On October 26, half of Argentina’s representatives and one-third of senators will face voters at the ballot box. This is, on its own, fortunately unexceptional. Indeed, Argentina has been a solid democracy since 1983, when the last generals left the presidential palace.
Nonetheless, these midterm elections represent an existential challenge for Argentina. They are, de facto, a referendum on the economic reforms of President Javier Milei. Milei, who was inaugurated on December 10, 2023, had flamboyantly promised to take a chainsaw to public spending, to tame an inflation rate nearing 300 percent per year, and to set the economy back on the path of growth. As realistic as he is idealistic, Milei promised 18 months of suffering and austerity measures to fix a country that had been ravaged by Perónism. Where does Argentina stand?
A Bit of History
Before looking at contemporary Argentina, it makes sense to offer a bit of historical context. Argentina was the forgotten backwater of the Spanish empire in the Americas; it lacked gold or a local population to be enslaved. After independence in 1816, Argentina suffered through a half-century of pendulum swings between dictatorships and civil wars — neither of which is favorable to economic growth. In 1860, Argentina adopted an almost verbatim translation of the US Constitution of 1787. Miraculous growth ensued. By 1910, Argentina was the eighth richest country in the world, a living laboratory for the economic theories of Adam Smith, Ludwig von Mises, F.A. Hayek, and Douglass North. Economic liberty, defense of contracts, freedoms of speech and religion — in sum, Argentina thrived under institutions that favored entrepreneurship and industrialization. Alas, Argentina didn’t quite have rule of law, but a ruling oligarchy with weak institutional safeguards. The first military coup came in 1930. There would be another 10 throughout the twentieth century, with a total of six military dictatorships (half the time, the military would simply evict the president and hold fresh elections).
The key factor for understanding the last century in Argentina is Perónism, a corporatism imported from Mussolini’s Italy, and given an Argentine flavor by Colonel (and future president) Juan Domingo Perón. Redistribution of wealth to buy friends and votes, populism, a corporatist balance of the country’s interest groups with an interventionist state as arbiter, five-year economic plans, and heavy regulation — these formed the new constitutional order. The eighth richest country in the world in 1910, Argentina suffered through a century of chronic hyperinflation, routine monetization of budget deficits, and economic crises — and fell to the rank of 68th richest country in the world today. Argentina has also garnered the dubious honor of being the IMF’s greatest debtor (it now owes $57 billion). Despite the obvious economic damage, the Perónist instinct dies hard; in the decade before Milei’s election, the Perónists doubled down on their policies. Intervention after intervention, regulation, redistribution, all took their toll. The poverty rate, which had fallen to 20 percent in 1993, hit a high of 58 percent before settling at 45 percent in 2023. The debt-spending was financed by printing money to feed friends and clients; hyperinflation, which had been tamed in the 1990s, returned, and rose to almost 300 percent per annum by 2023. Worst of all, the Perónists systematically destroyed the country’s institutional checks and balances.
Milei was elected in 2023, with a mandate to solve the economic consequences of Perónism. But the Perónists remain powerful: they hold 108 seats (of 257) in the lower house and 33 (of 72) in the Senate, along with 16 governor’s mansions (out of 23 provinces). This past September, the Perónist candidate won 47 percent of the votes in the Buenos Aires province gubernatorial election (against 33 percent for Milei’s party). To be sure, this province has long been a stronghold of Perónism… but this still represents a challenge to Milei’s reforms.
Halfway Through Milei’s Term, Where Is Argentina?
On December 10, 2023, Javier Milei inherited an economic and institutional disaster. He has — of course! — not been able fully to fix a century of interventionist damage in the span of two short years. But, 22 months into his presidency, where does Argentina stand?
Because he lacks a congressional majority, Milei has had to impose reforms by emergency decree. Such decrees, according to the Argentine constitution, are valid for one year, and must have the consent of one the two legislative chambers.
Milei was thus able to cut public spending, notably by reducing the number of cabinet agencies by half, from 18 to 9. By taking a chainsaw to government spending, Milei eliminated the budget deficit, a chronic feature of Perónist Argentina. Public debt, which had reached 155 percent of GDP in 2023, has now fallen to 83 percent.
Perónism’s fiscal profligacy had dire monetary consequences, because the budget deficit was routinely monetized by the central bank, which had effectively become an arm of the Treasury. Milei inherited an annual inflation rate of 294 percent — which he has reduced to 34 percent (this would be unthinkable in the US, but is quite healthy by Argentine standards).
As a good economist (and economics professor), Milei has not focused exclusively on macroeconomics. He has also attacked microeconomic impediments, by removing the heaps of regulation that blocked growth and suffocated the economy. By emergency decree, Milei removed import controls and price controls. Notably, the real estate market was paralyzed by rent controls, mandatory three-year leases, and the inability to sign a lease using dollars (or any currency but the Argentine peso). One does not need a doctorate in economics to predict that the sad combination of regulation and hyperinflation would erode supply, as landlords faced the very real possibility of evaporated rents. Since Milei suspended rent controls, the price of rental housing in Argentina has fallen by 30 percent, and housing supply has increased by 212 percent.
Argentina’s risk premium has tumbled dramatically, and foreign investment has returned. After years of recession, economic growth is now at an enviable 6.3 percent. The middle class has surged, in two years, from 23 percent to 39 percent of the population. The 45 percent poverty rate Milei inherited from the Perónists temporarily rose to over 50 percent — Milei had indeed promised the pains of austerity — but has already fallen to 31 percent.
This is but a summary of Milei’s success.
There’s One More Thing
Unfortunately, there is one glaring omission in Milei’s reforms.
He has allowed contracts to be signed in foreign currency and cryptocurrency. He has also imposed an amnesty for depositing the dollars that had been hidden in mattresses because of currency controls and the past freezing of dollar-denominated accounts. These are steps in the right direction. But he has not crossed the last Rubicon: the complete abolition of Argentina’s central bank — even though he had promised to wield his terrible swift chainsaw on it too. Closing the bank would have gotten rid of chronic hyperinflation, and opened the door to dollarization (which already exists de facto), or even currency competition, to replace the monetary cash cow.
Beyond the immediate economic benefit of taming and preventing hyperinflation, shutting down the central bank would represent the final nail in the coffin of Perónism. Indeed, all the good that Milei has brought to Argentina over the past two years could evaporate with one simple law or presidential decree if the Perónists return to power. Argentina would then relapse back into its perennial bad habits, with favors and votes purchased by redistribution, and budget deficits financed by the monetary printing press — in sum, a return to the predatory state of Perónism. Economist Emilio Ocampo (who had offered his services as the last president of Argentina’s central bank) explains that closing the central bank is the only method for Milei to show credible commitment to his reforms, and the only way to end the profligacy of Perónism.
These midterm elections are not merely a political footnote in the history of a troubled country. They are a veritable existential struggle between two forces. On one side, we have intervention, privilege, and a poverty that is as absurd as it is preventable. On the other, there is hope, progress, freedom, and prosperity.
