This is part 2 /2 of ‘Don’t Cry for Milei, Argentina’. Part 2 goes into Milei’s fiscal plan, where he proposes to close 10 out of 18 government ministries to reduce the government’s budget deficit, even though these cuts could negatively impact economic development and citizens’ access to healthcare. Part 1: https://www.warwickeconomicssummit.com/post/don-t-cry-for-milei-argentina-javier-milei-and-the-rebirth-of-libertarianism-part-i
This article was written by Argus Jay Lee, a PPE student from The University of Warwick.
Image credits: Ilan Berkenwald
Fiscal discipline:
Milei correctly identifies that the current state of government finances is, at best, unsustainable and at worst disastrous. Thus, a lot of Milei’s economic reforms are focused on reducing government expenditure, or in conservative terminology, ‘shrinking the state’. He pledges to cut spending by 15% of GDP. To achieve such an ambitious cut in government spending, he talks about closing Argentina’s main public science-funding agency, 10 out of 18 government ministries (such as the Ministry of Environment and Ministry of Women, Genders and Diversity), and introduce plans to privatise healthcare. He enthusiastically talks about deregulating and scrapping the ‘unnecessary’ labor, environmental, and health regulations in his political rallies. By shrinking the size of the state, Milei hopes that it will reduce the huge burden on state finances, cutting its enormous budget deficit. At the same time, Milei (like other conservative economists) believes that private investment will pick up where the state has left off, with less ‘crowding out’ of private industry, and more credit available to private firms in financial markets.
However, while cutting the budget deficit is crucial, a lot of Milei’s cuts are misguided. Closing the Ministry of Environment (which has plenty of room for improvement) will not do anything to help tackle the global climate crisis, which has also been affecting Argentina (it suffered extreme heat in late 2022 which led to a sharp cut in harvests). Shutting down the Ministry for Women, Genders, and Diversity may likely set back women's rights in the country – female participation rate in the labour market has consistently lagged behind male participation rate by more than 20 percentage points. Privatising healthcare might save the government some money in the short run, but a lot of poor families will now struggle to access basic medical services. While private investment is crucial to a flourishing economy, the state can also play a role in fostering innovation in the economy, as shown in Professor Mazzucato’s book. In short, the implementation of austerity measures in Argentina ‘overlooks the complexities of modern economies, ignores lessons from historical crises, and opens the door for accentuating already severe inequalities,’ as written in a letter signed by over 100 economists (including influential economists Piketty and Ghosh).
Rather than cutting government expenditure by abolishing arguably vital government ministries and terminating state-run science projects, Milei should focus on rooting out corruption and other rent-seeking activities (Argentina is ranked 94th in the corruption perceptions index). Manzetti (2014) concluded that corruption has worsened under the centre-left government, and Argentina’s vice president was recently found guilty in a US$1 billion fraud case related to public works. Tackling corruption will improve Argentina’s government finances, as well as make Argentina more attractive to foreign investment. Reforms in taxation may also reduce the budget deficit. With a Gini coefficient of 42.0, (which is higher than that of Turkey, Haiti, and Iran), the introduction of a higher income tax bracket or the creation of an inheritance tax will boost tax revenue for the government, as well as decrease inequality. However, it is unlikely to expect Milei’s libertarian government to adopt this measure, albeit how reasonable it is, when he says ‘taxation is theft’.
A more realistic approach for Milei’s government may be to focus on the supply side of the economy, hoping that the spurt in growth will increase taxable income without raising tax rates – this could come in the form of bolstering women's involvement in the labour market by strengthening (rather than demolishing) the Ministry for Women, Gender and Diversity, or via increased scientific funding to the public science agency to boost innovation and enhance productivity.
In conclusion, Javier Milei’s ambitious and ideology-driven plan is probably not the answer to Argentina’s problems. His policies may work in conventional economic models, but applying them in the complex 21st-century economy is unlikely to yield the same results. The biggest flaw with ‘Mileinomics’ is ignoring the massive short-term costs his policies will incur as the benefits of most free-market policies are enjoyed in the long run. Argentina desperately needs a change in the short run, and it can no longer be so reliant on inefficient government spending that plunges the country into a never-ending debt trap.
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.
References:
Nature Article - https://www.nature.com/articles/d41586-023-03480-x.pdf
Financial Times - https://www.ft.com/content/d0219348-8990-484a-a4c8-dbd5923cb4fd
Harvard Health Publishing - https://www.health.harvard.edu/blog/is-our-healthcare-system-broken-202107132542
Website of Mariana Mazzucato - https://marianamazzucato.com/books/the-entrepreneurial-state
Transparency International - https://www.transparency.org/en/countries/argentina
Milei interview clip - https://www.youtube.com/watch?v=1xuSJG_3DCs