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World Bank Document ReportNo. 15402-AR Argentina The Convertibility Plan: Public Disclosure Authorized Assessmentand Potential Prospects (In Two Volumes) Volume l: The Main Report July12, 1996 CountryOperations Unit II CountryDepartment I Latin Americaand the CaribbeanRegional Office Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Q)ocu*nntof theWorld Ba4nk Currcncy Equivalents Currency Unit: Peso (As of July 1996) US$ 1 = ARG$1 Fiscal Year January 1 - December 31 Glossary of Acronyms APC State Employment Agencies' Program ATN Treasury Grants B.A. Buenos Aires BCRA Central Bank of the Republic of Argentina BHN Housing Bank BIS Bank of International Settlements BOCON Government Debt Consolidation Bonds BONEX Dollar denominated Treasury Bonds CET Common External Tariff CGE Computerized General Equilibrium Model CPI Consumer Price Index EFF Extended Fund Facility ENTel National Telecommunication Enterprise EPH National Household Survey FDI Foreign Direct Investment FEDEI National Electric Development Fund FIEL Foundation for Latin American Economic Research FONAVI National Housing Fund GATT General Agreement on Trade & Tariffs GDP Gross Domestic Product HUBN Households with Unsatisfied Basic Needs IMF International Monetarn Fund INDEC National Statistics & Census institute LAIA Latin American Integration Association LFP Labor Force Participation LIBOR London Interbank Offer Rate MERCOSUR Southern Cone Common Market NTC National Trade Commission OECD Organization for Economic Cooperation & Development PAYG Pay as you go PEP Partial Subsidy for Private Employment PPF Production Possibility Frontier PRENO Public Sector Social Program PROAS Public Sector Social Program PROEDIS Public Sector Social Program PRONOPAS Staging Study Abroad PYMES Small and Medium Enterprises QR Quantitative Restriction SEGBA Water Company SIGEN Government Internal Auditors TBILL Treasury Bill TFP Total Factor Productivity USA United States of America VAT Value Added Tax WTO World Trade Organization YPF Oil Company COUNTRYDATA -ARGENTINA AREA POPULATION DENSITY 2766.9thous. sq.km. 34.2 million(mid-1994) Countrydensity 1991 11.7hab.per aq.km 1.2%annual growth Ruraldensity a. 16.9hab. per sq.kmof arableland POPULATIONCHARACTERISTICS aI HEALTHbl CrudeBirth Rate (per 1000-1992) 20.5 Populationper physician (thous.) 0.4 CrudeDeath Rate (per 1000- 1992) 7.9 Populabonper hospital bed (thous.) 0.2 InfantMortality (per 1000live births-1992) 23.6 INCOMEDISTRIBUTION bI DISTRIBUTIONOF LAND OWNERSHIP % of nabonalincome, highest quintile 51.0% % ownedby top 10%of land owners % of nationalincome, lowest quinble 5.0% % ownedby smallest1 0% of land owners ACCESSTO SAFEWATER (1991) ACCESSTO ELECTRICITY11989) % of populabon- urban 72% % of populaton 95% % of populabon- rural 17% NUTRITIONal EDUCATION Calorieintake as % of requirements 119.2% Adult literacyrate % (1980) 95% Per capita proteinintake (gramsper day) 99.7 Primaryschool enrollment % a/ 100% GNPPER CAPITA IN 1994dl 8,060 GROSSDOMESTIC PRODUCT IN 1995 di ANNUAL GROWTHRATES (% constant prFIes) USSBill. % (current prices of GDP 1965-73 197340 19B0-94 1995 GDP at marketprices 276.0 100.0 4.3 2.2 1.3 -4.4 GrossDomestc Investment 49.1 17.8 6.8 4.3 0.1 -15.9 GrossNabonalSavings 45.3 16.4 2.5 2.3 -18.3 4.1 CurrentAccount Balance -2.3 -1.4 ExportsofGoods&NFS 23.9 8.9 -4.7 141 5.2 26.1 ImportsofGoods&NFS 23.7 8.7 0.6 13.3 -13.0 -10.5 OUTPUT,LABOR FORCEAND PRODUCTIVITYIN 1995 Value Added (constant prices) Labor Force ti VA. Per Worker Arg $ Thousand % of Total Thousands % Arg S Agriculture 915 7.5 2,964 12.0 309 Industry 4,346 35.8 7,755 31.4 560 Services 74,721 615.1 13,978 56.6 5,346 TotalGDPatFactorCost 12,148 658.4 24,697 100.0 492 GOVERNMENTFINANCE g/ Federal Government Provincial Government Million Pesos %ofGDP Million Pesos %oOGDP 1995 1995 1995 1995 CurrentRevenues 49,038 16.9 CurrentRevenues 24.093 8.7 CurrentExpenditures 48,449 16.8 CurrentExpenditures 27,492 10.0 CapitalRevenues 1,256 0.3 CapitalRevenues 239 0.1 Capital Expenditures 3,218 0.4 CapitalExpenditures 3,999 1.4 Surplus -1,373 0.0 Surplus -3,179 -1.2 a/ For theperiod 1982-1985. b/ For the period1970-1976. c For the period 1987-1992. d/ CurrentUS dollars.Estmated usingBank Atas methodology. a/Current US dollarestimates, calculated from datain constantArg S 1986. f/ Calculatedby applying1980 census shares to 1994populabon. gl Cash Basisin currentPesos, includes Central Administration, Social Security and PublicEnterpnses. COUNTRYDATA . AROENTINA MONEY,CREIXT AND PRICE 16 192 1993 1994 165 (_ o Paw; erd of p.1o4) Momn OoASrmoneye/ 11,003 17.467 24,682 27,535 DamnsdoBaBnCndi to Pbc edorf a 15,004 12,010 14,871 18,052 Do i Bt CrMto*Pi sebBdoWro 22,046 34.261 43.243 52,130 MomnyandC Mony ss % dODP 6.1 7.7 9.6 9.8 Wh_FeeIPcdes1apIlUI-.100) di 90.8 104.7 106.4 107.1 115.4 Ain pwweu Ir_ hI: GulW loee Pib mau/ 110.7 6.0 1.6 0.7 7.7 BS Cred to Pubk Sedm .. -20.0 23.8 7.9 BStnkCredloPrlto Sedor .. 55.5 26.1 20.6 .. MERCHANDIS8EEXPORTS(Avwag.1661-1665)b/ LLANCEOFPAYMENTSbi 1962 1993 1994 1"5 US$SM %atTotal Prinury product 3723.0 25.1 Men. of agsliurnl oigin 5584.3 37.7 EngoiaofGoods. NFS 15,272 15,624 18,507 23.657 Menu. of kd *dodgin 4121.5 27.8 bhpt of Goods.NFS 18,817 20.684 25,591 23,724 Fuels 1381.8 9.3 Resouce B9aie -3,545 -5,060 -7,084 133 TotalMerchidso Exports 14810.6 100.0 ftaed Paynieri (nol) -2,695 -1,109 -1,277 -1,218 OlerFedor Payeubi(nel)at -845 -1,273 -1,270 -1,624 TddPlbktDl OuleO l*ilgADisburad (EndINS)bf Ur1S11m Not Cmd Transfr 749 411 320 432 Balnce an Caret Accot -4.336 -7,031 -9,311 -2,277 Total 87091 IBRD 4462 CaprftalAccoLt 10.162 11,408 9,668 2,206 IDB 4791 IMF 6120 FiNls Sedor 6.632 7.065 6,376 4.996 Biataluls 11614 PulbcSsdor 1.530 4.343 3,492 7.206 BonrJ 58340 Conmerdal Baits 1764 Chlng.s In Gros Rea. ( * h s ) 3.826 4,377 557 -69 DEBT SERVICERATIO, 1994 55.7% RATE OF EXCHANE IBRDADALENDING, DECEMBER 31, 1995(1M U3S) bl US# 1. Ag.6 I IRD IDA OWistandnga DIslsed 4462 i/Sourc: IMF. bvSoure: MUrdiy of Ec00mw c/So : INDEC d/Aveng Mai for ts year. zt Basedon fI avwagelo der for yew. Source:Mistry of Econory. TABLE OF CONTENTS Page Number Executive Summary ........................................... i Resumen Ejecutivo .. ........................................ vi CHAPTER I: Defining the Convertibility Plan . ...........................1 A. Origins of the Crisis Leading to the Convertibility Plan ............................ 1 B. The Convertibility Plan .......................................... 2 The Convertibility Law ....................................... 3 Public Sector Reform........................................ 4 Debt Restructuring ....................................... 7 Social Security Reform ........................................ 8 Trade Reforms........................................ 9 CHAPTER II: Economic Performance and Macroeconomic Implications of the Convertibility Plan .............................. 11 A. Economic Performance (1991-94) .11 Public Sector Performance (1991-94) .12 Capital Inflows, the Current Account and the Real Exchange Rate. 15 Effects on Financial Markets .17 Monetization and Dollarization.18 The Response of Trade Flows to Liberalization.18 Investment: Recent Trends and International Comparison .21 Savings: Recent Trends and International Comparison.23 Evolution of Productivity and Competitiveness.24 B. Impact of the 1995 Mexican Crisis .. ........................ 27 CHAPTER 11: Sustaining High Economic Growth . ...............................31 A. Simulating a Pattern of Sustainable High Growth................................... 31 B. Policies Conducive to Higher Economic Growth..................................... 34 Investment .................................... 34 Private Saving................................... 36 International Trade Regime................................... 40 C. The Unfinished Reform Agenda ....................... 45 Argentina's Provinces: New Priorities for Public Sector Reform ......... ...45 Provincial Expenditure Efficiency............................................ 45 Recommendations for Reform............................................ 48 Relations between Provincial Governments and the Financial Sector .51 Labor Markets and Institutions .................. ........................... 52 Employment Performance ............................................. 52 Wage and Earnings Performance............................................. 54 Determinants of Unemployment ............................. ................ 54 Prospects ............................................. 55 Recommended Course of Action............................................. 56 Financial Markets ............................................. 58 The Banking Sector ............................................. 59 The Capital Markets ............................................. 62 D. End Note ............................................. 63 Statistical Appendix (in volume II) EXECUTIVESUMMARY 1. Five years have passed since Argentina, faced with the most severe of a series of economiccrises characterizingthe eightiesdecade, adopted the ConvertibilityPlan. This courageousand innovativeplan restructured the country's economic landscape, generating prospects for unprecedented stability and economicgrowth. The purpose of this report is to review the achievementsand challengesthat this Plan has brought to the Argentine economyover 1991-94, and then assess prospects for economic growth in the wake of the economicturbulence that beset Latin America in 1995. The 1991-94Record 2. Argentina
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