Argentina elected Javier Milei as its new President on Sunday a week before (November 19) who describes himself as “anarcho-capitalist” and believes in the classical model of free market above all other things. He won by a wide margin of 12 percentage points against Peronist candidate Sergio Massa, the minister of the economy in the incumbent government with the far-right radical views to fix an economy battered by triple digit inflation, a looming recession and rising poverty. In fact, Milei’s victory is a new expression of the appeal of radical, populist authoritarian extreme far right in Latin America, Europe and India.
Milei is a far right political outsider often compared to former US President Donald Trump and former Brazilian President Jair Bolsonaro. His term will run from December 10 to the end of 2027. The danger of far-right fascism is now a global phenomenon, not confined to Trump or Bolsonaro as demonstrated by Modi in India to Meloni in Italy, Victor Orban in Hungary and the newly elected Geert Wilders in the Netherlands among others. Now Milei is joining the rank with them and like them is a very divisive figure, dividing society into “good Argentine” and “leftists and thieves.”
Soon after Javier Milei emerged as the clear winner of Argentina’s presidential election, former US president Donald Trump posted on his Truth Social platform: “You will turn your Country around and truly Make Argentina Great Again.” Like Trump, who wanted to “drain the swamp”, Milei has deep contempt for an entrenched establishment and vows for an all-out political and cultural war against enemies on the left.
Political confusion notwithstanding, the convincing electoral victory of Milei does not necessarily represent the approval of Argentine people for his extreme economic measures which will further elevate poverty and misery of vast majority of the people like the poor and the middle-income people. While the vote was for a change, but more specifically directed against the political establishment largely dominated by Peronists causing the defeat the Peronist candidate Sergion Messa.
Milei is well known for his outbursts against government spending, especially social spending, great admiration for the US and Israel; and obscurantist beliefs, including claims that he receives advice from his dead dog including his decision to run for the presidency. He now has four cloned dogs and named them Murray, Milton, Robert and Lucas who are named after Milei’s economist idols including Milton Friedman. He has appeared in public with his dogs. Milei is also staunchly anti-abortion, favours looser gun laws, supports privatisation of education and healthcare and criticises Argentine Pope Francis.
At one point on the campaign trail, he even wielded a chainsaw to symbolise his intent to cut state spending. Some of his proposed policies include dollarisation of the economy, abolish country’s central bank and privatise the pension scheme. On election victory night, Milei showed little sign of diluting his vision for Argentina, the second largest economy in South America and declared, “The change this country needs are drastic”, announcing Trumpian plans to make “Argentina great again”.
But Milei is facing tough challenges. Despite his convincing victory, he remains in a very weak position. He has a very small number of members in the legislature and not a single governor across Argentina’s 23 federal provinces or a mayor from his party. Therefore, his governability will largely depend on the type of coalition or alliance he could forge, and it will not be surprising to see that he tempers some his more radical proposals.
The economic challenges facing Milei’s presidency are enormous, especially given that the country is once again in the grip of a profound economic crisis. The country is now facing an annual inflation rate of 140 per cent rising to 143 per cent in October this year, the highest in three decades. The fiscal deficit is large and its financing via the central bank has fuelled very deep monetary imbalances. Net foreign exchange reserves have fallen to negative US$10 billion despite strict currency controls as the government tried to avoid peso (Argentine currency) devaluation.
Now, 40 per cent of Argentinians live below the poverty line. This year, the country’s crops have been ravaged by one of the worst droughts on record, and the loss of soy, corn, and wheat could cost farmers US$14 billion. The worst drought in six decades has seriously hurt current account revenue as food is historically a major source of current account revenue. According to the World Bank Argentine economy is set to contract 2.5 per cent in 2023.
In economic history, Argentina is possibly one of the most studied country. Argentina’s economic and institutional decline has long posed a conundrum to economists and social scientists. One of the most cited quotes in economics, originally attributed to Simon Kuznets, says that there are four types of countries – developed, underdeveloped, Japan and Argentina. In the field of development economics, Argentina perhaps is the most interesting and perplexing of all.
Once one of the richest and fasted growing countries in the world, Argentina is now firmly entrenched in the ranks of developing countries. The Belle Epoque, the turn of the century’s golden age is now a dim and distant memory for most Argentines of today.
Economic crisis has left Argentina deeply in debt now and unable to tap global credit markets, although Argentina’s economic growth since the turn of the century has been one of unprecedented boom followed by persistent economic decline. The case of Argentina’s economic failure constitutes one of the most puzzling case studies.
However, Argentina teaches us that once attained, long run development can not be taken for granted. It can easily be undermined if powerful interest groups bend the institutional framework to their own advantage through discretionary policies, which tends to destroy the foundation of sustained development. It is generally suggested that in the absence of institutional breakdowns, Argentina would largely have avoided the decline and joined the ranks of rich countries with an income level like that of Australia and New Zealand.
A vast literature emerged offering various competing explanations for such extraordinary long-run relative economic decline of Argentina. Among the explanations include deleterious conditions for capital accumulation in the post Belle Epoque period i.e., post 1913.The trade (exports + imports)/GDP ratio was more than 50 per cent in the pre-WWI period but during the interwar period fell to about 20 per cent or slightly above and that did not change much after the WWII.
In fact, since the 1930s through to 1970s import substitution policies were implemented and caused relative price of key imported capital goods to rise rapidly leading to the failure to diversifying away from agriculture. Thus price disincentives channelled funds away from investment activities.
Also, Argentina’s political history is replete with political crises since the 1930s. In fact, some analysts argue that the onset of electoral fraud in the 1930s is the major turning point and corresponding erosion of the rule of law the major contributing factor to the country’s economic decline.
Furthermore, recurrent cycles of populism added to secular economic decline of the country. It is further argued that the absence of a large middle class also enabled the takeover of politics by well organised and politically powerful social groups. The weakness of the middle class and extraordinary income inequality between the rich and the poor laid seeds of the degradation of democratic institutions.
Now Milei has styled himself as the redeemer of Argentine greatness invoking the country’s early 20th century history when Argentina was one of the richest countries in the world. His backers believe that only Milei can uproot the political status quo and fix economic malaise that has afflicted the country.
There are obvious problems with Milei’s economic plans. His dollarisation plan has sparked criticism from economists across the wide political spectrum. They argue that dollarisation would cause higher inflation, a recession and higher unemployment without solving the underlying problems. An appreciating dollar, that is happening now, can negatively impact on Argentina’s commodity exports, further creating pressures on the external balance.
In the face of high and rising inflation rate, it is possible that dollarisation could help moderate inflation expectation. But it is fiscal discipline coupled with very low monetary growth that can only help reduce inflation, thus also inflation expectation. And this is the only sure way to tame inflation.
Argentina already used a watered-down version of dollarisation in the 1990s when it pegged one peso to one American dollar (currency board). That plan brought inflation down, but it had to be abandoned because a stronger dollar made Argentinian commodity exports uncompetitive in the international market, creating a trade deficit. During this period many state-run enterprises were privatised and used the proceeds to reduce public debt. But things again started to go wrong at the turn of the 21st century and continued.
Adopting the US dollar would inevitably lead to a major peso devaluation as a first step. This move would also mean that the country will be with no monetary policy of its own. Many legal experts also believe that the move could be unconstitutional. Domestic financial markets could remain volatile until Milei clearly spells out his dollarisation plan.
Argentina has a long history strong labour movement and social protest. No wonder his privatisation plan for the Argentine state enterprises including oil company YPF is facing stiff opposition from trade unions declaring that “Argentina is Not for Sale.” He also faces legislative obstacles to privatise these enterprises as he does not have a majority in the legislature.
Despite long standing problems associated with the Peso, his plan for closing the central bank (Banco Central de la República Argentina, BCRA) is simply not feasible nor practical because that will deprive the country to influence the course of the economy through moves such as interest rates. Without a central bank, liquidity can not be injected when the baking system needs it for the survival. Bereft of monetary policy will inevitably lead to increased reliance on fiscal policy which means substantial fiscal deficit and stagnant growth. Overall, trying to address one problem can lead to perhaps creating problems somewhere else.
Milei’s economic policy measures to a large extent were tried already before in the 1990s, but failed to stabilise the economy. Therefore, it is extremely unlikely that Milei will deliver a way out of Argentina’s chronic record of hyperinflation, debt defaults, recessions, and unemployment—conditions likely to continue for many more years. The legacy of crises confronts Milei with tough choices and little room to manoeuvre, despite his populist appeal. Argentina’s economic crisis has now also become a political crisis.
muhammad.mahmood47@gmail.com
Javier Milei's radical economic recovery plan for Argentina
Muhammad Mahmood | Published: December 02, 2023 19:03:24
Argentina's president-elect Javier Milei —Agency Photo
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