Updated: Nov 22
This is part 1 of a 2-part series. Part 1 of this article introduces Javier Milei and his rise to popularity. It describes Argentina’s current economic struggles and Milei’s proposed monetary policy, which includes dollarisation and potentially closing Argentina’s central bank.
This article was written by Argus Jay Lee, a PPE student from The University of Warwick.
Libertarianism is dead. Or so we thought. On the 19th of November, Argentineans will head to the polls to decide their next president in the highly-anticipated run-offs. On the one hand, they have the current Minister of Economy Sergio Massa, representing the centre-left, Peronist coalition. Their other choice is the radical libertarian Javier Milei, the chainsaw-wielding, ferocious populist who threatens to ‘tear down’ the establishment. (He is nicknamed ‘El Loco’ for a reason). A staunch admirer of the famous conservative economists Milton Friedman and Robert Lucas (he named his dogs after them), his fervent love for monetarism (as well as his rockstar-like demeanor) has appealed to a large group of voters, who have grown tired and wary of the interventionist policies which have stagnated the economy. In an age in which both the left and right of the political spectrum advocate for anti-globalisation policies and the expansion of the state, the abrupt rise of a libertarian like Milei is largely unexpected and unforeseen.
The Rise of Javier Milei:
Javier Milei was born in 1970 in Buenos Aires. Intrigued by the collapse of the exchange rate and hyperinflation in Argentina in the 1980s, he decided to study economics and became a professor of economics at various Argentine universities. He became pretty well known in Argentina, especially among the youth, when he started spreading his radical right-wing thoughts via YouTube and radio.
Argentina’s economy has been (indisputably) struggling under the center-left Peronist coalition government. The economic mismanagement in the past decade, along with recent economic shocks such as COVID-19 and the Ukraine war, has plunged the economy into disarray. Argentina’s inflation rate is currently at 124.40%, real GDP has contracted by 4.9% in Q2 2023 and the debt-to-GDP ratio exceeds 80%. Once again, Argentina has sought help from the IMF, sealing a deal in 2022 worth US$44 billion to bail out its financial struggles. (It leads all countries in total IMF credit outstanding at US$31.7 billion as of the 10th of November, (distant) second is Egypt at US$12.4 billion). Unfortunately, the brunt of the economic consequences has been felt by normal Argentine citizens, with the poverty rate surpassing 40% in the first half of 2023. In a moment of desperation, the people have responded by supporting a political outsider, who promises to ‘blow up’ the political status quo and pursue a strategy centered around laissez-faire economics, a stark contrast to Argentina’s long-rooted traditions of protectionism and pro-worker politics. In short, Javier Milei’s dogmatic belief in the power of the free market means that his economic policy is centered around the 2 pillars of conservative economics – monetary stability and fiscal discipline.
Milei’s monetary reforms are extremely ambitious – he aims to dollarise the Argentinean economy. The adoption of the US dollar will reduce excessive exchange rate volatility caused by speculation, therefore preventing the risk of a sharp spike in the price of imports and reducing cost-push inflationary pressure. Ironically, the Argentinean peso plummeted 12 percentage points when Milei won the Presidential primary poll earlier in the year. More importantly, a dollarized economy and free capital flows (which will likely occur under a libertarian like Milei) mean that Argentina will lose its monetary autonomy. The Argentinean central bank’s (BCRA) loss of power in controlling the money supply has motivated Milei to argue for its complete dissolution, leaving the control of inflation to the more conservative U.S. Federal Reserve.
Milei’s monetary reforms might work in conservative economic orthodoxy, but these grandiose plans face a lot of obstacles in reality. Firstly, the plan is unaffordable – dollarisation will require around $20 billion to $25 billion, but the country has net negative international reserves, and Argentina still needs to pay back the $44 billion loan from the IMF. To secure dollarisation, it will require further loan deals, worsening the debt crisis. Also, dollarisation will require an immediate devaluation in the currency, which will exacerbate inflation in the short term, leading to a fall in real purchasing power which will cause more families to fall below the poverty line. At the same time, it would not be wise for Argentina to lose its monetary autonomy – the country is still developing and should have more lenient inflation target rates to account for higher growth rates, and confining itself to the relatively higher US interest rates will limit its growth and development.
Historically, only 3 countries in Latin America have adopted dollarisation – Panama, Ecuador, and El Salvador. All these countries have a significantly smaller economy than Argentina, and the results have been mixed at best. While inflation subsided, they were more exposed to external shocks when they lost their ability to manipulate their exchange rate.
Rather than abolishing the BCRA, Argentina urgently needs a strong, independent central bank that prioritizes tackling inflation. While it would be wise for Argentina to devalue its currency to avoid a balance of payment crisis, dollarisation would be too radical and costly to be put into practice. For Argentina to fully resolve the inflation crisis, it is just as important to implement drastic reforms to the supply side of the economy, starting with irresponsible fiscal spending, which will be explored in part (ii) of this article.
Click here to access part 2 of the article.
The views and opinions expressed in this article belong solely to the writer and do not necessarily reflect the views and opinions of The Warwick Economics Summit
Financial Times - https://www.ft.com/content/ce580dc9-7b89-4c59-a0de-917ad8dc892e
Milken Institute Review - https://www.milkenreview.org/articles/dollarization-in-latin-america