Argentina: It's Still Milei Time

October 18, 2024, National Review Online

Ten or so months on, Argentina’s Javier Milei is still pressing on with his reforms, but even though the Argentine system gives a lot of power to the president, it doesn’t help that his still young party (LLA — La Libertad Avanza) only has 15 percent of the seats in Argentina’s lower house and about 10 percent in the Senate. Even with the help of allies it can only exercise some degree of control via ad hoc blocking minorities.

Midterms are due late next year, and, if a recent poll in Buenos Aires province is any indication (not that much: the midterms won’t be held until October next year, an eon away under current circumstances) the LLA should increase its representation significantly, although still well short of a majority. What will matter most is how the results are interpreted. If they are seen as a vote of confidence in the president’s reforms, the Milei bandwagon will roll on. If they are regarded as something less that will embolden both left and (I would imagine) establishment right.

There is something else. When I was in Argentina in June, many of the people I spoke to (at not just at the Cato conference I was attending) approved of what Milei was doing (sometimes only out of recognition that there was no alternative) but were concerned about the “permanence” of his reforms. To what extent would they survive a recapture of the presidency by the Peronist opposition, which remains deeply entrenched in the country’s power structure. One reason that so many Milei voters were so enthusiastic about his promise to replace the peso with the dollar (now seemingly discarded, on balance, I reckon, not wrongly) was the belief that adopting the dollar (and the discipline that went with that) would be politically irreversible (I’m not so sure), thus entrenching part of Milei’s reforms.

Developing the LLA as a “proper” grassroots-based party, both nationally and, critically, at the provincial level would be another way to reduce the risk of a return to Argentina’s bad old days. But, of course, little of this will be relevant if Milei fails, something that is still far from a remote possibility.

The Financial Times, a newspaper devoted to Davos progressivism and thus not particularly sympathetic to a libertarian head of state, chose to lead its account of a recent interview with Milei and his finance minister Luis Caputo with discussion of one specific failure. Milei had previously said that he had hoped to end currency controls in the middle of 2024, a target date which has come and gone. Argentina does not yet have sufficient hard currency reserves to take a chance on this.

Milei tacitly admitted as such by saying that “we are not communists, we are libertarians…There is a philosophical question behind this, which is that I cannot set dates because I don’t think like a central planner. We think in terms of a regime of freedom.” Put less grandly, he will let the facts determine the right time to lift the controls, not some fixed date, thinking that his interviewers, employees of a newspaper wedded to net zero’s nutty 2050 “deadline,” must have found upsetting.

Milei referred to a number of conditions to be met before currency controls can be lifted, including a reduction in the monthly inflation rate to 2.5 percent. Unmentioned was the possibility that, even if those conditions were satisfied, he might postpone currency liberalization until after the mid-terms. An unshackled peso would almost certainly be a weaker peso, meaning, even if only temporarily, higher inflation numbers. Those wouldn’t play well at the polls.

The two FT writers who conducted the interview, Michael Stott and Ciara Nugent, did note some of Milei’s (considerable) achievements, albeit somewhat grudgingly:

He has balanced the budget, ending years of deficits funded by central bank money printing, and brought down monthly inflation from a peak of 26 per cent last December to 4.2 per cent in August [it declined again in September]. However, prices have still risen by 237 per cent over the past 12 months.

That’s an appalling number, but it is, in many respects, the math of the past. Prior to Milei taking office, Argentina was hurtling toward hyperinflation. Inflation was then given a further boost by a 50 percent devaluation of the massively overvalued peso shortly after the Milei government began work. The government’s early measures headed off hyperinflation, as the sharp decline in the monthly rate reveals, but the year-on-year rate will look horrendous for a while.

Meanwhile, as Stott and Nugent point out, the currency is again looking overvalued. The peso is linked by a crawling peg to the U.S. dollar, under which it depreciates by 2 percent a month. That’s less than the current inflation rate, and thus is leaving the currency priced too highly, a price which takes scarce dollars to defend and may discourage much-needed foreign investment (why invest in a country ahead of a devaluation?). The main official rate (Argentina has several to choose from) is 958-998 to the dollar, as against the (“unofficial”) Dólar blu, which is trading at around 1116-18. This is, however, a somewhat narrower spread than some months ago. That might indicate (in part) confidence in a resumption in the decline in the monthly inflation rate, which after stalling for a month or so at around 4 percent fell to 3.5 percent in September. On some estimates it may fall to 2.9 percent in October.

The danger of a devaluation is (as referred to above) that it will push up inflation, another blow to economically hard-pressed Argentines. The poverty rate stood at 53 percent by the end of the second quarter (a terrible number, but, to give some context, the rate rose throughout 2023, crossing the 40 percent threshold early that year). Pensions have been frozen, subsidies and welfare benefits have been cut, and public sector jobs have taken a hit as Milei’s chainsaw grinds its way through Argentina’s swollen state. The political cost would (again as referred to above) be high too. It is far easier for Argentines to accept Milei’s harsh medicine if they can see that inflation is moving down, but if its decline is reversed by a devaluation, their patience (which has been remarkable: Milei’s approval rating still stands at around 50 percent) may wear very thin.

Finance minister Caputo did not sound particularly sympathetic to industry’s claims about the hit to competitiveness it was taking from an overvalued currency, arguing that the country “must gain competitiveness not by devaluing [again], which is what Argentina has always done,” but that “the solution is growing, achieving a [fiscal] surplus and lowering taxes.” That’s true in theory. Whether businesses can adapt at a sufficient pace is at best an open question. Their task is not made any easier by the fact that 50 percent or more of Argentina’s exports are either raw materials or agricultural products where prices tend to be set globally. The country is the world’s largest exporter of soybean oil and meal, the third largest exporter of soybeans, and the second largest exporter of corn. For all the complaints, it’s worth noting that Argentina has reported a trade surplus all year, boosted by the agricultural sector, mining, and hydrocarbons, although doubtless depressed domestic demand helped.

Resources may be one way in which Argentina can escape from its current morass. It has massive reserves of copper and lithium, which will be useful in the supposedly decarbonized world of the future, but also (shhh) large hydrocarbon reserves, some of which are being exploited, but much more should be on the way.

Not all the proposals included in Milei’s Omnibus legislation passed, but one piece that did was RIGI (Régimen de Incentivos para Grandes Inversiones) a series of incentives designed to encourage large (at least $200 million) investment projects in various key industries such as oil, gas, and mining. These include lower tax rates, favorable customs arrangements (no import duties on capital goods), spare parts, and the like, more flexible currency rules, and so on. In an article for his Substack, bowtiedmara details a number of projects together amounting to as much as $80 billion that might benefit from this program. Let’s see, but a comment by Manuel Adorni, an economist who serves as the president’s spokesman, quoted by Mara helps illustrates the cost to Argentina of too many governments with no fondness for free markets or international capital (except, in the latter case, to help fund its borrowing):

Chile exports 52 billion dollars per year and Peru 42 billion, while in Argentina we export less than 4 billion dollars. With the right investments, in a decade this level could triple.

Note the word “decade” and Adorni’s relatively modest target. He’s right to show some caution. Those planning major investments will not be thinking about time scales of a year or so. However attractive the incentives contained in RIGI, they will not be enough to attract investors unless they can be reasonably sure that Milei’s reforms will succeed in transforming the ideological and intellectual climate in Argentina into something far healthier than it has been. Milei was elected because another economic crisis had left enough voters angry or desperate enough to vote for him as the only possible alternative. They were voting against the crisis and the political class they rightly blamed for it, rather than for Milei’s libertarianism.

RIGI must be approved at the provincial level for investments in that province to benefit from its provisions. It is a warning sign that quite a few provinces have not gone along. That said, and despite the concerns I mentioned above, investments are beginning to come in (some details here). That doesn’t change the reality that investing large sums in an Argentina that returns to Peronism the next time round makes little sense. Thwarting that will take the institutionalization of Mileism (which should be understood as a direction of travel in, for the most part, a classically liberal direction) or, less ambitiously, a center-right willing to reject any accommodation with the dogmas of the country’s Peronist past. If either objective is to succeed it must involve the establishment of the LLA as a viable political force even after Milei eventually leaves the stage.

But none of this can happen unless Milei’s revolution delivers results.

The FT’s Stott and Nugent note that Argentina’s economy “has contracted for three consecutive quarters.” Indeed, but they might have mentioned that Argentina’s GDP was already falling when Milei took office in December 2023: it declined by 1.6 percent in 2023, after 5 percent growth in 2022, but that was partly post-pandemic recovery, helped further by the fiscally expansionary policies of the previous (Peronist) government, policies that the country could not afford, but which generated growth for a while, until of course they didn’t.

Between 1919-22, Germany’s real per capita GDP grew by 20 percent, even as the country hurtled toward hyperinflation (typically defined as a monthly inflation rate of 50 percent), which it reached in the latter part of 1922. In 1923 the bill came due: the economy fell apart, and unemployment soared. At a certain point, the damage inflicted on the pricing mechanism by hyperinflation means that normal business becomes almost impossible to conduct.

How to price a good when the value of the currency in which it is paid is in free fall? How to price a loan? Argentina was already showing signs of this dysfunction in 2023: One manager in Buenos Aires explained to me how she refixed salaries for her team every month, adding that she also needed a bag full of pesos to pay the rent on her own apartment. Restaurants boomed, as people “ate” their spare cash before too much of its value had evaporated. To blame Milei for the battered shape of Argentina’s economy is like blaming an ER doc for the state of the wreck bleeding on the gurney in front of him. It is also worth remembering what things would have been like had Milei not been elected.

To be sure, Milei’s prescription has involved a great deal of pain (the World Bank forecasts that GDP will fall by 3.5 percent this year) but some green shoots of recovery can be detected, early signs perhaps that the bank’s forecast of 5 percent real growth in 2025 might actually be met. To take a few examples, Argentine companies have raised $4 billion in hard currency debt this year, the most since 2017, a declaration of confidence by both the companies and, more significantly, their lenders. Hard currency debt cannot be inflated away. To be fair, those borrowers (click on the link to a story that gives the details) are companies with access to dollars, but it’s a start. Yields on dollar-denominated Argentine debt have been falling. As Bloomberg reports, around 80 percent of larger issues (more than $100 million) were yielding single digits. A year ago, that was the case for fewer than a quarter of them.

Industry was operating at 61 percent of capacity in August, still well below the levels of 12 months ago (67 percent), but up strongly from January’s 54 percent. Car sales in September were up 42 percent year-on-year, reaching the highest number since 2020. Real wages in both the formal and informal sectors, which were already declining before Milei’s election, are now moving up, and credit has started expanding, albeit from very low levels. Argentines have brought some of their dollars back into the banking system, enticed to do so by confidence in Milei’s reforms and a generous tax amnesty. Dollar deposits, at around $19 billion, are up 40 percent since he took office, but there’s plenty more where that came from. According to Argentina’s National Institute of Statistics and Census, at the end of 2022, Argentines had stashed away some $250 billion under the mattress, abroad and in safety deposit boxes. For comparison, the country’s GDP today is around $600 billion.

Milei’s hacking away at rent control has already produced, as is well known, spectacular success. And a much broader deregulation effort is underway. Milei has, as promised (afuera!), scrapped or merged various ministries. The only new ministry he has created is a ministry of deregulation headed by Federico Sturzenegger, a well-respected economist, academic, and former central banker. The new ministry is behind the so-called hojarasca (fallen leaves) law being put before Congress. Its purpose? To repeal some 70 obsolete laws.

As Amy Booth relates in the Buenos Aires Herald, the government gave six broad reasons for choosing these laws for the chop.

· They restrict individual liberties and private property

· They have been superseded by subsequent legislation

· Technology has rendered them obsolete

· They remove “pointless” bureaucracy

· They apply to organisms that no longer exist

· They involve financing public bodies that should be self-funded

·  

One law to be removed, dating from 1951, penalizes those who “foster political or economic sanctions against the state” and was commonly used to persecute the political opposition, including those who report rights abuses. Likewise, a 1969 law establishing government intervention in the paper business was used to control newspapers during the dictatorship of Juan Carlos Onganía.

That 1969 law meant that the government was able to restrict the supply of paper to opposition publications.

Something else is at play other than just junking obsolete laws. The government argues, Booth explains, that it is “seeking to return to a legislative approach that assumes an activity is allowed unless it is explicitly prohibited in the Constitution,” an example, in other words, of an attempt to shift the ideological climate in Argentina, something that Milei is attempting to do with words as well as deeds.

Milei has to climb two mountains. He has to turn round Argentina’s economy and then he has to do what he can to ensure that his reforms can last. He is some way up the first, but there is a long, long way to go…

For more Milei, please check out this National Review Institute webinar featuring a conversation between Marcos Falcone and me. Marcos Falcone is currently the Project Manager of Argentina’s Fundación Libertad, a free market think tank established in 1988. He teaches political science at Universidad del CEMA and was a Hayek Fellow at the Mont Pèlerin Society. He has also written for National Review‘s Capital Matters and is a frequent contributor to American and Argentine media outlets.

Extract from the Capital Letter for the week of October 7, 2024