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*Not financial advice, merely pointing out political trends*
After a long election campaign, Argentina finally elected a new President on November 19th, 2023. But this was no ordinary election: it came down to two radically different candidates. One candidate, Javier Milei was a former soccer player, Youtuber and Senator running on a highly anti-establishment platform. The other was the slippery current economy minister in a country with 200% inflation, Sergio Massa. He had a difficult task to win: he needed the government to support him, but, at the same time distance himself to secure votes from independents.
Javier Milei begins his economic reforms
In the end Milei and the protest vote triumphed, 56% to 44%. This is despite a number of his personal eccentricities- he has been a sex coach, wears leather jackets to meetings, has ridiculous hair, and cloned his dog several times. He takes over in a month and will have four years of battling the left and the entrenched political/union class of the country.
Why did he win? What will he do first as President? Is he Trump, Bolsonaro, or someone different? We hope to shed some more light on what our contacts in the country have been telling us for the past year and the reformist path they will follow over coming months. This column has a substantial amount of experience with Argentine politics and economics, and many years of travel to the country.
Milei’s win is important: it represents not just a fresh face, but the beginning of the end for Peronism. The Argentine system relying on labor unions, government control, heterodox policies and social handouts is now about to be replaced.
The Argentine Model and Its Failure
First- how does a political system that has been in control since the 1940’s, in various forms, lose to a guy who’s a Youtuber? It must have been an epic failure of performance and all the usual mechanisms of control.
An Argentine free market think tank produced this chart, which shows Argentina’s ranking in the world in GDP per capita. Up until 1950, it was always in the top ten and even reached #1. Very free markets, open trade, accumulated reserves and natural resources allowed Argentine to remain prosperous. After 1949, the Constitution was changed to guarantee social grants and highly entrenched labor rights. That has produced a host of defaults, inflations, and political chaos that has now put Argentina halfway down the global rankings. And this is contrast to neighbors like Chile, Peru, and Brazil, which have grown substantially the past two decades.
Almost half the population now lives under the poverty line. Almost half the population receives a government grant. Inflation is currently 140% yoy heading to 200%. And the country had to be bailed out by the IMF multiple times in the past five years.
The economic failure is apparent everywhere, and it has worsened in the 40 years since the return of democracy. The Peronist system and various flavors of the Peronist party were in power the vast majority of that time. From 2003-2023, four of the five terms featured the criminal gang of either President Nestor or Cristina Kirchner running the show. There’s no one left to blame.
The Milei Model
Milei has made an important shift in the perceptions of voters in Argentina. His campaign was not against one party or the incumbent president. It was not a bunch of promises to improve everything that ‘the current government’ had messed up.
Instead, he brought attention to the systemic flaws in Argentina. He was emphatic that the system was designed to screw them, and benefit a political caste that remains untouched by the law. His campaign promised radical change, and he brought up the point in his ads “Why do we think we will get something different from the same people that have presided over this mess?”.
Milei pointed out that the system in Argentina had guaranteed government jobs for many and guaranteed benefits for others. This has now morphed into a system where less than 8m Argentines (in a country of nearly 50m) pay for the other 42m as government workers, family members or government dependents. Half the country lives on mostly government assistance. Thie country now an expensive government and an uncompetitive economy.
Frequently, the country simply runs out of hard currency to pay for it all. Instead of rolling back the benefits, they print money and generate inflation. Workers keep their benefits, they just purchase much less- if there are goods in the stores! This printing press allows the government leaders to maintain control over the people, enrich themselves, and impoverish everyone else. Taking away this tool forces radical changes.
The political classes that have run Argentina have worked with an unspoken agreement for decades: If you are a member of the system and don’t challenge it directly, you can break the law with impunity. Government ministers and presidents have faced lawsuits, but there have never been any serious consequences in decades. And so the system rolls on.
The Argentine Trump? Far Right Take-Over? Bolsonaro in Buenos Aires?
This Milei model is a large contrast to the politicians that Milei is often compared to. President Bolsonaro in Brazil largely ran on social issues, saying that the elected officials were pushing a radical Marxist agenda. Economics was secondary to his campaign, and he had little involvement in economic policy.
Trump’s campaign was built on the diagnosis that leaders ran things in their interest, and couldn’t care less about average Americans. His solution had three planks: uprooting a corrupt political class, reversing America’s foreign policy disasters, and tilting fiscal policy to the average person. Again, some overlap with Milei, but Milei’s message is 90% radical economic reformer.
The mainstream media often uses ‘far-right’ as a smear: that someone’s ideas are far outside of the mainstream. Its connotations are of radical and dangerous. Oftentimes they use it as a synonym for Nazi or fascist.
Milei is clearly NOT far-right. He is vehemently pro-Israel and converted to Judasim, which would make him the worst Nazi ever. Nothing he has said with echoes of a fascist military government. If a very libertarian economic model is far-right (debatable, as most fascist systems had heavy economic intervention), then he could be.
But we would rather place him in the 19th century tradition of Mill, Bastiat, and other writers he admires: a classical liberal, promoting individual rights in all fields with the state as the referee.
The First Moves
There were four proposals which generated the most attention during the campaign:
1. Eliminate half of the government ministries
2. ‘Take a chainsaw’ to government spending
3. Dollarize the economy
4. Shut Down the Central Bank
Many Argentines like these proposals, deeming them necessary to end inflation and ensure prosperity. Their concern has largely been on the implementation- is this politically feasible? How long will it take?
We expect the following specific measures to be tackled in the first year of the administration in order to fulfill these campaign promises. From there, we can hope for more radical reforms and overhauls of Argentina’s labor laws, constitution, and other structural problems.
1) Cut the Ministries. This is more of a symbolic move because the ministries he wants to cut are not massive drains on the government finances. But he has already announced the first to close down Dec 10th (Women,Gender and Equality) and has a roadmap to consolidate and eliminate several others. The hope is also to reduce the ability of the political class to enrich their friends and family through these bloated groups.
2) Balance the budget/The Chainsaw. The government runs a 5% of GDP deficit, which they have to monetize with printed pesos. Eliminating this will require a battery of measures. Milei has proposed a quick privatization of the airline, broadcasters, the oil company YPF and others to raise money and cut overall corporate subsidies.
They want to cut energy subsidies to middle and upper income customers. There will be the elimination of several small government ministries and consolidation of several others into one. At the same, given the almost 50% poverty rate, they acknowledge they risk major social issues if they immediately cut lower end benefits or don’t wait for the labor market to recover. With no deficit spending to monetize….
3) ….Freeze the peso money base. Once the budget is on track to being balanced, the government will move to freeze the amount of pesos in circulation and the banking system. No money growth, no inflation.
Simultaneously, Milei wants to let Argentines choose the currency to transact in. He believes this will promote competition and improve the quality of services. One example of this ending the current rental law, which allows only peso rents, which can only be adjusted every three months. In a country with 10% monthly inflation, you can imagine the problems faced by both landlords and tenants. Milei would end it, and allow free transactions in whatever method both parties choose. Now they can move to…..
4)Limited dollarization/Ending Central Bank. This one is the most controversial and most difficult to implement of Milei’s agenda. Argentina’s central bank has a large presence and the economy and has printed an ocean of pesos in the past four years to finance the government’s deficits.
Once the amount of pesos is fixed, then you can determine roughly how many dollars at the current FX rate you need to ‘back them’. Milei’s back of the envelope estimates suggest about $30-40bn is required. They plan to have foreign investors buy bonds in dolars, then deposit that money at the central bank. After it’s at the central bank, the exchange rate can become fully convertible and move freely. Brazil did much the same from 1999-2007.
The other part of this is that the central bank has built up a huge liability in pesos, held by the banks, known as LELIQ’s. The government forces the banks to buy these in order to pay for their spending. With the number approaching $50bn and rising, something has to be done. Milei’s proposal is to essentially swap the LELIQs that banks own for an equivalent in Argentine backed government bonds, in dollars. From there, they are free to act as they want. This would help move the banking system to a steadier footing and encourage currency competition.
After the dollarization and the LELIQ plan, what next? A full full dollarization like Panama or a shutting down of the central bank is a challenge. You would need to find out the legal mechanisms to do this. Depending on how peso or dollar holders are renumerated, there are going to be winners and losers- the government will have to be careful to create the perception of fairness. At the moment it’s probably a political no-go without more support in Congress (more in the next section). The perception of selling out to the US Empire is the third rail of Argentine politics.
Many have asked- why dollarization? Why not base the system on bitcoin, gold or something else? Argentina in the past had a currency peg to the US dollar. Many Argentines save in dollars, have accounts offshore in US dollars, and hold large amounts of physical USD in cash (18% of physical US dollars in circulation are in Argentina). Those other solutions are theoretically sound, but the ‘ease of use’ of dollarization for the average Argentine makes it superior. We can discuss the flaws in the dollar - but a currency with ~5% inflation and global acceptance is worlds better than the current Argentine system.
The 1990’s dollar peg was an intermediate step that failed because the government ultimately chose to ignore it. Full dollarization would make the entire system unexposed to a peg breaking. With this speed limit on spending of the amount of dollars in Argentina, it will prevent runaway spending in future administrations.
Finally, Argentina has had an extensive system of capital controls that prevents money from coming into the country without heavy fees, and for Argentines to get money out of the country. Milei has promised to end all of these, but with the acknowledgement that it will take time to implement due to the risks at the beginning.
Implementation
Can these become law? All these proposals are useless without the ability to implement. One advantage of the Argentine system Milei has is that Argentina’s President has a substantial number of powers that are outside of Congress. He can implement a host of smaller reforms that add up to a big total without consulting anyone.
In addition, Milei has been working with the two leaders of the center-right party, JXC, in Argentina which has the majority of governors and the second largest voting blocs in Congress. This will bring votes and institutional support to his program, a much needed boost to what would otherwise be a protest vote that would fizzle out.
What about issues which require Congress? Dollarizing, changing banking sector financing, shutting down the Central Bank all require significant legal changes and political negotiation. As of now, he barely can achieve a majority in Congress and not yet in the Senate. He will have to hope to pick up a large majority in both in 2025’s midterms to implement major reforms on his terms.
Looking more closely at the voting math for the next two years: Argentina’s Congressional Lower House has 257 seats. Right now, adding Milei’s party (38 seats) and JXC (93) gets you a slim majority. Some JXC members may reject the more reform oriented bills, but several independents support Milei, offsetting those losses.
In the Senate, which has 72 seats, Milei’s party has only 6 seats. Adding JXC’s 27 seats gets you a total of 33 for the coalition. They will have to reach out to work with independents and Peronists to ensure legislation can get through. Peronists can be easily bought or bribed, so expect a substantial number of favors to start flowing to the different provinces from the national government.
The initial spending cuts and moderate reforms will pass, as virtually everyone realizes their need. Milei can do a good amount himself. The question is what political trade-offs or watering down will be required to get these later reforms through, or if they will fail.
Conclusion
Milei has blazed a trail for libertarians everywhere by proving that there is a demand by voters to roll back decades of bad policy that simply isn’t working for the average person. He brought attention to the systemic flaws in Argentina that had created the underperformance. Implementation is going to be a long process, but if we get even a third of what he has promised, it will create a decades long change in Argentine society by ending entitlement culture and government control.