Why Argentina’s Economy is Floundering
Javier Milei is failing in the least predictable way possible.
When Javier Milei took over as president of Argentina in 2023, there was no shortage of pundits speculating about which of his many flaws would doom his presidency. My guess was that his general pugnaciousness would leave him squabbling with opponents in congress permanently and unable to govern. Many others thought his rigid, doctrinaire libertarianism would push him to adopt unworkable policies, or that protests from trade unions would leave Argentina ungovernable.
Everyone got it wrong. Milei’s first year in office confounded critics: the guy proved more competent and politically astute than the doubters guessed, achieving more in the way of structural reform than most had thought possible. Sclerotic markets were liberalized across the board and fiscal discipline maintained, leading to an immediate fall in inflation. Even as spending cuts took a toll on Argentinians’ household finances, the eccentric new president remained remarkably popular. He fought with congress plenty, but he also managed to cobble together deals to get legislative approval for key reforms, privatizing state-owned enterprises, eliminating red tape, and overturning rent controls. Argentina, so long a byword for economic chaos, seemed to be on the mend.
It couldn’t last. Last month saw the country return to form, with a stock market freakout coming on the heels of an exchange rate crisis, and the president out pleading for support abroad. In some ways, it was the same old, same old Argentina. What’s bizarre, though, is that Milei seems to have gotten himself into this bind not via an excess of libertarianism, but by a dearth of it.
Milei had been elected on a wild, utopian promise to abolish the Argentine peso altogether. The chronically disaster-prone currency had proven Argentina’s undoing time and time again, and adopting the U.S. dollar seemed like a radical solution to the chronic devaluation problem. But once in power, Milei quickly realized that ditching the peso would not be so simple: finding enough dollars to swap out everyone’s peso holdings was beyond the government’s capabilities, so Milei started talking about dollarization the way old Soviet apparatchiks would talk about the withering away of the state and the arrival of communism: as a notional but far-off goal that might perhaps be enjoyed by some distant future generation.
For the here and now, Milei’s priority became just to ensure the peso would not blow up again, sending his whole agenda off track. But bucking up confidence in the peso has been a losing game for the last eight decades: investors have had ample opportunity to learn that, in Argentina, even sincere vows to reform the economy typically end up in tears.
Back when he was a TV pundit in the 2010s, Milei made a habit of explaining why messing with capital markets was generally a losing game. But a funny thing happened once he reached the Casa Rosada, where Argentinian presidents live. Unable to ditch the peso, Javier Milei found himself forced to defend it: pledging scarce dollar reserves to ensure it didn’t lose too much value too quickly.
The “exchange rate band” Milei adopted amounted to a government promise to prop up the peso’s value should it ever wobble beyond pre-established parameters. It’s a hazardous promise to make. If something happens to give investors pause—if it looks like the government might run out of the dollars it uses to prop up the currency, for example—they’ll head for the exits, selling their pesos en masse and sending the value of the currency plunging.
The dynamics here are unfamiliar to Americans, who’ve been spoiled by the unique privilege of issuing the world’s reserve currency, which exempts them from this kind of problem. Argentinians, though, have been trained by many turns on this merry-go-round to know exactly what to do when the peso starts to wobble: rush to dump it.
Javier Milei, of all people, ought to have known better than to gamble his government’s credibility on a currency promise he may not be able to keep. When his party lost provincial elections in Buenos Aires on September 7, investors got jittery and started dumping local stocks, then selling their pesos for dollars. The stock market plunged 13% in a couple of days, and the peso reached the limits of the exchange rate band Milei had vowed to defend.
Argentinians, who’d seen it all before, braced for impact.
Impact didn’t quite come, because in the Nth impossible twist in an impossible saga, Milei ended up requesting emergency support from his biggest ally: Donald Trump. This Thursday, U.S. Treasury Secretary Scott Bessent promised to backstop the peso with U.S. taxpayer dollars. In the end, the Argentinian president who’d vowed never to seek a bailout ended up getting bailed out by the American president who’d vowed to stop bailing out his deadbeat allies.
Where does this leave Javier Milei’s reform program? Badly battered. Increasingly perceived as a Libertarian in Name Only, Milei’s put himself in precisely the kind of position he’d spent his career denouncing previous presidents for getting into. Dependent on foreign largesse to defend an artificially inflated value for the peso, Milei’s reputation for economic competence is seriously bruised. And while Washington has been happy to break character and support a foreign ally in this one case, Milei now depends on the continued goodwill of a notoriously fickle ally for economic stability.
It’s easy to imagine how pundit Milei would have reacted a few years back if faced with President Milei’s bumbling. Market forces, he would have said, are far too powerful to be stymied by administrative fiat. Dependence on unpredictable allies, he would have railed, makes a mockery of Argentinian sovereignty. Half measures, he’d have concluded, only invite further speculative attacks.
In all this, pundit Milei would’ve been right. President Milei, alas, stopped listening.
Quico Toro is a contributing editor at Persuasion, Director of Climate Repair at the Anthropocene Institute, and writes the Substack One Percent Brighter.
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The problem for democracies fixing systemic problems that they become baked into the behavior of the population and their culture... this is the thing not given enough consideration. You simply cannot drag people to a new perspective. It is a generational project at best. And that is why a communist country like China, as long as it has a country like the US to loot from, can succeed in a long-range plan... it can wait for a generation or two while sucking on the lifeblood of the successful free and creative countries.
There is a lesson in this for democracies... never let the systemic problems grow and fester. Nip them in the bud immediately. Good luck with that.
Javier Milei reminds me of Carlos Menem who did everything right and still ended up in a ditch. Argentina is doomed because no country can operate without a banking system, and no rational person would ever deposit his money in an Argentine bank even if it is a branch of UBS. If it's in pesos you know it will be inflated away and if it's in dollars you now there will be a forced conversion into pesos at an unfavorable rate. Or your bank can go bust and default on its deposits. The Argentines deposit their money in the UBS branch in Montevideo or Miami.