Argentina's Reckoning

THE STORY SIMPLIFIED

A PROLONGED TURBULENT ECONOMIC HISTORY

Since emerging from military rule in 1983, Argentina has faced persistent economic challenges characterized by a series of financial crises, largely stemming from fiscal and monetary mismanagement. These ongoing struggles include:

• 1980s-1990s: Hyperinflation Crisis
  Argentina struggled with hyperinflation, which peaked at 3,000% annually in 1989, prompting the implementation of the "Convertibility Plan" in the early 1990s. This plan pegged the peso to the U.S. dollar and restricted the government's ability to print money, bringing initial stability but also limiting the use of monetary policy to stimulate economic growth.

• 2001: First Major Debt Default
  Argentina defaulted on $95 billion of debt, leading to the abandonment of the Convertibility Plan. The government resumed printing money, resulting in a sharp currency devaluation. The International Monetary Fund (IMF) withdrew financial support.

• 2014: Second Default
  A $29 billion default further damaged Argentina’s credibility and access to international debt markets.

• 2020: Third Default Amid Pandemic
  During the COVID-19 crisis, Argentina experienced a partial default as it struggled with debt repayments.

• Chronic Overspending and Inflation
  Despite repeated crises, political leaders have been unable to curb excessive spending, worsening the economic situation. Ahead of the 2023 election, inflation reached a staggering 211%—the highest in 34 years.

THE RISE OF JAVIER MILEI

The prolonged economic crisis set the stage for the emergence of Javier Milei, a figure with a unique vision for Argentina's economic future.

• Libertarian Roots and Media Influence
  Milei, a self-described anarcho-capitalist, gained public attention as a media commentator known for his staunch libertarian views and calls for austere economic policies.

• Entry into Politics
  In 2021, he entered the political arena, winning a seat in the Argentine Congress and quickly building a reputation as an opponent of the political establishment.

• Formation of La Libertad Avanza
  To further his ambitions, Milei founded the political coalition La Libertad Avanza (Liberty Advances), positioning himself as a presidential candidate.

• Controversial Campaign Stances
  Milei’s platform included proposals to dollarize Argentina's economy—that is, to adopt the U.S. dollar as the official currency—while also dismissing concerns about climate change and refusing to condemn the human rights abuses committed by the former Argentine Junta.

• Presidential Victory in 2023
  Milei secured the presidency in December with 55.7% of the vote, drawing significant support from younger voters frustrated with the status quo.

CONTROL, POLITICS, AND THE LAW

Milei envisioned a rapid and sweeping implementation of his policies, but his ability to do so is constrained by his coalition's lack of a majority in Congress. To overcome these limitations, he has taken steps to consolidate power:

• Omnibus Bill and Power Struggles
  Milei aimed to pass an omnibus bill to implement broader executive powers and 300+ economic reforms, including privatizations and deregulation. After resistance led to the bills’ withdrawal in February 2024, a scaled-down version passed the Senate in June and continues to move through the legislative process.

• Mega Decree to Bypass Bureaucracy
  The ‘Mega Decree’ is an executive order that aims to reshape Argentina's economy through extensive deregulation, privatization, and labor law reforms, affecting areas such as trade, industry, healthcare, and workers' rights. Importantly, as a Decree of Necessity and Urgency (DNU), it took effect immediately without requiring prior congressional approval.

• Proposed Electoral Reforms and Political Pressure
  He has also called for changes to the electoral system and made controversial threats against political opponents, labeling dissenters as "traitors."

AUSTERE ECONOMIC POLICY

As President, Milei has leveraged his control over government spending to enact measures aimed at improving Argentina’s financial position. Here are the key actions taken under his administration:

• Immediate Currency Devaluation
  Milei’s administration devalued the peso by 50% shortly after taking office, aiming to reduce the gap between official and parallel exchange rates, discourage dollar hoarding, and boost export competitiveness.

• Public Sector Job Cuts and Ministry Closures
  Over 25,000 public sector jobs were cut, with an additional 50,000 cuts announced. Milei also closed 13 government ministries as part of his austerity measures.

• Subsidy Reductions
  Utilizing the Mega Decree, he began scaling back subsidies for electricity, gas, water, and public transportation, significantly reducing state expenditures.

• Cuts to Pension Spending
  A third of the 2.7 trillion peso reduction in government spending came from slashing pension payouts.

THE SOCIAL AND ENVIRONMENTAL PERSPECTIVE

Milei's administration has taken notable steps in social and environmental policy, with decisions that have attracted criticism:

• Environmental Policy

  • Proposed regulations to permit mining on certain glaciers and allowed provincial governments to carry out deforestation on protected land.

  • Proposed a cap-and-trade carbon emissions system and affirmed Argentina's commitment to the Paris Climate Agreement.

• Gender Policies

  • Dissolved the government agency responsible for gender equality, including initiatives to protect women from violence, as part of broader austerity measures.

  • Banned gender-inclusive language (the practice of modifying gendered Spanish words with an "x", "e", or "@" to make them gender neutral) in official military and government documents.

  • Declined to endorse the G20 summit's statement on female empowerment in October, making Argentina the only country that did not sign.

• Funding for Scientific and Cultural Sectors

  • Significantly reduced funding for scientific research and cultural programs as part of the administration's cost-cutting efforts.

THE RESULTS SO FAR

Milei’s approach to economic policy has sought to deliver rapid and transformative changes to Argentina's financial landscape – did it work? 

• Inflation Trends

  • While inflation initially surged, the country saw a notable decline from 25% in December 2023 to 11% in March 2024, and further down to 3.5% in September 2024.

• Fiscal Improvements and IMF Relations

  • The administration’s spending cuts resulted in a budget surplus of 1.1% of GDP. This fiscal turnaround has led to a more favourable stance from the IMF in debt restructuring negotiations.

• Rising Poverty

  • Poverty levels have increased to 55% from 41.7%, with 5.5 million people falling into poverty during the first six months of Milei’s term.

• Food Crisis and Social Assistance

  • The United Nations highlighted a growing food crisis in the country. In response, the government increased payouts for child allowances and food cards, although these came after previous cuts to food security funding such as soup kitchens.

• Public Unrest and Protests

  • Nearly continuous protests have erupted across the country, attributed to attempts to consolidate legislative power and significant reductions in public services and subsidies.

Milei is delivering on his promise of significant economic reform, easing inflation and balancing Argentina's budget. However, these fiscal gains come with steep costs: job losses, rising poverty, and cuts to public services. The austerity measures are straining the social fabric, with Milei's social policies contributing to the tensions. The question now is whether Argentina can endure this economic crunch long enough to benefit—or if the costs will ultimately prove too high.