Milei and Steering Argentina Toward Economic Stability

A recent visit to Argentina confirmed my sense that President Milei is on the right track despite what his critics on the left and the skeptics on the right are saying. 

As is always the case when free-market reform takes place in real life as opposed to an academic paper or a classroom, political, social, and market realities impose a certain degree of strategic adaptation. Milei’s strategy is clear: he wants to kill inflation by bringing discipline to the fiscal purse and purging the central bank’s balance sheet of the interest-bearing garbage accumulated under the previous government’s maniacal money-printing habits in time for the midterm elections in October of next year. Then, assuming he maintains the significant popularity he still enjoys despite the painful hardship that shock therapy is causing throughout society, he can substantially increase his party’s representation. Considering that his party controls just fifteen percent of Congress today, getting more than one-third of the total seats might be enough to pass large amounts of free-market legislation with the support of various allies and last-minute opportunists “inspired” by the government’s victory.

This doesn’t mean he contemplates paralysis between now and then. He signed a wide-ranging decree early in his tenure, some of which are currently being challenged in court. Additionally, a watered-down version of his original proposal was recently approved in the Senate. This version allows him to make legislative decisions by decree in certain areas and within limits. This means he will make some progress on the microeconomic front, which is essential for any free-market revolution. The removal of obstacles hindering savers, investors, producers, consumers, and traders will eventually lead to an investment boom in a free economic environment. This could involve privatizing some government-owned companies or opening them to private capital, providing incentives to foreign investors, and relaxing certain labor legislation.

Milei’s strategy disappointed some classical liberals because he postponed lifting exchange controls (which also translated into capital controls) that he inherited. His promise to abolish the central bank and officially dollarize the economy or allow various currencies to compete has yet to be fulfilled. His economic team has persuaded him that he needs to stabilize the government’s finances, clean up the central bank’s balance sheet and build up some foreign reserves before proceeding with these reforms. Tackling them too early, they fear, would cause a debacle.

Although I am one of those who believe that they should have implemented these significant changes earlier rather than later, it is too early to give up hope. Monthly inflation, which was as high as 25 percent, has now decreased to just above 4 percent, thanks to the reduction of the fiscal deficit in record time, the elimination of a large amount of short-term central bank debt that was incurring astronomically high interest rates (and its conversion into longer-term Treasury bonds at much-reduced interest rates), and the increase in foreign reserves, which has helped to restore people’s expectations. All of this has taken place with the support of the International Monetary Fund, which continues to express confidence in Milei’s plan and has disbursed the funds it conditionally committed to provide to Argentina long before Milei’s presidency.

The principal question mark involves people’s patience. Under Milei, a country accustomed to living off the state has seen pensions, cash transfers to the provinces, public works, subsidies to various public utilities, salaries, and many other sources of fiscal spending substantially cut, either outright or because they have ceased to be adjusted to keep up with inflation. If we add the fact that investors are taking a wait-and-see attitude before committing their capital, that the Peronist and the extreme left opposition are violently trying to derail Milei’s government, and that center-left and even some members of center-right parties are openly sabotaging him, it is not hard to see why some early enthusiasts have seen their faith in Argentina’s success somewhat reduced.

I am not among them. It is way too early to lose hope. The achievements so far are impressive on the fiscal and monetary fronts. Argentineans are even beginning to see improvements beyond lower inflation, such as the rebirth of mortgage credit and other signs of normality. Let’s cross our fingers and give the guy a bit more time. His Herculean effort to overhaul one of the world’s most statist countries deserves an extension of credit.

Alvaro Vargas Llosa is a Senior Fellow at the Independent Institute. His Independent books include Global Crossings, Liberty for Latin America, and The Che Guevara Myth.
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