Could Javier Milei’s radical reforms start to heal Argentina’s economy?

Argentina has spent most of its 200-year history in deficit; no other country currently owes the International Monetary Fund a greater sum of money. The new finance minister, who entered government with President Javier Milei earlier this month, has been stark in making the point: “Out of the last 123 years, Argentina ran a fiscal deficit in 113… we have come to solve the addiction to fiscal deficits.”

Milei’s government is wasting little time carrying out what it calls “shock therapy.” The official value of the peso, Argentina’s currency, has been halved against the US dollar. Why might a government want to weaken its own currency, pushing up the price of imported goods for consumers? The answer is that Milei’s government is simply accepting what everyone in the country already knows; the official conversion rate is effectively redundant given the parallel black market in currency, which operates in broad daylight in Argentina. 

In Argentina, two exchange rates co-exist: the official rate and the black market rate. Through the unofficial rate, the peso has half the value. It therefore seems unintuitive that Argentines always opt for it when buying wads of USD — a common practice to guard their savings against inflation. Unfortunately, purchasing dollars through the official rate presents impossible obstacles. For starters, you must prove that you are buying dollars for travel abroad, and certainly not for saving purposes, which is forbidden. The reason for this is that the Argentinian government is deep into the minus figures in dollar reserves, so they aren’t keen to sell them. Given that saving is the primary intention for Argentines buying dollars, they have no choice but to turn to crooks. 

Milei’s lack of a majority in congress will probably mean that some of his more radical proposals — such as anti-abortion laws — are unlikely to succeed

Most people outside of Argentina will know Milei only for his chainsaw-wielding antics on the campaign trail, a useful symbol for those who wished to portray him as a manic South American populist. Listen to Milei, however, and you’ll quickly realize what he was taking his chainsaw to: massive and unsustainable state spending. Candidates rarely win elections by telling voters what he has: that “there is no money.” But Milei promised he would destroy the decades-long practice of throwing printed and borrowed cash into the bottomless pit that is the corrupt public sector. It’s a message that has cut through to Argentine voters.  

The previous president, Alberto Fernandez, and his left-leaning Perónist movement largely showed their benevolence in the form of public sector salaries. State employment rose by 34 percent between 2011 and last year, while the number of private sector jobs increased by only 3 percent. A fervent anarcho-capitalist skeptic of the state, Milei has axed the number of ministries from nineteen to nine, creating a single, condensed ministry of human capital, which deals with “everything concerning education, culture, relationships and individual and collective work conditions,” exemplifying his zero-waste approach. He has also fired thousands of Argentine civil servants and halted all new public work projects.

To the Argentine left, the cuts are brutal. But others feel Milei is already betraying his radical campaign message. While the ministry of women, gender and diversity has been scrapped, child benefits and the value of the government-provided food cards have been doubled. Carlos Melconian, a former president of Argentina’s largest state bank, said “so far, he has just swapped the chainsaw for the blender.” The IMF, however, is optimistic: “These bold initial actions aim to significantly improve public finances in a manner that protects the most vulnerable in society and strengthen the foreign exchange regime.” Not the kind of comments you might expect from such a sober institution if this were a populist madman.  

Milei’s lack of a majority in congress will probably mean that some of his more radical proposals — such as anti-abortion laws — are unlikely to succeed. Shock therapy, as the name implies, will involve pain, something Milei has tried to convey to voters. Argentina already suffers from the third-worst annual inflation rate worldwide, at 161 percent. JP Morgan predicts a jump to 210 percent by the end of the year, and a recession next year. Moreover, drivers are already throwing their arms in the air over the generous energy subsidies being pulled.

Nonetheless, Milei’s bold measures are already restoring confidence from the global economy. While investors are encouraging Milei to take even more extreme steps in the same direction, the finance minister affirmed that the market reaction after the recent announcements shows “an enormous vote of confidence” in the ruling party to make the proposed drastic changes.

This article was originally published on The Spectator’s UK website.