Latin America

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.

“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.

TRUMPISM HAS NEVER WORKED:

Javier Milei and the Promise of a New Argentina (ALEJANDRO A. CHAFUEN, DECEMBER 15, 2023, Religion & Liberty)

Despite its name, derived from Argentum (silver), Argentina did not get rich owing to its mineral wealth. The country has little or no silver. Argentina began its road to prosperity only after General Justo José de Urquiza (1801–1870) defeated Juan Manuel de Rosas (1793–1877), the powerful governor of Buenos Aires, then and now the wealthiest province in the country, with the aid of Brazil and Uruguay. Urquiza became president in 1854 and adopted the Constitution inspired by the work of Juan Bautista Alberdi (1810–1884), a legal scholar and political theorist well-versed in economics. The 1853 Constitution created the legal framework that propelled Argentina’s economy.

Argentina endured ups and downs, but from the mid-19th century until the 1930s and ’40s, it experienced high economic growth. In fact, it overcame the Great Depression of 1930 faster than most other countries. However, the financial crisis of the 1930s created incentives for some of the world’s leading intellectual centers to explore new economic policies. Economists at the leading universities around the globe started devising various interventionist and statist schemes. The economic policies of the New Deal, Keynesianism, and fascist corporatism had a worldwide impact. Unfortunately, Argentina copied many of them. Its labor law was a copy of Mussolini’s Carta di Lavoro, for example. Although there have been periods of liberal economic policies during the past eight decades, the trend has continued toward increased interventionism, and the result has been dire poverty. Today, estimates from the Argentine Catholic University Center report that almost 45% of the population lives in poverty.

WITH THE BARK ON:

Argentina devalues currency by 50% in ‘shock’ measure against hyperinflation (france 24, 12/13/23)

The International Monetary Fund (IMF) — to which Argentina owes $44 billion — welcomed the measures.

“These bold initial actions aim to significantly improve public finances in a manner that protects the most vulnerable in society and strengthen the foreign exchange regime,” the IMF said in a statement.

Caputo announced the exchange rate would slide to 800 pesos to the dollar, from about 391 in recent days, a devaluation of a little over 50 percent

The Argentine government has for years strictly controlled the exchange rate of the peso to the dollar, which analysts have derided as an expensive fiction.

There was no immediate mention of lifting the controls which have birthed a multitude of dollar exchanges and a thriving black-market where the dollar has sold for up to three times the official rate at times.

“The devaluation was much, much more than I think most people had expected,” said Nicolas Saldias, a senior analyst with the Economist Intelligence Unit, adding this would have “significant impacts on inflation.”

IMPORTING DISCIPLINE:

Lessons from Argentina’s Dollarization Debate: The Challenge of the Commitment Device (Nicolás Cachanosky, December 11, 2023, AIER)

Unlike a fixed peg or a currency board, a government cannot easily abandon dollarization.

Argentina has frequently abandoned fixed pegs. It has also voided peso convertibility to the US dollar. These options are unavailable under dollarization. De-dollarizing would require the government to introduce an entirely new currency that the public does not want. Consider the challenge of currency in circulation. Would the government go into individual houses and compel owners to exchange their US dollars for a new currency they reject? A dictatorship might pull off such a move. But in a democracy such a move would likely see incumbents ousted.

The experience of Ecuador illustrates the point. Rafael Correa, who was president from 2007 – 2017, was an outspoken opponent of dollarization. But he never openly announced plans to de-dollarize Ecuador. His attempt to introduce the dinero electrónico was a total failure. As popular as Correa was, he couldn’t surpass the popularity of the US dollar.

As a monetary regime, dollarization is an institution independent of local politics. That would make a big difference in Argentina, where the average terms of the Ministry of Economics and the Central Bank president are only 1.4 and 1.5 years, respectively. Argentina cannot offer a predictable fiscal and monetary policy with key officials turning over so frequently. Since dollarization is difficult and politically costly to reverse, it establishes credibility in countries where other options are not viable.

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.