Ian Bremmer
What happens when a country
with triple-digit inflation and chronic fiscal deficits elects a
chainsaw-wielding populist with a dead dog for chief counsel as president?
Back in November, following the unexpected triumph of the self-styled “anarcho-capitalist” Javier Milei in Argentina’s presidential election, I expected the economy would further collapse in short order.
Thankfully for the people of
Argentina, that didn’t happen. In fact, since taking office in December,
President Milei’s economic team has seemingly achieved what I (along with most
political analysts and economists) thought impossible: Monthly inflation has come down every month for the past three months, from 25%
in December to nearly 10% in March, with forecasters expecting the April figure to come in at single digits. The
government did this by turning the 5.5% budget deficit it inherited into the
country’s first surplus in over a decade, while boosting the central
bank’s reserves, lowering its benchmark interest rates, and reducing the money
supply – all without destabilizing currency and financial markets.
That’s not to say average
Argentines are having a good time (more on this below). But this is a big deal
nonetheless, and it’s one that I’m very happy to have been wrong about – just
as I’ll be happy if I’m wrong about Ukraine eventually getting partitioned (although I’ll take
the under on that).
Why didn’t the economy
collapse?
One key reason is that President Milei turned out to be significantly more sensible and moderate than candidate Milei, to most everyone’s surprise.
Unlike Argentina’s last
several administrations, which were known quantities to anyone who covered the
country, Milei and his inner circle were completely untested outsiders with a
reputation for intransigence and ideological dogmatism. Absent a better first-hand
assessment of him and the people surrounding him, I was more willing to take
his campaign promises and stated views at face value than I would have
otherwise. And let me tell you, some of those were … pretty out there.
Upon taking office, however,
Milei proved himself more willing to listen, engage, and compromise than I
expected. Despite his combative rhetoric, the most institutionally weak
president in modern Argentine history – with little support in Congress and
among governors – went back on his promise never to negotiate with the
so-called “political caste.” He quickly backed off the most
outlandish/ambitious (depending on who you ask) libertarian economic policies
he and his original advisors had run on – at least for now. The most notable of
these were dollarization (aka replacing the peso with the greenback as
the local currency), abolishing the central bank, and lifting currency controls,
which if implemented on day 1 as pledged would have caused the sharp and
immediate crisis that I predicted.
Instead, Milei appointed a
strongly pragmatic economic team that has been well-received both by markets
and the IMF – two essential players in Argentina’s economic stabilization. Led
by the experienced ex-banker Luis Caputo, whom former President Mauricio
Macri nicknamed “the Messi of finance,” the government embarked
on a sweeping shock therapy agenda consisting of a 54% devaluation and
draconian fiscal and monetary tightening. Wisely (but contrary to economic
orthodoxy and Milei’s campaign rhetoric), they decided to keep currency and
capital controls in place to prevent a disorderly run on the peso from wreaking
havoc on markets. The gamble has paid off thus far, with investors, businesses,
and the IMF all welcoming Milei’s steps with open arms.
Can it last?
While shock therapy has been
successful at balancing the budget and slowing inflation, it has come at a
great social cost. The fiscal and monetary austerity has caused a deep
recession, with economic activity shrinking more than 10% year-on-year in
March, unemployment rising, and real salaries hitting their lowest point since
2003. The government is hopeful that all the sacrifice will soon give way to a
V-shaped recovery as output expands in the second quarter thanks to
agricultural exports. However, most economists are skeptical, and it’s unclear
how much more pain Argentines will be willing to take before they turn on the
president’s policies.
Caputo’s original deficit
reduction plan envisioned a mix of 60% spending cuts and 40% tax increases.
That plan, however, was blocked by Congress earlier this year, leaving the
government with no choice but to rely on unpopular spending cuts for the bulk
of it. While Argentina's public sector is without a doubt excessively bloated
and in need of a good trim, many of the real-term cuts (referred to as “blending” in Argentina) to social spending that the Milei
administration is banking on to balance the budget are regressive,
recessionary, and therefore socially and politically unsustainable.
Mass protests against budget cuts to public universities
two weeks ago drew more than 400,000 people, and labor unions called for a
nationwide general strike tomorrow. Public discontent can only
intensify as the austerity measures cut deeper, further undermining the
president’s ability to pass legislation and limiting his room to maneuver. With
the president’s approval ratings starting to trend down (albeit from
honeymoon-level highs) and opposition to his policies mounting both on the
streets and in Congress, this is the greatest risk to Milei’s plan.
Will Milei and Argentines have
what it takes to stick with the treatment until the patient is cured? Or will
they let this painful fiscal adjustment and recession go to waste even though
their best chance for success in decades could be right around the corner?
As a fan of Argentina (and,
you know, people in general), I know what I’m hoping for. But as they say, hope
is not a strategy.
Ian Bremmer, GZERO
Media, 8-5-2024
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