Argentina’s Economy Minister is favourite to become President, despite 138% inflation. Here’s why.
“There are 4 types of countries: the developed, the undeveloped, Japan, and Argentina1”, remarked Simon Kuznets about global economies. In relation to Argentina, his comment was about their economic implosion, from having the world’s 10th highest GDP per capita in the early 1900’s and being resource rich, to being the largest debtor to the IMF, and plagued by chronic inflation23. So, what led to this decline?
Argentina’s pre-modern history
Argentina, like many other Latin American countries, has had a complex history with democracy and government, and has never been able to establish strong, trusted state institutions. Before the 1930’s, Argentina had had a somewhat stable democracy, with full male suffrage being granted in 1912. In 1930, amongst the crisis caused by the 1929 Great Depression, and following similar trends in Europe, the democratically elected government was overthrown in a military coup, leading to a fascist dictatorship. The ‘Infamous Decade’ followed, where the junta ruled by terror, establishing their own secret police, and winning rigged elections. Replaced by a popular military coup in 1943, a transition to democracy ensued, and elections in 1946 were held - won by Juan Domingo Perón.
Perón was a populist, and had certain fascist inclinations; openly expressing his admiration for Hitler and Mussolini’s regimes4. He held complex, somewhat confusing views - both opening Argentina to Nazi war criminals, but welcoming and providing protection to Jews. His populist policies contributed to his successful election, one of which was the promise of a Christmas bonus to workers, and he nationalised several key industries - perhaps the most important being the central bank. His 10 years in power expanded several rights to Argentinian workers, with strong unions, and generous labour laws, but his cult of personality, cracking down on dissidents, and friction with the Catholic Church led to a military coup against him in 1955. Still to this day, ‘Peronism’ - the support of Peron, and pro-worker, large welfare state policies - is the leading force in Argentinian politics, with a ‘Peronist’ party having won every election since 2001, bar 2015. The Peronist principles are still evident - Argentina’s welfare state has left some very positive legacies - especially its education, with Argentina having free, top-class universities, and by far the highest English proficiency of Latin America18. Perhaps the most prevalent legacy, however, is the bloated state, with 52% of Argentinians receiving some support from the government. An additional 4 million work for the state, of whom at least around 250,000 are ‘ghosts’ - meaning they do not attend work, yet still receive a full salary56.
Inflation and mistrust.
Perhaps unsurprisingly, given Argentina’s bloated welfare state, and nationalised central bank, the country has routinely suffered from high inflation - having averaged 105% annual inflation over the last 100 years7. There have been several times when Argentina entered hyperinflation - notably in 1983, after the Falklands War failure, which led to the demise of Argentina’s final military dictatorship, the return of democracy, and a diminished role of Argentina’s military. Following another bout of hyperinflation in 1989-90, Argentina pegged their currency to the dollar - by holding USD reserves equal to the number of pesos in circulation, and in the 1990’s, led by Carlos Menem, Argentina experimented with neoliberalism and experienced rapid economic growth - with their GDP tripling between 1990 and 20088. In 2001, beset by government overspending, the country’s reserves ran dry, and a bank run followed. "The aftermath saw widespread protests, the president fleeing the official residence in a helicopter, and five different presidents assumed office within 12 days, while those with their money in pesos lost around 60% of their savings "9.
Argentina's historic inflation - Source - https://www.bcra.gob.ar/PublicacionesEstadisticas/Principales_variables_datos_i.asp
One problem that analysts have frequently commented upon is Argentina’s ‘short-termism’ - summarised by the joke “If you leave Argentina and come back 20 days later, you’ll find everything is different, but if you come back after 20 years, you’ll find that everything is the same.10” This short-termism comes from Argentina never being able to build strong, neutral institutions, and from its long tradition of electing populists. No wonder Argentinians have such little confidence in their state - on average they have the least faith in their government and central bank of any nation surveyed11. Indeed, the lack of faith in the country’s economy becomes a self-fulfilling prophecy; because the peso has historically become so weak, nobody saves in pesos, and because nobody saves in pesos, it is condemned to being weak. Locked out of the global banking system, and unable to convert pesos to dollars at the ‘official’ rate, Argentines save in cash dollars - it is estimated that there are $200bn of cash dollars that act as Argentines’ savings, second only to the USA12.
The 2023 Elections
And thus, we come to 2023. Facing the usual problems of overspending, and being hit hard by the pandemic (which led to the world’s longest lockdown), and a crop failure that cost the nation $20bn, Argentina finds itself in the all-too-familiar position - facing inflation of around 140%, and a collapsing economy. On 19th October, Argentina voted in the second round of its election; leading to a run-off between Sergio Massa, the ‘centrist’ economy minister, and Javier Milei - a self-professed libertarian.
Argentina's first-round election results. Source - resultados.gob.ar
Sergio Massa was appointed as a ‘super minister’ in August 2022 by the ruling Peronist, left-wing coalition - a combined head of the ministries of Economy, Productive Development, and Agriculture. He has a centrist background, with Julio Burdman, from the local Electoral Observatory, stating “Massa is the least Peronist of the Peronists”, referring to some of his more pro-business stances13. One example of this is his policy of supporting small to medium businesses, and workers alike, by simplifying the tax code and making it cheaper for businesses to employ ‘informal workers’, who currently work without a formal contract. His success in the first round can be attributed to him using the political machine of the Peronistas to mobilise their consistently loyal vote - from those who receive social welfare, the unions, and those who work for the state - as well as attracting more centrist moderates, afraid of the alternative.
Javier Milei is that alternative. Chatham House describes Milei is a populist, radical libertarian, who regularly campaigns with a chainsaw, a metaphor for what he will do to the state14. His most famous pledge is to dollarise Argentina, and to eliminate the central bank, which he blames for Argentina’s woes. Dollarising is a controversial pledge, which would be difficult given Argentina’s current account deficit, and lack of foreign exchange reserves, but symbolically it has been very popular, with many Argentines sharing Milei’s assessment regarding the central bank. Milei’s campaign has tapped into the widespread anger at Argentina’s situation, pledging to eliminate the political cast, chanting “La casta tiene miedo” (the cast is afraid), and “Que se vayan todos” (make them all go) during his rallies. His more controversial proposals - which would almost certainly not have enough support to be voted through congress - include legalising firearms for all, as well as organ trading. He is also anti-abortion, has criticised the Catholic Church, and the pope as a ‘Filthy Leftist’, and has downplayed the number of deaths caused by Argentina’s last dictatorship, saying that the numbers are wildly overstated1516.
What could happen next month?
One significant reason why Massa could win is because many Argentinians believe that Milei threatens Argentina’s social fabric. While the economy might be in tatters, many Argentinians take great pride in their country’s social liberalism - with it being the first country in Latin America to legalise gay marriage, being progressive on trans rights, and offering free education to all, at all levels. Milei would threaten all of this, and many middle-ground voters sense that a vote for Milei is simply a vote for anger, preferring to stick with the ‘devil they know’, rather than the outsider17. The traditional right-wing coalition has not universally endorsed Milei; while their candidate - Patricia Bullrich - and their ex-President Mauricio Macri endorsed Milei - saying that Argentina cannot have 4 more years of Peronism, the governor of Buenos Aires has said that either choice would be ‘catastrophic’ for the country18. Massa, the de facto ruling president, also has several levers that he can pull - one of which is using the police to clamp down on the black market exchange rates on the dollar, artificially lowering the price, giving the impression of stability19. Another option that Massa has used was ‘Plan Platita’ (plan ‘pocket money’) - an increase in government subsidies before the election, which cost $3bn, and was funded by printing money20. Patrick Esteruelas of Emso Asset Management stated that Massa’s spending tactics are “turning what was an already poisoned chalice for whoever ends up succeeding him, into an undrinkable chalice.” It remains to be seen who will win the election, which for now is too close to call, and Argentina is a notoriously difficult country to make predictions for.
Room for optimism?
Despite the current crisis, there is certainly room for optimism about Argentina’s mid-term future. Their current crisis has been exacerbated by the COVID-19 pandemic, and a 2023 crop failure that cost the country $20bn - two exogenous shocks which likely won’t be repeated. Argentina looks set to benefit from a large influx of capital by exporting its natural resources. Should the Vaca Muerta pipeline - which comes from the second largest shale gas reserve in the world - be completed, it could see exports of around $37bn a year by 2027 - which is around half of their current exports in 202321. Further, Argentina has the second largest proven lithium reserves in the world - and with the electric vehicle industry set to boom, this has the potential to amount to billions of dollars of exports. When Argentina’s economy does expand, it expands rapidly - such is its boom-bust cycle, and it appears that in the next 5 years, Argentina will be on a much better path than its current one. History suggests that a bust normally follows a boom in Argentina, as it generally increases state spending in line with an increase in export revenue, and when exports fall, it funds the gap by printing money, leading to inflation and crisis. If Argentina can seize the upcoming opportunity, and elect a government that reduces state spending on populist policies and foments positive conditions for businesses, then Argentina might once again become a first-tier economic power.
What are your thoughts? Let us know in the comments!
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