Javier Milei, a libertarian economist favored to win next month’s Argentine election, was interviewed by Tucker Carlson last week. After proclaiming his adherence to Milton Friedman and Friedrich von Hayek, Milei announced that there should be no public sector layoffs initially, instead allowing the economy to recover before laid-off bureaucrats had to seek work. Bad mistake! – the same one that doomed his center-right predecessor Mauricio Macri in 2015-19. As I shall explain, the correct approach to Argentina’s problems is very clear; it will however require truly god-like levels of fortitude to achieve it.
One important difference between Milei’s policies and those of Macri is that Milei intends to dollarize the Argentine economy, abolishing the Argentine peso and forcing the populace to transact entirely in U.S. dollars – more on this interesting policy later. Macri, on the other hand, relied primarily on a gigantic borrowing from the International Monetary Fund to allow the economy time to recover – after three years, the government simply ran out of money, as it had so many times previously. Macri’s policies did not work, primarily because he did not sufficiently cut Argentina’s public spending, grossly bloated by decades of Peronist excess. Milei’s dollarization will certainly force public spending to be cut because initially there will be an acute shortage of currency in the economy. That fact alone will make his reluctance to cut bureaucratic numbers impossible as well as perverse.
For those not familiar with Argentine politics and economics, I should go back to the halcyon period before 1929 when Argentina was the fifth richest economy in the world. Buenos Aires was said to be like Paris, but in the 1920s it was considerably richer than Paris, which had been badly battered by the economic effects of World War I. Argentine prosperity had been built up over the decades since 1860 by the “Oligarchy” — a succession of Presidents, elected on a limited property-based franchise who pursued “liberal” policies of small government, strong property rights and low taxes in the spirit of the British 19th century. The best of them were probably Domingo Sarmiento (President, 1868-74), a “liberal” in the 19th century European sense and Julio Roca (President, 1880-86, 1898-1904), a tough conservative by any standards.
Full democracy was introduced by the Lei Roque Saenz Pena of 1912, enfranchising the urban masses of recent Italian immigrants, who had brought with them the socialism of Europe. There was a brief late flowering of liberalism under Marcelo de Alvear (President, 1922-28) the “Argentine Coolidge” but he was succeeded by a radical and the beginnings of the Great Depression, which was met by a coup restoring the pre-1930 governments, but without full legitimacy.
From 1930 to 1943, a period since christened by the left the “Infamous Decade,” conservative policies continued to be followed but against the headwinds of the Great Depression (whose 65% decline in world trade was especially cruel to trade-dependent Argentina) popular discontent increased. World War II brought renewed prosperity (since Argentine exports were in great demand by both sides) but in 1943 a military coup brought to power generals who strongly favored the Axis. The Allied victories of 1944-45 in turn discredited the military leadership, who were succeeded by the populist/socialist (but still strongly Axis-influenced) Colonel Juan Peron (President, 1946-55, 1973-74) with his radio star wife Eva “Evita” (1919-52).
In terms of foreign exchange, Argentina was even richer in 1945 than it had been in 1929, but Peron and his wife soon managed to change that, with nationalizations, huge projects such as developing a local auto industry, a nuclear fusion project (alas, unsuccessful) and a gigantic social giveaway program, from the Eva Peron Foundation. By 1953, the economy had descended into hyperinflation and penury. Most of Peron’s social programs remained in place after his removal in 1955, as did the inefficient state industries, despite several military dictatorships, with the result that annual inflation averaged 189.9% over the 79 years from 1944 to 2023 and the country’s living standards are now a fraction of their level in the late 1940s.
Even the better Argentine governments since Peron, like that of Carlos Menem (President, 1989-99) solved temporarily some of Argentina’s problems – indeed, Menem was notably successful on inflation – but at the cost of running up foreign debt to a level that caused one of Argentina’s most unpleasant bankruptcies in 2002, only three years after he left. Only one Argentine government briefly pursued truly sound policies; the military dictatorship of Jorge Videla (President, 1976-81) and his Minister of the Economy Jose Martinez de Hoz, christened the “Wizard de Hoz” by the international financial community, and honored as Euromoney’s Finance Minister of the Year in 1979. They freed prices completely, freed the foreign exchange market, cut tariffs and above all cut back the ultra-bloated Argentine public sector. Alas, Videla was not given a second term; his successor Roberto Viola was a conventional Peronist, wrecking Videla’s achievements and the next President Leopoldo Galtieri invaded the Falkland Islands.
To succeed, Milei will need to revert as far as possible to the economic policies of the pre-1930 Oligarchy, in circumstances very similar to those in which Videla came to power in 1976. Given the circumstances, there can be no delay in cutting back the public sector, nor can Milei “rely on the Argentine judicial system and the Constitution” as he told Tucker Carlson. The Argentine judicial system, full of judges appointed during the last 20 years of socialism, is hopelessly unreliable at best, and past history has shown that violent resistance to Milei’s policies is all too likely.
In these circumstances, democratically elected though he will be, Milei will need the help of the Army to maintain order. The Army top brass will of course be useless, indeed hostile, having been appointed by the socialists, but at the colonel level there must be Army officers generally supportive to Milei and eager to restore Argentina’s economy and society. Milei must find such people, promote them to the top strategic posts and deploy the Army to maintain order, hopefully without the Videla regime’s violations of human rights (which have of course been grossly exaggerated in retrospect by its opponents). Only then will he have a chance to implement his necessary but painful policies.
His dollarization in particular offers the best prospect of achieving a better fate than Macri or indeed Videla/Martinez de Hoz, the later years of whose regime was marked by catastrophic capital flight. With dollarization, the dollar savings of the Argentine people will, once removed from mattresses and Swiss bank accounts, be the currency for all transactions in Argentina. There will be plenty of such currency; it is currently estimated that the hidden dollar savings of the Argentine public total $50 billion, whereas the total peso money supply, at the free market “blue” exchange rate, totals a mere $9 billion.
As shown by the examples of El Salvador and Ecuador, which dollarized in 2001 and 2000 respectively, dollarization will have several effects, mostly salutary, on the domestic economy and the government sector. Not only will the government lose the seigniorage profits from printing its own currency, it will also lose the credit assurance gained from its ability to do so. Shorn of that assurance, most governments subject to elections and waves of populism are very poor credits indeed. In El Salvador, for example, the government is only able to borrow medium-term at rates approaching 20%, whereas ordinary middle-class Salvadorean citizens can easily obtain home mortgages at around 6%.
Given Argentina’s gigantic foreign debt and the costs of servicing it, there will be very little room for government expenditure beyond debt service, as the government will be forced to run a budget surplus through its inability to raise new debt at a reasonable cost. Thus, the need for immediate major cutbacks in the bureaucracy. Conversely, with free market policies, Argentina should quickly run a massive balance of payments surplus, as it did in 1977-80, especially as prices for both its farm products and its minerals are currently high (the country has large unexploited reserves of lithium, for example). Milei’s difficulty will be to overcome the inevitable initial pains and show progress sufficient to secure re-election within the period of only four years before the next election, due in late 2027. Extreme policies, rapidly and forcefully implemented, are the only way in which this might be achieved, and even then it is chancy.
The probabilities must be against Milei succeeding, even with the help of the Army – he will need both the policies and the fortitude of the great Julio Roca to do so. Even so, for the sake of the prosperous future that could be available to all Argentines with decent policies, one must wish him all possible luck.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)