Argentina

The Janus face of Javier Milei

On 19 November 2023, just under a year ago, the self-confessed anarcho-capitalist Javier Milei won the presidential election in Argentina. A few weeks later, he became president. Since then, he has ruled with a heavy hand. The interim balance of stability policy is difficult to interpret. We will try to be brief.

To anticipate: You don't have to like Javier Milei with his right-wing populist posturing and pompous slogans. Convinced liberals like us are particularly irritated by the socio-politically reactionary ideas he cultivates and alienated by the foreign policy porcelain he has already smashed - for example during his appearance in front of thousands of cheering supporters of the ultra-right Vox party in Spain. Nevertheless, his stability policy agenda must be taken seriously. He wants – for the first time in decades – to lead Argentina back to economic prosperity as part of an integrated global economy. He wants a functioning market economy. He wants to do away with the protectionist planned economy of Peronism, which has run Argentina into the ground and stifled its great economic potential through over-regulation and clientelistic redistribution. And that is the right thing to do.

Can he achieve this? Domestically, he has achieved considerable success, particularly on three fronts: Combating inflation, reducing the budget deficit and improving investment conditions and tenancy law. Let’s have a closer look:

1. Inflation has fallen to 3.5 per cent per month. For a ‘normal’ nation somewhere in the stable expanses of the world, this would be a monetary devaluation disaster – an inflation rate of around 50 (!) per cent extrapolated on an annual basis. For Argentina, it is a gigantic success after years of hyperinflation. It is the weakest inflation trend that the Argentinian people have experienced for over two decades. And above all, the trend has been going in the right direction since Milei took office: downwards. This is also stabilising inflation expectations, which is extremely important in order to create confidence in the markets.
2. This success is made possible by drastically decreasing budget deficits, and now even the first budget surpluses, which are mainly due to the fact that wages and salaries in the public sector are only adjusted so moderately that there can be no talk of ‘equalising inflation’. Consequence: Real incomes are falling massively. Advantage: The central bank no longer has to ‘step in’ with so much money printing to finance the state. The Argentinians call this the ‘mixer’ (‘la licuadora’) with humorous sarcasm. The situation is similar with transfers to the provinces - we would call this ‘fiscal equalisation’. These are politically motivated and lag drastically behind inflation, which is clever in terms of stability policy, but problematic in terms of constitutional law. However, it should also be borne in mind that the country's fiscal framework has a serious structural problem, as it leads to organised irresponsibility and makes budgetary discipline extremely difficult.
3. Argentina is a resource-rich country that is actually ideal for private investment in the energy and raw materials sector, including renewable energies. In this respect, the government has introduced massive relief – as part of its comprehensive legislative package, the ‘omnibus law’, which passed through the legislative process in a slimmed-down form, although Milei and his party lacked the necessary majorities of their own. The same applies to the previously absurdly restrictive tenancy law. It was liberalised, and lo and behold: a huge supply of rental flats that had previously been withheld came onto the market – to the benefit of those looking for housing, but to the detriment of ‘old tenants’, who now have to pay much higher rents, which affects many low-income households.

Conclusion: considerable domestic stability policy successes, naturally with an equally considerable social price to pay. A thoroughly courageous programme: ‘work in progress’. The external economic situation is quite different. The Argentinian currency, the peso, is still hopelessly overvalued at a basically fixed official exchange rate, even if its parity with the dollar is moderately adjusted by 2 per cent every month, i.e. devalued. As a result, the ‘gap’ between the official exchange rate and the market rate is widening rather than narrowing, capital controls remain in place, Argentine companies are still unable to offer their products at competitive prices and to buy important capital goods abroad on the open market. Tourism, an important source of foreign currency, is weakening due to the massively overvalued peso. The Argentinian economy therefore remains ‘Peronistically isolated’.

It should be noted that this has nothing to do ideologically with Javier Milei's anarcho-capitalism. Rather, it has more to do with a reluctance on the part of the otherwise so flamboyant Milei to allow market forces to make the necessary adjustments, as this would certainly cause a further – albeit temporary – surge in inflation, which would look bad for Milei politically. You wouldn't believe it, but at this point he lacks the courage: he doesn't want that much market economy after all.

Will that work? The fact is that the longer this state of affairs lasts, the more a backlogged, hidden ‘international inflation’ will build up, which could at some point cause the Milei system to totter. The Argentinian president should take a close look at Germany's monetary reforms in 1923 and 1948 and Poland's successful stabilisation programme (with overt temporary inflation!) under Leszek Balcerowicz after 1990. Then he would realise that liberal decisions were needed at an early stage to stabilise the economy and set it on a path to prosperity.

It is not enough to celebrate the rhetoric of anarcho-capitalism and let the ‘mixer’ do its work in the country itself. You have to ratify the credibility of your own domestic economic programme in terms of foreign trade. If this does not happen, everything is up in the air – including the prospect of successful debt rescheduling negotiations with the International Monetary Fund, which Milei's Argentina still faces.

So: a first start has been made, but not much more.

Dr Hans-Dieter Holtzmann heads the Foundation's representation in Buenos Aires (Argentina), Prof Karl-Heinz Paqué is Chairman of the Foundation's Board of Directors. Both will participate in a conference of the Foundation on Javier Milei's financial and economic policy, which will take place in Buenos Aires on 26 November 2024. A detailed analysis of the situation in Argentina by Holtzmann & Paqué will follow at that time.