"Only such a sophisticated people could do it so badly". This is a favorite saying of the Brazilians about the proud, as they consider them, their neighbors, the Argentinians. And maybe they are not too wrong. If one takes a look at the recent and modern history of Argentina, one will come to more or less the same conclusion.
About a hundred years ago, Argentina was among the ten richest countries in the world, leaving behind several European countries, such as France and Italy! Technological progress and the improvement of maritime transport contributed to the economic miracle of this Latin American country, which was initially based on its extroversion and primary wealth.
But today the picture is very different. Its inability to diversify and adapt to a constantly changing international economic environment, the unfair social stratification, the inadequate education system, a series of successive coups and the alienating economic policies of the democratic period of the last thirty years or so have resulted in its steep decline .
From 2000 to today, it has gone bankrupt 3 times, repeatedly failing to repay its international lenders. In the past two years, an unprecedented drought has battered its agricultural sector and plunged its already fragile economy into recession, while inflation in October, according to International Monetary Fund data from October 2022 rose to 135.7%. Four out of ten Argentines live below the poverty line, double the rate from not too long ago in 2017. Over the past four years, the value of its currency against the dollar has lost nearly 90% of its value , essentially zeroing out the purchasing power of Argentines. Levels of state corruption indescribable: The video of President Cristina Kirchner's former public works minister hiding $9 million in cash behind the walls of a monastery (!) is hard to erase from the memory of those who have seen it.
Amidst this economic climate, the second round of elections to elect the country's new president was held on November 19. The winner of the first round was Sergio Massa with a percentage of 35.9%, while the second place was taken by the leader of the party La Libertad Avanza (Liberty Advances), Javier Milei, with a percentage of 30%. And while everything looked like the Peronist finance minister would succeed Alberto Fernandez, Monday, November 21, 2023 found many analysts and many Argentines trying to digest the previous night's election result. New president of 2her of Latin America's largest economy will be Javier Milei from December 10. The news caused consternation to many, but great joy in the capital markets. In New York, Argentine stocks and bonds rose sharply, with YPF, the majority state-owned oil and gas company, closing up 40%. "This is your chance for a fresh start,” Jorge Piedrahita, founder of Gear Capital Management, told Bloomberg, and markets seem to be discounting it.
But why all the fuss? Why all the fuss and in any case, who is this Milei? The truth is that most media present him as a real "case" and the truth is that they are right. The fact that the 53-year-old economist became known to the general public not because of his professional status, but mainly because of his participation in a late-night television show, and the fact that he presents himself as a tantric sex guru, obviously contributed to this. , but also as the interlocutor of his dead dog Conan, who was however cloned by a quadriplegic in the United States. At least this time he gave the Conan clones economist names: Milton (Friedman), Robert and Lucas (Robert Lucas) and Murray (Rothbard). Those of you little ones who, instead of collecting soccer player stickers, collected economist cards, will already understand that the aforementioned gentlemen belong to the liberal economic thought and the infamous Chicago School (the first two), which they have loved so much at times in Latin America.
His election campaign was a sustained "blame" of Argentina's political establishment, responsible for the country's economic woes over the past 30 years, and promised to "blow things up". While he directed most of his fire at the center-left "Peronist" parties in power for the past twenty years, he also criticized Mauricio Macri's center-right government, which was in power from 2015 to 2019, for not being conservative enough in terms of its economic policy.
He succeeded in breaking the hegemony of the two leading traditional political forces of the left - the Peronists who have dominated Argentina's political scene since the 1940s - and the main right-wing opposition, the conservative bloc "Together for Change", promising to reduce government spending, lowering taxes, less government intervention, replacing the peso with the US dollar and abolishing the Central Bank. "Today marks the end of decline in Argentina”, he declared immediately after his victory. (For me now these big mouths bring to mind other, more familiar, but painful associations).
Many compare Milei to Donald Trump, as a right-wing populist with authoritarian sympathies (note that the newly elected Argentine president has downplayed the crimes of the military dictatorship that murdered thousands of Argentines between 1976 and 1983, and has also been a longtime adviser to Antonio Bussi, the general who served as governor of Tucuman province during Argentina's military dictatorship). He is a classic authoritarian populist who happens to be right-wing only because the ruling party is left-wing. But when it comes to the consideration of economic policy, convergence is impossible. Although both call themselves economic nationalists, the Argentine has no time for Trump's protectionism or telling industries where to build their factories. Milei is also often described as a liberal, but that too is wrong. Liberals usually prioritize people's right to choose and are against abortion and sex education.
Spiritual inspirations for Milei's hardline economic liberalism include Milton Friedman and Robert Lucas, two prominent University of Chicago economists, and Murray Rothbard, a lesser-known New Yorker who helped introduce the Austrian school of free-market economics to the United States. In a revealing interview with the Economist in September, Milei recalled reading an article by Rothbard that turned him into an “anarcho-capitalist,” someone who believes that the economy should be organized solely around private interests and private contracts, and that the welfare state is "the enemy". So, in practical terms, he is a "minarchist". (Minarchism is, in political philosophy, a school of thought that proposes that the size, role, and influence of the state in a society should be kept to a minimum. Minarchism, then, advocates a model in which the state is limited to the protection of territorial integrity, of the territory. That is, a state whose only functions are to provide its citizens with defense and courts, protecting them from any possible infringement of liberty by third parties). In the historical and geographical space of Latin America, he is the heir of General Pinochet's Chicago Boys, who liberated Chile's economy in the 1970s and eighties at gunpoint, and of Domingo Cavallo, the neoliberal Argentine economy minister who committed the peso to the dollar in the 90s. However, it is one thing to espouse radical ideas as an economic commentator or protest candidate and another to implement them, especially in a country as divided with a people as troubled as Argentina.
The obstacles that Milei will have to face are not few. Having ruled out implementing his policies by presidential decree, he will have to pass them through the bicameral legislature: House and Senate, dominated by center-right and center-left parties. Even if Mauricio Macri's party supported the new president's proposals in the House, it would have to win over some of the Peronists in the Senate. This seems rather unlikely. So given these political realities, Milei may struggle to push through the tough austerity policies he has called for, which include cuts to pensions and anti-poverty programs. There are also serious questions about his main economic policy proposition: “dollarization”. His intellectual argument for this is clear. He claims that the main cause of Argentina's inflation problems is the fact that politicians of all parties, when faced with economic challenges, routinely resort to the printing press. Abolishing Argentina's Central Bank and establishing the US dollar as the sole legal tender would curb inflation and force the government to balance its books, he says. Three other Latin American countries, Ecuador, El Salvador and Panama, have dollarized their economies, but we are talking about much smaller economies.
Milei points to Argentina's experience in the early 1990s, when Cavallo, serving under President Carlos Menem, responded to hyperinflation by making the peso fully convertible into the dollar. Within a few years, inflation dropped from just over a thousand percent to less than twenty percent. Milei's only criticism of Cavallo's political convertibility is that he kept the peso as the national currency and could therefore revert to free-floating exchange rate, which happened in 2002.
There are several potential problems with Milei's proposal, starting with two very basic ones: first, the US and Argentina are by no means an Optimal Currency Zone, and second, right now, Argentina doesn't have the dollars or any other foreign exchange reserves it needs. to dollarize its economy. Net foreign exchange reserves at the country's Central Bank are negative, according to the International Monetary Fund (nearly $7 billion), meaning it owes more money in foreign currencies than it has. "Making dollars without dollars is like wanting the entire population to wear Nike sneakers even though you don't make them and don't have the resources to buy them,” Alejandro Werner, a former senior official at the International Monetary Fund, told Bloomberg a few months ago. "It's simply impossible.”
Emilio Ocampo, an economist, historian and adviser to Milei, argues that the dollar shortage is more apparent than real. "Argentines have more than 200 billion dollars hidden in safes, in banks or at home "under the mattress",” Ocampo recently wrote. "This means spontaneous dollarization". Even if this figure is real, almost all experts believe that for his plan to work, Milei's government will need to borrow a large amount of dollars from abroad. Milei, too, has recognized the dilemma: “If someone comes and gives me the 30 billion dollars in cash, I can solve it in a day” he said in the Economist interview. "If they don't give me the $30 billion in cash, I'm not going to solve this in a day".
But where could Milei find the dollars he needs? Argentina already owes the International Monetary Fund more than forty billion dollars, most of which was granted during Macri's Presidency. As a result, getting the Washington-based lender to fund the dollarization plan seems a distant goal, at best. In recent years, China has also supplied Argentina with a lot of hard currency, but Milei is an avowed staunch anti-communist. He wants to align Argentina with the US and Israel.
Even if dollarization proves feasible, it could prove disastrous over time. In the late nineties, when Cavallo's dollar peg was still in place, an increase in the value of the dollar, and therefore the peso, contributed to making Argentina's exports uncompetitive in world markets. The economy sank into a deep recession and capital began to flee the country. Despite Cavallo's return to office in 2001, capital flight accelerated and he eventually ordered banks to limit cash withdrawals. In December 2001 riots broke out in Buenos Aires and other cities. Cavallo punched her. So did the President, Fernando de la Rúa. Shortly after this, Argentina defaulted on its debts and eventually abandoned its hard currency policy through a peg to the dollar.
This is a hard lesson in monetary policy that many Western governments learned in the decades after the First World War when they insisted on restoring the nineteenth-century gold standard. Rigid monetary regimes, while they can provide an effective anti-inflationary anchor, deprive countries of the ability to respond to economic shocks, both internal and external. Also, by abolishing the Central Bank, full dollarization would deprive Argentina of a lender of last resort, which would make its financial system even more fragile.
“Dollarization is a potentially dangerous strategy with no exit,” Mark Sobel, a former senior official at the U.S. Treasury Department and former U.S. representative to the International Monetary Fund, wrote in an article about Milei's proposals. "It could cause a massive contraction and crash while distracting from the hard work of fixing the economy". Mark Weisbrot, a Latin American expert at the Washington-based Center for Economic and Policy Research, a progressive think tank, wrote that although Argentina was facing serious economic problems, “a crazy, financially suicidal approach would make things worse, and as Argentina has experienced, things can get much worse".
Many "newbie" presidents and aspiring "Leaders", from Andrés Manuel López Obrador in Mexico and Pedro Castillo in Peru, to Gustavo Petro in Colombia and Gabriel Boric in Chile, won by protesting against the "oligarchy" and those who were "ever strong". This is exactly what Milei is doing today, when he declares that “it's time for them to go” and vows to get rid of the “ruling caste” by giving them “a good kick in the ass". But these are simple slogans, which may ignite the enthusiasm of the people, but they do not fill their plate and as quickly and cheaply as minds are inflated, they deflate so quickly and painfully and the place of the beaten air is taken by anger and indignation... By the way , these two brothers, have never been good advisers to anyone.
Good luck Argentina. I will follow you with special interest...