The rockstar president who is rocking Argentina’s economy

A deep-dive into the underlying economic conditions in Argentina.

Last month, the Argentine primaries elected far-right free-market anarchist Javier Milei as the country’s president. With a majority of over 55% of the votes, the former economist captivated the hearts of millions through his unorthodox demeanor and rhetoric. His promise? Fixing Argentina’s economy.

Argentina: an economic profile

When hearing the word “Argentina”, two things spring to mind: football legends of the likes of Messi and Maradona and a crippling economy. Here at this blog, we’re much more interested in the latter. The South-American country’s economic disarray spans over half a century, with consistent periods of hyperinflation and economic stagnation throughout its recent history: between 1989-90, Argentina was hit with hyperinflation that crossed the 3’000% threshold. Once one of the world’s richest countries just over a century ago, filled with natural richness and raw materials that had given it its name, was just a shadow of its former self.

Two emergency currency changes that sought to bring back stability and investor confidence resulted in the Argentine Peso used today; it saw short-term success in the beginning of the 2000s before spiraling back into instability to the present rate of over 150% inflation. The causes are clear: inept fiscal policy coupled with powerless monetary policy.

“Spend it while you can” is an apt way to describe the dogma that surrounded Argentina’s government spending in the 21st century. Widespread mismanagement of resources, corrupt siphoning of funds and simple incompetence resulted in the country’s public budget being poorly allocated and in a widening government budget deficit. Unlike in the U.S., high unemployment, isolationist policies and a stagnating industrial base made the fiscal deficit unmanageable. The solution? Printing money to pay off debts. A recipe for disaster, just ask the Weimar Republic.

The consequences are stark. Consumer confidence in the macroeconomic situation and economic outlook is poor, with high inflation turning people away from investing or large purchases. Banks and other financial institutions are seen as unsafe, leading to people stashing their savings in cash at home – although not in pesos. Just as investors buy safe U.S. Treasury bonds, Argentinians feel much safer with U.S. dollars. The pegged exchange rate, designed to keep government spending in check, protects people with a stable exchange rate when traded through legitimate channels.

The one to save it all

Enter Milei, the man who promises Argentinians a way out of this situation. With a background in economics and through proud nationalism and outlandish populism, the now-president represents a strong authority figure for the tired populace. Though it’s easy to draw comparisons with a certain “make [x] great again” policy, for many, Milei is the first real chance at escaping the economic predicament Argentina is stuck in.

His policies are simple: re-pegging the peso, deregulations, a complete restructuring of Argentina’s financial institutions (including the dysfunctional central bank) and eventually “dollarising” Argentina. Within three days of stepping into office, Milei changed the exchange rate from 360 pesos to usd to 800, a 120% increase. This bold devaluation makes weak Argentine exports more competitive (by making it cheaper to import from the country), helping curb the wide trade deficit.

The devaluated rate also closes down on the disparity between the official and black-market rate, marking coherence and signaling stability. Nevertheless, devaluation is often associated with growing aggregate demand and, hence, demand-pull inflation. Perhaps Argentine authorities judge the benefits of increasing free trade and boosting exports to outweigh possible inflationary pressures.

Moreover, Milei’s administration has opted to enact contractionary fiscal policy by cutting down on spending and increasing deregulation, moves aimed to cut down on the dangerous deficit whilst boosting the economy – although the policies have already been criticized for placing economic growth over welfare. Is Milei planning to sacrifice short-term welfare for long-term economic prosperity? A swift overhaul has also taken place in financial institutions: though the promised “complete shutdown” of the central bank is extreme, the president has reorganized its top positions with close allies, perhaps in a move to centralize economic authority around his cabinet.

Dollarisation

Lastly, Milei’s infamous and provocative plan to dollarise Argentina. Why bother rescuing a sinking currency, when there is another safe and stable currency that is already used to conduct most large transactions? Seen as a cheap campaign promise for some, the president wants to ditch the peso in favor of the dollar. Though socially a feasible option, the economics are much more convoluted. First off, the already indebted country would need to acquire much larger foreign exchange reserves if it were to go through with the shift – a very expensive undertaking. Argentina would also completely loose control over their currency, which includes control over the rate. On the other hand, loosing control could free up some responsibility from the central bank; it could focus on other macroeconomic objectives. In the short-run, dollarisation seems like an impossible task. But could it work down the line?

Where Argentina is headed

Argentina’s president has taken a strong and staunch approach to getting the economy back on track. Though desperately needed, many contractionary and regressive policies have spillover impacts on poorer and working cohorts of society: labour rights have been reduced in an effort to increase short-term productivity and reduce inflation. Milei has also been accused of undermining Argentina’s judicial powers by trying to streamline and leap over lawful processes.

Internationally, his election has generated interest amongst investors and apprehensive reactions from economists and financial bodies. It is also indicative of a global shift towards right-wing leaning politics; in the coming year (the most vote-packed year in world history) this trend will be worth looking out for. Argentina and its economy are, under Milei’s leadership, headed towards decisive times in the country’s history. For us interested in economics, interesting times. For the people of Argentina, possibly life-altering times.