ONE CUCKOO FLEW OVER:

Argentina Is Responding to Shock Therapy: He comes across like a madman, but Javier Milei is fast becoming the man of the moment. (Quico Toro, Dec 17, 2024, Persuasion)

Alongside a tax and cost-cutting spree, Javier Milei has gone on a kind of crusade against the thicket of regulatory nonsense that had colonized every bit of the Argentinian state. His economy minister launched a new mechanism to invite Argentinians to suggest useless rules to be done away with: in the first eight hours it was in operation, it received over 1,300 suggestions. The government deregulated everything from imports to labeling to apartment rentals. Its Deregulation Minister thundered at the mass of absurd regulations that meant importing, say, $30,000 dollars worth of toys required you to spend $10,000 on paperwork.

Argentinians may not have all turned into doctrinaire libertarians overnight, but they seem to have been catching on to the utility of the libertarian instinct. Faced with the mad mass of overbearing state interference in economic life, they seem to have accepted that you need a bit of a lunatic to cut through it: someone with the bombast and the pugnaciousness to fight the beast. In normal times, you’d surely prefer your president not to run around waving a chainsaw in the air like a madman, but Argentina left normal times so long ago the objection barely seems to even register.

Not, of course, that you can ever rest quite easy with a crazy person in charge of the government. Though he’s shown some signs of moderation in, for instance, restraining himself from calling Xi Jinping a murderous thug to his face, the way he used to, Javier Milei remains the edgelord he’s been all along: inveterately vituperative, revelling in insult, permanently itching for a fight. Treating bilateral relations with Spain the way a 14-year-old treats his first online fight, he called Prime Minister Pedro Sánchez “the torture poor Spaniards have to put up with.” His frustration-control, never strong, remains as flimsy as ever. As long as he stays in power, Argentina will always be one tweet-thread away from the next crisis.

But for the moment, Milei has had more successes than failures. He’s stabilized the currency, ended the deficit, tamed inflation, and made more progress in terms of structural reform than would’ve seemed imaginable a year ago. He’s managed to get enough support from a congress he doesn’t control to pass some important reforms, though he’s had to push much of his agenda through executive action. He’s pushing for a major new nuclear power plant building program to prepare Argentina for the AI future. Milei is a man with big plans, and it’s no longer obvious they will fail.

LIBERALISM IS UNDEFEATED:

Milei Has Tamed Inflation, but Argentina Still Isn’t Out of the Woods (Bruno Binetti, Dec 6, 2024, World Politics Review)

From the moment he took office last December, Milei wasted no time wielding his proverbial chainsaw, slashing public spending by nearly a third and erasing a fiscal deficit that had exceeded 5 percent of GDP. His reforms included halting budget transfers to provincial governments, dismissing over 30,000 public sector employees, cutting subsidies for public utilities, canceling most public works projects and reducing pensions by around 7 percent.

These drastic measures were effective at cutting public spending, but they came at a cost. A steep devaluation of the peso triggered short-term inflation, with prices surging by 25 percent in December 2023 alone. The economic fallout was severe: In the first six months of Milei’s presidency, an already deep recession worsened; wages lost significant purchasing power; funding for national universities plummeted by 30 percent; and poverty rose to 53 percent, up from 42 percent.

Despite these challenges, Milei’s approval rating remained remarkably stable, reflecting both the public’s disillusionment with traditional political elites and the gravity of the economic crisis he inherited. The chaotic Peronist administration of Milei’s predecessor, former President Alberto Fernandez, left the country teetering on the brink of hyperinflation and economic collapse. Many Argentines viewed Milei as their best hope for salvation, accepting the pain of his adjustment policies as a necessary cost to avoid catastrophe, even as they doubted his assurances that the burden would fall solely on the “political caste.”

In the end, their resilience appears to have been rewarded. Monthly inflation steadily fell from 20 percent in January to just 2.7 percent in October, a remarkable achievement for a nation long haunted by runaway prices. This newfound stability has fueled a modest recovery in real incomes and restored some ability for households and businesses to plan for the future. The gap between official and black-market exchange rates has also narrowed dramatically, from over 200 percent to less than 10 percent. With GDP projected to grow by 5 percent in 2025, Argentina is poised to rank among Latin America’s top-performing economies. Meanwhile, the government expects forthcoming data to confirm a significant drop in poverty, potentially bringing the rate well below 50 percent.

WHERE’S THE BEEF?:

Argentina’s reforms are more than economic: For most Argentines, cooperation among political rivals is a reason for patience amid economic reform (The Monitor’s Editorial Board, June 25, 2024, CS Monitor)

Mr. Milei’s biggest challenge may be in keeping a political consensus for his difficult reforms. He has brought key opposition figures into his Cabinet. And in a June 13 vote in the Senate, he won incremental changes that mix spending cuts with measures to strengthen cooperation between national and local officials.

In March, Mr. Milei asked ordinary citizens for their “patience and trust.” The reforms enacted so far have exacerbated hardships. The percentage of people living in poverty has reached the highest it’s been in 20 years (57.4% nationally). Yet two polls this month found that as many as 63% of citizens are willing to stay the course.

Their confidence may rest on a willingness of Argentina’s political leaders to work together with transparency. “It was crucial that he showed that he can work with the opposition to get something approved,” Eugenia Mitchelstein, a political analyst at the University of San Andrés in Buenos Aires, told The Wall Street Journal. “If everything is a conflict, and no negotiation, he won’t get anything done.”

Mr. Milei received similar advice this week during a brief visit with German Chancellor Olaf Scholz. While Argentina makes far-reaching economic reforms, it is important to protect “social cohesion,” Mr. Scholz said. Greece won that key battle. Argentina seems ready to do the same.

THE BUSINESS OF GOVERNMENT IS NOT BUSINESS:

Javier Milei takes a chainsaw to Argentina’s state companies(Ciara Nugent, 3/21/24, Financial Times)

“All of these companies . . . spend 20 per cent of their budgets on delivering their specific goals, and 80 per cent on management costs,” Guillermo Francos, Milei’s interior minister, told Argentine television network LN+ last month. “We must strive for efficiency.”

ASAP, a local NGO tracking government finances, found Milei had cut transfers to state companies to 456bn pesos, or $535mn at the official exchange rate, in February — a 61 per cent decline in inflation-adjusted terms from the same month in 2023.

The roughly 40 state-owned companies provide public services including passenger rail, sewerage and energy. Most operated at a loss under previous governments. Now Milei’s administration has appointed new management at many of them, with a mandate to slash staff numbers and revamp their strategies.

Juan Cruz Díaz, managing director of the Cefeidas political consultancy, said: “There’s a lot of space to cut costs, make things more efficient, improve management [in Argentina’s state companies]. But the government has an ambition to move much more intensely. This is a question of principles as much as costs.”

THANKS, GUS!:

Doug Irwin on the History and Political Economy of Trade Policy: Shruti chats with Doug Irwin about trade economists, trade in India, and globalization (Shruti Rajagopalan, 2/22/24, Mercatus Center)

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. […]

Today my guest is Douglas Irwin, who is the John French Professor of Economics at Dartmouth College. He is the author of dozens of books and papers, most recently, Clashing over Commerce, which is a magisterial history of US trade policy. We spoke about India’s liberalization moment in 1991, the five phases of globalization, British repeal of Corn laws, premature deindustrialization, the relevance of the WTO, absolute versus comparative advantage, the future Argentina, and much more.

RAJAGOPALAN: I think of this group of trade economists, especially the four of them, their ideas first percolated into the East and Southeast Asian countries. They had some impact on India for sure though not as much as one would like. And after 1990s, African countries started unilaterally liberalizing very much based on the Asian experience, but one group, which somehow never quite took their lessons and ran with it is the Latin American countries. Was it just a different set of problems or something was lost in translation? Because there was another group of economists who were the Chicago Monetarists who did have some penetration or impact in the Latin American countries. What’s going on there?

IRWIN: There’s a great deal of diversity across Latin America. Chile is an example where the reform stuck. Now, albeit they were introduced in the Pinochet dictatorship, but they survived the transition to democracy. The center-left governments that took over once Pinochet left, they had some appreciation for the economic model that they inherited. Chile had done pretty well with it towards the tail end of the Pinochet regime. Obviously, some big crises early on.

If you talk to Alejandro Foxley, who’s the first finance minister under democracy, he wanted to run fiscal surpluses to show markets that they were committed to not the excesses of the past. They reduced tariffs. They want to double down commit themselves to keeping the open economy model. Then the question is, why haven’t other countries in Latin America seen the benefits? Some have and some haven’t. Argentina, just to pick another big country has had cycles, and there’s a whole political dysfunction in Argentina

There’s been this pendulum swinging back and forth with Argentina. They were liberalizing in the ‘90s, then they closed up a little bit in the 2000s, and now maybe they’re moving in a different direction again. Peru’s an interesting case. Because once again, they opened up in around 1991.

RAJAGOPALAN: Had shock therapy.

IRWIN: Had shock therapy. That has stuck as well. Even though there’s continued political dysfunction in Peru, the economy’s done pretty well and the open economy model is pretty much entrenched. Colombia also a country that was never quite as closed as some of the others but opened up also in 1991. When I say opened up, getting realistic exchange rates, getting rid of quantitative restrictions on trade, getting rid of import licensing. Even if the tariffs are relatively high, getting rid of those other things really goes a long way to open up the economy. Columbia’s kept the open economy model. Then we can go to Brazil, another big country, which supposedly opened up in the early ‘90s, but there’s still a lot of non-tariff barriers and what have you.

RAJAGOPALAN: They’re like India.

IRWIN: A little bit.

RAJAGOPALAN: They opened up, but they still have lots of restrictions. We don’t quite get captured in the trade liberalization obvious model or laundry list.

IRWIN: That’s a great way of putting it because what you don’t see when they liberalize is you don’t see imports as a share of GDP going up a lot, whereas you do see that in some of the other countries. I’d say there was a Latin American reform moment early 1990s. Once again, not uniform, very imperfect, but they did try to move in a different direction and shed the Raúl Prebisch dependency theory import substitution policies that had really doubled down on in the 1950s and ‘60s and into the ‘70s.

NOT EVERYONE IS AS LUCKY AS IBERIA AND CHILE:

Will Milei Make Argentina Great Again? (BRYAN CAPLAN, JAN 18, 2024, Bet on It)

As far as “emergency” measures go, Milei’s labor deregulation is notably mild: It lengthens new workers’ probationary period from three to eight months, cuts severance pay, and threatens dismissal for protesting workers who block traffic. But so far, these proposals have provoked the strongest pushback. The CGT, Argentina’s leading labor union, insists that the “only purpose” of these “ferocious” and “regressive” measures is to “hamstring union activity, punish workers and benefit business interests.”[viii] An Argentinian court almost instantly suspended Milei’s emergency labor deregulations, though perhaps he’ll win on appeal. The privatizations will be more significant if they happen, but since he declined to put them in his emergency decree, they’ll have to pass both houses of Argentina’s legislature.

What is the most likely scenario for Argentina? The monetary and fiscal stabilization is very likely to work. Argentina has faced far worse crises before: The hyperinflations of the 70s to the 90s multiplied prices 100 billion times. That’s like turning a billion dollars into a penny. Yet Argentinians ultimately overcame all these problems and more using the orthodox medicines of monetary restraint and fiscal responsibility. Since even politicians who ideologically opposed these treatments ultimately endured their short-run costs, it is a safe bet that a libertarian economics professor will do the same.

Turning Argentina, just a cut above Venezuela and Cuba in economic freedom, into a bastion of free-market policies is far less likely. Milei’s party, La Libertad Avanza, has a tiny share of the seats in both houses of the legislature, and all of his allied parties are clearly less libertarian. While Argentina did have much more pro-market policies in the 90s, this was part of the global anti-socialist wave after the Soviet collapse.[ix] Admirers of the neighboring Chilean economy may note that Milei is much more ideologically committed to free-market policies than Pinochet ever was. Like many politicians, he is acting on the adage, “Never let a good crisis go to waste.” But Milei plainly has far less power to remake his country than the Chilean dictator.

ILLIBERALISM DOESN’T WORK:

Argentina offers a textbook study in why rent controls are a bad idea (Ryan Bourne, 1/22/24, CapX)

One of Milei’s first acts in his decree scrapped these damaging regulations for all new contracts. Rents will now be decided in free contract negotiation, meaning no more central bank indices capping rent increases. He’s also scrapped the three-year minimum contract length while making it legal for rents to be paid in foreign currency (i.e. dollars), providing landlords a hedge against inflation.

Already the reduced risks to landlords is leading a rebound in the rental supply. Broker Soledad Balayan has shown a 50% rise in notices for traditional rentals since the decree. A host of other sources, including the Argentine Real Estate Chamber, have confirmed large supply jumps. Perhaps unsurprisingly, reports show new rental prices falling, by between 20 and 30% so far.

Economists have frequently cautioned against traditional rent controls that apply caps on rents within and between tenancies. But in recent years there’s been a new drumbeat for providing more security for tenants by controlling rents within longer, secure tenancies. Argentina’s experience provides a textbook warning of how this policy can backfire, and more grist to Milei’s educational mill.

CREDIBILITY WORKS WONDERS:

Chainsaw cuts path to new Argentina-IMF deal (Alex Kliment, 1/03/24, Gzero)

The IMF, which suspended its lending to Argentina last August after the previous government missed key reform targets, says his actions to date are “bold.” A fresh deal would unlock about $3 billion more in assistance, and not a moment too soon: Argentina owes the fund roughly that amount over the next two months.

THANKS, GUS!:

Why Chile Couldn’t Bury Neoliberalism (Juan David Rojas & Geoff Shullenberger, December 19, 2023, Compact)

Chile’s aborted attempt to rewrite its constitution is a cautionary tale for all of those seeking a radical break—whether from the right or from the left—with the “end-of-history” consensus known as neoliberalism.

Until 2019, Chile was regarded as the pinnacle of Latin American development and a testament to the benefits of free-market economics. To be sure, the model erected by Pinochet and the Chicago Boys—the University of Chicago-trained economists tasked with implementing a radical overhaul of the economic order—eventually restored Chile’s macroeconomic stability following the inflationary chaos unleashed under Salvador Allende’s socialist government. This stabilization allowed the country to attract investment and achieve impressive rates of growth. But the reforms also brought about catastrophically high unemployment, which would have been difficult to sustain under democratic rule. Eventually, the resulting discontent led many Chileans to vote against keeping Pinochet in power in the 1988 referendum that ended his rule.

The irony is that the fruits of the Chicago Boys’s neoliberal reforms came mainly under the stewardship of Pinochet’s democratic successors. After two decades of political turmoil and economic pain under Allende and Pinochet, Chile witnessed an economic boom in the 1990s thanks to high commodity prices. Democratically elected presidents also secured trade deals that had previously eluded the pariah dictatorship. GDP growth averaged 7 percent a year, and per capita GDP doubled by 2010—the year Chile became the first South American country to join the OECD.

The biggest problem with neoliberalism is that, singularly, it works. Yopu can’t have a clash of civilizations when there is only one.

“STOP ME, BEFORE I KILL AGAIN!”:

The Case for Dollarization in Argentina: A Path to Economic Stability (Nicolas Cachanosky, 12/19/23, Econ Lib)

The primary rationale lies in the necessity for a credible commitment device. This paper by Emilio Ocampo explains how dollarization can serve as such for Argentina. Drawing from the experience of Ecuador under Rafael Correa, we see that dollarization acts as a credible institutional constraint that diminishes the costs associated with a populist regime. In a country where political shifts are frequent, and the probability of populism returning to power is 100%, establishing a stable monetary system becomes indispensable for sustained economic success.

Dollarization is Cost-Effective and a Safer Solution:

In relative terms, dollarization is the most cost-effective and safest alternative. With an annual inflation rate hovering around 160% (and expected to go up in the coming weeks), the demand for Argentine pesos is practically nonexistent. Dollarization facilitates the redenomination of financial liabilities in pesos into US dollars, eliminating the risk of a run against the peso. This would not only stabilize the currency but also afford the government more time to enact necessary changes. Given the combination of high inflation and a lack of credibility in Argentine politics, the amount of US dollars required to sustain the peso exceeds the US dollars needed to implement dollarization. Those who argue that dollarization is not possible due to the lack of dollars at the central bank need to think seriously about where they intend to obtain the dollars to bring the peso back to life. Furthermore, as dollarization implies phasing out the peso, its success becomes more plausible than reviving the peso. […]

Argentina’s persistent struggle with inflation, which has averaged 60% annually since the mid-1940s, has impeded long-term planning and economic growth. The nation has exhausted every textbook solution to high inflation, all of which have proven futile.