the economic role of the state

[from Vito Tanzi's Argentina: An Economic Chronicle: How One of the Richest Countries in the World Lost Its Wealth, Jorge Pinto, 2007]

A different and longer-lasting problem was created by the welfare state policies established in the 1946-1955 period. These policies promoted and legislated an economic role of the state, that is an implicit set of promises to the citizens that required large public spending and, therefore, large public revenue to contain fiscal deficits and avoid fiscal difficulties. After World War II, the financing of public spending had been facilitated by the reserves accumulated during the war and by large rents from the export of commodities (although these rents had not been sufficient to finance all the spending). Future governments would not have those rents and would find themselves with a welfare state that the country could no longer afford. When this happens, and countries are unable to politically change the legislated role of the state, they generally try to cut spending administratively or they look for non-permanent and non-ordinary means of financing, including borrowing and the printing of money. This creates situations where public spending tends to continually exceed ordinary public revenue. Fiscal deficits become the norm and the quality of public services deteriorates creating constant pressures for more spending. In these situations, a country is left with an inefficient and under-financed welfare state and with continuous macroeconomic difficulties. This happened to Argentina with a vengeance and characterized the half century after the first government of Perón. It is a lesson that should be learned by countries now undergoing large yearly fiscal deficits . . .

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how to solve a fiscal deficit

Around 1985, Argentina had a program of financial assistance with the IMF. As was normal in those programs, the loans came with conditions attached to them. One of these conditions was that the size of the fiscal deficit should not exceed a given level. At that time, Argentina had great difficulties in meeting this fiscal ceiling, but without meeting it, it would not be able to continue receiving money from the Fund. Unable or unwilling to cut spending, the economic team was desperately in search of additional revenue. At that time, as the result of the famous real estate bubble in Japan, the price of real estate in Tokyo had gone through the roof. The value of the land in Tokyo was estimated to be higher than the value of all the land in the United States. This situation suggested a magical or practical, though unusual, solution to the fiscal difficulty of Argentina. Argentina could sell its embassy in Tokyo and use the proceeds from the sale to cover the fiscal gap. Argentina would then rent back the embassy from the new owner. In the Argentina team, there was an economist . . . Jorge Sakamoto, an Argentine of Japanese descent now living in Washington. He was the ideal person to negotiate the sale, so he was sent to Tokyo to conclude the deal. The sale went through and Argentina got revenue close to 0.5 percent of the Argentina GDP at that time. This revenue would help to fill the fiscal gap and keep the IMF happy and the money flowing in. . . .

The sale of the embassy in Tokyo happened at about the same time when Mobutu, the then Congolese dictator, in order to comply with the fiscal requirements of a financial program with the Fund, which also required that the fiscal deficit be kept below a certain leve, had the brilliant idea of selling his personal plane. He used the money to raise the country's revenue and then leased the plane right back.