"There are four kinds of countries: Developed, underdeveloped, Japan, and Argentina"
- Simon Kuznets.
What comes to mind when you hear about Argentina? Most commonly, people would think of these three things: Lionel Messi, Tango, and perhaps their beautiful woman. However, the answer would be completely different if you ask an economist. Their answer would probably look like this: Stagnation, hyperinflation, and Poverty. These three words pretty much sum up the state of the Argentinian economy for the last 30 years.
However, if we took a step back to the early 20th century and compared the landscape of the Argentinian Economy to that of today, it would seem like we're seeing two completely different nations. From the late 19th century until the early 20th century, Argentina was on track to become one of the world's biggest economies. During this period, Argentina had everything it needed to become an economic powerhouse. Endowment-wise, Argentina has a massive comparative advantage over its Latin American neighbors because of its abundant natural resources. Human capital-wise, during this period, Argentina had a population with one of the highest literacy rates in the world (Alejandro & Carlos, 1970). Due to these massive advantages, their economy excelled, making them the world's ten wealthiest countries by 1913 (Spruk, 2019).
At this time, Argentina has positioned itself comfortably among the ranks of rich countries. But we all know how the story ends. Instead of becoming the economic wonder that everyone expected Argentina to become, Argentina's Economy somehow took a turn and became a catastrophe. Then one can only wonder, what went wrong?
What Went Wrong With Argentina?
The answer to the previous question is simple: everything went wrong for the Argentinian economy. For decades, Argentina has experienced a continuous institutional breakdown, where its historical norm is characterized by a poorly limited government, persistent militarism, amateur self-government, and political absolutism (Spruk, 2019). The 1930 military coup in Argentina was to blame for embarking the nation on the path of years of chronic instability. It eroded the nation's checks and balances system, allowing demagogues, politicians who often make false claims and promises to appeal to the voter’s emotions, like Juan Peron, to be elected as their 35th president in 1944 (Spruk 2019).
Juan Peron was mainly known for his Peronism ideology, which was characterized by extensive welfare state programs oriented toward the working class. With his ideology, Peron's primary focus is to improve the well-being of the lower class, where he consistently promises to provide the Argentinian people with free public health care, education, and higher wages. Eventually, due to his populist approach, Peron gained massive loyalty from the Argentinian lower class, allowing him to win the 1946 election in a landslide.
Despite its popularity, Juan Peron and his philosophy were mainly blamed for directing the Argentinian economy toward failure. His populism bloated Argentina's spending on welfare state programs, which caught the nation in a deep budget deficit of $160 million in 1949 (Pahowka, 2005). This caused printing money to be customary to cover the government deficit, which sparked inflation. The increase in Argentinian workers' wages during Peron's time in office also significantly contributed to inflation as wages grew faster than worker productivity (Jordan, 1975).
Other than his populism, Peron's regime is also known for its statism approach. He believes the state should have significant control over Argentina's economic and social affairs. This leads to the absence of a check-and-balance system in Argentina's political system, allowing rent-seeking activity to dominate the economy instead of productive activity (Spruk, 2019). Eventually, his philosophy led Argentina towards decades of stagnant productivity and poor economic growth with ridiculously high inflation, the long-term consequences of which are still felt today.
Despite his death in 1974, Peronism remains popular to this day. Since the re-establishment of democracy in 1983, Peronist parties have continuously dominated Argentina's political landscape, where generous welfare state programs and considerable state intervention have become the face of Argentina's politics for decades. This led Argentina toward a debacle. Peronist Presidents like Nestor Kirchner continue to expand the government deficit recklessly due to their populism, forcing the central bank to print money to repay these deficits.
As Crisis Transpires, an Anarcho-Capitalist Prevails
Being fed up with Peronist leaders who continuously fail to resolve Argentina’s economic crisis. Last year, the Argentinian people decided to elect Javier Milei, a far-right Libertarian figure who claimed himself a tantric sex guru, insulted the pope as a "Leftist son of a bi***”, and has had recent clashes with Taylor Swift fans. He's a big fan of the 'free market’ and even named his dogs after famous conservative economists Milton, Murray, Robert, and Lucas. He even leaves his hair uncombed because he believes the invisible hand will do it for him.
Throughout his life, hard-line libertarian economists who believed in the power of the Free Market have been Milei's intellectual inspiration. He always acclaimed himself as an Anarcho-Capitalist, an ideology introduced by a libertarian economist Murray Rothbard. Anarcho-capitalism believes that society will function much better without the state's intervention and on which the welfare state is the enemy (Costa, 2024). This is why, during his campaign, Milei continuously blames its predecessors, who recklessly expanded Argentina’s deficit for the sake of their welfare program.
Milei's odd political persona and ideology definitely make us wonder why the Argentinian people elected him. The answer is simply because the Argentinians are desperate for change. His unorthodox approach frames Milei as the Antithesis of Peronism, which had ruined the Argentinian economy for decades. Where he successfully presents himself as the antidote to a decade of political and economic mismanagement.
The Chainsaw Plan To Fix a Crippling Economy
So, what does Javier Milei have in his pocket to fix Argentina? The answer is a "Chainsaw". Throughout his campaign, he uses a chainsaw to symbolize his plans to cut down government spending and taxes. His administration's early motto was "No hay Plata," which means there's no money, signaling that Milei would take extensive austerity measures to save the Argentinian economy. Milei himself has pledged to cut down Argentina's federal spending by eliminating 10 of the 18 Argentina's federal ministries. He has also promised to stop new infrastructure projects, cut education & energy subsidies, and reduce payments to Argentinian provinces.
In line with his aim to break old policies, he also pledges to "blow up" the Argentinian central bank and dollarize the economy throughout his campaign. This is because, in addition to the fact that Argentina's peso is one of the most unstable currencies in the world today, closing the central bank would prevent the future government from recklessly expanding Argentina’s deficit, as financing the deficit through money printing is no longer feasible.
Can "The Madman" Save Argentina?
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
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