The economic challenges facing Javier Milei's presidency are enormous, especially given that the country is in the grip of a profound economic crisis. Since taking office as President of Argentina in December, Milei , a political outsider and self-declared "anarcho-capitalist" has embarked on a frantic deregulation of the economy, devaluing of the ailing currency and taking sweeping measures to reduce the size of government. Milei argues harsh austerity is needed to put Argentina back on the path to prosperity and that there is no time for a gradualist approach. Argentina's inflation is currently running above 240 per cent, the amount of debt well over US$100 billion. 40 per cent of Argentines now live below the poverty line.
However, he has promised any adjustments will almost entirely affect the state rather than the private sector to reduce the weight of the state in the economy, including the privatisation of several public enterprises, economic deregulation measures, export facilitation and the end of price controls. Milei listed 30 points, adding that they will be followed by a broader package containing over 300 measures to deregulate the Argentine economy aiming at overhauling the country's economy and reining in public spending. He also declared that there is no plan B.
Milei, ideologically a far-right libertarian, has unveiled his "shock therapy" economic reform plan for Argentina. The radical economic plan include devaluation the Argentine peso (ARS) by more than 50 per cent against the US dollar which has already taken effect causing the ARS to fall from 350 to 820 against the USD. His plan to dollarise the economy and to abolish the central bank has not yet been implemented.
He has already scrapped more than 350 separate rules and laid off more than 5000 state employees. The aim is to reduce the size of state by about a third of its total workforce, slashing the number of ministries to nine and reducing secretariats to 54 from 106 to create a leaner government structure.
The legal structure of state-owned companies will be changed completely to pave the way for their privatisation, especially in key sectors like railways, energy, oil, water and sewage. But privation of energy companies such as YPF may prove to be difficult because that will require two thirds approval by the Congress for the sale of government shares. Other measures include deregulation of satellite internet services, health insurance, tourism and rental property market.
The plan also includes a fiscal deficit to 5.5 per cent of GDP and money available for discretionary transfers to provinces will be reduced to the minimum. Also, energy and transportation subsidies are to be reduced.
In this regard Milei follows the privatisation drive in line with former president Carlos Menem in the 1990s who sold several strategic state assets and cuts in social spending in an attempt to downsize the government after a period of hyperinflation. It is reported that Milei has described Menem as the best president of Argentina.
Argentina also 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.
But Milei is facing tough governability 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. In fact, it will not be surprising to see that he tempers some his more radical proposals as reflected in not yet implementing his dollarisation plan and closing the country's central bank. Many economic observers believe his "shock therapy" carries enormous risks both to the upside and the downside.
Now he is using the constitutional instrument of the "Decree of Necessity and Urgency (DNU)". According to the letter of the constitution, the president can use this Decree in "exceptional circumstances that makes it impossible to follow ordinary procedures". Such decree remains in force until both houses of Congress vote to annul the. The objective clearly is to use this special presidential prerogative to pursue his effort to reduce in record time the budget deficit and the size of the external debt.
But there are clear signs that he is now following a pattern of deliberate attempts to reform or subvert the normal legislative means to implement his neoliberal reform agenda which does not have majority support in Congress. What has been described by some as "neoliberal parliamentarism", which if successfully carried through by Milei can leave long-term scars on institutions by weakening their norms and operational mechanisms. Milei is essentially not only trying to subvert and undermine the democratic process but also attempting to destroy the very institutions that help to uphold democratic values.
Milei was very warmly welcomed at the Davos conference last month. He also got a positive nod from the IMF Chief Kristalina Georgieva. She said, "The Argentine economy is in such a bad shape that it has to be shaken up. President Milei and his team are doing exactly that". The IMF also announced its decision to release US$4.7 billion out of US$ 57 billion bailout package. Argentina is the biggest debtor to the IMF, with a total outstanding debt of $46 billion. Argentina is still the IMF's biggest problem.
Milei's administration highlights a fundamental contradiction between Milei's public utterances and the selection his ministers. He rode to victory exploiting resentment against Argentina's elites promising to make "la casa" pay for their decades-long mismanagement of the economy. But that very group now runs his administration. Former neo-liberal president Mauricio Macri (2015-2019) along with his economic minister Luis Caputo were responsible to take out the largest loan in IMF history. That loan has been the single biggest driver of Argentina's inflation and foreign currency reserve depletion over the last four years. Caputo is now the minister of economy again under Javier Milei's presidency. Another very important figure is Patricia Bullrich, the former security minister under Macri is the new security minister in the Milei administration.
His policy is being pursued at the expense of ordinary citizens, yet a survey conducted by pollster Escenarios found that 55 per cent of respondents believed that Milei's reform measures were necessary to improve the economy. Political observers agree that Milei and his libertarian supporters were successful in managing to create a consensus over the diagnosis of the economic crisis and that helped to build approval for his reform measures.
Milei's policy measures such as devaluation will cause inflation to further spiral hitting consumers harder over many months ahead. His budget cuts will also cause a plunge in household income as well. As such salaries will have a hard time keeping up with rising prices resulting in reduced consumer spending which is likely to lead to a recession, further pushing up unemployment and aggravating already very high levels of unemployment.
The International Monetary Fund (IMF) has revised down its economic outlook for Argentina, forecasting a second straight year of negative growth amid President Milei's push for what the IMF report calls a "significant policy adjustment". In its latest World Economic Outlook update on January 23, the IMF said that Argentina's gross domestic product (GDP) will contract 2.8 per cent this year, following a 1.1 per cent decline in 2023.
Also, Argentina's bond markets that soared after President Javier Milei took office a month ago is now giving Milei a dose reality with bond prices slipping. With the ARS weakening again, investors are wary of the government's new debt auctions.
A top court in Argentina has already invalidated a key component of his "mega decree" which sought to cancel a host of workers rights. It is also highly likely that Milei will face opposition in Congress blocking most of his policies. Some political observer opine that the government could find itself in the eye of the storm in just a few months.
While in his inaugural address he warned the country that Argentina's situation would get worse before it got better, the Confederation of Argentine Workers (CGT), the main trade union in Argentina, convoked a general strike on January 24 in an attempt to mobilise opposition to the "shock Therapy" measures implemented by President Milei. The CGT estimates that 600,000 people marched in Buenos Aires. However, Patricia Bullrich, the security minister tweeted that, "no strike can stop us, no threat can intimidate us" after claiming that there were no more than 40,000 people in Buenos Aires. She termed the organisers of the strike as "gangsters" and "guarantors of poverty". President Milei also weighed in describing the strike as evidence of backward thinking. Like other authoritarian populist politicians, he then went on to use the divisive language to describe the strikers as those who want to stay "behind, in the past, in decadence".
If Milei is to succeed in carrying out his shock therapy measures, he will have to continue to rely on executive power and repression. So, Milei will have to find ways to build some kind of a consensus and draw in some more moderate forces to gain some degree of legitimacy for carrying out his reform programmes.
Federico Finchelstein, a historian and fascism scholar said Milei's first month in office has demonstrated his "authoritarian style of populism". He then further added, "it's a type of populism that looks to undermine democratic institutions". Milei's current reliance on the DNU along with the newly introduced anti-strike protocols provides a picture of what is likely to come over the next four years of Milei's presidency. If Milei continues to rule by decree, it will not only change the country's trajectory over the next four years, but also the future of democracy in Argentina.
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