The World Bank announced yesterday that it will lend Argentina $350 million to help the debt-burdened nation make major changes in the way it taxes agriculture, in order to boost its farm exports $1 billion a year by 1989.
World Bank Vice President David Knox said the loan is of the kind called for by Treasury Secretary James A. Baker III in his three-part initiative to help major developing nations resume economic growth while continuing to pay their foreign debts.
It is the first loan to a major debtor nation, although the bank has made similar loans to smaller debtors since Baker unveiled his strategy in October at the annual meeting of the International Monetary Fund and World Bank.
Baker said that policies in many of the countries hinder economic growth. He urged debtor nations to make significant reforms in their economies and called on multinational lenders such as the World Bank and the Inter-American Development Bank to make vast new loans to support such reforms.
Knox said that if Argentina makes other needed reforms, the country's economy could grow at 4 percent a year. Last year, economic output fell by that amount in a serious recession spawned by Argentina's program to contain inflation.
Knox estimated that 50 percent of Argentina's export income is required to pay the interest on its $53 billion in foreign loans. By the end of the decade, exports could grow so much that interest payments would absorb only 30 percent of its foreign income.
Knox said that the Baker proposal gave increased impetus to the World Bank's lending programs designed to encourage policy changes in developing countries.
In the spending year ended June 30, about 15 percent of the World Bank's loans were made to support economic reforms. In the year that ends this June, about 30 to 33 percent of its loans will be policy-oriented, he said.
Knox said that the World Bank is working on two more big loans to Argentina, a $500 million loan to Mexico to encourage trade liberalization and two large loans to Brazil to support changes in its massive electric-power industry and its agricultural sector.
Brazil, Mexico and Argentina are the developing world's biggest debtors. Brazil and Mexico each have about $100 billion in foreign debts.
Knox said that it would be unfair to characterize the Argentine loan as a Baker-initiative credit because the country and the bank had been discussing such a loan for 18 months. But Knox said that Baker's proposal gave negotiators "a bit more urgency to get on with it."
Within the next year or so, the World Bank expects to lend Argentina about $1 billion to support the country's economic reform efforts, Knox told reporters.
He said the bank is working on a similar $350 million loan to support Argentina's efforts to remove import and export restrictions on industrial products and to encourage Argentine industry to produce for foreign markets as well as domestic buyers.
The bank also expects to lend the country about $300 million to strengthen some of its state-controlled enterprises and to restore others so that they can be sold back to private interests.
The farm reforms Argentina is undertaking are designed to increase farm income, reduce costs to farmers and make Argentine exports more competitive in world markets.
Farm exports account for about 75 percent of Argentina's total exports, which last year came to about $8 billion.
Knox said that Argentina will substantially reduce the taxes it levies on farm exports.
The reduction in taxes, which now are as high as 38 percent, will permit farmers to receive higher prices for their exports -- mainly wheat, corn, sorghum and soybeans -- without raising the price of the products on world markets.
The export tariffs kept the price of farm products low, while tariffs on imports farmers need -- such as fertilizers and tractors -- boosted farm costs. That discouraged investment in what has been considered a generally efficient agricultural sector.
Knox said the agriculture reforms should stimulate investment in Argentine farming.
To replace the income lost from taxing exports, the Argentine government will propose a graduated land tax similar to those levied in many countries.
The tax would not discourage production as the export levies do, Knox said.
The land tax presents a sticky federal-state problem for Argentine President Raul Alfonsin, however. Many Argentine provinces already tax farmland and view the central government's proposal as an intrusion on their taxing rights.