581,721 0.46 90.4 99

my 4990.95 114 114 21.5 3917.90 900.744.064 0.43 85.5 97i un 5313.75 119 119 21.5 4171.29 968,430,646 0.43 84.6 1013 5319.76 126 126 21.5 4176.01 996.758,694 0.42 82.3 104aug 5976.14 125 127 21.5 4711.50 1.160.551.630 0.41 79.8 101sep 5795.50 108 127 21.5 4735.68 1,263,704.935 0.37 73.6 94oct 5578.40 101 126 21.5 4632.03 1,296.496.134 0.36 70.2 90nov 5274.52 110 126 21.5 4299.97 1.340.746.891 0.32 63.0 81dec 5109.26 107 128 21.5 4190.99 1.340.746.692 0.31 61.4 79

mdion 98.60 97.90etandard deviation 24.16 20.58coefficient of variation 24.49 30.21

Uotees1. The echaupg rate ia the rate applicable to exports.2. The indez price ia the .716 export regiatration price.3. Export tTxe i nclude the ratenci6n, the XNTA levy. .6d the Statistics Tax (since Juun, 1989 ).4 The ad1usted exchange rate inorporetee the effect of the xprt tax and the ldes Price/FOB Price distortion (if any) on the export tax rate.S. The index is the tdjuetd e tange rate deflated by the Argentin non-agricultural wholesale price index.6. The F03 price (iu US dolcrs per ton) adjusted by th EE index (tKy 1985-100). The differene betvwen the adjusted and actual FOB price

reflcte the combined IWpact of export taxes and misalignment of the exchSane rate, relative to May 1985.

- 47 - ANNEX IIITable 2

Effective Exchange Rate for Wheat

Exzeb!,,; Rote Ind.. PrIce 108 Price Export Tazes Adjusted lxc N~Ion..Agric VPZ m E Index EER-&djuitad(A U I) (US$/(too) (U0$/ton) (2) 8t. (A-US$, index (May 1985-100) 808 Price(US$/ton)

1985 0.20 118.0 109 19.5 0.16 29.460 0.54 102.78 112.03feb 0.24 118.0 111 19.5 0.19 35.102 0.55 104.42 115.91mar 0.31 118.0 113 19.5 0.24. 45.356 0.5* 102.66 116.01apr 0.40 116.0 13 19.5 0.32 60.10 100.26 113.295a035 116. 113 196.. '0.42 79,867 0.32 100.00 113.00

1un 0.74 114.3 107 25.2 0.54 114,068 0.47 90.10 96.410.60 110.0 107 26.0 0.57 111,926 0.51 97.26 104.070.80 109.4 96 28.0 0.55 112,066 0.49 93.77 91.89sep 0.80 104.8 94 26.0 0.53 112,038 0.49 93.84 88.21oct 0.80 100.0 92 18.7 0.64 112.558 0.57 108.20 99.54nov 0.80 96.4 99 16.5 0.67 112.867 0.59 113.67 112.54doc 0.80 109.9 112 16.5 0.67 113.382 0.59 112.99 126.35

1986 ja 0.80 113.0 107 16.5 0.66 113,462 0.56 111.25 119.03feb 0.60 111.7 100 16.5 0.65 114,139 0.57 109.24 109.24mr 0.80 109.0 97 16.5 0.65 115,770 0.56 107.56 104.33apr 0.83 109.0 100 16.5 0.68 119.154 0.57 108.77 108.77

0.85 101.2 s8 16.5 0.69 121.736 0.57 107.97 95.010.87 100.0 84 16.5 0.70 126,751 0.55 105.75 88.83

F-Yi 0.90 100.0 80 16.5 0.72 133.522 0.54 102.57 82.06"US 0.96 100.0 80 16.5 0.76 143.667 0.53 101.56 81.24gap 1.05 88.7 80 11.8 0.91 151,781 0.60 114.56 91.63oct 1.09 83.0 81 6.5 1.02 1586706 0.64 122.49 99.22nov 1.15 83.0 80 6.5 1.07 167,604 0.64 121.84 97.47dec 1.21 80.2 79 6.5 1.13 176,386 0.64 122.22 96.561987 lan 1.29 82.3 64 6.5 1.21 186159 0.65 123.88 104.06ob 1.38 90.9 90 6.5 1.29 198 752 0.65 123.87 111.48mar 1.54 93.3 93 6.5 1.43 213,398 0.67 128.48 119.49*pr 1.54 92.3 92 6.5 1.43 217.321 0.66 126.16 116.07may 1.59 93.9 95 6.5 1.48 226,377 0.66 125.19 118.931un 1.70 95.8 96 6.5 1.59 242.131 0.66 125.37 120.35jul 1.69 96.0 83 6.5 1.75 265.100 0.66 125.70 104.40aU4 2.10 96.0 83 6.5 1.94 302,115 - 0.64 123.01 102.09sop 2.43 95.8 89 6.5 2.27 354.081 0.64 122.76 109.26Oct 3.21 94.0 94 6.5 3.00 473.266 0.63 121.06 113.80nov 3.49 95.5 95 6.5 3.26 495.094 0.66 125.89 119.60dec 3.49 96.2 96 1.5 3.44 505.042 0.68 130.05 124.851988 jan a.8 94.5 95 1.5 3.79 564.307 0.67 128.28 121.87lob 4.30 97.0 97 1.5 4.24 642.437 0.66 126.06 122.28mar 4.89 97.0 106 1.5 4.83 751,291 0.64 122.76 130.12apr 5.69 102.3 107 1.5 5.61 883.501 0.63 121.27 129.76may 6.35 107.1 110 1.5 6.26 1.096,801 0.57 109.06 119.97iun 8.02 132.0 133 1.5 7.90 1,342.531 0.59 112.47 149.59ul. 9.18 135.0 154 1.5 9.06 1.665.942 0.54 103.86 159.94"S 12.00 138.0 138 1.5 11.82 2.206,684 0.54 102.35 141.24cop 11.92 135.0 10 1.5 11.76 2.305.691 0.51 97.45 146.17oct 12.14 146.0 148 1.5 11.96 2,402.406 0.50 95.15 140.83

00v 12.59 152.0 149 1.5 12.40 2,521.977 0.49 93.93 139.95d.c 13.06 158.0 154 1.5 12.86 2.667,959 0.48 92.07 141.791989 Ian 13.58 159.0 161 1.5 13.37 2.842 380 0.47 89.90 144.75fob 15.14 157.0 160 1.5 14.92 3.060.163 0.49 93.14 149.03mar 20.23 157.0 156 1.5 19.92 3,604,950 0.55 105.59 164.72apr 51.00 155.0 156 1.5 50.24 5,789.112 0.87 165.81 258.66may 124.15 158.0 160 22.8 96.20 11,848,102 0.81 155.13 248.21

208.33 177.0 158 35.3 130.62 27.405.298 0.48 91.07 143.89FYJul 3563.14 155.0 156 34.5 370.10 87,658,542 0.42 80.67 125.85auS 650.00 153.0 153 34.5 425.75 94.005.779 0.45 86.54 132.40sop 650.00 130.0 148 33.5 429.31 95,263,241 0.45 86.11 127.44oct 650.00 151.0 148 32.5 434.47 96.218,601 0.45 86.28 127.69nov 650.00 150.0 150 30.5 451.75 97.994.561 0.46 68.08 132.13d.c 1128.93 148.0 148 30.0 790.25 145,822,490 0.54 103.55 153.231990 lc. 1686.25 146.0 146 26.5 1224.69 238 260 931 0.51 98.21 143.39fob 3682.75 151.0 151 24.5 2760.48 454.822.107 0.61 116.8L 176.38mar 4756.19 150.0 150 26.1 3514.82 782,898,052 0.45 85.78 128.67apr 4951.57 144.0 145 25.9 3677.96 842.581.721 0.44 83.41 120.94m, 4990.93 148.0 148 23.3 3818.08 "0.744.064 0.42 80.99 119.87

5313.75 148.0 148 21.6 4165.98 968.430,646 0.43 82.20 121.65FuY-l 5319.76 141.0 141 19.5 4282.41 996,758.694 0.43 82.09 115.75aun 5976.14 140.0 140 19.5 4810.79 1,160.551,630 0.41 79.21 110.89cop 5795.50 89.0 86 19.5 4625.95 1,263.704.935 0.37 69.95 60.15oct 5578.40 83.0 83 19.5 4490.61 1,296,496,134 0.35 66.18 54.93nov 5274.52 79.0 80 4.5 5040.13 1.340.746.891 0.38 71.83 57.46doc 5109.26 75.0 75 4.5 4879.34 1.340.746,892 0.36 69.54 52.15

madian 112.58 120.46Standcrd deviation 31.29 34.42coefficient of variation 27.79 28.57

Notes$1. The xichabgo rate is ths rate applicable to exportc.2. The indez price is the JNO export regietration price.3. Export tc include the retenci, the IlTA lvy. and the Statietics Tax (snc June. 1989).4. The edlucted exchangS rate ncorporatc the ffct of the export tax and tbh ltdex Price/OB Price distortion (it any) on the export tax.S. TheM index s the adjusted exchange rate deflated by the Argeatina non-agricultural Wholesale price iudex.6. The FOB price (in US dollars per ton) adjusted by tbe EEI Lndez (May 1985-100). The difforence botvems the adjusted and actual FOB pricereflecte the combined ispact of export taxse and misalignamnt of tbh *cbang rate, relative to May 1965.

ARGENTI NAEffective Exchange Rate for Maize

180-

170 -

160

150

140-

N 12 -12

go

110

700

60

50 -. ,111 ,,,,,g 11,,,, ,, ,-, 1111 .II5 .iu, *u.| uIIu X |--r- "'' '""

1985 1986 1987 1988 1989 1990

0 FOB Price + EER Index 5/85=100

ARGENTI NAEffective Exchange Rate for Maize

200-

190

170

160

1 SG~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~S

7N.6 140

C 130

120(-

100

900

70-

70

1985 1986 1987 1988 1989 1990

0 FOR Price 1 EER Adjust FOB

ARGENTINAEffective Exchange Rate for Wheat

170-1 60

150

140

130

120

80

70 -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

c 06

1985 1986 19ga7 1 988 1989 1 990

0 F0B Price + EER 5/85-100

ARGEN 'fiNAEffective Exchange Rate for Wheat

260 -t 250 -

240-230-220-210 -200 -

190-

1 804 r 6;i170-160

L

c 150 140-

Cl) 130 3 120-

110100908070

60

1985 1986 1987 1988 1989 1990

0 FOB Price + EER Adjust FOB [I b

- 52 - Annex IVPage 1 of 7

Statement on Agricultural Policv

Dear Mr. Clausen:

Re: Policy Statement on Macroeconomic and Agricultural Policv

The Government of Argentina wishes to request a World Bank loanto suppo:: an agrlcul:ural policy reform program.

Argentina has a favorable production environment which enablesself-sufficiency in cost agricultural needs, and allows i: to produce arange of internationally traded agricultural commodities for which it has acomparative production advantage compared to most of i:s marke.competi:ors. While agriculture has been growing a: an annual rate of abou:3% in recen: years, :he sector is advancing below its production pozer.:±al.

The dependence on the vagaries of the international market andincreased subsidies bv developed countries introduces an element of pricerisk whlch must be taken into account by producers in making investment andproduction decisions; production levels, therefore, could be expected to beless than that which would be obtained Ln a more guaran;eed and favorableproduc: price environment. However, in addetton to the inevitableinterna:tonal market uncur:ainties, the producer has been confronted withGoverumer.: policies which have had a depressing effect on prices andprofi:s. High overall level of export taxes have reduced producer prices,and the pr±ce uncertainty associated with changing expor: tax ra;es andinappropriate exchange rate policies has acted as a d±slncen:±ve toagricul:ural tnves:ment. Agricultural impor: tariffs and regulations havealso had nega:tve implica:ions for adoption of agric:lural technology. Incircums:ances of relatively low and uncertair. product prices and prof:tmargins, farmers have tended to opt for lower-risk:lower-outputtechnologies that have translated into a significant opportuni:y cost tothe cour.:ry in terms of foregone production and expor: earnings.

The Government has initiated a medium-cerm program Lo tackle theunderlying distortions in the economy so as to improve the incentivesnecessary for a more intensive use of agricultural resources to increaseproduction and exports, develop regional economies, and generateexployment. To this and, exchange rate policy plays a major role inmaintaining the competitiveness of exports and as a mechanism forallocating scarce foreign exchange; the system of export incentives isbeing strengthened and mos: agricultural export taxes are to be rolled backover a four-year period and replaced by a federal land cax based onunimproved market values; import tariffs on agricultural inputs notproduced locally are being implemented; quantitative and other restrictionsto agricultural inputs are being phased out; the development of a local

-53 - Annex IVPage 2 of 7

f ¶ l zc 4,qndustry 's benrg promoted to reduce costs -o :his po::an:

produc:torn npu:; and the lines of credi: for private irvestment -, thesector are :a be broadened.

Before going in:o the spec'f'c actior programs through whic6 thepolicy changes will be ins:±tuted, let me refe: to several o:heiinterrelated ma:ters deaalng with efforts to arrest ''fla:ion and promotegrowth and some of their side effects; and to the ongoing adjustmen:efforts of the Government that, to a considerable exer.:, provide themacroeconomic framework for the agriculture sec:or polic reforms tha: theGovernment has been adopting.

A. Adius=:ent Patter=s of the Arzentine Economv

Argentina has undergone a long period of very high ra:es ofinflation. Over the las: 10 years, price increases have averaged a monthlyrate o! 11:. As car. be expected during this period of hIgh infla:ton, anumber of differen: stabilization prograws were implemented. Hoveve:, :neydic no: achieve :ne expected results. The coc:Inuous cnanges in ec^cocl:policies have i' :nemselves been a source of significant ins:abili:y.

Jthen the democra:ic Governmcn: took office in Decembe: of. 983,infla:i4c had alreadv risen above 17Z a month. Moreover, s::ongir.fla:iocary forces were already a: work. Firs:, the previousadn'^Is:ra:ion had ended its period wrth a huge f'sca. :ef,t':' amount:ig to16Z of the GDP. Second, mos: social groups had been demanding anImprovement r. living standards after a long period of economicstagnation. ThIrd, the heavy burden of the country's external debt hadincreased the Government's financing requiremernts and l'- :t the growthpotential of the economy, adding to inflatIonary pressures.

The Government ir.!:ially adopted a rradu&lis: approach, aimet a:red_u:'nr r.'!az:oo s:e ads.l Iv thou: major :4s:t1.s :. e:ncmi:a::ivt:v. Thus, in 1984, real output recovere: slig.-:lv. anla tonr.,howeve:, c=t:Inued *'th a rIsing trend. ': tnus becaze eviaer.: nat: :heeconomv would no: be able to functLon w'th sucn levels o' Inf.ration.Individuals and f''rms were unable to plan beyond :ne ve-y snco:-:erm. As aconsecuence, Investment and produc:ion were slgniflcat.: affeccc. TheGovernmes: recog'Ized that price stabilizatior. had to tate place quIckly; aslov reduction of inflation would be very dIfficult to manage anc wouldsubject :he economy to a long period of unszable -:ices and reducedeconoml: a::'vi:y. Thus, price s:ab"':ty became a si'e oua noo for asustainable recovery.

B. Ontoir.s Adiustment Effortr

The Government's new program has three main aspects. FIrs:, a

drastic reduction ir. the fiscal deficit in order to cornrol tae mone;supply. Second, the introduction of a temporary wap and price freezcintended to eLiminate Lnflazionary expectaoions. Th-rd, adopt-Ion of ^

monetary reform In order to eliminate price Ladexa:ior..

Page 3 of 7

To undertake the adjustment successfully, the money supply had tobe under control. Thus, the overall fiscal deficit had to be reducedsignificantly. Through the adoption of a number of measures to reducepublic sector expenditures and increase tax revenues, the deficit wasbrought down from 12% of GDP in 1984 to 4% in 1985. Since the announcementof the economic program in June of 1985, the Government has been able toreduce the deficit further during the second half of the year to below 2%of GDP. This has been possible in spite of large interest payments on theexternal debt.

The wage and price freeze, intended to eliminate the inflationary-momentum", is not intended to enforce an artificial price structure.First, it is regarded as a complement, and not a substitute, of adequateaggregate demand policies. Second, 'key" prices were adjusted before cheprogram started so as to avoid future upward pressures. The real exchangerate was depreciated in order to obtain a substantial surplus in the tradebalance and public sector prices were increased in real terms.

The drastic and sudden reduction in the rate of inflation couldhave created a serious situation because very high nominal interest ratescould suddenly have been transformed into extremely large real rates asprices stopped rising. This would have caused large income transfers fromdebtors to creditors. In order to offset this possibility, the programintroduced a new currency (the austral) and a 'conversion scale" that fixeda daily exchange rate between the new austral and the old peso, to be usedfor cancellation of peso-denominated debts or Lndexed debt reflectingpre-reform inflation indices.

The first results of the new prdgram have been encouraging. Asizeable step has been taken in the direction of bringing inflation undercontrol. The Consumer Price Index fell from a monthly level of 30.5% lastJune to 6.2% in July; 3.1% in August, 2% in September, and 1.9% inOctober. The Wholesale Price Index, on the other hand, declined from 422in June to -0.9% in July, 1.5% in August, 0.6% in September, and 0.8% inOctober. There have also been significant changes in the behavior offinancial markets, among them a substantial increase in demand for money.The Ml to GDP ratio, which had practically vanished prior to the economicreform, increased dramatically in the first two months foilowing thereform. At the same time, index-linked deposits have disappeared, a goodreflection of the growing confide'nce in price stability. Also, largeexternal inflows of short-term capital have taken place following theintroduction of the new measures that intended to take advantage of thelarge differential between domestic and international interest rates. TheGovernmenc has acted to discourage these short-term capital inflows whichhave proven to be disruptive in the past.

The drastic slowdown in inflation is causing important changes in"microeconomic" behavior. Consumers are now able to 'memorize' prices,something that was nearly impossible when prices changed almost daily.Price competition works more effectively as firms cut their prices belowthe levels officialy quoted. Firms have alsa a stronger incentive to watchtheir costs closely. These changes indicate some of the positiveconsequences that result from a sustained stabilization.

-55 - Annex IVPage 4 of 7

Economic activity had been declining since late 1984 and afterJune 1985, fell even further. This was caused by a drop in demand asconsumers delayed their spending and by the elimination of excessiveinventories by firms. The private sector has reduced its working hours andlayoffs have been reported. The economy is thus undergoing a deeprecession. However, some sectors have begun to show aa increase in salesover the last two months, which has permitted the absorption ofinventories. If sustained, these developments may lead to increases inoutput in the near fucure. While it is coo early to indicate that arecovery is under way, the recession does not seem to be worsening.

The sudden transition from an economy verging on hyperinflationto near price stability has not been accomplished without problems. Theeconomic recpssion is far from over and the country needs to recover itsoutput and employment generation potentlal. Inflationary expectacions havenot been eliminated completely. This is reflected in iaterest rates which,given the small present inflation, are very high in real terms. Publicenterprises are showing a slower than expected adjustment to the newsituation of fiscal disciplIne. Some provincial governments are alsoshowing reluctance to accommodate their expenditure levels to theiravailable incone. Other sectors are concerned about the possibillty ofrenewal of inflation once the freeze is ended.

The Government Is aware of these concerns but expects that itseconomic management efforts will allay them. Fiscal restra'nt will bemaintained. The freeze will be phased out graduaily, following agreementswi:h the different sectors concerned, so that it may end without a surge Inprices. As the councry benefits from the experir.ce of several months ofvery low inflation, inflationary expectations are likely to be brokenfurther. This may help to lower interest rates and iaduce the privatesector to expand output. The Government's economic growth strategy isbased on increasing exports and promoting private sector investment. Inorder to be able to renew real economic growth, the country needs toincrease domestic savings and improve the allocazion of investmentresources. Over the longer term, price stability can only be sustained bya growing economy.

C. Agricultural Policy Reforms

The agricultural policy reforms relate to five major categories:(1) exchange rate polLcy; (2) export incentives; (3) revenue measures; (4)trade regime; ard (5) administrative procedures.

In connection with exchange race policy, the Government willcon:Inue with the course followed during June of 1985. A sIgnificant realdepreciatIon of the Argentine currency took place. The Government willcontinuously review the level of the real exchange rate taking intoaccount, inter alia, the differential between international and domesticinflation and balance of payments evidence, to ensure its adequacy.

-56 - Annex IVPage 5 of 7

In connection with expor: taxes, the Government intends togradually remove exporc taxes on agricultural commodi:ies as a significantsource of fiscal revenues, The first phase of this program will berepresented by a roll-back to the races existing in May 1985 for exportsproduced in the 1985/86 agricultural season, followed by a reduction torates not to exceed 70% of the May 1985 rates, and then to rates not toexceed 50X of the Hay 1985 races- by the 1988 tax year; the latter wouldrepresen: an average tax rate of about 9% on the five major cropcommodicies, considering the export mix of primary and processed products(oils and meali). Further reductions in a second phase of the programwould be made in accordance with the overall study of ectoral taxation.and-progress in developing effective substitute sources of tiscal revenue. Theobjective is to maintain a low flexible level of export taxes, say around5% on fob value, and to use this tax measure to assist in pricestabiliza:ion.

The Government has not made an analysis of the propor:ion offiscal revenues which should be supplied by the agr'cultural sector; nor isit easy to define exactly how much the sector has been contribu:'ng tototal provincial and federal revenues because of the existing system offiscal accounting. Because of the heavy reliance the Governmen: has placedon export taxes as an easily-collec:ed revenue source (about 11% of federalrevenues Ln 1983 and 1984), the agriculcural sector, as the main exporter,has experienced a fluctuat±ng share in the total tax burden in accordancewith the export tax regime imposed by the Government at any one ctime,rather chan in accordance with its net income generation or use of nationalresources. Thus, the Government intends to carry out a study co determinea basis for formulating an appropriate tax burden for agriculture inrelation to other sectors, and would also examine alternatives to exporttaxes as a fiscal revenue measure, in addlt:.'on to :he proposed federal landtax.

The Government intends to introduce a federal land tax as a majorsource of seccoral taxation. A draft law has been presented to Congress ir(November , 1985) to permit the implementation.of this tax which, forcons:t:u:ional reasons, would be described as a tax payment advance againstprofit, capital and net worth taxes under an emergency law format. The lawwould be valid for f've years, as is customary for this type oflegislation, and would be renewable for five-year periods. Finalpreparation activities were commenced in November 1985 and addressinstitutional arrangements, agroeconomLc and cadastral issues, and taxcollection and sharing agreements between the provinces and the FederalTreasury. The cadastral base and administrative arrangements would besatisfactory for the implementation of the first phase of che federal tax(able to generate about US300 million) by mid-1986, and it is envisagedthat the cadascral base would be adequate for a federal land tax of overUSS500 aillion in 1988.

57 - Annex IVPage 6 of 7

In 1984, the import tariff policy was modified to favor the useof some agricultural inputs such as fertilizer and insecticides. However,in Juce L985, 10 percentage points were added to existing tariffs as a180-day measure to increase fiscal revenues. In addition, the import oftractors and a range of agricultural machinery is prohibited, and thisrepresents a constraint to the introduction of some appropriate technologyLa farm machinery. The Goverument will remove the temporary increase inimport tariffs on agricultural inputs at the expiration of the 180-dayperiod. Agricultural machinery currently ln the "prohibited" category willbe changed to the "prior review" category of imports. The overall tarifflevels for all types of commodities will also be revieved with the-objective of rationalizing tariff policies across all sectors.

There are other areas related to agriculture where the Governmentalso intends to act. Fertilizer use has been very low in Argentineagriculcure, largely due to unfavorable benefit: cost ratios for use ofthis input. These ratios have been poor, on the one hand because ofrelatively low product price, and on the other hand because the cost offertilizer has been relatively h'gh. The latter has occurred because theprice has been based on cif cost rather than a local cost of production,and, until recently incurred an import tariff. The Government is adoptingthree measures to promote the use of fertilfzer and thereby increaseproduction: (1) a payment-in-kind fertilizer credit program adWtnisteredchrough che JNG is designed to: (a) encourage the use of fertilizer byguaranteeing a known price relationship between fertilizer and the finalproducz (which has been an important concern in the recenthyperinflationary environment); and (b) promote sufficient fertilizer usageto encourage the pr±vace sector to invest *in erficient and competitivefertilizer dtstribution and service networks; (2) promotion of localferz'l'zer manufac:uring indus:ry based on existing natural gas resources;and (3) continuation of applied research on che use of fer:il'zer on arange of crops throughout the agricul:ural zones.

The Government policy with respec: to markeDing of agr±culturalproduce will be to: (1) promote the participacion of the private sector,especially cooperative organizations, in grain transport, storage andmarke:ing; (2) particlpate in infras:ructural investment where i: isnecessary to promote economic agricultural development in non-traditIonalagricultural areas, or where Lt is necessary to complement the privacesector investmenc to ensure orderly marketing of agrLcultural produicts; (3)act as a compecitor in the agricultural commodity market where necessaryand set Lndicative export prices to ensure producers receive full marketvalue for their products (through JNG); and (4) provide or ensure adequatemarketing investmen: and operational credit.

The total agricultural sector credit portfolio in each of thelast few years has been lest than 50Z of the portfolio registered in 1980reflecting the decline in the use of credit. The enviroment of politicaluncer:ainty and high inflation combined with posittve interest rates hasnegatively affec:ed the demand for credit* especially long-term credit.

- 58 - Annex IV

Page 7 of 7

Hovever, in the case of short-term production credit, inadequate supply bythe Banco de la Nacion and Provincial Banks has been a constraint in recentyears. The latcer has been associated with the Government's program ofcredit restriction to combat inflation. The Government's program ofpromoting increased agricultural production and exports will requiresubstantial amounts of investment and short-cerm credit. Suttablefinancing of the machinery pool is especially critical, as the purchase ofmachinery is more dependent on the availabilty of attractive financing chanon the price of the machine itself. As the economic stabilization programbrings inflacion under control, the Government intends to make adequaceresources available to financial institutions to meect ha demands for bachlong-term and short-term credit in the agricul:usAlasctor.

The Government has put togecher an ambitious program of policyreform designed to have a lasting impact on the scructure of Argentina'sagriculture. The Government believes that the export-oriented s:rategywill yield positive results.

I should like co stress that while th's statement has focussedupon economic adjustmen: agricultural policy, cont±ntied emphasis would beplaced on a socioeconomic program to sustain growth, increase expor:s,reform the financial sector, generace employment, and improve liviagstandards. Such development with the adjustment described in th±s letterremaias our medium-term goal.

In view of the measures befng taken, the .Argentine Governmentwould appreciate your favorable consIderacion of Let request for anAgriculture Sector Loan. We look forward to a con:'nuing exchange of ideaswith the Bank and to the oppor;uni:y to discuss from cime to time theprogress made in ±mplemenzing those reforms.

Yours sincerely,

Juan V. SourrouilleMinister of Economy

Buenos Aires, March 18, 1985

Area Ptanted to Maior Cereals ad Oilseeds. 1960181-1989/90(t_Uxanu of hectares)

1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90

wheat 6,196 6,566 7,410 7,200 6,000 5,700 5,000 4,850 4,660 5,656

Maize 4,000 3,695 3440 3,484 3,620 3,820 3,650 2,825 2,485 2,206

Sorghun 2.400 2.712 2.657 2550 2,040 1.400 1.127 1.075 820 819TotaL 12,596 12,973 13,507 13,234 11,660 10,920 9,777 8,750 7,965 8,681

Soybeans 1,925 2,040 2,362 2,920 3,300 3,340 3,700 4,413 4,600 5,097

Sunflower 1,390 1,733 1,930 2,131 2,370 3,140 1,891 2,117 2,265 2,790

Linseed 780 851 910 810 620 750 758 671 153 590

Peanuts 201 180 125 146 146 176 240 194 _153 190Total 4,296 4,804 5,327 6,007 6,436 7,406 6,589 7,395 7,588 8,667

Source: JNG and SAGyP

OQm

o a

Prodictian of Maior Cereals md Oils seeds, 1980IS-lgSO)90(thossands of tans)

1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90

Wheat 7,780 8,300 15,000 13,000 13,600 8,700 9,000 9.500 8,360 10.150Maize 12,900 9,600 9,000 9,500 11,900 12,100 9,250 9,200 4,260 5,000Sorghtsn 7,5 _000 7.400 6.900 6.200 4.000 3.000 3.200 1.360 2.300Total 28,230 25,900 31,400 29,400 31,700 24,800 21,250 21,900 13,980 17,450

Soybeans 3,977 4,150 4,000 7,000 6,500 7,100 6,700 9,900 6,250 11,000 oSunflower 1,260 1,980 2,400 2,200 3,400 4,100 2,200 2,915 3,100 3,800Lirseed 585 600 730 660 500 460 622 535 416 520Peanuts 170 205 162 235 240 259 350 310 210 220Total 5,785 6,935 7,935 10,095 10,640 11,919 9,872 13,660 9,976 15,540

Source: JNG and SAGyP

0

0 a

Ln Ce

tietds Ler Hectare of Major Croas. 198I-81-989I9O(Kg per hectare)

1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1/

Wheat 1,549 1,400 2,049 1,837 2,305 1,617 1,836 1,984 1,840 1,790Maize 3,801 3,028 3,030 3,141 3,563 3,745 3,190 3,774 2,803 2,270Sorghum 3,595 3,187 2,937 2,911 3,155 3,125 3,071 3,347 2,878 2,800Soybeans 2,005 2,090 1,754 2,405 1,988 2,141 1,896 2,264 1,601 2,160 1Sunflower 984 1,184 1,262 1,106 1,447 1,346 1,268 1,435 1,437 1,360Linseed 806 733 845 821 829 669 836 816 742 880Peanuts 864 1,145 1,296 1,613 1,644 1,497 1,468 1,629 1,372 1,160

Source: JNG and SAGyP

o t2 0

X-h

v}

-62 - Annex VPage 4 of 5

Grain ExDwrts 1980/81 to I90/90 Al(mitlions of tons)

Wheat Maize Sorghum Soybeans

1980-81 3.9 0.9 4.9 2.71981-82 4.3 4.9 5.2 1.71982-83 7.5 6.5 4.9 1.41983-84 9.7 5.9 4.8 3.01984-85 0.8 0.7 3.4 3.31985-86 6.1 7.4 2.2 2.61986-87 4.3 0.4 1.0 1.31987-88 0.5 0.5 0.8 2.61988-89 3.2 3.1 1.1 2.11989-90 5.5 2.8 1.1 0.4

Xf Commercial years run from July 1 to June 30 of the fotlowing year.

So-rce: JNG

Agricultural Exworts od Effect of Export Taxes

Crop Year 1985/6 Crop Year 1988/9

Total Export Tax Total Export TaxExports Ft8 Value Value Ueight at 5.1.1985 Exports FOB Value Vatue Weight at 10.26.19a8

tni l.tons) (US$/ton) (million USS) (S) tX of FOB) (million tons) (USS/ton) (million USS) (t) tX of FOB)

Wheat 4.4 95 418.0 14 18 5.00 140 700 14 0

Maize 7.0 100 700.0 22 21 6.00 120 720. 14 0 1

Sorghum 2.3 85 195.5 6 20 1.55 100 155 3 0 c

Sunflower Seed 0.3 200 60.0 2 25 0.30 280 84 2 10 I

Sunflower Seed Oil 1.1 440 484.0 15 14 0.95 500 475 9 0

Sunflower Seed Neml 1.4 65 91.0 3 15 1.25 130 163 3 0

Soybeans 2.7 190 513.0 16 25 2.50 290 725 14 11

Soybean Oil 0.6 410 246.0 8 10 1.25 480 600 12 3

Soybean Neal 3.0 147 441.0 14 10 6.00 250 1500 29 3

Total 314U.5 100 5123 100

Weighted Average 17.59 2.97

Note: Export and FOB value data for 1988/9 are based on JNG and Bank estimates.o X

MAP SECTION

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SEPTEMBER 1985