No Room for Gradualism
Xavier Milei's Argentina at the Six-month Mark
The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.
- Vladimir Lenin
The above quote is one of the many venimous phrases floating on the Internet. This one is falsely ascribed to Lenin. Regardless of the veracity of its origin, Javier Milei would be the practical antidote to its rhetorical poison.
Javier Milei is a libertarian economist and politician who assumed office as President of Argentina in December 2023. Milei promised to implement free-market policies to tackle inflation and to reduce crippling government spending. I wrote a two-part series last fall about Milei here and here. It has been seven months since Milei took office, and I wanted to see if, and to what extent, he has succeeded in the first six months.
I know no one can reverse decades of economic malfeasance and incompetence in 6 months. There are no magic solutions. But I wanted to see if the Milei policies have made any progress. The jury is still out, but there are encouraging signs. Let's have a quick look.
Canadians should pay close attention to what is unfolding in Argentina. Argentina is an important cautionary tale of what Canada is not so slowly becoming under the Trudeau regime; policies such as those that Trudeau currently pursues have led Argentina to a calamitous state. Decades of government spending far beyond their means trying to buy popularity while inventing increasingly absurd government programs and temporary macroeconomic fixes to feign progress have led the economy to an unsustainable condition.
Argentina has long struggled with high inflation, a problem deeply rooted in its left-wing populist, high-spending policies (Peronismo). The country has faced persistent inflation for decades due to political and economic mismanagement. Argentinians elected Javier Milei last fall to set the country on a new financial path.
I am not able to provide a complete analysis of Milei’s policies. Still, I will look at two of his central promises to form an idea: the reduction of the size of government and the containment of inflation.
Reduce Government Spending
Javier Milei has implemented several measures to reduce the government's size. His libertarian policies focus on minimizing state intervention in the economy, promoting free markets, and emphasizing individual freedoms. These measures have received a mixed reception, and their effectiveness is still under scrutiny. Milei’s economic strategy includes several key initiatives. Foremost among these is a determined effort to cut down on the size of government and its expenditures.
With the reduction of the state in mind, a significant component of Milei's policy is the reduction of bureaucratic red tape. The size of the government cabinet went from 18 portfolios to 8, significantly reducing the size of the bureaucracy and the money distribution programs they engendered. Milei believes that excessive regulations stifle businesses and prevent economic growth. His deregulation efforts are intended to create a business-friendly environment, encouraging entrepreneurship and innovation. In tandem with deregulation, Milei supports the privatization of state-owned enterprises. This move is designed to increase efficiency and competitiveness within various sectors of the economy, reducing the burden on the government. So far, his privatizing efforts have been stalled by the legislative assembly. Additionally, to further cut government spending, Milei has halted all major infrastructure projects he deems unnecessary or overly costly.
Milei criticizes the welfare state, viewing it as a trap that perpetuates dependency and poverty. He aims to promote economic growth and enhance individual freedom by reducing public spending. For the first time in 12 years, Argentina's monthly state deficits disappeared in the first quarter of this year.
Another significant measure is the removal of trade barriers to attract foreign investment and stimulate economic growth. Import tariffs and export taxes have been sliced. Milei advocates for open trade, believing it benefits all parties and promotes economic development. One of Milei's more radical proposals is the abolition of Argentina's central bank and the adoption of the US dollar, which have not yet been adopted. Milei believes that Argentina can achieve greater monetary stability and restore confidence among investors and the public by pegging the economy to a stable currency.
Reducing corruption and cronyism is also a priority for Milei. He aims to establish a transparent and merit-based system to restore fiscal responsibility and integrity in government operations. These measures to eliminate free rider leeching reflect his overarching goal of creating a smaller, more efficient government that allows greater freedom for individual and business initiatives.
Inflation
Javier Milei has identified the containment of inflation as his number one priority. As noted above, Argentina has long struggled with high inflation due to the systematic vote-buying spending at the core of the Peronista ideology that has informed ruling elites on and off for a century.
As of November 2023, when Javier Milei was elected, the monthly inflation rate was nearly 26 percent, over 200 percent annually. That was the world’s highest inflation rate at the time. By February 2024, it had escalated to a yearly cumulative of 289%, underscoring the severity of Argentina’s economic challenges. Inflation is still quite high, surpassing Lebanon’s and Venezuela’s, but it has slowed: in April 2024, the month-on-month rate fell to 8.8%, the first time since October that it was not in double figures. This reduction indicates some initial impact of Milei’s policies.
In combatting this rampant inflation, Milei has pushed bold policies aiming at reducing the government's size and stabilizing the economy. In tandem with cutting spending, Milei has proposed substantial tax reductions.
Milei has lowered income tax rates for individuals and corporations. This measure is designed to increase disposable income for citizens and enhance profitability for businesses, thereby encouraging investment and consumer savings. Milei has eliminated or significantly reduced export taxes on agricultural and industrial products to boost Argentina's competitiveness in the global market. This move aims to increase the volume of exports, thereby improving the trade balance and stimulating economic growth. Milei has also targeted value-added taxes (VAT), particularly on essential goods and services. By reducing or abolishing VAT on basic necessities, he aims to lower the cost of living for Argentines and reduce the regressive impact of consumption taxes on lower-income households.
He believes that high taxes discourage investment and entrepreneurship, essential drivers of economic growth. By lowering taxes, he aims to enable individuals and businesses to retain more of their earnings, which can then be reinvested in the economy, thereby stimulating economic activity. This policy is designed to foster a more dynamic and robust economic environment.
Six months into his presidency, the effectiveness of Milei’s policies remains a topic of debate, and many challenges persist. Initial feedback from the business community has been positive, particularly regarding deregulation and tax cuts, which are steps in the right direction. However, the immediate economic conditions, such as high inflation, present substantial obstacles.
The effectiveness of Milei's measures is still being evaluated. While his policies aim to stimulate economic growth, the high inflation rate indicates ongoing economic challenges.
There is optimism within the business sector about the potential for a more favourable environment for entrepreneurship and investment. However, concerns about the social impact of reduced government intervention persist. Critics worry that cutting social programs and services might exacerbate poverty and inequality, especially given that a significant portion of Argentina's population lives below the poverty line.
Balancing economic health with the painful sacrifices of the masses remains one of the crucial challenges. Critics argue that Milei’s policies could increase social inequality and neglect essential social welfare programs. There are concerns about the potential negative impacts of reduced government intervention on vulnerable populations. The balancing act between fostering economic growth and ensuring social peace remains a critical challenge for Milei’s administration.
Concluding Thoughts
Milei's measures have received a polarized response. Among supporters, his policies resonate strongly. Advocates for free-market economics and reduced government intervention see Milei’s libertarian approach as a much-needed shift from the traditional interventionist policies that have characterized Argentina's economic history. His emphasis on individual freedom and economic liberalism has garnered significant backing from those disillusioned with past governments.
Internationally, Milei's unconventional style and radical economic views have drawn comparisons to other right-wing populist leaders. His proposals have been praised for their boldness and criticized for their potential risks.
Left-wing European observers, some of Milei’s strongest critics, have had to admit that things are going well and better than expected so far: Argentina managed to leave behind 12 years of monthly fiscal imbalances in the first fiscal quarter of 2024, recording budget surpluses. Official data indicates that, in the first quarter of this year, total government spending fell by 29.7% compared to the first quarter of 2023. This puts the country on track to meet its agreement with the International Monetary Fund (IMF), which sets an extremely ambitious goal of a fiscal surplus of 2% of GDP by the end of 2024
There remain challenges. Political opposition remains healthy, as it should be in a democratic setting. Milei has no legislative majority, so he has had to compromise. Last week, he scored his first legislative win: the Argentinian Senate passed his somewhat watered-down reform plan.
This quick analysis shows that there has been some progress, even if only a little. No one was expecting a full transformation in six months. The long-term effects of these policies remain to be seen as Argentina navigates its economic recovery The next few years will be crucial in determining whether these measures can stabilize Argentina’s economy and set it on a path to sustainable growth. The questions remain, however, about whether progress will continue and at what pace, and whether the changes will last long enough to make a difference in Argentina’s future and reverse the direction of the country’s economy in the long term.