Argentina's economy is highly unstable with an inflation rate of 138%, rampant poverty and a worthless currency. JPMorgan forecasts believe inflation could reach 210% by the end of the year. Argentina has had a long history of defaults[i] and is the largest debtor to the IMF. Part of the problem stems from its history. This year, the Argentinian Presidential runoff elections will be between the Peronist Sergio Massa and a newcomer with radical ideas, Javier Milei. The 2 candidates are offering very polarised visions to turn Argentina’s fortunes around.
How has Argentina’s Economy fared historically?
Argentina was once one the richest in the world. In the late 19th century, it even had a higher GDP per capita than the USA thanks to its abundant natural resources, fertile farmland and thriving meat exports. The country was even seen as a potential great power enjoying high levels of economic growth and huge inflows of investment.
After World War 1, growth slowed as the countries investing in Argentina had fewer funds which meant foreign investment mostly dried up. Many foreign consumers couldn’t afford to import Argentinian products anymore.
Things were never the same when in 1929 the Great Depression came. Economic troubles brought by the depression gave rise to a military dictatorship in 1930 after a coup.
This disaster transitioned Argentina from a stable and conservative country to a chaotic and radical country while also permanently reversing its status as a world leading economy. Political turbulence became commonplace. Between 1930 to 1976 the country saw 12 total coup attempts and numerous military dictatorships.
In 1946, Juan Peron was elected the President of Argentina. He came into office promising social reforms and to make Argentina self-sufficient. As such, the size of the bureaucracy was doubled. Under his reign, the state nationalised[ii] many industries including banks and railways. Labour market reforms were brought in which included better wages and shorter hours. Peron also promised to shrink inequality and began an extensive redistribution of wealth campaign. Public investment was increased and protectionist[iii] policies brought in. These efforts sparked a short-lived boom in his first term.
By Peron’s 2nd term, economic calamity was looming. Argentina couldn’t afford to maintain such a generous welfare state and austerity measures had to be brought in. Many of Peron’s reforms turned out to short sighted. For example, the nationalisation of the railways cost the government more than $600 million. In today’s money that would be a staggering $8.2 billion. Not only did the railways never turn a profit, much of the trains and rail infrastructure bought were old and decrepit predating 1914. Modernising the system would've cost around $1.2 billion.
Corruption was out of control as Peron filled many top positions with his cronies instead of capable officials. The uncontrolled spending built up huge debts and sent inflation through the roof. Protectionist policies and excessive bureaucracy meant that Argentinian firms faced no foreign competition and were deeply inefficient making them zombie companies[iv]. Efforts to industrialise ruined the agricultural sector which was a major employer and exporter.
Social unrest followed and a coup in 1955 sent Peron into exile. As part of Peron’s mixed legacy, his ideology survives in the form of Peronism which is still mainstream belief in Argentina today. Peronists have dominated Argentinian politics in the past 20 years. Nevertheless, their policies are stuck in the past and they have failed to catch up with the modern global economy.
How is the Argentinian economy struggling at this moment?
The rapid growth and collapse cycles continue to haunt Argentina to this day. Every few years a new political movement will emerge promising to alleviate the economic woes and modernise the country. However, they all inevitably fail due to bad policies and corruption while creating huge debts in the process.
From 2020 to 2022, the Argentinian economy grow more than 60% making it one of the fastest growing in the world. Unemployment fell and exports grew.
However, this growth was mostly spurred by government spending after they narrowly avoided a debt default. For example, in 2022 the government spent a grand total of $12.5 billion on energy subsidies, accounting for 2% of Argentina’s GDP.
A large part of the budget also goes towards paying costly public sector workers and pensions. This invokes an opportunity cost whereby money could've been allocated for better use such as investing in infrastructure or technology.
Due to its history of defaults, Argentina found it hard to find any lenders. So, to fund government spending, the central bank started printing more money. As we all know, higher money supply decreases its value and creates inflation.
As the debt to GDP ratio is around 80%, this growth would've been unsustainable. The economy is now back in turmoil with triple-digit inflation and more than 40% of the population living in poverty. Social unrest saw protests held against the government. To ease inflation, the central bank has raised interest rates to 133%. However, monetary policy generally has a long time lag which makes it ineffective. This also makes the cost of debt servicing even worse for the government.
Many citizens spend their money immediately or keep their savings in US dollars thanks to a lack of trust in the banks and in the government. The government has set an artificial exchange rate but only $200 a month can be bought from this. Therefore, a huge black market for US dollars has sprung up but are much more expensive than the official exchange rate. It is estimated Argentina has more US dollars than anywhere outside the USA.
The country’s agricultural sector has also been suffering. Agriculture makes up 6% of Argentina’s economy and agricultural products such as wheat and soybeans are its main exports. This year Argentina faced its worst drought in 60 years which badly damaged crop yields and livestock. The total economic loss could amount to $10.5 billion to farmers. The government has been able to offer little help since they themselves are a sinking ship. $3.5 billion in tax revenues were lost from farming.
The sector is a major supplier of the foreign currency that Argentina desperately needs to pay back its debts and buy imports. Foreign reserves right now are at dangerously low levels to support the Argentinian peso. As nobody wants to invest in Argentina, foreign reserves are the only way the government can manage the balance of payments[v]. Less exports also hurts the peso as demand dwindles.
There has been a lack of political will for change. Of course, in the run up to an election many empty promises were made and throughout a term none will be fulfilled. Peronists have won 10 of the past 13 elections overseeing 5 recessions in the past 10 years. For the long term, painful austerity is a necessary evil to get debt and inflation under control. Except proposing such a measure is certain political suicide which means politicians keep adding to the problem instead of fixing it.
What are the 2 presidential candidates promising to do?
Things may change this year with our 2 candidates facing off in the runoff. The Peronist hopeful, Sergio Massa is the current economics minister who has overseen this current debacle of inflation and second-rate currency. He has promised to normalise Argentina’s economy without cutting welfare. Massa also stated his government would be one of unity claiming himself to be “someone who believes in dialogue and consensus,”. This would be done by bringing together capable opposition politicians to fill important roles and restore fiscal order.
Massa also want to develop the fossil fuels and mining sector. Argentina has ample reserves of lithium and copper which are important components for many products such as electric cars and power cables. Energy infrastructure such as pipelines would be built to help the shale gas industry. Tax breaks would be given to small businesses to ease some pressure. Education would also be reformed to provide a stronger emphasis on STEM subjects and improve the human capital of Argentina.
However, due to his dysfunctional time in office many are sceptical over these claims. There is also a question of how Massa would fund his ideas as money is tight. Many voters want a change and a break from the past.
On the other hand, we have Javier Milei, a former economist, who offers more radical change. He wants to roll out a huge privatisation programme selling off many state owned companies to improve efficiency and cut government expenditure. The private sector has barely grown in the past decade. This could also raise significant revenue which can be used to pay off some of Argentina’s debts. Promises to slash spending by 15% of GDP were also made. Energy subsidies would be cut and the number of government departments would fall from 18 to 8. This would severely drop state involvement in the economy.
Corruption would be tackled by abolishing the ministries of Education, Health and Social Development as Milei believes them to be the “safes” where politicians siphon off money. Milei has criticised previous Peron governments for overly generous welfare and has called social justice an “aberration”.
Milei also wants to dollarise the economy and abandon the peso. He has been particularly scathing of the central bank for printing too much money. In the 1991 a peso to dollar convertibility programme helped bring inflation back down to single digits from 20,000% in 1990. Milei is hoping to replicate the success of that scheme with his dollarisation campaign. However, dollarisation represents the loss of monetary autonomy. Argentina will no longer be able to adjust the money supply or set interest rates according to the national interest.
Adopting the US dollar would hopefully restore some confidence in the economy and slow inflation. A new Monetary Stabilisation Fund would be created to replace the central bank. Milei argues Argentinian society has already rejected the peso in favour of the US dollar anyway.
On trade matters, Milei wants to leave the Mercosur trade bloc. He believes it to be a “poor quality customs union” that harms Argentina. Leaving Mercosur could blemish commerce with Brazil who is Argentina’s biggest trading partner.
Some voters are put off by the sweeping reforms proposed by Milei. Some are also worried about his lack of experience. Milei is from an academic background and has served in Congress for less than 2 years. As the country is in crisis, only a seasoned veteran could steer clear of the upcoming storm.
Regardless of your personal choice, it is clear that Sunday’s winner is going to inherit a troubled economy and a perturbed populace. No politician has been able to drag the country out of the economic quagmire. Argentina requires extensive structural changes to free itself from the continuous boom and bust cycle. Debt, inflation and currency woes must all be dealt with to normalise the economy. For now, one can only wait for the future to unfold.
Footnotes:
[i] Default - failure to repay a loan.
[ii] Nationalisation - bringing private owned assets under the public ownership of a national government or state.
[iii] Protectionism - measures taken by a country to restrict trade with other countries.
[iv] Zombie company - a company that is unable to pay off its debt but is still able to operate by servicing its debt.
[v] Balance of payments - a record of all transactions between one country and the rest of the world.
Bibliography:
The radical outsider promising to cure Argentina’s economic ills (ft.com)
Explainer: Argentina presidential election: Key takeaways from first-round vote | Reuters
Argentina's beleaguered peso sinks to new low as election looms | Reuters
Argentine peso steady after devaluation as central bank tightens control | Reuters
7 Reasons Why Argentina's Economy Is a Disaster, As Key Election Looms (businessinsider.com)
In Argentina's drought-hit fields, billion dollar losses and farmers going under | Reuters
‘A normal guy’: Argentina’s radical Milei struggles to rebrand for run-off vote (ft.com)
Argentina’s economy minister Sergio Massa seeks broad coalition after first-round election win
What Is Libertarian Candidate Javier Milei's Plan for Argentina’s Economy? (bloomberglinea.com)
