Will Milei Make Argentina Great Again?

Easy come, easy go: The New York Times invited me to write this op-ed on Milei’s Argentina, but decided to go in another direction. I’m still planning on pre-registering my predictions on this exciting situation. But for now, here’s a piece aimed at a general audience.

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Argentina is desperate, again.  From the mid-70s to the early 90s, Argentina’s inflation habitually exceeded 100% per year.  Now, after three decades of keeping inflation in the double digits, Argentinian prices are once again more than doubling every year.  Hyperinflation’s return is only the most visible of its economic failures: The official poverty rate, around 25% in 2017, now exceeds 40%.  Even during normal times, Argentina’s economy has been a severe underperformer for more than a century: In 1910, the average American was only 25% richer than the average Argentine.[i]   Now it’s about 400%.  Amidst this wreckage, Argentina has just elected libertarian economics professor Javier Milei, who pledges to use radical free-market policies to not only end the crisis, but transform Argentina into a beacon of laissez-faire capitalist prosperity.

Milei’s proposed remedies for the latest crisis are not new.  Almost everyone who knows what crises are grasps their cause: Argentina’s government spends much more than it taxes and borrows, then makes up the difference by printing ever-larger denominations of the Argentine peso.  To stop inflation, you must stop printing money and fix the budget at the same time.  Due to its poor credit history, Argentina couldn’t borrow much more; indeed, its budget woes exists in large part because it borrowed so recklessly in the past.  Nor can Argentina, which already has close to the highest tax burden in Latin America, plausibly end its 5.5% of GDP deficit with higher taxes alone.[ii]  

Argentina’s past

Milei repeatedly vowed the opposite approach; promises that the adjustment “will be paid for by the public sector” seemingly ruled out tax increases.  Back in October, Milei planned to cut spending by 14%, more than double the deficit.[iii]  By early November, his proposed spending reductions were down to 5% of GDP.[iv]  Now, like Argentina’s past crisis doctors, Milei seeks to slash monetary growth, cut government spending, and raise taxes.  The current plan is to reduce spending by 2.9% of GDP, while increasing taxes, especially on labor and income, by 2.2% of GDP.[v]  Although Luis Caputo, Milei’s Minister of Economy, promises to “move forward with the elimination of all export duties” “once this emergency is over,” the private sector will pay extra while the emergency endures.

Still, Milei sounds very different from past crisis doctors.  Almost no politician on Earth, much less in Argentina, openly yearns for a future where “Everything that can be in the hands of the private sector will be in the hands of the private sector.”  Crisis doctors often embrace trade and exchange rate liberalization, but Milei has a broader free-market agenda.  Ten days after taking power, he issued an emergency decree (the “Megadecreto”) to relax regulations on rents, grocery stores, and hiring, and open the door to privatization of state-owned firms.[vi]  Days later, he issued an ordinary bill (the “Ley Omnibus”), whose most notable proposal is to privatize 41 state-owned companies, including Aerolíneas Argentinas, the national airline.[vii]

As far as “emergency” measures go, Milei’s labor deregulation is notably mild: It lengthens new workers’ probationary period from three to eight months, cuts severance pay, and threatens dismissal for protesting workers who block traffic.  But so far, these proposals have provoked the strongest pushback.  The CGT, Argentina’s leading labor union, insists that the “only purpose” of these “ferocious” and “regressive” measures is to “hamstring union activity, punish workers and benefit business interests.”[viii]  An Argentinian court almost instantly suspended Milei’s emergency labor deregulations, though perhaps he’ll win on appeal.  The privatizations will be more significant if they happen, but since he declined to put them in his emergency decree, they’ll have to pass both houses of Argentina’s legislature.

Argentina’s present

What is the most likely scenario for Argentina?  The monetary and fiscal stabilization is very likely to work.  Argentina has faced far worse crises before: The hyperinflations of the 70s to the 90s multiplied prices 100 billion times.  That’s like turning a billion dollars into a penny.  Yet Argentinians ultimately overcame all these problems and more using the orthodox medicines of monetary restraint and fiscal responsibility.  Since even politicians who ideologically opposed these treatments ultimately endured their short-run costs, it is a safe bet that a libertarian economics professor will do the same. 

Turning Argentina, just a cut above Venezuela and Cuba in economic freedom, into a bastion of free-market policies is far less likely.  Milei’s party, La Libertad Avanza, has a tiny share of the seats in both houses of the legislature, and all of his allied parties are clearly less libertarian.  While Argentina did have much more pro-market policies in the 90s, this was part of the global anti-socialist wave after the Soviet collapse.[ix]  Admirers of the neighboring Chilean economy may note that Milei is much more ideologically committed to free-market policies than Pinochet ever was.  Like many politicians, he is acting on the adage, “Never let a good crisis go to waste.”  But Milei plainly has far less power to remake his country than the Chilean dictator.  Optimistically, Milei could close a quarter of the economic policy gap between Argentina and Chile after two four-year terms.

Those who remember “shock therapy” in the former Soviet bloc with horror will regard even a marginal move toward free-market policies with suspicion.  The hard truth, though, is the shock therapy worked wonders.  The countries that embraced radical free-market reforms in the 90s really are vastly better-off today as a result.  Those that took a cautious, go-slow approach were stagnant by comparison.[x]  The corollary of “In the long run, we’re all dead,” is that we’re all living in the long-run our predecessors chose for us.  If Argentinians had voted for Chile’s free-market model back in the 80s when they were twice as rich as Chileans, their children would probably now be citizens of a First World country instead of a basket case.[xi]

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[i] https://en.m.wikipedia.org/wiki/File:GDP_per_capita_of_Argentina,_percent_of_US_%281900-2008%29.png

[ii] https://www.oecd.org/tax/tax-policy/revenue-statistics-latin-america-and-caribbean-argentina.pdf; https://www.reuters.com/markets/argentina-braces-economic-shock-package-peso-shackled-2023-12-12/

[iii] https://www.bloomberglinea.com/english/javier-mileis-plan-a-14-gdp-reduction-in-government-expenditure/

[iv] https://english.elpais.com/international/2023-12-11/milei-at-his-inauguration-a-20-billion-cut-to-the-public-sector-and-more-poverty-in-the-short-term.html

[v] https://www.ft.com/content/5178b17c-da6a-468c-ad0a-a8683b42c5b2

[vi] https://en.wikipedia.org/wiki/Decree_70/2023

[vii] https://batimes.com.ar/news/argentina/milei-sends-omnibus-law-to-congress-extraordinary-powers-emergency-and-privatisations.phtml

[viii] https://apnews.com/article/argentina-milei-protests-economy-austerity-9f8a41c0149b71d2480ae380191e52ec

[ix] https://www.fraserinstitute.org/economic-freedom/map?geozone=world&page=map&year=2020&countries=ARG

[x] https://www.cato.org/cato-journal/fall-2020/economic-liberalizations-around-world-1970-shock-therapy-versus-gradualism#shock-therapy-versus-gradualism

[xi] https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=CL-AR