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What is widely considered one of the most unstable economies in the world has elected a self-proclaimed anarcho-capitalist. In October, Argentina elected Javier Milei, an eccentric outsider, as president. During his campaign, he promised to take radical steps to save Argentina from its hyperinflation rate of 185% and its poverty level of 40%.
These steps include seemingly crazy ideas such as abolishing the central bank, and replacing the Argentine peso with the US dollar, and implementing economic “shock therapy.” These policies at first glance seem like they would do more harm than good, but there is a logic to Milei’s supposed madness.
Argentina’s Economic Crisis
To properly understand Javier Milei’s policies, its important to understand Argentina’s current economic situation and history. Over the past 100 years, the country has seen cycles of extraordinary growth, followed by periods of stagnation and hyperinflation. Hyperinflation has occurred several times following global crises in the early 90s, early 00s, and most recently in 2023.
However, at the turn of the previous century, Argentina was one of the wealthiest countries in the world, relying on the income from exports of luxury goods such as meat and wine. Following WWI and the great depression, demand for Argentina’s exports fell, and with it the economy stagnated.
This led to political instability, and the start of new economic policies. Trade openness was replaced with protectionism, as the country tried to develop self-sufficiency. Eventually this led to increased government spending and a bloated welfare state that continues even to today.
Foreign investment also fell as several coups took place between the 1920s and the 1980s – leading to political instability and discouraging investment even more. Argentina’s current economic instability is a byproduct of these years of turmoil which came to a head during its 2001 crisis. Fears of nationalization by a new government and its failure to decrease the country’s huge deficit caused the Argentine stock market to plummet.
The stock market collapse led to a run on banks, with people demanding to exchange pesos with dollars to avoid devaluation. This caused the dollar supply to run out, inflation to rise significantly, and the peso to become a free floating currency.
Since then, little has changed. Argentina’s consolidated fiscal balance as of September 2023 was a deficit equal to 4.3% of its nominal GDP thanks to successive governments borrowing to finance its deficit.
Part of the problem is the lack of political will to reform. Politicians proposing austerity and liberalization would be very unpopular due to the heavy influence of Peronist ideology on the country. Named after Argentina’s President Juan Perón who served from 1946 until his overthrow in 1955, and again in 1973, Peronism advocates for social justice, economic nationalism, and protectionism.
Out of the last 20 years, 16 have had Peronists in power. Because this ideology is deeply engrained in Argentinian politics, politicians have allowed the deficit to increase for the sake of popularity without regard for the country’s economic situation.
A third of all of Argentina’s workers are employed by the government, and this bloated public sector is a drain on its resources. Subsidies have also contributed to bankrupting the country as high inflation drives people into poverty. The vicious cycle of the government increasing subsidies to protect people from inflation only for the government to print more money to pay for the subsidies, further fuels inflation. Currently, the country has an annual inflation of 143%.
The fall in exports due to isolationism, has also hurt the country’s ability to service its debt, collect taxes, generate demand for its currency, or bring in dollars. The current scarcity of dollars within Argentina’s government and banks has driven people to the black market. Argentina has effectively become a dual currency economy since many Argentinians have dollars in foreign bank accounts or in undeclared cash at home to avoid the volatility of the peso.
In the midst of this o this scene, Javier Milei was elected. This political outsider has promised to take radical steps to deliver Argentina from its economic crisis. But are his methods more madness than rational policy?
President Javier Milei
Born in 1970 into a middle class family, Milei studied economics and went on to become a professor. Living through Argentina’s continuous economic crises, most notably in the early 90s and early 00s, no doubt shaped his view of the world.
He first appeared on TV as a pundit known for his aggressive style. In November 2021, Milei was elected to Argentina’s chamber of deputies, after denouncing establishment politicians as inept and self-interested during his campaign. Then in 2023, he ran for the presidency and won thanks in part to his populist tactics.
Ironically, Milei has been described as a libertarian, an ideology often described as an extreme form of economic liberalism seeking to minimize or remove government intervention in the economy. As for Milei, he describes himself as an anarcho-capitalist. Broadly speaking, anarcho-capitalists are anti-government and strongly supportive of private property rights and free market capitalism.
Milei’s journey to the presidency is noteworthy, because it is the first time in history that a Libertarian has been elected President of a country. But this remarkable event may be more indicative of Argentina’s economic situation than anything else. After all, a country that had been so enthralled with Peronist ideology and suffered the crises it brought, may have at last reached a tipping point prompting it to try the different extreme proposed by Milei.
Milie proposes liberalizing the economy and implementing austerity to slash public spending – something politicians have been reticent to pursue. Milei hopes that these policies will help the country tackle its large public deficit and stop the endless cycle of the central bank printing money to pay for subsidies.
But Milei’s plans don’t end there. He wants to abolish the central bank and replace the peso with the dollar while deregulating the economy. Essentially, these plans involve transitioning the country from having a lot of government intervention in the economy to having very little. This is meant to cut bloated deficits to cure hyperinflation, as well as encourage competition and investment.
And at the center of all these policies is “shock therapy” – Milei’s proposed economic plan to stabilize Argentina’s economy.
Economic Shock Therapy
Shock therapy generally ivolves slashing government spending and involvement in all areas of the economy. As a result, it would reduce the public sector and the welfare state, remove subsidies and price controls, and privatize state-owned industries.
According to this theory, reducing public spending will lead to less borrowing which will lead to less inflation. A key tenet of shock therapy is the belief that the free market is better at allocating resources than the state, and by leaving it on its own economic growth will follow.
While this should decrease unemployment and lead to greater prosperity, removing all of the welfare policies at once when the economy is struggling, could be met with resistance from the public. But it’s also important to note that many of the people who benefit from subsidies actually voted for Milei. This means that at least part of the public is ready for a change even if it may be painful.
Argentina & Dollarization
Beyond shock therapy, Milei has some even more extreme proposals such as abolishing the central bank and the peso to implement dollarization. If this happens, then Argentina will use US dollars as its official currency. But right now, the central bank has virtually no dollars.
There is some merit to scrapping the peso. Dollarization would force the government to implement austerity measures because it will no longer be able to print money to finance public spending. Insteand it would have to increase taxes. It would also decrease inflation since prices will be more accurately reflected in dollars and will not be subject to the many exchange rates that exist between the dollar and the peso.
Currently, there are several official exchange rates depending on why the peso is being exchanged for the dollar. For example, if you’re importing goods you pay a different rate compared to when you want to visit another country and need dollars to spend there. Ultimately, this adds to the confusion and encourages transactions on the black market.
But in order to dollarize, the government would have to buy back pesos using dollars. Since it has no dollars, it will have to borrow even more than it already has – fueling inflation and making things worse before they can get better.
Milei is well aware of this and has even admitted it. But right now, it’s uncertain if Argentina will even be able to borrow more dollars, due to its terrible credit.
Past Attempts at Shock Therapy
By now you might be wondering whether there have been any successful attempts at shock therapy. After all, if its been tried before and the results were positive then Milei’s approach would make even more sense.
As a Professor of Economics, Milei is no doubt well aware of the Russians’ attempt at “shock therapy” after the fall of the Soviet Union. The new Russian government wanted to quickly transition from a planned economy to a free market after the failure of communism. To achieve this, public spending was slashed, the public sector shrunk, and large scale privatizations were initiated.
The results were catastrophic. Removing state protection and benefits resulted in a dramatic increase in poverty, while a small number of individuals acquired companies and resources that were previously state-owned for undervalued prices. Inequality ran rampant – the poor stayed poor, and some of the rich got even richer.
The same could happen in Argentina if public safety nets are removed during a time of economic hardship. But with such a poor track record, it does cast some doubt on Milei’s plans to institute shock therapy in Argentina. However, dollarization may offfer a brighter outlook for Argentina.
Several countries use the dollar as their official currencies, but most are small island nations in the Caribbean or Pacific Ocean. Unfortunately, these countries don’t offer a good model for Argentina since its population and economy are much larger. Not to mention, Argentina’s debt is much larger than any of these nations.
A better example may be Ecuador, which dollarized in 2000 after suffering a banking crisis. Its population had lost faith in the domestic currency and went through a structured default with help from the IMF to dollarize. Essentially, the country defaulted on its loans and took out new loans in order to dollarize.
Overall, the results of dollarization were mixed. On one hand, it improved banking since Ecuadorian banks now use the safest currency in the world which is encouraging to both borrowers and lenders. On the other, its implementation and enforcement of regulations has not gone well because Ecuadorian institutions are too weak to enforce them.
Yet, Argentina could still learn from Ecuador’s process of dollarization, replacing the local currency over a 9 month period. Around the same time El Salvador dollarized, choosing to recognize both its local currency and the dollar as official currencies.
Argentina could choose either route, but since Milei wants to abolish the Central Bank there would be no one to print Pesos which makes it more likely that he would use Ecuador’s approach.
Reception of Milei’s Policies
Initially, the Argentinian stock market reacted positively to Milei’s election victory, with the state oil company YPF leading the rally. Investors seem reassured by Milei’s policies which will limit regulation and increase competition. Exporters will also benefit from Milei’s policies.
Argentina’s number of exporters has been decreasing despite increased global trade during the last 3 decades. This is due to a number of reasons, chief of which is protectionism discouraging other countries from trading bilaterally with Argentina. Exporters face several barriers, whether its taxes on what little foreign money they make or the different exchange rates which complicate exports depending on the product.
So far, the government has done little to incentivise exporters, despite its desperate need for foreign currency. This could change under Milei whos is an advocate of free trade.
Lowering trade barriers will encourage countries to trade bilaterally and adopting the dollar will eliminate the different exchange rates. However, it remains to be seen whether Milei will be able to implement his radical program.
Enforcing these Policies
It’s one thing to promise these changes on the campaign trail, and another to pass them into law. Milei has ruled out using presidential decree to institute these policies so he will have to pass his reforms through Congress where he has no majority. Working with the same establishment politicians he called ‘thieves’ will be a major obstacle for the newly elected President. However, given the country’s desperate situation some members of Congress may be persuaded by at least some of his policies.
A second obstacle is Argentina’s powerful labor unions which may oppose rolling back the welfare state and the protections their members benefit from. But even if they oppose these policies, it seems inevitable that some austerity cuts and compromises will be made to combat inflation.
What’s Next for Argentina…
If Milei is able to enforce some of his proposed austerity measures, then creditors may agree to lend Argentina money for dollarization. Yet, monetary laws are controlled by Congress which likely would not give up the peso.
A more likely solution could be establishing a currency board. This means that every unit of the peso would be backed up by a dollar equivalent – restricting money creation and decreasing fiscal pressure along with shock therapy.
However, only time will tell whether shock therapy will work better in Argentina than it did in 1990’s Russia. In the hands of Javier Milei, Argentina stands at the crossroads of radical change.
As he charts a course towards economic liberalism and dollarization, Milei confronts not only the ghosts of Argentina’s past but also the skepticism of a political landscape accustomed to centrism and left-wing policies.
Whether his anarcho-capitalist vision can untangle the nation from decades of fiscal mismanagement remains uncertain, but in this unprecedented chapter, the world watches as the first libertarian president attempts to reshape Argentina’s destiny
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