Javier Milei faces a rough road ahead, but with the country bust and accelerating towards hyperinflation, that was always going to be the case.
Argentina’s new president, Javier Milei, has to face two realities. The first is that the Argentine economy is in a desperate state, and the second is that he will depend on the support of other parties in the country’s congress, where Freedom Advances, his own (more or less start-up) party is only lightly represented. The second reality probably explains some of his backtracking, for example when it comes to dollarization, and his sticking with the Paris climate agreement.
And the first reality explains why the government has announced the first stages of shock therapy.
They include a creeping devaluation designed to take the official peso–dollar rate to 800 from 390. The current “unofficial” rate (the “blue” dollar) is around 1100. Capital controls, however, it seems will stay for now. Milei has already announced that nine ministries will be shut. According to his finance minister, Luis Caputo, that will account for 34 percent of public-sector jobs, although I assume that that is only at the central-government level.
The London Times quotes Caputo as saying that “it is better to tell an uncomfortable truth than a comfortable lie,” something that would be a novel approach here in the U.S.
Caputo also announced that energy and other subsidies will be cut. The state will not tender any new public-works projects and will cancel projects that are not yet under way. Any future infrastructural projects will be handled by the private sector. Transfers to the provinces from the central government are to be cut.
Caputo: “The reality is that there is no money to pay for more public works that, as all Argentines know, often end up in the pockets of politicians or businessmen on duty.”
Caputo also announced a temporary rise in taxes on imports but promised to scrap the existing system of government permits for imports. Export taxes, which are hated by Argentina’s powerful farming lobby, will be removed once the economic emergency is over.
The Times:
“The objective is simply to avoid catastrophe and get the economy back on track,” Caputo said, admitting the measures would be painful but warning that without them the country was heading towards hyperinflation. . . .
South America’s second largest economy is battling inflation nearing 150 per cent, its central bank reserves are deep in the red and two fifths of the population is in poverty. Caputo put the deficit at 5.5 per cent of GDP, noting that Argentina has had a fiscal deficit for 113 of the past 123 years.
“We’re here to solve this problem at the root,” he said. “We need to solve our addiction to a fiscal deficit.”
The IMF (which is owed $44 billion by Argentina) has welcomed the plan, but many Argentines will not, and Milei can expect strong opposition from the still strong Peronist machine, including, of course, the labor unions. Devaluation will accelerate inflation still further, which is why Caputo’s plan also includes a substantial increase in some of the benefits paid to the country’s poorest.
The only thing that is certain is that a very rough road lies ahead, but then, with the country bust and accelerating towards hyperinflation, that was always going to be the case. Now, however, if Milei’s program is adopted, the rough road may at least be pointing in the right direction. That was not the case before.
Will this type of shock therapy work? It could. But looking at the experience of Eastern Europe in the 1990s, the best chances for success are when there is substantial national and institutional buy-in, as well as extensive international support, as, for example, was the case in the Baltic states and Poland. The counterexample, of course, is Russia, although the story of what occurred there in the 1990s is by no means the story of failed “market fundamentalism” that is so often claimed.