Salvador Argentina’s economy is deep in crisis – and an ultra-liberal economist wants to save it with measures that are unconventional for the country. 52-year-old Javier Milei has a good chance of being elected as the new president in the October 22 election or a subsequent runoff.
In the national primaries in mid-August, he overtook all competition from the political establishment. Milei is challenging Economy Minister Sergio Massa, who has a Peronist alliance behind him, i.e. an alliance based on the ideology of long-time President Juan Domingo Perón, and the opposition center-right candidate Patricia Bullrich.
Inflation in Argentina is 115 percent, the second highest in Latin America after Venezuela. Inflation threatens to become uncontrollable and develop into hyperinflation. Economics Minister Massa has just increased social spending again in order to win votes. This is likely to further fuel devaluation.
Milei, on the other hand, wants to radically cut government spending, even more than the International Monetary Fund (IMF) is demanding from Argentina. He wants to open the economy, sell all state-owned companies and abolish the central bank. He also wants to introduce the US currency as a means of payment in addition to the peso, which is already pegged to the dollar.
“In the 122 years since the beginning of the last century, the country has lived beyond its means for 112 years,” he told voters frankly. Its program differs significantly from that of the competition – and that’s exactly what Milei could benefit from.
According to Carl Moses, a political analyst and consultant in Buenos Aires, the ongoing crisis in Argentina has led to a “complete loss of trust in the institutions.” “It is a frustrated society that is completely disoriented about the future.” This makes the temptation to turn to something new all the greater.
Milei’s role as favorite is also the result of a change in trend in Argentine society: for the first time, almost 60 percent of voters voted for liberal and conservative politicians.
“This is a big change for Argentina,” says pollster Augusto Reina from the Pulsar UBA Institute at the University of Buenos Aires. In Argentina there has always been a preference for a state that provides for everyone. Today, however, a majority trusts the private sector to provide certain services.
Advisor Moses sees significantly better opportunities today for far-reaching reforms to deregulate and stabilize the economy. “Whoever wins the presidency will be able to count on strengthened forces for liberal reforms in the new parliament.”
The background is that, from the perspective of many Argentines, the two leading political groups have failed economically for several generations.
Argentina is isolated from the international credit market
There is no other country that has regressed from one of the richest economies in the world to a developing country in a century. More than a hundred years ago, the British luxury department store Harrods opened its first and only overseas branch in Buenos Aires. The first subway in South America ran there. But since then things have been slowly but steadily going downhill.
Milei also convinces many voters with his economic competence. He worked as chief economist for an important pension fund, but also for banks such as HSBC in Buenos Aires. For years he was a financial advisor to Eduardo Eurnekián, one of the country’s richest entrepreneurs. Before his political career, Milei appeared on talk shows as a controversial libertarian.
A large proportion of Argentines live in poverty.
(Photo: AP)
But would his policies be enough to restart Argentina’s economy?
Argentina has a budget deficit of around nine percent of gross domestic product. That’s not much in international comparison. Colombia and Brazil, for example, had higher deficits in their national budgets than Argentina last year. But the country, which has suspended its debt payments nine times since its independence – twice since the turn of the millennium – hardly wants to finance any banks anymore.
Argentina recently only received smaller bridging loans from China and Qatar. In order to keep the few dollars in the country, the government has introduced capital controls. There are now a dozen exchange rates for the dollar.
The country is almost completely isolated from the global credit market: no private bank trusts Argentina to repay loans.
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Only multilateral donors like the IMF still give Buenos Aires long-term loans – but no new money either: the fund pays the government in installments just as much as the country has to pay back in interest and repayments on the $45 billion loan received it in 2018.
Doubts about Javier Milei’s plans
Walter Molano, chief economist at emerging markets investment bank BCP Securities, said Milei’s proposed solutions sound ideal in theory. But he is skeptical that they can be implemented. “They would lead to massive social unrest as many people would be deprived of their aid.”
Today, almost half of Argentina’s 42 million inhabitants live on government subsidies. But these are not easy to finance when around 15 million people are civil servants, pensioners or recipients of social welfare, but only nine million Argentines work in the private sector. 40 percent of Argentines are poor today.
For Milei to be successful, he would have to correct a structural flaw in Argentina’s economic system. For a long time, the state has financed itself primarily by levying taxes on both imports and exports in internationally competitive sectors. This is primarily agriculture, but also the gas industry and increasingly mining.
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The government levies taxes on both imports and exports in these industries. The state hardly has any other sources of financing: Given the high level of informality in the economy, value-added or income taxes have little impact and the state loses out on income.
With taxes on agricultural goods, Perón tried for the first time as president after the Second World War to industrialize the country. Since then, Argentina’s Peronists, who have mostly been in power, have protected inefficient companies and unproductive industrial jobs with tariff walls and subsidies.
This is also politically profitable: the Peronist governments use social spending to support their political clientele, such as the powerful trade unions and organized social welfare recipients. Changing this practice is politically difficult to achieve. The resistance is well organized. Within hours, the unions can shut down the country with strikes.
Dollarization has failed in the past
The former head of the central bank of Ecuador, Luis Jácome, is also skeptical. He does not believe that introducing the dollar as a means of payment will solve Argentina’s problems. This must be accompanied by a solid economic policy and growth-oriented structural reforms. “Otherwise, dollarization threatens economic stagnation and high unemployment.”
Among other things, Milei plans to introduce the dollar as an additional currency.
(Photo: AP)
Jácome refers to the experiences from the 1990s. At that time, Carlos Menem stipulated that each peso must be covered by one dollar in the reserves. But the measure failed and the country slipped into an even greater crisis.
It also seems clear to Milei that Argentina cannot be brought out of its misery so quickly. He needs at least 35 years to put the country back in order.
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