- Shankar Ananth
New Hope?
One day.
One day, is all it took for Argentina’s flamboyant new president to make an impact and shake the foundations of the economy. But to be fair, he did warn everyone that a sea of change was coming. He also said it won’t be pleasant.
Javier Milei, a former television commentator and economist, was inaugurated on 10th of December, 2023 as the new president of Argentina, vowing the upturn decades of questionable economic policy that had left the formerly wealthy South-American nation scraping the bottom of the barrel for survival. On 11 December, Milei got rid of half of the Ministries, and devalued the peso, Argentina’s currency, by 50%.
Life has not been easy for Argentinian citizens in the last few years. Used to a rather generous welfare program, the nation’s fiscal problems seem to be trickling down to the people, with some places effectively settling for a barter system of transaction. There have been fewer things to be joyful of late, except of course for that marvellous victory in the football World Cup in 2022. But that was barely more than a short-lived distraction from everyday problems.
Argentina needs some substantial changes to escape its economic ructions. Can Javier Milei be the saviour that the nation of 46 million needs? Who is he, and how did he come to power with such radical promises? While Milei’s inspirations can raise eyebrows, and his policies may seem extreme, can they actually work?
Argentina – political and economic climate
‘Rich like an Argentine’ was a common phrase toward the end of the 19th century. The country was destined for glory and was often taken in the same breath as the United States and the UK. Argentina’s upper classes indulged in latest fashions, summered in Paris, lived in villas and spearheaded the economy by investing in new factories. The world wars did not quite affect the South-American nation to the same degree as others, and it carried on with a staggering 5% annual growth – quite significant for the times. The conditions were fortunate - with a seemingly endless supply of raw materials, and ideal conditions for agriculture, the country made a fortune by exporting leather, grain and meat to Europe and North America.
The promised land of South-America became a haven for European refugees, primarily from Italy and Spain trying to escape their war-ravaged continent. The average Argentinian was more prosperous than the average citizen almost anywhere in the world – with more cars per person than France, and more telephone lines than Japan. Even till the 1950s, the per capita income remained significantly higher than West Germany, one of the post-war economic success stories.
At a time when the world was struggling with changing boundaries and lack of leadership continuity, Argentina enjoyed a relatively stable political structure. Since 1861, the Argentinian Republic had a string of presidents, most often indirectly elected. This lasted till 1930, when Jose Felix Uriburu led the first coup d’etat in modern Argentine history. While the election of following leaders was through questionable means, there was still a certain degree of policy continuity leading to continued growth.
Like all stories with a twist, the Argentine story had a definite moment when things started going south. After Juan Domingo Peron, arguably the most influential leader in modern Argentine history, rose to the top, Argentina was never the same again.
Modern Argentina and why it needs saving
Probably no modern nation has seen as spectacular a fall from the top as Argentina. When Juan Peron came to power in 1946, he promised a middle-path between capitalism and socialism. Quite understandable given Argentina’s official position of neutrality in both world wars, and the post-war division of the world between American and Soviet camps.
Peron leaned more toward the left side of the spectrum from an economic point of view. He used his first few terms to elevate the working class by raising minimum wages and enshrining workers’ rights. He also embarked on a massive public work drives, building schools, hospitals and houses in impoverished areas, in addition to nationalising railroads and other utilities. All good, but he did not have a solid plan to keep up the cash generation for these projects. Furthermore, with Peron’s ‘Argentina first’ policy, tariff barriers were put in place to protect the country’s relatively weaker industrial base – hampering free international commerce.
Peron called his system as ‘justicialismo’, or social justice. But the array of populist social measures took their toll. A staggering number of inefficient state companies were founded. Corruption became commonplace. Any monetary shortfall was accounted for by borrowing or by printing more pesos, or a scary combination of both.
By 1949, Peron had tripled state expenditures, and by 1955, when he was pushed out of power, he had effectively doubled the number of state employees. The Argentine peso had lost its sheen.
While the presidents following Peron tried other policies such as cutting social spending , re-privatization, pegging the peso 1-to-1 to the US dollar, the combination was somehow never right. Between 1992 and 1999, state expenditures rose by 50%. In fact by 2001, Argentina was indebted a whopping $160B. By the December of 2001, the country declared bankruptcy.
Peron was an incredibly divisive figure, and perhaps remains one even today. While the famous phrase "somos todos peronistas” (”we are all peronists") reflects the country's majority political current and the Argentinian populace still has a lot of respect for what Peron did, economists concur that the cycle of fiscally imprudent public spending started by Peron led to Argentina losing its crown as the South-American promise land. Peron also repressed political dissent on both sides of the spectrum during his time, earning him powerful enemies.
Argentina has officially defaulted 9 times since 1816 – the year it won independence from Spain, and a big part of the reason has been populist spending and a lack of fiscal prudence. Yet Peron’s justicialismo is still popular amongst the nation’s leaders. The amount of social spending in Argentina can be understood as follows: In 2019, out of 100 working-age people, barely 20 were stable-workers employed in private jobs contributing to the immense social security covering for the remaining 80 people. And out of those 80 people, 10 were public-sector workers – which means they earned very less; 14 were self-employed – meaning they were mostly subsidized or low-income workers; and 15 were in the informal sector. A staggering 35 people were not even looking for a job.
Today’s Argentina is leading exporter of food grains, soyabeans and other agricultural products. The export mix is thus heavily reliant on volatile, low margin commodities. Inflation has jumped to 200% over the last year, and unemployment has been high. Peso’s value has been fixed artificially since 2019, and ‘self-reliance’ policies have resulted in an intricate web of taxes on international trade. Even in 2023, Peron's policies had left their mark on Argentina. People wanted change.
Enter Javier Milei.
Who is Milei?
Milei, can best be described as a spanner in the system.
Milei is constantly juxtaposed with conservative global leaders, which include former US president Donald Trump, Hungarian Prime Minster Viktor Orban and former Brazilian president, Jair Bolsonaro.
He rose to fame around the COVID lockdowns, when the Argentinian population began to feel the exacerbated effects of the pandemic over an already sketchy economy. Perhaps what they were looking for was something to break the decades old cycle of economic misery. When Javier Milei came on to their television screens, brash, outspoken, and an anti-hero, they hung on his every word. His continuous presence inundated not only through talk shows, but also via public speeches and YouTube left a mark.
Classified as an eccentric libertarian economist, Milei promulgated an anti-elite and pro-libertarian stance, attacking Peronism and calling it responsible for decades long economic stagnation. The chainsaw wielding firebrand was quite a pull amongst the audiences, as is evidenced by the victory. A big part of his allure is his radical speech. One of his statements that perfectly exemplifies what he believes in is as follows:
“For me the state is an enemy, as are the politicians who live off it,”
The rebellious, eye-catching views resonated amongst critical sections of the society. He developed a cult figure, especially among the young males of Argentina, that got him elected to Congress in 2021. An unauthorised biography of Javier Milei described his childhood as lonely and subject to parental abuse and schoolyard bullying. The author of the book, Juan Gonzalez stated, “More than his ideas, what worries me is the state of his mind and his emotional stability”.
Milei has earned the moniker, ‘El Loco’, or the Madman.
You generally don’t wish to hear such things about a future world leader.
Milei’s election
As already touched upon earlier, Milei’s approach to the economy is presented as a shock to the Argentine political system – an alternative to the long-reigning Justicialist Party, which has been in power for 27 out of 40 years since democracy was restored to Argentina in 1983. Peronist by nature, the Justicialist Party has been primarily blamed by most opposition parties on both sides of the spectrum for failure to reverse the economic situation. Criticism even coming from groups that also claim to be peronists. Milei used this to his advantage.
He played on the anti-Peronist stance, something the public had begun to resonate with, and was able to portray his main rival, Sergio Massa, as a Peronist in the eyes of the public. Despite Massa’s more centrist position, his closeness to the previous administration’s Cristina Kirchner ensured that he was unable to escape his label.
Milei crafted his image as the well-intentioned, radical underdog who promised to fix Argentina through his own brute ways. His extreme ways of fixing the economy attracted international attention, especially with the global wave of right-wing governments coming to power. He even received support from popular figures such as Elon Musk and Tucker Carlson, allowing him to gain more airtime.
And well, who doesn’t love underdogs?
What will Milei do?
What’s makes the story interesting is that Milei is probably the first self-proclaimed libertarian anarcho-capitalist head of state or government in world history.
Libertarianism, in this case, is based on the Principle of Non-Aggression (PNA), where aggression is defined as any use of physical force, threat or fraud against a peaceful individual. A logical consequence of this principle is that the state is inherently unethical, since it forcibly takes the products of its citizens' labour through taxation.
And well that means that anarcho-capitalism preaches the total abolition of the state within the capitalist system.
Despite the radicalism of these ideas, Milei admitted that it is not possible to achieve such goals in the short term, but his mandate would aim to make Argentine society free through respect for private property, voluntary exchange between individuals and the natural order of markets, without government interference.
Milei has promised a lot of significant cuts, true to his ‘chainsaw’ policy. As per his libertarian background, Milei has advocated free-market reforms that may bring in some significant structural corrections.
Milei’s Economy Minister, Luis Caputo, mentioned that the point of departure for his government was one of the worst, with low cash reserves, high government debts, and a staggering 40% of the population below the poverty line. Argentina also owes around $44B to the IMF. Consequently, Milei’s slew of austerity measures were, as Caputo puts it, “going to make Argentina worse for a few months before it gets better”.
These measures include reducing fuel and transport subsidies, freezing government spending on many public works and advertising, allowing the peso to fall to its market value against the dollar, and cutting down government ministries.
The IMF has welcomed these measures, and hopes that the reforms towards fiscal prudence will continue.
Some of the more extreme measures that Milei had promised before getting elected include abolishing Argentina’s central bank, dollarizing the economy and stopping trade with China on ideological grounds. He also wanted to restore personal income taxes, cut earlier by the outgoing government. It remains to be seen how sternly he pursues these more controversial measures. It also remains to be seen how effective those measures are.
The reaction from the opposition, especially the left, has been cold. Juan Grabois, a campaigner and a social leader ,described Caputo as a “psychopath on the verge of massacring his defenceless victims”.
Anticipating a blowback, Milei’s government has been preparing to restrict some protests, most importantly the traditional piquete, in which demonstrators blockade roads and highways. Milei’s new protocol allows police to seize face masks, sticks or other elements. It also restricts who can take part in these protests, such as teenagers.
But given the amount of upheaval these austerity measures are set to cause, is there any precedent of them working? Being an economist himself, what has prompted Milei towards such radical moves from an Argentine perspective?
Milei’s chances of success
Milei’s belief in free-market economics, and his staunch opposition to leftist, populist policies is evident. But part of his policy direction is not entirely new, and has been attempted in different forms in Argentina. Most notably by Carlos Menem, who was in power between 1989 and 1999. Menem went on a privatization spree, but also controlled the peso. Government spending spiked up uncontrollably, and resulted in default in 2001.
But while reforms haven’t yet worked for Argentina, doesn’t mean they haven’t worked anywhere in the world. Perhaps a good example to look at in recent years with similar problems, albeit not to the same degree, is Portugal.
Portugal’s problems were familiar – high debt and high unemployment, both touching unmanageable heights. Portugal went to the IMF and EU in 2011 for financial assistance, in return for committed actions that promised to a fiscal prudence. Portugal ensured gradual reduction in deficit, reduced its generous state pensions and lowered the public sector bill while in parallel implementing structural reforms that would enable cash generation. Some of the measures included privatization of stakes in national energy companies, the sale of the national airline and labour reforms to facilitate the business environment.
One critical facet that Portugal ensured, which turned out to be a game changer, was policy continuity. Portugal prioritized social cohesion, meaning they built support using all key stakeholders – business groups, the opposition, unions and other non-state social groups. Therefore, the program did not derail even when the governments changed.
While the case of Portugal cannot be mapped as it is to Argentina, it does offer a few key insights. An economic recovery, especially for a country the size of Argentina, will take more than a single-term. And for a populace so used to high social spending, austerity is not going to be easy to digest. It remains imperative that the reforms be tamed down and communicated well to the nation, mainly to help understand what they will yield in the long run. Additionally, similar to Portugal, it would be critical to ensure continuity. Milei’s government would do well to onboard all stakeholders so that even if the government changes, the reforms don’t derail.
A big factor in the success will also be the support of Mauricio Macri, a former President who lent his support to Milei. Macri’s political experience can be leveraged by Milei to course correct policy decisions, such as the EU-Mercosur deal.
Mercosur, a South-American customs union, has been on the home stretch of concluding a trade deal with EU, which could result in a turning point for South America. A big part of the deal remains South American commitment to environmental standards and climate change, a point Milei has been skeptical about. But Milei’s push to encourage such trade deals could be beneficial to what he wants to achieve for his nation. And Macri could help Milei get the support of Argentina’s congress, where Milei’s coalition is only the third largest bloc.
Milei’s foreign relations
Milei’s foreign relations views are as interesting, if not more, than his economic perspective. Milei claims to favor the ‘free-world’, and has threatened to cut ties with China over communism - a relationship moulded by the outgoing leftist government. But the reality of the presidential position is different from the electoral campaign. According to the Infobae website, the day after his inauguration, Milei met Wu Weihua, a Chinese diplomat, and handed him a letter addressed to Chinese President Xi Jinping. The letter asks China to renew the currency swap agreement it has with Argentina. If the request is accepted, Milei will be able to convert part of the reserves in yuan, the Chinese currency, into dollars to pay for part of the loan granted by the IMF and to pay for imports.
In the meantime, he has displayed his eagerness in working with the US – be it the Democrats or the Republicans. He has also backed Israel in the ongoing Israel-Hamas war, a view not shared by many of his Latin American counterparts. He has gone as far as saying that he may move Argentina’s embassy to Jerusalem from Tel Aviv, similar to what Trump did in his term.
Another international stance that distances him from most of its regional counterparts was the public defense of Ukraine against Russian aggression. In fact, Milei offered Zelensky a Ukraine-Latin America summit to be held in Argentina.
Conclusion
While Milei may be one of the most interesting leaders of recent times, and his views may be the most radical amongst Argentine leaders, a lot of things will have to go right for Milei-nomics to work. The odds are increasingly against him, simply given the deeply embedded Peronist ideology in Argentina, and the challenging macro-economic environment. The underdog status and anti-incumbency coupled with larger frustration with repeated economic failures may have gotten him elected, but criticising from outside and actually impacting change in the face of constant opposition are very different things.
Sources
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