Argentina's President Javier Milei is referred to by his critics as "el loco," or "the madman." His first week in office didn't disappoint his enemies or his supporters.
He rolled out a series of reforms, including a big devaluation of the nation's currency, and a shocking cut in the number of ministries. So far, it's playing well at home and abroad, but Milei's reforms have yet to take hold. When they do, it's expected that there will be a lot of pain for ordinary Argentinians.
"We're always worse off because our response has been to attack the consequences but not the problem," Economy Minister Luis Caputo said in a televised address. "What we've come to do is the opposite of what they always did, and that's solve the root problem."
"For a few months, we're going to be worse than before," Caputo said, adding that the government plans to double social welfare programs to help the poor.
The stroke of his pen ended 9 of the 18 ministries. Only the ministries of foreign affairs, economy, security, defense, human capital, justice, infrastructure, health, and internal affairs are still in business. According to Reason.com, "the ministries of transport, public works, science, culture, territorial development and habitat, tourism, livestock and agriculture, and women's affairs were either eliminated or recombined."
Perhaps his opponents didn't really believe that he'd go as far as he apparently is. That's to be expected. In truth, no one expected Milie to move so fast so soon.
Going forward, the government has announced a series of spending cuts to solve Argentina's "addiction to fiscal deficit." It plans to cut spending equivalent to 2.9 percent of its gross domestic product by reducing energy and transport subsidies and cutting security and pensions.
Other measures include reducing transfers to provincial governments, restoring personal income taxes, and increasing import taxes. With public employment accounting for 18 percent of the country's total employment, the administration also announced that it will carry out an extensive review of contracts and that contracts less than a year old will not be renewed.
Will these measures save Argentina or destroy it?
I'd like to think that the reforms will lead to a stronger economy and set the stage for sustainable growth over the long term. But the left is powerful in Argentina and has shown in the past a hatred of capitalism. They are not going to go lightly into the wings as Milei begins to implement his reforms.
“It is the first time in a long time that a dim light appears at the end of the tunnel,” Hernan Ladeuix, director of strategy at Buenos Aires-based Latin Securities, wrote in a note to clients. “For now, markets have reason to celebrate no matter how complex the process will be.”
But that light can be extinguished quickly if Milei fails to handle the brutal economic pain that's on the way.
The feel-good market vibes and social calm contrast with Milei and Economy Minister Luis Caputo’s dire warning that brutal economic pain is coming as they slash subsidies, devalue the peso and cut government outlays. JPMorgan Chase & Co. economists forecast annual inflation will catapult to 210% from 160% this month, followed by a sharp recession in 2024. That all but guarantees more poverty in a country where almost half the population is already destitute.
But things have been so bad for so long that Argentines are willing to tolerate this experiment.
Early indications of the shock's effect on the economy are positive. But Reason's Katarina Hall points out the worst is yet to come: "Milei's Argentina is facing rapidly rising inflation, a 40 percent poverty rate, a $43 billion trade deficit, and debt, including $45 billion owed to the IMF. To save the country's economy, Milei promised a tough pill to swallow. That is exactly what he has delivered in his first week as president of Argentina."
The last time this kind of medicine was administered was in Greece from 2010 to 2015. Greece saw "three rescue packages, totaling 320 billion euros, or $343 billion, with bitter austerity terms. Household incomes and pensions were slashed. The economy shrank by a quarter and hundreds of thousands of businesses collapsed as banks shuttered."
Eventually, Greek voters rebelled and the "rescue package" was jettisoned in favor of a more lenient series of reforms. Greece also had a huge public sector employment problem with one in three Greeks employed by the government or government-owned businesses.
Argentina isn't as bad as Greece in 2010. But will the Argentine people do what's necessary to save their economy?
