More of the same?

Luis Rubio

According to Simón Kuznets, there are four types of countries in the world: developed, underdeveloped, Japan and Argentina. Argentina has been defying gravity for decades, in fact almost a century: with small moments of euphoria, its economy has gone from bad to worse for so long that this Nobel-winning economist ended up creating a special category for that nation, which was the second richest in the world at the beginning of the 20th century and today has more than 40% of its population living below the poverty line. Regardless of the economic and, in general, governmental project that the president-elect Javier Milei implements, for at least 56% of voters the situation had become so intolerable that any alternative seemed better.

It doesn’t take a genius to appreciate the unease of Argentines. In conceptual terms, Argentina’s problem is very obvious: over eight decades they built a set of social programs that entail increasing public spending, while facilitating, and in fact rewarding, unemployment. The number and diversity of “support” schemes is extraordinary: pensions, transfers based on the number of children, retirement with full salary with very few years of work and a wide variety of benefits. Juan Domingo Perón, president in the forties, created and was able to finance his transfers (which were meant to elicit loyalty from voters) and nationalizations due to the enormous wealth that that nation accumulated during the Second World War, but as soon as it vanished, everything collapsed: the first great fiscal crisis occurred at the beginning of the fifties. There has never been the capacity or willingness to face the simple fiscal reality: the programs remain, expand and multiply, but the income to pay for them does not.

The fiscal cost rises systematically, in fact exponentially, all of which has been financed with monetary emission, which keeps the country, especially in recent years, permanently on the brink of hyperinflation. The inflation that characterizes the country is structural: transfers have become acquired rights that take on a life of their own and become untouchable political factors.

The notion of forcing a solution through a monetary mechanism is not new. In the nineties Menem created the so-called convertibility that equated the Argentine peso with the dollar one to one. The theory behind that project was that the cost of breaking convertibility would be so high that it would force politicians to face fiscal realities. However, the problem was not addressed, spending continued to grow as always and the inevitable happened: the project collapsed with the so-called “corralito” at the beginning of this century, where most of the population lost all their savings, while a virtual depression occurred.

Milei has two traits: one is his style and rhetoric, which makes him similar to Trump. The resemblance to Trump is merely of appearance, because his economic team is not protectionist. According to Milei, who intends to shrink the government drastically, the problem does not lie exclusively in social spending but in a towering bureaucracy that prevents it from being resolved.

The other characteristic is a monetary shock program no longer with peso-dollar convertibility, but with the outright adoption of the dollar as currency. Adopting the dollar implies that spending can only increase to the extent that the number of dollars in the economy grows, which can only occur through exports, investments from abroad or the normal growth of the American monetary base. In practice, adopting the dollar implies an immediate brake on the economy, since everything has to be adjusted to the available dollars. As Argentina is in default with the IMF, the bondholders and the private banks, the project, if it is implemented (given that the president will not have a majority in Congress), would imply creating a pressure cooker effect: there is no money, but spending demands remain constant. The ensuing conflict is clear cut.

According to the economists behind Milei, the recession would be brief because there are many dollars in private hands and Argentina could increase its exports of meat, grains, oil, gas and the like as soon as the taxes that currently disincentivize exports are eliminated. This has logic, but it only covers part of the problem. The other problem is that deficit spending is structural due to social programs. If the government actually sticks to the monetary project it proposes, it would have to cut that spending immediately and brutally. Time will tell if voters understand the implications of what they voted for, but what’s coming is not going to be pleasant, however necessary it may be.

From Mexico’s vantage point, whose government did everything possible to support the losing Peronist candidate, the message is very clear: sooner or later the population rebels against what they consider intolerable. The notion that more of the same would be acceptable to the electorate has always been dubious, even while, clearly, Mexico does not face the size or type of crisis that characterizes Argentina today. The two candidates have a lot to learn from what happened in Argentina: for one to propose something different, but reasonable; and for the other to not get carried away by the idea that everything is fine.