KICKING THE CAN DOWN THE ROAD DOESN’T SEEM TO WORK:

Is there a way out for Argentina? (Monica de Bolle, 11/28/23, PIIE)

To better understand Argentina’s cycle of economic crises, it helps to trace the history of Peronism from its original goal to turn away from the nation’s largely agriculture-based economy, which was overly dependent on international fluctuations of commodity prices, and toward industrialization using whatever means necessary: protectionism and subsidized credit for selected sectors, combined with targeted government social welfare spending for favored population segments. Adopting the advice of so-called dependency theory advocates, Perón also created labor protections for the new urban-industrial labor force, as well as several state-owned enterprises. In a pattern that was to be repeated over many decades, enactment of these policies between 1946 and 1955 increased Argentina’s budget deficits, its external debt, and balance of payments vulnerabilities, laying the groundwork for future boom and bust cycles.

By 1977, the country was suffering its first bout of hyperinflation, with an annual rate of over 300 percent. In 1978, an inflation stabilization plan was attempted, and it succeeded in halving the inflation rate for a short period. But in 1981, the country had a severe balance of payments crisis, which led to a debt default accompanied by a banking crisis. By 1985, inflation had spiked to more than 670 percent, forcing the adoption of the Austral Plan. The currency’s name was changed from the peso to the austral, wages were frozen, the exchange rate was fixed, and spending was slashed for a brief period. Ultimately, the Austral Plan failed, and by 1989, inflation had reached more than 3,000 percent. Argentina’s attempts at stabilization involved several IMF programs generally calling for tough austerity measures, including budget cuts, deregulation, and a floating currency.

In 1991, Argentina adopted the so-called Convertibility Plan following several reforms, including some designed to rein in the budget deficit, which succeeded in eliminating the country’s hyperinflation and restoring stability for a time. Over the next decade, Argentina fared somewhat well despite a banking crisis in 1995. By the late 1990s, other problems associated with growing domestic imbalances were aggravated by external shocks stemming from emerging-market crises of that period. Spurred in part by commodity price fluctuations and financial panics, these crises took their toll on the economy.

When Brazil was forced to devalue its currency in 1999, Argentina’s fixed parity with the dollar accentuated its lack of competitiveness, further weakening its already fragile economic situation. In 2001, Argentina finally faced its demons, abandoned the Convertibility Plan, and suffered its worst financial crisis in modern times. The crisis involved a complex debt default, a collapse of the banking system, and a deep recession. By 2003 the outlook had improved significantly as a result of rising commodity prices in international markets.

During the worst of the turmoil in 2001, Argentina became famous for its revolving door of five presidents in only 12 days. Eduardo Duhalde, appointed as interim president by Congress in January of 2002, would see the country through the aftermath of the crisis, handing the presidency to Néstor Kirchner in 2003 following his victory in the 2003 elections. During his time in office, Argentina grew at an average clip of about 8.5 percent annually fueled by high commodity prices as well as some domestic reforms. In 2007, Néstor Kirchner’s wife Cristina Kirchner was elected president. Néstor had planned a comeback to power, but he died in 2010, one year before Cristina was reelected for a second term.

Cristina Kirchner’s time in office, from 2007 until 2015, became the hallmark of what is now known as Kirchnerism, a mixture of ad hoc government interventions in the functioning of markets—including setting or freezing certain prices—and tinkering with Argentina’s statistics, particularly with official inflation data. Her tenure was plagued by fiscal irresponsibility and corruption scandals. Argentina did manage to avoid a major financial crisis during her time in office, helped by high commodity prices and investments from China, but it remained vulnerable to crises. Cristina’s successor, Mauricio Macri, failed to resolve inherited and newly created problems, helping to lead the economy to its current state.

ESCAPING NATIONALISM/SOCIALISM:

New Argentine Leader’s Economic Savvy: Whether Milei will free his statist economy is still unknown. But his understanding of crucial principles gives him a head start. (David R. Henderson, 12/07/23, Hoover: defining ideas)

Argentina’s economy and Argentina generally are in bad shape. That’s the result of decades of policies that follow the playbook of Juan Perón, the president of Argentina from 1946 to 1955 and again from 1973 to his death in 1974. Those policies consisted of heavy welfare spending, government nationalization of selected industries, and making the government the monopoly purchaser of grain, to name three. Various scholars have referred to Peron’s policies as fascistic. That charge is probably overstated. As Sheldon Richman wrote in his article on fascism in The Concise Encyclopedia of Economics, “fascism is socialism with a capitalist veneer.” Richman explained, “Where socialism sought totalitarian control of a society’s economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners.” Perón didn’t go nearly as far as Mussolini did. Think of Peronist economics as “fascism light.”

Javier Milei wants to move in the opposite direction, by freeing Argentina’s people from government control of their economic activities. The uncertain news is that we can’t know how successful he will be. The good news is that, not surprisingly for someone who has been an economics professor, Milei shows a deep understanding of economics that will serve him, and Argentina, well.

PRE-DOLLARIZED:

Argentina’s Rampant Inflation, Explained (in One Chart) (Jon Miltimore, December 5, 2023, AIER)

The New York Times, which recently interviewed Capobianco, reported on the inflation that “has convulsed Argentina” and led to the rise of Javier Milei, who last week became Argentina’s first libertarian president (and arguably the first libertarian president in the world in modern history).

Prior to Milei’s stunning victory, inflation in Argentina hit 143 percent. Triple-digit inflation has helped push 40 percent of Argentines into poverty and has led to a surge in demand for US dollars.

An estimated $200 billion in US currency has gravitated toward Argentina’s $487 billion economy, the Times estimates, nearly 10 percent of all US dollars in circulation (more than any other country in the world except for the USA).

The appeal of US dollars in Argentina should come as little surprise. The purchasing power of the peso is depreciating so fast that people continually swap them out for dollars, which are hoarded.

“You’re constantly gathering up money quickly in order to buy dollars,” a 30-year-old supermarket worker told the newspaper, “because the next day, it’s devalued again.”

WHEN YOUR dEEP sTATE IS PERONIST…:

Argentina’s Disordered Liberty (marcos falcone, 12/03/23, Law & Liberty)

To explain the evolution of Argentine law, it is useful to examine constitutional changes, and particularly those that were made to the 1853 Constitution, which is still active today. Juan B. Alberdi, who had the most influence at the time of writing, purposefully followed the model set by the American Founding Fathers so as to establish the kind of rule of law that a classically liberal society would need. Argentina declared, in the 19th century, that everyone in the world who wished to do business in the country could do so; that internal, bureaucratic barriers to free trade were to disappear; that no privileges would be extended by the government to anyone; and that private property was an inviolable right. As Isaiah Berlin might say, the document considered liberty in a negative way. The state’s role was simply to set rules for individuals to act and flourish.

Ever since its inception, though, the Argentine Constitution has suffered from several changes that have modified its spirit. In many instances throughout the 20th century, new articles incorporated into the Argentine Constitution have recognized social and collective ‘rights,’ the enforcement of which depends on increased government intervention. The 1949 reform, for example, instituted a ‘social use’ of property that directly paved the way for the state to violate property rights. That change, though later overturned, would serve as the basis for Article 14 bis of the Constitution, which was added in 1957 and is still active. This section, among other things, guarantees the existence of a minimum wage, mandates ‘fair’ salaries for workers, demands that they get a share of whatever capital gains exist, and effectively bans the state from dismissing public employees. 

Further reforms solidified the increasingly interventionist spirit of the Constitution. The 1994 Convention, for example, added the concept of ‘environmental rights’ in a way that implies proactive government intervention. This and other third and fourth-generation ‘rights,’ particularly those that demand affirmative action for various groups to ensure the ‘true’ enforcement of other constitutional rights, show that the concept of liberty embedded in the document is no longer negative, but has become positive: The state is to actively intervene in order to bring about specific results.

Unsurprisingly, Argentine law has become more and more interventionist. Congress has, at various times in the past, nationalized private businesses and pension funds, and it has established and increased dozens of different taxes with the result that effective total tax rates are over 100%. But bureaucracy has also increased so dramatically that complying with legislation costs small and medium businesses 500% more time than their counterparts in neighboring countries such as Brazil. And even though the evolution of bureaucratic stringency is difficult to measure over time, available evidence for the past decades suggests the situation has gotten worse: According to the Fraser Institute’s Economic Freedom Ranking, Argentina ranked 36th in 1970 but ranks 151st out of 165 countries today in terms of regulation, which means it has become more and more bureaucratic. It is no wonder, then, that informal employment now accounts for as much as 45% of the total workforce. The ‘tendency towards illegality’ that Nino identified in the Argentine society seems to be caused by the state itself.

We too much take republican liberty for granted.

MAYBE NATIONALISM/SOCIALISM HAS FAILED FOR LONG ENOUGH?:

Argentina Agonistes: The Separation of Money and State (Michael Munger, November 29, 2023, AIER)

Argentina is in many ways an advanced nation with a moronic government, saddled with the ditzy wishful thinking of Peronism. Argentina has a tax collection/compliance rate of less than 40 percent, more characteristic of a third world nation. As Leonidas Zalmanovitz pointed out last week, the real problem is a consensus on reducing inflation, not fiddling with rules.

Still, rules and institutions matter. Combining the “generosity” of Peronism, albeit generosity with the money of others, and the inability to collect taxes, has meant that the government has systematically gutted the value of the already threadbare peso. That issue, more than any other, is the reason that an outsider such as Milei was able to win by nearly 20 percent of the vote, a landslide rejection of orthodoxy. It is worth taking a step back and considering the sources of these “Argentina Agonistes,” and thinking about Milei’s core promise: the separation of money and state. I wonder if future generations will look back and wonder, “what took them so long?”

ALWAYS TAKE THE DRUNK’S KEYS:

Milei’s dollarisation plan isn’t as crazy as it sounds (Ben Ramanauskas, 11/28/23, Cap X)

As the great economist Simon Kuznets once said, ‘There are four types of countries in the world: developed, underdeveloped, Japan, and Argentina’. The economy of Argentina continues to confound economists. Despite once being one of the wealthiest nations on Earth, it is now an economic basket case which experiences endless cycles of borrowing, money printing, high inflation, and default due to the failed policies of its politicians – and it is the ordinary people who see their livelihoods destroyed. There is nothing normal about Argentina’s economy.

Moreover, an independent central bank only works if it is actually independent and run by competent officials. This is hardly the case with Banco Central de la República Argentina. It has enabled successive governments in their profligacy by excessive money printing which has led to inflation of over 142%.

Dollarisation is perhaps the only thing which can help to put an end to Argentina’s rampant inflation. Milton Friedman wasn’t quite right when he said that inflation is always and everywhere a monetary phenomenon. However, he was spot on with Argentina. The central bank has printed so much money that the peso has been completely debased. Replacing it with the much more valuable US dollar would help to put an end to this and get inflation back under control.

This is not just economic theory – the experience of other countries show that this can work. El Salvador, Ecuador, and Panama which have all dollarised and Peru which has semi-dollarised all have the lowest inflation in the region, and the fully dollarised nations have seen their GDP per capita surpass that of Argentina in recent years.

SHOCK THERAPY:

The appeal of Argentina’s radical libertarian Javier Milei (HARRIET MARSDEN, 11/21/23, THE WEEK)

Despite the “fervent” support for Milei, his success owes more to the failures of his opponent, said Sam Meadows in The Spectator. Sergio Massa took the lead in October’s first poll, with Milei coming second, but the finance minister’s “inability” to tackle the nation’s economic woes over the past year “ultimately proved an electoral millstone he was unable to shrug off”. Inflation is the fourth highest in the world, and the country owes “gargantuan” debts to the IMF. […]

After spending most of a century “in thrall to one self-destructive economic ideology”, said the Financial Times’ newsletter “Trade Secrets”, Argentina has “decided to have a shot at another” after Milei takes office in December. “How a country manages to hop straight from Peronism to reactionary anarcho-capitalism without ever having a go at boring old liberal social democracy is a wonder to behold.”

TAKING THE DRUNK’S KEYS:

Milei’s Policy Challenges (luis pablo de la horra, 11/24/23, Law & Liberty)

Milei’s plan to tackle inflation hinges on the radical step of dismantling Argentina’s central bank (BCRA) and embracing the US dollar as the nation’s official currency. This proposition has sparked fervent debate, evident in the strong resistance it faces from politicians across the political spectrum and prominent academics. Nonetheless, there is a widespread acknowledgment that decisive action must be taken to confront the nation’s foremost economic challenge. Does dollarization represent the optimal strategy to set the nation on a path toward monetary stability?

There is no straightforward answer. Dollarization is not the first best choice, as it deprives central banks of the monetary policy tools they typically employ to address economic crises. For instance, in the face of deflationary pressures, a central bank would typically reduce the policy rates to stimulate economic activity. In a dollarized economy, the national central bank is either eliminated (as Milei proposes) or loses its authority over monetary policy, leaving policymakers with fewer resources to use in the event of a crisis.

Furthermore, the elimination of the BCRA implies the loss of its role as a lender of last resort to address liquidity issues within the banking sector, especially during financial crises. Likewise, the process of dollarization demands an ample supply of dollar reserves, and the BCRA has notably reduced its holdings over the past year. This reduction in reserves could potentially introduce complications in the dollarization process. The question then arises: are these challenges insurmountable?

Undoubtedly, the ideal stance for a country or a group of countries is to uphold monetary policy autonomy. However, the effectiveness of such a policy hinges on the existence of an independent central bank endowed with the capacity to promote price stability through judicious monetary measures. This stands in contrast to the BCRA, which has demonstrated a dismal track record in controlling inflation, as evidenced by the recurring inflationary episodes over the past decades.

A less radical course of action could involve retaining the peso while endowing the BCRA with independence from political interference, thereby curbing its tendency to monetize government debt. Regrettably, this option might be hindered by the BCRA’s lack of credibility and the historical inability of politicians over the past decades to effectively address and control inflation by granting independence to Argentina’s central bank.

NATIONALISM/SOCIALISM ISN’T WORKING:

Misunderstanding Milei (g. patrick lynch, 11/23/23, Law & Liberty)

It took almost 80 years. That’s how long Argentina’s economy and society have been in free fall. In some ways, it’s a testament to our greatest fears about democracy and self-government that no political leader had the political incentives and simple nerve to buck the status quo. Eighty years of relentless, grinding inflation and spiraling deficits, followed by defaults, currency devaluations, and restarts before November 19. But finally, the people of Argentina have rejected a failed status quo. Javier Milei publicly won a near landslide by Argentinian standards, and when one considers the probability of Peronist cheating at approximately 100%, the margin was likely much higher. Whether or not the alternative Argentinians have chosen will “fix the situation” is for now beside the point. They have exercised the one option they have—rejecting the incumbents for the promise of something different. That’s all that democracy promises.

[…]

Milei’s main, nay fundamental, policy proposals are all in the context of this backdrop. His firm commitment to abolishing Argentine central banking and cutting social spending is straight out of Ludwig von Mises and Milton Friedman, and it is completely appropriate given the circumstances. The only way that an “anarcho-capitalist” could be elected was in a situation of failed governance and welfare statism so dire that he could crack the door open slightly and introduce ideas unknown by the mainstream intelligentsia, let alone the average Argentine on the street. […]

There are no easy solutions here, which is part of the reason the media and its stale-minded intellectual influences have no solutions to offer. They are left with nothing but vague language, scare tactics, and labeling. What took 80 years to destroy will take decades, perhaps centuries to recreate. Well before he won the first round of voting back in September, Milei was asked what his model for Argentina was. He replied, Ireland. Ireland of course famously cut taxes and regulation, freeing its economy and spurring rapid economic growth. Argentina could do worse than Ireland, but anything different than its current path will be an improvement.

We know what works and what doesn’t. Do what works.

MORE:

Inflation Destroys Rotten Governments (HAROLD JAMES, 11/23/23, Project Syndicate)

In Argentina, the election of a radical self-styled anarcho-capitalist, Javier Milei, as president can be understood as the immediate consequence of the incumbent Peronist regime’s inability to deal with inflation, which has hit an annualized rate of 143%. Milei’s most important campaign promise was to restore price stability by abolishing the central bank and replacing the Argentine peso with the US dollar.

Ending monetary autonomy is obviously a bold and risky experiment that will severely limit government action. But that is exactly the point. Since the previous government tried to do too much, and manifestly failed, voters now feel as though anything would be better than more mismanagement. […]

[R]ussian inflation also surged in 2022, following the full-scale invasion of Ukraine – just as it had done in 2014 after the initial seizure of territory in Crimea and eastern Ukraine. Then, from April 2022, the inflation rate fell for a full year, and almost looked as though it would settle at a respectable 2.5%. But that stability turned out to be an illusion. Inflation returned this summer, following Wagner Group leader Yevgeny Prigozhin’s aborted putsch, and it now represents the greatest immediate risk to Russian President Vladimir Putin’s wartime regime.

Moscow’s city government is candid about this source of angst, and even Putin, who generally avoids acknowledging weaknesses, recently commented on inflation and its threat to Russian families. The Russian central bank has duly hiked its policy rate to 15% – almost three times higher than the US federal funds rate.

As Putin may well know, discontent over prices is often the first sign of an authoritarian regime’s loss of social support.

NOT HOW FASCISM WORKS:

Privatize State-Owned Media, Public Companies (Associated Press, 11/20/23)

Populist Javier Milei, a libertarian economist and self-described “anarcho-capitalist,” won a presidential runoff election Sunday with 55.7% of the vote. He said Monday that he would move quickly to privatize the country’s state-owned media outlets and look to do the same with other public companies.

“Everything that can be in the hands of the private sector will be in the hands of the private sector,” Milei told Bueno Aires station Radio Mitre.