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Argentina’s recurring crises and failure to fulfil its obvious potential have long made the South American nation an unhappy exception among the world’s steadier-performing middle-income economies. Its turbulent history helps explain why it elected last year a president who defies convention. Javier Milei, a self-styled anarcho-capitalist with libertarian principles and an unconditional love of the free market, has become a darling of global hedge funders and private equity moguls — and this despite his embrace of Donald Trump, denial of climate change and antiabortionist stance.
Milei’s campaign pledge to take a chainsaw to the state would seem reckless in much of the world, but it resonated in Argentina. Out-of-control government spending and rampant corruption have bankrupted the state, destroyed the value of the peso and left the nation close to hyperinflation.
Given the depth of the crisis, the president’s first measures were not unreasonable: a drastic fiscal adjustment to balance the budget quickly, a big peso devaluation to correct a wildly overvalued official exchange rate, increases in food cards and child benefit to offset some of the pain felt by the most vulnerable. Thankfully, Milei seems to have backed off his pledge to dollarise the economy; the inflexible, commodity-based economy would struggle in the straitjacket of US monetary policy.
Business, investors and the IMF have welcomed Milei’s steps so far. Inflation is heading down from a peak in December, the black-market peso rate has stabilised and unsustainable transport and fuel subsidies are being unwound.
Yet the economy is heading into recession. It is unclear how long the population will tolerate the increasing pain caused by austerity. Falls in the real value of wages and pensions are not sustainable and could trigger mass protests. The IMF noted that Argentina needed market-oriented reforms but that “these should be designed and sequenced to ensure sustained and inclusive growth”.
Milei also risks becoming a victim of his political tactics. The former TV economist has stuck in office to the strategy that served him well in the campaign: firing up supporters on social media by denouncing Argentina’s corrupt ruling “caste”, insisting that there are no alternatives, and hurling colourful insults at opponents.
Such an all-or-nothing strategy flies in the face of political reality. Milei is far short of a majority in Congress, even with the backing of the conservative PRO party of former president Mauricio Macri. None of the country’s 23 provincial governors are certain allies. The president has said he is ready to bypass hostile legislators and rely on decrees and other executive powers. But Milei has to win over centrists and some moderate opposition Peronists or risk his presidency being neutered by a broad coalition of the disaffected.
In his annual address to Congress this month, the president invited governors and political leaders to join him in agreeing a new “foundational pact” for Argentina to cement reforms. Many welcomed the chance of dialogue. Yet Milei insisted attendees must sign up to 10 overly rigid principles, including eschewing government deficits for ever and limiting public spending to about 25 per cent of gross domestic product.
It is not in Argentina’s interest for Milei’s economic plans to fail: the alternative could be government paralysis and hyperinflation. Yet the president seems almost too comfortable with the idea of being a prophet in the wilderness. He reminded the Financial Times last month that his hero Moses spent 40 years in the desert before his people reached the land of milk and honey. Argentina cannot wait that long. Milei needs to show his promised land is no mirage — and that he can bring enough people with him for his economic reforms to succeed.
Source: Economy - ft.com
