Is Argentina’s new president too divisive to fix a broken economy?

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Javier Milei’s libertarian policies may be too radical to pass, or to work.

Javier milei, Argentina’s newly elected president, rose to fame by bashing the country’s political class on television. Now the world’s first avowedly libertarian leader will probably demonstrate the truth of the notion that it is easier to criticise than to do. On November 19th, Mr Milei surpassed expectations and won 56% of the vote in the presidential run-off, compared with 44% for Sergio Massa, a stalwart of the Peronist movement, which has governed Argentina for 28 of the past 40 years. His coalition, Liberty Advances, won in 20 of Argentina’s 23 provinces, plus the city of Buenos Aires. In his victory speech, Mr Milei promised to make “drastic changes” to end Argentina’s century-long decline and return the country to being a “world power” within 35 years.

Yet, despite what at first glance appears to be a clear mandate, the firebrand Mr Milei will not find governing easy. His coalition was only created two years ago. It commands the support of none of Argentina’s powerful governors, and will have only 38 of 257 seats in the lower house of Congress, and seven of 72 seats in the Senate.

Javier milei, Argentina’s newly elected president, rose to fame by bashing the country’s political class on television. Now the world’s first avowedly libertarian leader will probably demonstrate the truth of the notion that it is easier to criticise than to do. On November 19th, Mr Milei surpassed expectations and won 56% of the vote in the presidential run-off, compared with 44% for Sergio Massa, a stalwart of the Peronist movement, which has governed Argentina for 28 of the past 40 years. His coalition, Liberty Advances, won in 20 of Argentina’s 23 provinces, plus the city of Buenos Aires. In his victory speech, Mr Milei promised to make “drastic changes” to end Argentina’s century-long decline and return the country to being a “world power” within 35 years.

Yet, despite what at first glance appears to be a clear mandate, the firebrand Mr Milei will not find governing easy. His coalition was only created two years ago. It commands the support of none of Argentina’s powerful governors, and will have only 38 of 257 seats in the lower house of Congress, and seven of 72 seats in the Senate.

This lack of political muscle, combined with the depth of Argentina’s malaise, will make it difficult for him to achieve his grand promises. Mr Milei was elected on a pledge to take a chainsaw to Argentina’s gargantuan state. He has vowed to cut public spending by up to 15 percentage points of gdp (from 38% now), to slash export taxes and regulations, and to privatise most state-owned enterprises. He wants to reduce the number of government ministries from 18 to eight and move towards a unified exchange rate. The country’s central bank, he says, is nothing but a machine for “crooked” politicians to print money, and thus must be shut down. In order to eliminate inflation, Mr Milei proposes swapping the peso for the United States dollar, the currency which most Argentines prefer to save in.

There is little doubt that much needs to be done to turn Argentina around. Under the current Peronist administration of Alberto Fernández, annual inflation has risen from 54% in December 2019 to 143% today. The share of poor people, defined as those who cannot afford both a basic bag of goods and an essential service like transport, has risen from 36% to 40%. Around 32 taxes have either been created or raised, and numerous new exchange rates have been invented, making investment fiendishly complex. Argentina owes the imf $43bn but the current government has ploughed through the central bank’s vaults; net foreign exchange reserves are over $10bn in the red.

Yet in order to slash public spending by the amount that he promises, Mr Milei will have to touch the most sensitive parts of Argentina’s economy. Much of the increase in spending has gone towards pensions, on which the state splurges around 12% of gdp—a similar share to far richer and greyer countries like Germany and Finland. Another 2.5% of gdp is spent every year on transport and utility subsidies. Reducing pensions and subsidies will hurt Argentina’s poor in the short term.

Javier milei, Argentina’s newly elected president, rose to fame by bashing the country’s political class on television. Now the world’s first avowedly libertarian leader will probably demonstrate the truth of the notion that it is easier to criticise than to do. On November 19th, Mr Milei surpassed expectations and won 56% of the vote in the presidential run-off, compared with 44% for Sergio Massa, a stalwart of the Peronist movement, which has governed Argentina for 28 of the past 40 years. His coalition, Liberty Advances, won in 20 of Argentina’s 23 provinces, plus the city of Buenos Aires. In his victory speech, Mr Milei promised to make “drastic changes” to end Argentina’s century-long decline and return the country to being a “world power” within 35 years.

Yet, despite what at first glance appears to be a clear mandate, the firebrand Mr Milei will not find governing easy. His coalition was only created two years ago. It commands the support of none of Argentina’s powerful governors, and will have only 38 of 257 seats in the lower house of Congress, and seven of 72 seats in the Senate.

This lack of political muscle, combined with the depth of Argentina’s malaise, will make it difficult for him to achieve his grand promises. Mr Milei was elected on a pledge to take a chainsaw to Argentina’s gargantuan state. He has vowed to cut public spending by up to 15 percentage points of gdp (from 38% now), to slash export taxes and regulations, and to privatise most state-owned enterprises. He wants to reduce the number of government ministries from 18 to eight and move towards a unified exchange rate. The country’s central bank, he says, is nothing but a machine for “crooked” politicians to print money, and thus must be shut down. In order to eliminate inflation, Mr Milei proposes swapping the peso for the United States dollar, the currency which most Argentines prefer to save in.

There is little doubt that much needs to be done to turn Argentina around. Under the current Peronist administration of Alberto Fernández, annual inflation has risen from 54% in December 2019 to 143% today. The share of poor people, defined as those who cannot afford both a basic bag of goods and an essential service like transport, has risen from 36% to 40%. Around 32 taxes have either been created or raised, and numerous new exchange rates have been invented, making investment fiendishly complex. Argentina owes the imf $43bn but the current government has ploughed through the central bank’s vaults; net foreign exchange reserves are over $10bn in the red.

Yet in order to slash public spending by the amount that he promises, Mr Milei will have to touch the most sensitive parts of Argentina’s economy. Much of the increase in spending has gone towards pensions, on which the state splurges around 12% of gdp—a similar share to far richer and greyer countries like Germany and Finland. Another 2.5% of gdp is spent every year on transport and utility subsidies. Reducing pensions and subsidies will hurt Argentina’s poor in the short term.

If Mr Milei insists on his ill-defined plan to dollarise the economy, that could also lead to higher inflation or perhaps even hyperinflation as Argentines dump their pesos in droves, thinks Alejandro Werner, a former director of the Western Hemisphere department at the IMF. He warns that Argentina does not have sufficient dollars to pay for all the pesos in circulation and held in banks, and that neither international creditors nor the IMF will lend Argentina greenbacks to implement a risky plan.

If the economic situation implodes, social unrest may follow. Only one of Argentina’s three non-Peronist presidents has been able to finish his mandate since the collapse of the military junta and the return of democracy in 1983. The other two had to leave office early as a result of street uprisings. “I am a militant,” says Lilian, from Somos Barrios de Pie, a Peronist social movement. “We fight twice as hard when we are in the opposition.”

Mr Milei received only 30% of the vote in the first round of the presidential election in October. To win, he had to ally himself with Mauricio Macri, a former centre-right president, and Patricia Bullrich, the presidential candidate from the main centre-right coalition, Together for Change (jxc by its Spanish acronym). It is far from clear that Mr Milei will have the backing of all of jxc’s 94 Congressmen and 21 Senators. Instead he will have to negotiate, a skill that he lacks. In the past, Mr Milei has called one of jxc’s main leaders a “leftist piece of shit” and accused Ms Bullrich of bombing kindergartens as a left-wing guerilla in the 1970s (there is no evidence she did so).

Detente will be made all the more difficult because of the bitterness of the election campaign. In the run-up to the vote, Mr Milei’s team repeatedly claimed—without evidence—that the incumbent party was planning a colossal fraud to steal the election. In the last presidential debate Mr Massa insinuated that Mr Milei was mentally unstable. Mr Milei’s running-mate, Victoria Villarruel, has long minimised the brutal crimes of the country’s dictatorship. On the night of the election, Donald Trump congratulated Mr Milei. “I am very proud of you,” he said in an online post. “You will turn your country around and truly Make Argentina Great Again!”

Much will come down to the professionalism of Mr Milei’s cabinet. “The main doubt about Milei is his team, and in particular whether the future central bank president and economy minister subscribe to the idea of dollarisation,” says Lucas Llach, an economist in Buenos Aires. Mr Milei himself often puts ideology before sound policy. He has called China “murderous” and Brazil’s president, Luiz Inácio Lula da Silva, a “communist”. He says he would meet neither Xi Jinping nor Lula in office—despite China and Brazil being Argentina’s main trading partners. So the immediate question is whether he stuffs his cabinet with technocrats from more established outfits like jxc, or with ideologues from his own party. If he chooses wrongly, he risks facing the same inglorious ending as other non-Peronist presidents before him.

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