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Milei’s Year
Argentina: The Thorny Path of a Victim of Interventionism to Freedom and the Market. Lessons for Ukraine and Other Countries of the World
9 December, 2024
World
Reforms
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The world's first libertarian president, the first economist president, and a supporter of the Austrian School of Economics (AES), Javier Milley won the second round of the presidential election in Argentina exactly a year ago. On December 10, 2023, he was sworn in and officially assumed the office of president of the country. Since then, all the world's attention has been focused on reforms in Argentina and the policies of the president, who is in a difficult political environment, without his own party majority in parliament.
To mark the first anniversary of his presidency, we present an analysis of the situation in the Argentine economy in a historical context. A look at the country from the middle of the 20th century, an analysis of key economic events, typical decisions and actions of the Government, and consequences - all this will allow us to adequately assess the justification of the decisions and the overall activities of President J. Milei in his first presidential year.
Main results of the first year of Javier Milei's presidency
Milei took over the country in a very difficult situation. Argentina had wasted more than 100 years of its development. In 1912, Argentina's GDP per capita was 72% of that of the United States, in 2023 it was only 17%. In 1895, Argentina was the world leader in GDP per capita. It was twice as rich as the main European countries. In the last years of the 19th century, at the beginning of the 20th century, Argentina was among the eight richest countries in the world. To a large extent, this success was due to the liberal Constitution adopted in 1983-60 (1853-1860). It was similar to the US constitution.
Before considering the historical context, let us briefly present the results of the first year of the presidency of H. Milei through the prism of specific decisions and macroeconomic data.
However, over the past 100 years, Argentina has gone down the path of self-destruction, gradually abandoning its former liberal philosophy. Indeed, the principles of freedom in all spheres: political, legal, economic, social, which contributed to its growth, were destroyed one by one, until collectivism, authoritarianism, restrictions on freedom, and the demagogic sense of "solidarity" and "equality" were perceived as unshakable dogmas that led to the country's population being equally poor and oppressed.Share
Milei Reform Watch 2023-2027 The reforms Proposed in Argentina by President Milei. Historical background, Current Situation and Decree 70/23
Already on the 17th of December, 2023 J. Milei issued an order, Executive Order № 70/23 "Foundations for the Reconstruction of the Argentine Economy" that consisted of 366 clauses.
L"The purpose of the order is clear. It is aimed at quickly starting the transformation of an economic structure that has been distorted over the past few decades and marked by a significant increase in state intervention, bureaucratic bloat, and exponential growth in government spending. All of this has led to the current situation in which the country is on the verge of sliding into a hyperinflationary spiral, practically into default, with 50% of the population in poverty and paralyzed production."L
At the end of December 2023, it was sent to the National Congress for ratification under the title “Law of Foundations and Starting Points for the Freedom of Argentinians”. It contained 660 clauses aimed at:
- deregulation;
- reforming public administration bodies (debureaucratization);
- reducing the size and functionality of the State;
- reforming the labor market;
- liberalizing foreign trade;
- amending laws to ensure freedom of contact;
- reforming the public health system.
After intense negotiations, in late July 2024, the Senate (the upper house of Argentina's parliament) approved the Ley de Bases reform package, which includes measures to deregulate the economy, privatize, reduce government expenditures, particularly on education, and liberalize the labor market. Of the initial bill of ~700 items, about 300 remain.
J. Milei proposed to the parliament to sign the agreement “Pact of May 25”, based on 10 principles. These are a balanced budget that is not subject to negotiation, tax reform to stimulate trade, inviolability of private property, reduction of state expenditures to ~25% of GDP, labor market reform, pension reform, structural political reform, liberalization of foreign trade, revision of the agreement on the distribution of federal tax revenues. Trade unions met the reform of labor legislation with bayonets. In their opinion, it is beneficial to employers, not employees.
J. Milei promised to cut government spending — and he did. He reduced the government by half, eliminated 50,000 public sector jobs, blocked new contracts for public works and procurement, and eliminated subsidies for transportation and fuel. He managed to liberalize the labor market, reduce expenditures on education, and eliminate tax breaks and preferences for foreign investment. Despite the fact that about 60% of the Argentine population benefits from various forms of state aid and subsidies, the level of trust in him remains high.
Preliminary results of the first year of Javier Milei's presidency in macroeconomic indicators.
Source: IMF database, October 2024.
In 2025, the consumer price index (from December to December) will be 45%, in 2026 - 25%, and then there will be a reduction to single digits within two years.
State of Argentina's public finances
- In 2023, general government revenues amounted to 32.5% of GDP (approx. $210 billion) with expenditures of 37.8% of GDP (approx. $244 billion). The budget deficit was 5.4% of GDP (approx. $35 billion).
- In 2024, revenues are expected to be 31.9% of GDP (approx. $193 billion) with expenditures of 32.0% of GDP (approx. $193.4 billion). Budget surplus. In 2023, it amounted to 155% of GDP, in 2024 it is projected at 91.5% of GDP, with a decrease to 60% of GDP by 2027 (IMF forecast).
J. Milei managed to balance the state budget in his first year, and he is undoubtedly moving in the right direction. Eliminating a budget deficit equivalent to $35 billion in the face of high inflation, the absence of his political party in both houses of parliament, the selfish interests of the provinces, and the high expectations of the population for support is an absolute positive. After 2025, the IMF predicts a stable budget surplus for state administration bodies, which will allow for a significant reduction in public debt. In 2023, it amounted to 155% of GDP, and in 2024 it is projected at 91.5% of GDP, with a decrease to 60% of GDP by 2027.
Who had been destroying the economy of Argentina and how. Historical discourse from the mid-20th century
Argentina is a federation consisting of 23 provinces and the autonomous federal district of Buenos Aires, with significant differences between provinces. Responsibility for many important expenditures lies with the provinces (basic health care, education), and tax revenues are concentrated mainly at the federal center. The center redistributes money back to the provinces through an automatic revenue-sharing scheme (coparticipación). Despite the declared automatism, there is considerable discretion on the part of the federal authorities.
«One of the main explanations for Argentina’s disappointing macroeconomic performance is its tendency to ‘live beyond its means,’ a practice that is an endogenous driver of its boom-bust cycles. The country’s social demands and political pressures lead to an equilibrium characterized by excessive aggregate expenditures… They are financed by the savings of the rest of the world, reflected in the current account deficit», the World Bank states.Share
Argentina: escaping crises, sustaining growth, sharing prosperity The World Bank. 2018
From the mid-1880s to 1915, Argentina developed rapidly through the use of fertile land and the sale of agricultural products. Landowners and exporters of agricultural products became very wealthy people, so in the early 20th century Argentina became a Mecca for European immigrants, who by 1914 constituted a third of the population of Argentina, most of whom had no experience of physical work in agriculture.
The history of the degradation of the Argentina’s economy is the history, on the one hand, of the economy nationalization by the Argentina’s political, economic, and intellectual elites, who were fascinated by Marxism, socialism, and state interventionism, and on the other hand, of the theoretical, consulting, and financial support of Argentina's economic policy by international financial organizations, represented by the IMF and the World Bank. Since the 1950s, they have consistently been in a state of dialogue with the Argentina authorities on the content of economic policy. By and large, Argentina has become a victim of the practical application of the postulates of development economics, which are a set of theoretical models and tools based on the theoretical works of John Keynes, the first wave of institutionalists, and Marxism. This entire theoretical framework can be qualified as the theory of the State of general interventionism. Let us consider the most characteristic fragments of the economic history of Argentina since the 1950s. They convincingly demonstrate the effectiveness and quality of the economic policy of Argentina’s Government and the IMF/World Bank.
The origins of monetary state interventionism date back to the 19th century. After the monetary orgy of the first 80 years of independence, on November 5, 1881, the parliament adopted the “Monetary Law”, on the basis of which bimetallism (gold and silver standard) was introduced. Monetary stabilization was the cause of the rapid economic growth and development of the country. In the 1880s, a real boom was observed, primarily due to significant foreign borrowing. During these years, Argentina absorbed 11% of all new shares on the London Stock Exchange. For comparison, North America, with a population 20 times as large as Argentina’s population, accepted 30% of the issue of new securities.
Economic historians estimate that the current account deficit was 20% of GDP between 1884 and 1889. In 1890, this figure fell to zero due to the crisis. “During the boom, the federal government increased the level of public debt in relation to real output from 64% in 1884 to 101% in 1890.” The monetary experiment, which the state abused, failed.
L"Firstly, American bonds could be redeemed for gold, while in Argentina the gold standard was suspended. Secondly, in the United States, the corresponding government bonds came from active secondary markets, while in Argentina the corresponding bonds were created specifically to back new bond issues."L
Straining at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880-1935 Gerardo della Paolera & Alan M. Taylor. 2001 University of Chicago Press
We have before us a typical example of a Ponzi Scheme (financial pyramid) made by a government and having a large amount of borrowed funds. It is very similar to John Law's famous manipulations in the French economy, which led to the “Mississippi Bubble” and the “South Seas" in the early 18th century. Foreign loans of Argentine banks were liabilities in gold, and many domestic loans were against assets in pesos. Such a currency mismatch created the prerequisites for devaluation. There was also a mismatch in the terms of repayment of loans. Some domestic loans were long-term, for investment projects, and their repayment terms were much longer than those of foreign bonds.
"From a macroeconomic perspective, the new scheme operated as a 'unilateral gold standard': the issuance of 39 million paper pesos was backed by an inflow of gold of 33 million gold pesos."
This historical example shows that the political, economic and intellectual elites of Argentina made gross mistakes in monetary and fiscal policy as early as the 19th century. The same pattern of behavior was reproduced many times during the 20th and early 21st centuries. It is unclear why international organizations, over decades of cooperation, failed to form scientific knowledge in Argentina's elites in the field of theories of money and credit, business cycles and interventionism.
Let us consider the main provisions of the World Bank report “Recent Economic Developments in Argentina”, 1959. At that time it was a classified report for internal use. It convincingly shows how the authorities in Argentina ignored the laws of money and credit, relying on the state as the main architect, stakeholder, and financier of economic growth and development. Let us turn to the facts.
Argentina - Recent economic developments (English) Western hemisphere (South America) series ; no. WH 82 Washington, D.C.: World Bank Group. February 1959.
The post-war state of Argentina was as follows: "Despite its rich agricultural resources, such as grain and livestock, Argentina's economic growth slowed considerably in the postwar period. While GDP grew by just over 40 percent between 1945 and 1957, the population increased by 33 percent, so that per capita output in 1957 was only slightly higher than in 1945... Argentina's poor economic performance over the past twelve years can be explained primarily by the stagnation, if not the deterioration, of its agriculture, largely as a result of poor government policies."
- Argentina's gross national income in 1957 in constant 1950 dollars was ~$400 per capita.
- The average annual volume of exports of goods in 1955-1957 was ~$995 million, imports - $1077 million.
- The external public debt at the end of 1956 was $686 million, at the end of 1958 ~$1300 million: an increase of ~$614 million over 2 years.
- The money supply in 1953 was 37.7 billion pesos, at the end of 1957 it was 67.6 billion: an increase of 79.3% over four years.
The authorities initially pumped the economy with money "wrappers" and provoked a crisis, which is reflected in the World Bank report:
L"In the second half of 1958, Argentina's economic situation deteriorated sharply. The government, facing the threat of a virtual depletion of foreign exchange reserves, is now taking bold steps to stop inflation and bring the balance of payments under control. The stabilization program is a comprehensive and logical set of anti-inflationary and currency measures. It consists of reducing the budget deficit, decreasing the volume of credit to the private sector, limiting wage growth, and transitioning to a new, single and more realistic exchange rate."L
Argentina: escaping crises, sustaining growth, sharing prosperity The World Bank. 2018
Inflation increased significantly in the second half of the 1950s, exceeding 30% in 1958. According to the World Bank, this was due to sharp wage increases and public deficits. For example, in 1958, the newly elected government of President Arturo Frondizi issued an order to raise wages for industrial workers to a level that was 60% higher than the level at the beginning of 1956. The unions, which put pressure on the new president, contributed to such a sharp increase in salaries. In addition, civil servants' salaries increased by ~40%. The government also decided to increase pensions, which led to the "eating" of the pension fund surplus. Its resources, amounting to a third of tax revenues, were used to finance general government expenditures. Ultimately, the imbalance of the state budget led to an increase in government expenditures due to the emission of the central bank. In the period 1954-1958, the average annual growth rate of the money supply exceeded 12%. However, the World Bank does not establish a direct interrelation between the amount of money in circulation, the money emission of the central bank, and inflation.
From 1945 to 2018, Argentina was “notorious” for its double-digit inflation for 61 consecutive years, or 83.5% of the time. It went through periods of hyperinflation, and only in 1994-2001 was there a period of low inflation, when the country had a currency board regime. Overall, the financial sector in Argentina is relatively poorly developed. The five largest banks account for more than 50% of all loans. At the same time, only half of the population (data for the second half of the 2010s) has access to bank accounts. And only 3% of micro, small and medium-sized businesses have adequate access to financial products. Households invest mainly in residential real estate, but the volume of the housing lending market in the second half of the 2010s did not exceed one percent of GDP.
We see a typical situation for any country whose government is engaged in counterfeiting money, pursues a soft monetary policy, manually sets the exchange rate of the national currency, does not control budget expenditures and resorts to foreign trade protectionism, and also practises social populism. When you cannot make both ends meet, when raising taxes is no longer possible due to the threat of an even greater "shadow", then the time has come for a state stabilization plan.
Fiscal and monetary policy measures, including exchange rate policy, were accompanied by decisions to overcome the electricity and fuel deficits that arose as a result of the “expropriation of foreign energy companies.” Active state interventionism led to an increase in public debt. The government actively borrowed money to implement state oil projects and develop railways. By 1960, public debt service was equivalent to 23% of annual exports. The World Bank stated:
L"If the economic stabilization program is successful, increased exports and import substitution will allow the country to service a reasonable amount of new debt, gradually reducing its dependence on urgent external financing."L
The success or failure of the program depended on the government's ability to contain wage growth. If it failed, the entire program would be undermined. The World Bank believed the Argentine authorities on the grounds that they had demonstrated determination in adopting the stabilization program and on the grounds that the provision of external financing was conditional on the effectiveness of the program implementation.
The peso exchange rate policy in the 1950s was full of multiple rates for exporters. Mandatory payments were applied to individual export items, while the lists of goods and rates were constantly changing. Access to foreign currency for the purchase of imports was severely limited. Manual management of the peso exchange rate led to an increase in the gap between the market and official rates. The government could not help but resort to devaluation. When adopting the economic recovery program, the World Bank pointed to such obstacles as the shortage of electricity for development, high dependence on oil imports (more than 60% of domestic consumption was provided by imports, which was reflected in the payment balance). The state railways were also of poor quality.
L"Most importantly, many productive sectors of agriculture and industry lacked incentives to expand or even sustain production. The country could not increase exports due to the containment of the growth of imports of raw materials, fuel, and capital goods."L
State interventionism permeated all areas of Argentina's economic activity, which was the cause of this crisis.
The state dominated the energy sector after the nationalization of the assets of CADE (Sofina) and ANSEC (American & Foreign Power). It also had a monopoly on oil production, which included the Argentine subsidiaries ESSO and SHELL, but these companies had concessions for oil deposits that were practically exhausted. Private companies could not obtain the right to engage in oil production. The Argentine authorities allowed the French consortium CIAVE, Sofremines, into the coal business, while this segment of the economy was also under full state control.
The reform program included the abandonment of manual exchange rate controls, the abolition of subsidies to producers and consumers, and the elimination of price controls except for ten primary commodities. Strict restrictions on lending were imposed on the public and private sectors, a ban on government financing through bank loans, and measures of direct control over trade and financial flows, export quotas, and other forms of control were also eliminated. Importers were allowed to import from any available sources, although this decision was particularly opposed by members of the Paris Club of creditors. At the same time, the procedure for coordinating with the central bank the procedure for paying for imports through supplier credits was preserved. Argentina's main commodity items were agricultural products, crop and livestock products. Producers worked under strict state regulation, which was sometimes relaxed, as, for example, in 1955 with the permission of the provisional government.
L"Although a more favorable exchange rate was granted for agricultural exports, domestic costs made the increase insufficient to create real incentives for producers. Other causes were a lack of agricultural machinery, an unsatisfactory land tenure system, and a lack of property guarantees."L
14 crises, 22 years in recession. Argentina in 1950-2016
In 2018, the World Bank published the report “Argentina: escaping crises, sustaining growth, sharing prosperity.” In it, the World Bank examines various measures and economic policy instruments that Argentina needs to break out of the vicious cycle of 14 economic crises since 1950. The emphasis is on macroeconomic policies, which should lay the foundation for medium-term economic growth and wealth distribution through job creation and productivity gains.
Argentina: escaping crises, sustaining growth, sharing prosperity The World Bank. 2018
The World Bank reiterates one of the basic principles of economic hygiene: “Achieving macroeconomic stabilization is a prerequisite for creating a healthy and dynamic economy.” In addition, the World Bank (WB) proposes measures to improve internal competition, develop the capital market, and the education system. It is suggested to Argentines to look at the structural reforms in Australia in the 1980s and Sweden in the 1990s.
It is very important to analyze, understand, and learn lessons from why the World Bank, which has been working with Argentina since the 1950s, has essentially become not the solution to this country's problems, but an accomplice in the processes of bringing it to 14 crises, degrading this country from the status of one of the richest to the status of a country with a whole bunch of deep, chronic problems, weak state institutions, an acute deficit of economic freedom, and macroeconomic imbalances.
Argentina is rich in natural resources, in particular, fertile land. The most modern technologies, machines, and equipment are used in the production of beef and soybeans. The country is rich in energy resources and solar energy potential. It has the world's second-largest natural gas reserves and the world's fourth-largest offshore oil reserves. Argentina has a hi-tech sector, industrial production, and Argentines traditionally value education. In the second half of the 2010s, four of the six most successful companies (capitalization over one billion dollars) in Latin America were Argentine. Listing these advantages raises obvious parallels with Ukraine. What is more, in Ukraine, the situation is much better in a number of parameters. Economic history teaches that any, even the richest country (energy resources, fertile land, access to the sea, human capital) can be destroyed by pseudoscientific economic policies, the institutional poison of the Great Power and Marxism.
Despite its comparative advantages, the Argentine government's economic policies constrained growth and development. Average annual long-term economic growth was 2.7%, half the rate of the region's fast-growing economies (3.7%) and less than a third of the growth rate of developing Asia. In comparison, the OECD growth rate was 3.2% of GDP. This led to a steadily widening income gap between developed countries and Argentina.
In the early 20th century, Argentina's GDP per capita was the same as that of the rich, developed countries of the time. By the end of the 2010s, it had fallen to 38%. Between 1950 and 2016, Argentina experienced 14 recessions, with an average duration of 1.6 years. That is, since 1950, Argentina has been in recession for about a third of the time, worse only than the Democratic Republic of Congo.
Argentina is characterized by ongoing conflicts between the federal center and provincial governments. The standard of living in some provinces is very high, while others are heavily dependent on support from the Center. In the province of CABA, for example, GDP per capita in the mid-2010s was $28,358 (higher than in Spain), while in the poorest province of the country, Formosa, it was only $3,704 per capita. The adoption of any reform plan requires the support of the provinces, which "pump out" funds from the federal budget for themselves, that is, there is an ongoing tug-of-war. There are obvious analogies with the decision-making system in Ukraine. Yes, Ukraine is not a federation. There is no bicameral parliament here, but there is a clinching in the decision-making system - between the Cabinet of Ministers and the Office of the President, between the Verkhovna Rada and the executive branch, between industry lobbyists (energy, agriculture) and small businesses.
Over 80% of firms in Argentina are micro and small businesses, but the majority of formal employment is in large companies. The Argentine economy is characterized by a high concentration of manufacturing (Buenos Aires Province, the Autonomous City of Buenos Aires, Santa Fe, Cordoba, and Mendoza. After 1975, Argentina abandoned its failed import substitution program and pursued more market-based solutions, but these were highly controversial. In the period 1950-1974, the probability of recession was about the same as in other developing countries (21%), but over the period 1975-2001 this probability increased to 52%.
There is no period in Argentina's history that could be called a time of systemic market reforms.Share
Argentina's development model, according to the World Bank, requires opening up the economy and creating conditions for private sector development. International experts once again speak about the importance of macroeconomic stability, fiscal and monetary sustainability. However, they remain silent about the fact that there can be no long-term economic growth unless the model of state stimulation of demand and increased government spending is abandoned. Here are the problems that require solutions:
L"The problem of low investment levels, underdeveloped capital markets, and large physical investment needs must be tackled. Lowering trade barriers is only part of the story. The economy must be opened up to domestic and international competition, and the highly concentrated market power held by a few firms must be reduced."L
If we insert "Ukraine" in the text instead of "Argentina", then the recommendation will be quite appropriate and accurate. It is important to remember that it is the World Bank and the IMF, as well as numerous international development agencies, that have advised the Argentine government for the past 70 years. Unfortunately, neither the IMF nor the World Bank critically reflect on their own contribution to the degradation of Argentina and other developing countries.
The crisis that was not prevented
In 2003, Forum on Debt and Development (FONDAD) published the book "The Crisis That Was Not Prevented. Lessons for Argentina, the IMF, and Globalisation”. It describes not only the economic policy of the Argentine Government, but also the contribution of the IMF and other international organizations to its formation and implementation.
The Crisis That Was Not Prevented Lessons for Argentina, the IMF, and Globalisation. Edited by Jan Joost Teunissen and Age Akkerman. FONDAD. 2003
L"There is now no doubt that the Argentine authorities made serious mistakes, but the international community also bears responsibility for the crisis. The IMF supported Argentina’s economic programs with money and advice for a decade while the convertibility regime (which tied the peso to the dollar) was in place. Argentina was praised as a model country that adopted the type of structural reforms that international financial institutions and private markets had been promoting for the past two decades. Argentina enthusiastically opened up to global financial markets, which provided the country with significant resources. All of these institutions and agents minimized the associated risks until the end of the process."L
It is worth recalling that the chief economist of the World Bank (1997-2000) was one of the theorists and ideologists of the model of the State of general interventionism, J. Stiglitz. At the end of 2001, he accused the IMF of having made a "fatal mistake" in recent years. The mistake was that the Fund had strongly recommended fiscal restraint to the Argentine government, hoping to restore confidence. «… The numbers in the IMF program were fiction. Any economist would have predicted that the restrictive policies would cause the economy to slow down and that the fiscal targets would not be met. Needless to say, the IMF program failed to meet its commitments.»
Stiglitz, Joseph E., “Argentina’s Collapse Incited the Largest Default in History”, In: The Straits Times, January 10, 2002
Professor J. Stiglitz did not see any danger in increasing government expenditures, since he identified public spending with private one, and public investment with private one. He does not take into account the failures of the State, seeing only market failures. Argentina in the 21st century carefully listened to the advice of this economist, who in 2001 received the Nobel Prize in Economics. However, as a result of such an intellectual support, Argentina in 2023 found itself in a state of the deepest crisis in its history.
J. Stiglitz considered the peso peg to the dollar to be a mistake, although such a regime quickly restored confidence in the peso and the country's financial system, and it only needed to be supported by an appropriate fiscal policy, but the Argentine authorities, especially at the provincial level, did not succeed. The Nobel laureate also considered it wrong that the IMF insisted on reducing the budget deficit below 3% of GDP, calling the reforms carried out by the Argentine government a “neoliberal failure.” The failure allegedly occurred not because the excellent student did not listen to the teacher in the form of the IMF, but because he listened and did everything he recommended. Calling any Argentine government liberal with any prefix is not a scientific approach, but within the ideology of state interventionism.
Source: The Crisis That Was Not Prevented Lessons for Argentina, the IMF, and Globalisation. Edited by Jan Joost Teunissen and Age Akkerman. FONDAD. 2003
Another proponent of the general interventionist state model, Harvard professor D. Rodrick, also saw Argentina's mistake in tying the peso to the dollar. He calls this the main cause of the default with the $132 billion national debt and considers the economic policy of the then Argentine government (December 2021) "an example of the orthodox standards of neoliberal economists that they proposed around the world". "The country carried out more trade liberalization, tax reform, privatization and financial reform than almost any other country in Latin America. No other country has tried so actively to win the favor of international capital markets."
Equating the introduction of a floating exchange rate regime with full-fledged, systemic liberal reforms is an obvious semantic fraud, which mainstream economists like Stiglitz or Rodrik resort to. In doing so, they discredit liberalism and the free market, saying that it does not work - look at Argentina. In fact, Argentina once tried to solve its economic problems in the early 1990s with purely technocratic measures. Even in a limited form, they had a positive effect, but were not supported by other necessary solutions, primarily in the area of fiscal policy.
Recall that the currency tying regime was introduced in the early 1990s to stabilize the monetary and financial system and restore confidence in it. In the period 1991-1998, the economy grew by 41%. However, the high level of dependence on external financing, coupled with a trade deficit and high levels of government spending, could not but lead to the accumulation of macroeconomic imbalances. Argentina felt the consequences of the crisis in Mexico in 1994, but the economy survived after Tequila Effect, and showed high growth rates in 1996-1998, until the global financial crisis. The expansion of trade with Brazil also had a positive effect. However, the devaluation in Brazil, capital outflows, and the appreciation of the peso led Argentina to a structural crisis in the very early 2000s. After the default, the IMF admitted its mistakes, assessing the behavior of the Argentine Government - from the Fund's point of view, it was necessary to abandon the peg to the dollar after the Mexican crisis in 1996-1997, but the Argentine authorities did not want to risk the trust that had been established in such a regime. That is, politics prevented them from making the necessary decisions in the economy again.
State expenditures had the following structure in 2001:
- wages – 40% of expenses;
- pensions – 25%;
- other expenses (related to wages) – 20%;
- government spending on goods, services and investments – less than 15%.
Cost reduction in such a structure implied a reduction in wages, social benefits, and education, especially higher education. In 1999, the public sector employed 12.5% of the workforce, which is typical for European economies, but much higher than in other developing countries. For example, in Brazil it was 7.3%, in Chile it was 7.1%, and in Mexico it was 4.5%. In 1994-1999, wages in the private sector remained virtually unchanged, while for federal civil servants they increased by 22%, meaning that the provinces caused a significant increase in wage costs. The problem is that the federal center lacks the authority to impose reforms on the provinces, so they issued debt instruments on their own. An IMF representative presented the situation as follows:
L"The system failed to enforce strict budgetary constraints at the provincial level. At the same time, the fiscal strategy of Economy Minister Cavallo and the credibility of the Fiscal Responsibility Act collapsed due to its failure to impose discipline at that level. Instead of bringing spending in line with revenue, provinces typically resorted to heavy borrowing, received federal aid, or even issued their own currency. Reforms that were lacking in this area included more efficient revenue distribution and a system of interprovincial transfers, the development of local tax sources, and legislative limits on provincial borrowing."L
The Argentine crisis of 2001/2002 opened up an opportunity to solve the problem of macroeconomic imbalances and create conditions for a long-term economic growth. The collapse of the convertibility regime and the default on government bonds bought by foreigners led to a deep devaluation of the peso, a reduction in production, a decrease in wages, and the formation of a fiscal surplus. High demand for raw materials and agricultural products allowed Argentina to achieve very high average annual GDP growth rates, which in 2003-2011 amounted to 5.9%.
However, the Argentine authorities again adopted loose monetary and fiscal policies to support high levels of private consumption, which led to the accumulation of macroeconomic imbalances again and to a rapid increase in public spending. Between 2004 and 2011, public expenditures increased by 11 percentage points of GDP due to subsidies, wage increases, and pension increases. Tax increases did not compensate for the increase in spending, which led to an increase in the budget deficit from 3.3% in 2004 to 7.8% in 2016.
L"Between 2011 and 2015, job creation in the private sector virtually ground to a halt. Government expenditures continued to rise, far exceeding historical records, labor productivity fell, and the current account deficit widened. Lack of access to international credit markets led to increasing monetization of the budget deficit, thus further fueling inflation."L
The Government's reaction was in the style of a typical state interventionism - increased trade protectionism, that is, there was a peso exchange rate increase, which in turn hit exporters. As well as export taxes, high import duties, low intensity of competition in the domestic market, discretionary (typical favoritism) regime of issuing import licenses, quotas - all this led to a decrease in the share of export sectors in GDP. The growth of non-export sectors (non-tradable sectors) led to a change in the employment structure, a significant part of the labor force moved to the sectors with a low productivity.
The economic policy of various presidents, governments, parliaments of the country and provinces of Argentina over the past 20 years has invariably been a policy of general state interventionism. Argentina has fallen victim to the endless experiments of the theorists of the welfare state model, who have replaced real life with econometric models. For them, living people are invariably homo economicus, and the State is a single collective Angel, wise, all-seeing, honest, just, capable of establishing a balance between all social groups and even between nature and human.Share
The theoretical model that the IMF/World Bank has recommended for Argentina and other countries of the world since the mid-20th century (it is the basis for mainstream economic universities and world organizations) is the main cause of their degradation, the formation of oligarchy, junta, authoritarian regimes, proto-feudal governments, and other political and legal regimes in which 1-3% of the population lives at the expense of 97% of the rest.
At the same time, theorists of the welfare state, that is, the model of the State of general interventionism, emphasize not so much on the person, not so much on the dynamics of processes, as on strong aggregate values, on static conditions. For them, it does not matter that 10 thousand micro and small businesses went bankrupt if one state concern created more GDP or increased exports. For them, it does not matter that ordinary people are forced to work in the gray economy if a couple or three foreign investors received benefits and the status of a nomenclature favorite and created a hundred jobs in the official economy. They do not care about the costs of lost profits, losses and fleeing of human and entrepreneurial capital. They evaluate success only by those aggregate values that can be implemented and which can be “played” within the framework of econometric models and hypothetical assumptions.
Source:Argentina: escaping crises, sustaining growth, sharing prosperity The World Bank. 2018
Source: Argentina country economic memorandum The World Bank. 2024
Argentina’s lessons for Ukraine and other developing countries
In the middle of the 20th century, at about the same time, certain organizations appeared in the same intellectual space, events took place, and long-term trends gained momentum. World War II ended, and in addition to the surrender of Nazi Germany, the Bretton Woods Agreement, which was the most important for the world economy, was signed. The United States became the undisputed leader of the world, and this leadership extended, in particular, to economic science. The International Monetary Fund (IMF) and the World Bank were created, and Keynesianism was rapidly gaining popularity, which P.A. Samuelson formulated into a kind of bible of the State of general interventionism - “Economics”. Aggregate quantities, macroeconomic modeling, and the concept of catch-up development came into fashion. Leontiev's production function, Kondratiev's long cycles, Harrod-Domar, Solow-Swan models, and a new field of knowledge in the scientific envelope of development economics appeared. "Economics" was rapidly becoming more and more popular and important in determining the contents of economic policy. Communism and socialism thundered around the world as the victors of Nazi Germany. The flare of the state for the proletariat, the ordinary people, a society of justice and equal opportunities intoxicated the developed countries and drove the ruling elites of the developing countries crazy.
The free market, capitalism, and liberalism were declared obsolete, immoral, and irrelevant. Virtually the entire field of economic theory and practice was taken over by the State, which became in charge of all the answers to the pressing questions facing the governments of poor countries:
- how to catch up with rich countries and become developed;
- how to defeat poverty;
- how to increase the incomes of the population;
- how to create jobs;
- how to feed, educate, and treat people;
- what to produce for export;
- how to attract more investments, etc.
Professors from America and Great Britain, France and Italy, experts from international organizations and development agencies, diplomats and consulting structures almost unanimously, in chorus, said: “The state!” There was no high-quality intellectual elite in the countries that could prevent the penetration of state interventionism through “Economics” from developed countries into poor ones.
And if smart heads from rich countries say “the state”, then it must be so?
The elites of developing countries, aristocrats, autocrats, all sorts of syndicates and oligarchs definitely did not want to allow proletarian, Bolshevik revolutions in their countries. The "Third Way", especially in the packaging of development economics, was better for them, because at that time it was them who controlled the institutions of the State and saw their own great new opportunities in this.
The state is a monopolist over money and there is no gold standard, only the discretion of VIP managers of money emission, the mode of functioning of the financial system. Moreover, if Western science through the mouths of the IMF/WB, US Ivy League universities, Cambridge/Oxford says "growth points", then the state determines them, creates favorable conditions for them, provides grants and subsidies, grants privileges and limits competition from others, and also writes off debts, forgives losses if mistakes occur.
The state is a monopolist over natural resources, land, infrastructure, energy products, large industrial enterprises, water and forest resources. All these are “commanding heights” in the economy and they are too important, strategic to be entrusted to the private market. In the hands of a high-ranking official there are endless possibilities for the distribution of grants, subsidies, tax breaks, customs regimes, access to land, infrastructure, the right to export/import, and regimes of access to the domestic market. This is a gigantic discretion (the ability of an official to resolve issues at his or her own discretion), which, within the framework of the theory of development economics, ends up in the hands of VIP managers of someone else's property. At the same time, they become not just authoritarian rulers, enslavers, usurpers of power, but quite respected developers, strategists of the long-term, sustainable development of the country.
The syndicate, consisting of 1) American and European development economics theorists, 2) representatives of newly created international economic organizations, and 3) VIP bureaucracy of developing countries, formed the contents of development policy and the relations of developed countries with transit countries (with economies in transition).
The representatives of these three groups had the same motivation and interests, because they all exploited the ignorance and naivety of the citizens of their countries. Citizens of rich countries thought that they were providing a full-fledged assistance to poor countries through the IMF/JI and development agencies. While citizens of poor countries thought that this assistance would really help them get out of poverty as quickly as possible and become successful.
None of the three members of the Big State syndicate spoke of economic freedom, private property, small government, open competition, and free trade. Such an agenda was considered archaic, ineffective, and did not take into account the development of modern (at that time) economic science.
The supporters of "Economics" did everything to discredit, to abolish the economic science that existed before Keynesianism and before its conquest of academic, university circles. In the middle of the 20th century, not only in Argentina, but also throughout the world, an unprecedented experiment in the practical implementation of the theories of development economics began, which were presented as models of Harrod-Domar, Solow-Swan.
Argentina is a vivid and persuasive example of this experiment that has lasted over 70 years. The variety of tools and means used allows us to formulate a number of lessons for Ukraine, and for other countries with economies in transition:
- The weakest link in Argentina's economic policy over the past 70 years has been money. The nationalization of finance, the transformation of monetary policy instruments into incentives for cyclical and countercyclical policies, for favoritism and isolation from general market conditions are the foundation of state interventionism, a source of macroeconomic imbalances, and discriminatory practices. In the context of an acute shortage of professional personnel, a high-quality economic school, an institutionally independent Central Bank, and a market structure of the economy, the optimal solution for Argentina would be to switch to a foreign freely convertible hard currency (dollar, euro, pound) or to a multicurrency regime. That is, the import of the institution of "Money", monetary policy, would allow quickly neutralizing the threats and risks of macroeconomic instability, unpredictability, and volatility, and would dramatically improve the quality of the business climate and investment environment.
- For a developing country with weak institutions of public administration and strong politicization of the budget process, it is critically important to have mechanisms for automatic restraining of the public spending growth. In Argentina, VIP-disposers of foreign money continuously violated the budget discipline and allowed a state budget deficit, which was financed, in particular, by the central bank's money emission. The fact that the Constitution or constitutional law has a clause stating a limit on the total expenditure of state administration bodies (for example, 25% of GDP), a limit on the budget deficit (for example, 2% of GDP), or the introduction of a rule prohibiting budget deficits, minimizes the risks of conducting a soft fiscal policy, which ultimately destroys macroeconomic stability and slows down economic growth.
- Argentina’s government practically applied all the instruments of development economics to ensure economic growth and development. In addition to the instruments of monetary and fiscal policy, the Government used measures of trade protectionism, public investment, quotas, public procurement and nationalization, import substitution programs, export incentives and the allocation of "growth points". The actions of the State to correct, improve, and accelerate market processes in the regime of soft monetary and fiscal policy did not only not allow Argentina to maintain income parity with developed countries, but also made it the economy of the 20th century that was developing at the slowest pace. In the context of the rapid introduction of technologies of the Fourth Industrial Revolution, the development of global network companies, and the significant influence of global value chains on the development of countries and regions, the use of development economics tools would most unlikely stimulate rapid, long-term economic growth, but would inhibit it, would not create high-quality development institutions, but would destroy them, concentrating political and economic power in the hands of powerful industry lobbyists and their partners in “nomenclature-power” circles.
- The nationalization of Argentina’s economy as a way to ensure catch-up development, capitalize on the country's comparative advantages, ensure the victory of Argentine producers in foreign markets, and take profitable niches in the international division of labor system ended in failure. There is no reason, justification, or fact in favor of the fact that the so-called neutralization by the State of "market failures" placed the country on a trajectory of rapid, long-term, inclusive economic growth and development.
- The degradation of the Argentine economy, the chronic crises into which it fell, are a direct consequence of numerous attempts to create a model of the General Welfare State in a country with weak institutions and a strong concentration of political and economic power. In fact, a model of general, comprehensive interventionism, corruption, conflict of interest, discrimination against small businesses, and concentration of capital not through market exchange, but through the abuse of state power.
After a hundred years of experiments with the Big State, Argentines have finally elected a president who offered them Liberty. Real Liberty, the kind that made Argentina rich at the end of the 19th century. Javier Milley has done a lot in a year, but this is only the beginning of a long journey of a systemic structural transformation of the country. The main thing is a chance to eliminate the big state in the head of every Argentine.
In this process, H. Milley can help, suggest, and advise sources of intellectual, worldview catharsis, but for the Argentines themselves, the internal “stop-sovok” button will not be pressed. This is a voluntary choice of each person, daily work on oneself by the intellectual, cultural, political and economic elite of the country. When the conviction and desire to make Argentina great again mature in Argentine society, then H. Milley's mission can be considered accomplished. For now, only plowing, only shoveling oneself, only a constant revision of vicious habits and ways, because everything that could only be thought up with the State, the Argentines have already tried, drunk a bitter cup filled with the poison of Leviathan, to the bottom.
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Yaroslav Romanchuk
A well-known Ukrainian and Belarusian economist, popularizer of the Austrian economic school in the post-Soviet space. He specializes in reforms in transitional economies in the post-socialist space.
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