Milei is already proving the Left-wing economic establishment wrong
Argentina’s reforms prove it’s possible to slash a bloated state
MATTHEW LYNN4 May 2024 • 2:00pm
Argentina has historically been a country of failed governments, economic collapses, and debt defaults. Yet incredibly there are signs that – against all the odds – the bold, free market reforms of its libertarian President Javier Milei are beginning to work.
With inflation falling, interest rates coming down, and the peso on fire in one market, Milei is already proving the global Left-wing economic establishment – addicted to bigger government and endless deficits – wrong. Indeed, it may provide a template for other countries to escape from zero growth.
First, what’s changed in the country: inflation has fallen to 11pc and Milei predicts it will fall further. While a monthly figure (this is Argentina after all), price rises may be coming back under control after soaring above 300pc annually.
Last week, Milei announced that the country had recorded its first quarterly budget surplus since 2008, a modest 0.2pc of GDP, but still an astonishing achievement in such a short space of time, especially for a country that has run deficits for 113 of the last 123 years.
Then, earlier this week, the central bank, which Milei has not yet gotten around to abolishing as he pledged, cut interest rates for the third time in three weeks. While they are still at an eye-watering 50pc, that will start to feed through into the economy very soon. Investors have started to notice.
According to Bloomberg data, in the blue-chip swap market the peso was the best-performing currency in the world in the first quarter of this year, and the bond markets are rallying as well.
It may also get better over the months ahead. With stabilising prices, and a rising currency, investment should start flowing again into a country rich in natural resources and hyper-competitive on wages costs.
If Milei can make good on his promise to unlock the country’s vast reserves of shale oil and gas – using technologies that have proved safe and successful in the US – then the economy could even start to boom.
If so, Argentina would be defying a global economic establishment addicted to bigger government, more regulation, and rising deficits.
We keep being lectured, not least by the shadow chancellor Rachel Reeves, and by President Biden and his acolytes in the United States, on the need for an active state, an industrial strategy, and more borrowing to pay for investment, and that regulation is the key to industrial and economic leadership, not its enemy.
The IMF, meanwhile, was too often a huge cheerleader for the failed Argentinian administrations of the past, extending the biggest loans in its history to the country.
On Milei’s election, he was dismissed as a madman who would be removed from office within a matter of months, if not weeks. In proving that narrative wrong, he would show that even after the short-lived catastrophe of the Liz Truss government, free market reforms are far from impossible.
So how is he en route to deliver such a massive shock to the stale economic orthodoxy? Fundamentally, he got three big calls right.
First, even without a majority in parliament, he has been ruthless. Whole government departments have been closed down overnight, regardless of the immediate consequences. The Ministry of Culture was axed, so was the anti-discrimination agency, and the state-owned news service. Only last month, he unveiled plans to fire another 70,000 state employees.
Milei hasn’t attempted to cut gradually, to control budgets, or to ease people out with early retirement, or hiring freezes. Instead, he has, as promised, taken a ‘chainsaw’ to the machinery of the state, yielding huge savings in the process.
Next, he has been bold. The president massively devalued the peso on day one, taking the financial hit upfront, and then tore up rent controls, price restrictions and state subsidies. He pared back workers’ rights, reducing maternity leave and severance compensation, and allowed companies to fire workers who went on strike.
He ripped away fuel subsidies, even though it meant a temporary spike in inflation. Sure, there has been some short-term pain, but the results are now becoming evident.
Rents, for example, are falling by 20pc a year as landlords, freed from controls, put more supply on the market, instead of withdrawing it as they do in countries where the price is set by the government.
Finally, Milei has never stopped making the argument. He promotes freedom, liberalisation and a smaller state with a messianic zeal.
Many of the measures he has taken might be rough, but the president has never attempted to dismiss that, instead explaining patiently and persistently why the reforms are justified, and how they will create greater prosperity for everyone in the long run.
Much of the developed world, and the UK in particular, are gradually slipping into Argentinian-style stagnation before Milei came along.
Governments are hooked on subsidies and price controls, trying to buy their way out of every challenge with higher spending. Deficits are allowed to rise relentlessly, with no meaningful plan for ever bringing them down again. A corrupt, crony capitalism is allowed to flourish, killing competition.
But the Argentine leader is providing a blueprint for how to break free. The global economic elite keeps lecturing us on why we need more government and a more powerful state despite the painful lack of results. Argentina is challenging it in dramatic fashion.
It is just possible that it is starting to work. |
