Book: Argentina: An Economic Chronicle How One of the Richest Countries in the World Lost Its Wealth Vito Tanzi

One hundred years ago, Argentina’s exports accounted for 7 percent of world exports,

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?

It is Fiscal mismanagement, pure and simple, is Tanzi’s answer.

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.

from here