Vito Tanzi, the former long-time Director of the IMF’s Fiscal Affairs Department, knows Argentina well. Over the past four decades, he traveled to Argentina about thirty times and lived there for a combined period of more than one year. This book is a history of Argentina from the perspective of his periodic visits and contacts. Although Tanzi focuses on the economic and fiscal problems of Argentina, the span of his book is broad.
Argentina: An Economic Chronicle is a thoroughly enjoyable memoir, with stories of encounters with presidents and ministers, artists and intellectuals, politicians and journalists, and taxi drivers and Italian immigrants. It collects the impressions—over four decades—of a European visitor to Argentina, as he tries to decipher the national culture and history, reflects on the fate of the many Italian immigrants to that land, describes places of stunning natural beauty (it was not all work and no fun after all), and relates the (inevitable) experiences of the frequent international traveler, including strikes, scary flights, and food poisoning.
Tanzi must also be fond of Argentina because it served to inspire the “Tanzi effect.” (In Argentina, this is often called the “Olivera effect,” in honor of Professor Julio Olivera of the Universidad de Buenos Aires, who also wrote about fiscal lags at about the same time.) The Tanzi effect explains that the real value of tax revenues falls in high inflation, as a consequence of the usual time lags in the collection of taxes—for example, between the moment when income is earned and when income tax is paid. With high inflation, this lag implies that by the time the government receives the money, its purchasing power has already depreciated, and the money will not go as far in purchasing goods or paying salaries (that often become indexed to inflation faster than taxes). At moderate rates of inflation, the Tanzi effect is negligible; at triple-digit rates and higher, it can be devastating. Argentina has, unfortunately, been the perfect subject for Tanzi’s observations and estimates of the fiscal lags’ effect.
Although the book is not technical, and does not contain charts or equations, Tanzi makes a serious attempt to explain the inexplicable secular economic decline of Argentina. One hundred years ago, he notes, Argentina’s exports accounted for 7 percent of world exports, and its per capita GDP was higher than France’s and twice as large as Italy’s. The economic history of Argentina is a history of un-development. What caused this economic tragedy? Fiscal mismanagement, pure and simple, is Tanzi’s answer. Since the Peronist regime started to create an overextended welfare state in the 1940s, the country became unable to balance the fiscal accounts ever again. This resulted in decades of persistent inflation, punctuated by devastating hyperinflation episodes, because the central bank was the ultimate source of finance for the fiscal disequilibrium. When, in 1991, Argentina adopted a currency regime that precluded central bank financing of the government deficit and effectively eliminated inflation, the fiscal imbalance resulted in an explosive accumulation of government debt, which ended in a notorious sovereign bond default by end-2001. This is where the book may prove especially controversial. Tanzi thinks that the IMF lending to Argentina during the 1990s was largely responsible for the debt accumulation that resulted in the financial crisis. Whatever one thinks of the IMF’s advice to Argentina at the time, which in fact was much more nuanced than commonly thought, this does not change the fact that global private markets were anxious to lend almost unlimited amounts to Argentina at the time. Granted that markets charged a higher interest rate than the IMF, but would this detail have stopped the borrowing and spending?
But what has been the ultimate cause of the secular impossibility to balance the books of the state? Many have blamed a famously abysmal taxpayer compliance. Taking off from the joke that “Argentines are Italians who speak Spanish and think that they are British,” Rudi Dornbusch commented that the “problem of Argentina is that the unions are British but the taxpayers are Italian.” But culture alone does not explain poor taxpayer compliance. A system with huge tax rates and almost no compliance enforcement can destroy taxpayer culture, even in Finland. In fact, tax revenues have increased significantly over time, and at least part of the credit goes to the recommendations of an IMF mission that Tanzi headed in 1989, along with the 1990s’ high growth rates and falling inflation (the other side of the coin of the Tanzi effect). Unfortunately, government spending grew more or less in line with tax revenues, and the fiscal disequilibrium did not close. Tanzi says that Argentina is “a society that over the long run wanted a level of public spending larger than what it was prepared or able to finance (through taxes or other ordinary revenues).” But why? Argentina’s inexplicable decline is still unexplained.
Originally published at Finance & Development and reproduced here with the author’s permission.