Argentine president Javier Milei’s effort to crush inflation and to bring back economic sanity to his country continues, despite some rough political going recently (over pensions, and within his party), which is only to be expected given the extent of the challenge he faces. He still has a long, long way to go.
Milei’s moves on certain tariffs have, however, been illuminating. An economist as well as a president, he comes as close to being one of those legendary “market fundamentalists” as can be found in the political wild.
As an economist, he is no fan of tariffs (to be clear, it is not only “market fundamentalists,” who share that view). As an Argentinian economist, he knows the role that tariffs played in supporting the turn to industrial policy in mid-century Argentina.
That shift was an understandable enough response to the economic turn inward of so many countries in the Depression years, but it took an an increasingly ideological tone after Juan Perón adopted the autarkic approach associated with the fascist social and economic theory to which his government owed a great debt. The interlinked combination of high tariffs and import substitution was a legacy that lingered in Argentina, with catastrophic results. Industrial policy is what it is. Senator Hawley will doubtless be glad to know that Perón drew a great deal of support from organized labor.
When Milei took office, he increased Argentina’s s wide-ranging PAIS tax (which, as applied to certain transactions, acts as an import tariff) as a part of his efforts to cut the country’s out-of-control deficit. PAIS? The “tax for an inclusive and supportive Argentina.” Inclusive, of course. At the time, Milei described the increase in the tax (from 7.5 percent to 17 percent) as temporary, which it has proved to be. The question now is how he will fill the revenue hole left by the tax cut.
Beyond an ideological distate for tariffs, his motive appears to have been to cut the headline inflation number. Higher tariffs increased the price paid by Argentines (who’d have thunk it?) for various products, thus boosting that number, the last thing that Milei needs to see politically. The greater the decline in inflation, and the greater the consistency of that fall, the greater the chances of persuading Argentines to stay with the (very hard) course on which the country is now embarked.
Milei promised to abolish the tax in December (which was what his Peronist predecessor had promised, unconvincingly, when introducing it in 2019). It’s not clear (to me anyway) whether the currency controls included within the PAIS regime will go too. That’s a different question.
The Buenos Aires Herald (emphasis added):
During his speech for Argentina’s Industry Day, Milei lashed out at protectionism and nationalist industrial policies, which recent Peronist governments have favored. He argued against import substitution, claiming that previous governments had created a false dichotomy between Argentina’s industrial development and the expansion of its commodity economy.
“To protect industry, they stole from the countryside, and all that created was an industrial sector that’s addicted to the state,” he said.
Milei and Economy Minister Luis Caputo have said the cut to the PAIS tax could help to reduce inflation, as businesses pass on savings to consumers. Analysts have said the cut could bring inflation down by around 0.7% at a time when the government’s progress on reducing inflation is beginning to stall at a monthly rate of around 4%.
Relatedly, Argentina is reducing bureaucratic obstacles to the import of steel and aluminum. In addition, it is modernizing its Repostock (Stock Replenishment Regime), which was designed to make it easier and cheaper to import materials intended to go into products for exports.
Mercopress quotes the economy ministry’s comment that the old system was paper-based and so complex that only 73 out of 5,000 eligible companies used it. This was not ideal for a country that badly needs the hard currency that exports can bring. No one ever said that industrial policy was straightforward. Well, maybe they did, but there we go.
Some companies welcomed these moves, others (not least Argentine steelmakers worried about Chinese competition) were appalled, yet another reminder of the competing interests Milei has to deal with as he tries to overhaul the economy.