A Farewell to Welfare

ONCE UPON A time, around 100 years ago, Argentina was one of the richest countries in the world. Since then, it has served as a cautionary tale of how even a rich nation can impoverish itself. From a per capita income that was among the top 10 in the world to a scenario where 40 per cent of the population is below the poverty line. The country has defaulted on its debt nine times. Finally, fed up of terminal decline, Argentines have chosen a political outsider and upstart economist, Javier Milei, as the man to radically alter course. Is he the right doctor?

Milei, who assumes office as president of Argentina on December 10, is certainly radical. A much-labelled man—he is described variously as populist, far-right, libertarian, anarcho-capitalist, El Loco (the madman)—he actually defies a neat categorisation. In his economic beliefs, he is on the libertarian right but some of his political positions, whether on banning abortion or going soft on Argentina’s erstwhile military dictatorship, is far from libertarian. Like any canny politician, “the madman” tries to mean different things to different people. But, in the end, he will be judged on his handling of the economy.

On the economy, some of his ideas like abolishing the central bank, seem extreme but they address directly the fundamental malaise afflicting the Argentine economy for decades. By always trying to live beyond its means, with debt-fuelled spending sprees, Argentina’s government has destroyed its economy. It’s a principle that applies equally to corporates, households and individuals. It is not unreasonable to borrow, to take on debt, but it must be underwritten by a capacity to pay it back. Too often, it is a principle which is ignored. But at the level of government, it is more perilous.

That is because the government has a power that corporates and individuals do not. To print money. There is a reason that Argentina is a poster boy for hyperinflation. As Milei takes over, inflation is running at 140 per cent. Without improvements in productivity and output, which in theory could help the government earn more taxes and pay off debt, higher government spending is ultimately financed by printing more currency. With more currency chasing the same number of goods and services, the end result is always inflation. It also leads to downward pressure on the currency which makes the repayment of foreign debt harder, ending in default. In Argentina, history has repeated itself so many times that it is both tragic and farcical.

Some of Milei’s ideas like abolishing the central bank, seem extreme but they address directly the fundamental malaise afflicting the Argentine economy for decades

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Milei proposes to abolish the central bank and make the US dollar the currency of Argentina. Critics say it is unwise to give up altogether an important lever of economic policy: monetary policy. In effect, dollarisation locks Argentina in with the interest rate policies of the US economy even if the business cycle of its economy runs on a separate trajectory from that of the US. Indeed, that would be a risk for a normal economy, but Argentina’s economy hasn’t been normal for decades.

What dollarisation means beyond the headlines is this: Everyone in Argentina, particularly the government, will have to live within their means and, more importantly, find ways to earn productively. Milei has already said that he will slash welfare spending to rein in government expenditure and balance the books. His government will also undertake reforms to enable a competitive and productive private sector, which is the key to a strong economy. Individuals will also have greater incentive to look for productive employment opportunities and betterment of opportunities without the crutches of the state. Argentina needs to rediscover its animal spirits.

There are only two sustainable ways for Argentina to earn dollars. Exports and foreign investment. Both require a focus on improving the productive capacities of Argentina with minimal government interference. The third avenue for US dollars is government borrowing overseas. That isn’t sustainable or likely to happen. However, short-term support from the International Monetary Fund (IMF) may be required as there may not be enough US dollars available in Argentina as the transition to dollarisation happens.

Things may get worse before they get better. But Argentina needs a shake-up. Tinkering around won’t do. And it isn’t what Milei is elected for. In what can only be described as cold irony, decades of wasteful populism, of the military and various Peronists, has to be undone by a man also described as a populist. If he sticks to libertarian economics, South America’s chronically sick economy may get a dose of the medicine it really needs.

About The Author

Dhiraj Nayyar

Dhiraj Nayyar is chief economist, Vedanta Ltd, and the author of Modi and Markets: Arguments for Transformation

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