Economic Reformation in Argentina

Towards the end of 2023, Argentina’s economic situation was so woeful that it opted for an economic reformation to halt the grievous conditions from worsening. The causes of the conditions are in no way unique to Argentina and could soon emerge elsewhere forcing more countries to face the same stark choices as Argentina. When they do, Argentina’s reformation should prove instructive.

For over a century, along with all countries in the Western World, Argentina followed a political path towards increased government interference in private life. The consequences throughout the West differed according to time, place, and degree of implementation. Yet the results were the same: in exchange for government-administered security, individuals gradually forfeited their freedoms to trade freely, enter contracts without compulsion, and retain the full fruits of their endeavors.

The negative repercussions of this chosen path in Argentina were so acute an electoral majority became convinced that enough was enough, their path had to change. Faced with the stark choice of continuing with statist policies or moving in a radically free market direction, not offered since Barry Goldwater’s campaign in the 1960 US election, they chose the latter and elected Javier Milei as their new President.

Though widely derided as populist and dangerous, Javier Milei and his party, La Libertad Avanza, made a compelling case for their selection by repudiating the previous direction on moral and practical grounds.

Claiming statism (Milei called it socialism) ran counter to individual liberty, La Libertad Avanza declared it immoral according to Enlightenment principles. Government intrusion into an individual’s economic activity robbed people of their freedom, they explained, and this was something no government had a mandate to do, morally.

For evidence to support their argument on practicality, they pointed to the manifest hyperinflation, widespread poverty, and rampant corruption threatening the country’s present and future social, economic, and political health.

Time and again, Milei claimed that government interference in economic activity was the root of the problem and during his campaign, he wielded a chainsaw to indicate his intentions. When interviewed, he calmly and forcefully made his case on both the moral and practical folly of the past in the manner of an economics lecturer, just as he had been doing as a TV personality for years.

Eight months into his term, President Milei is implementing his mission to move in the opposite direction to the path to poverty. In a race against time with economic growth as his only salvation, he is betting heavily on his free market policies before facing the electorate again.

To repeat an earlier point, Argentina’s woes differ from Western countries in degree only. Despite moving in the same statist direction as Argentina, few are as far along the path as one might think. But, following widespread interventionist actions post-March 2020, they are all too close to bankruptcy. With annual economic growth of 1% celebrated as a success, taxation thresholds at levels that any more will cause protests, and pension and welfare demands no longer sustainable, should a major crisis hit, most countries would face hyperinflation, a spike in poverty, and a rude political reckoning.

Take a financial crisis triggered by a bank failure. These are not uncommon and the cries of desperation from banks (picture a fouled soccer player writhing in feigned agony on the pitch) will initiate finance ministers and central bankers to do what worked in the past and expand the money supply through quantitative easing (QE). The US government, the present custodians of the world’s reserve currency, might get away with QE for a while, but others will not. Currencies such as the Sterling and the Euro, will devalue faster than the Dollar, causing inflation.

Banking crises soon move to the real economy via credit shortages, causing bankruptcies and lower commercial activity. Unemployment soon rises, creating more demand for government handouts. If governments respond by borrowing (selling bonds) they face more problems. Most, up to their eyeballs in debt, will face higher interest rates. As the UK’s short-term Prime Minister, Liz Truss, can attest, borrowing money is no longer an option for a government hoping to finance excess spending.

The UK is a prime example of a vulnerable country not far from Argentine-sized economic woes. It is massively in debt. Its economy has been broadly stagnant since the 2008 financial crisis despite high government spending. It has over 5.5 million people receiving disability allowances as income, countless others living on (unfunded) government pensions which rise with inflation, and still more owning pensions holding government debt whose value is derived from tax-funded interest payments. Widespread demands for the government to make good on its ‘social contract’ while dealing with a decent-sized crisis could prove tricky for His Majesty’s Government.

The options for all Western countries are limited. Tax rises and spending cuts are not politically palatable so money creation out of thin air might be the only response for an electorate unwilling to change. This is exactly what Argentina reverted to, hence the hyperinflation.

As economic circumstances in the West increasingly resemble Argentina, how will electorates respond? Will they realize the errors of their ways and copy Argentina’s path to redemption? Or will they opt for the Weimar solution? How long can the West continue along this same path? Most electorates see no need for radical change and are unwilling to give up the security side of the deal hoping it will all last indefinitely.

And maybe so-called mixed economies are stable. The direction towards ever-more intrusive government, reduced liberty, and chronic economic inertia does seem inexorable, but maybe Hayek was wrong when he predicted this would eventually lead to impoverishment regardless.

Well, stable or otherwise, crises happen. No Western economies are as resilient as before they incurred such debt and committed themselves to unsustainable entitlements. Economic growth is the answer all optimists tout, yet few economies, mature or developing, can realistically hope for the long-term expansion required to meet the growing bills without reform. Besides, when they do, governments fall over themselves to make new promises.

The world is not stable. Mixed economies suffer sharp economic downturns from time to time and the Argentine model, painful as it is, just might prove a decent alternative to what followed the Weimar approach. They should all watch closely and wish them good luck.

Should Argentina’s reformation produce growth long enough to entrench prosperity and restore resilience, others might see this path as an attractive alternative and adopt free market economics as a platform for reform. But to be successful, any reforming government needs to win the argument that socialism is both counter to Enlightenment values of freedom, and impractical. Only then will they gain the vital support of the people President Milei presently enjoys.