Despite his radical ideology, we can comfortably say that Milei's plan for Argentina is not radical but rather ruthless—especially his plan to slash government spending amid deep economic stagflation. Theoretically, despite being able to reduce the inflation rate, cutting government spending during times of economic downturn would further dampen the economy, increasing the unemployment rate and, thus, poverty (Core, 2017). This is why many economists, including JM Keynes, criticize the idea of decreasing government spending during times of economic downturn, as it would lead the country toward further recession (Kahloon, 2020).
However, an Italian economist, Alberto Alesina, believes otherwise. In his book "Austerity: When It Works and When It Doesn't," he concludes that during the recession, spending-based austerity has a minimal effect on the fall in GDP compared to tax-based austerity. This is because immediate tax increases reduce the incentive to invest, thus dampening investors' confidence. On the other hand, spending cuts might signal the possibility of future tax cuts, boosting investor confidence. So, relative to tax-based austerity, spending-based austerity would eventually spur economic investment and prevent Keynes's recessionary prophecy from happening (Kahloon, 2020). This would mean that The Madman's plan to slash Argentinian government spending while also reducing taxes might save Argentina, as according to Alesina this would spur investment for the economy in the long term.
What about Milei's plan to "blow up" the Argentinian central bank? As crazy as it sounds, closing the central bank and dollarizing the economy is not a ridiculous plan after all. Many economies, like Ecuador, have succeeded in dollarizing their economies, which successfully put Ecuador’s hyperinflation under control (Vazques et al., 2018). Still, dollarizing the economy would mean Argentina would lose its monetary authority, making Argentina's financial system more fragile, as it loses its lender of the last resort.
Even though Milei is confident that his plans would save Argentina, entering nine months of his presidency, everything does not look great for both Argentina and Milei. Despite succeeding in slowing Argentina's inflation rate and accounting for the first quarter of government budget surplus since 2008, his austerity measures have been detrimental to the Argentinian economy, at least in the short run. A study by the Catholic University of Argentina showed that poverty has surpassed 57% since he took office from 49.5% in December.
In response, Milei continuously assured the Argentines that his plans needed time. He told them that the effect of his plan would look like the letter “V”: a steep economic descent followed by a sharp rebound. But the main question is, will the Argentinian people give enough time for his plans to take effect? We'll see.
Reyhan Muhammad Hatta | Ilmu Ekonomi 2023 | Staff Divisi Kajian Kanopi FEB UI 2024/2025
Reference
Aires, V. B. (2024, May 23). Javier Milei’s radical plan to transform Argentina. TIME. https://time.com/6980600/javier-milei-argentina-interview/
Alejandro, D., & Carlos, F. (1970). Essays on the economic history of the Argentine Republic. http://ci.nii.ac.jp/ncid/BA14200227
Buenos Aires Herald. (2024, February 18). Poverty in Argentina hits 57%, highest number in 20 years, report says. Buenos Aires Herald. https://buenosairesherald.com/society/poverty-in-argentina-hits-57-highest-number-in-20-years-report-says
Cassidy, J. (2023, November 21). The Free-Market fundamentalism of Argentina’s Javier Milei. The New Yorker. https://www.newyorker.com/news/our-columnists/the-free-market-fundamentalism-of-argentinas-javier-milei
