Argentina's Third Act
Has it finally arrived?
The Nobel Prize-winning economist Samuel Kuznets reportedly once said, “There are four kinds of countries: developed countries, underdeveloped countries, Japan, and Argentina.” And what an outlier Argentina is. No country punches above its weight more than Argentina when it comes to economic study and analysis. Despite being a nation with an average population at the end of the Earth, it occupies a special place in the hearts of economists everywhere. I’ve written about the South American nation here and here. Why does it get so much attention? Because of La Albiceleste’s first two acts.
Act I was one of startling success. The decades after Argentina began its fight for independence in 1810 were a rocky, bumpy period, but by the middle of the 19th century, Argentina was stable. Then the economy took off. For decades, six percent growth per year was the norm. Millions of acres of fertile, cheap land led to an expansion not unlike that of the United States. People from around the world moved to South America. The country stood alongside the United States, Canada, and Australia, where a young man could go and make his fortune. By the eve of World War I, Argentina was one of the wealthiest countries in the world. In French, the phrase, “Il est riche comme un Argentin” (He’s as rich as an Argentine) entered the lexicon. Venturing around Buenos Aires, this success is clear. Wide boulevards are filled with Beaux-Arts buildings from Argentina’s Belle Époque. Buenos Aires was the grandest and greatest city in South America.
That was the peak.
Act II was one of slow but steady decline. The Economist, as per usual, has a great article about its decline from 1914 until today. World War I began its problems, and the Great Depression didn’t help anyone. Then, after World War II, Argentina made one bad decision after another. Despite becoming wealthy through trade, successful governments responded to declining fortunes by turning inward, limiting trade, and trying to prop up domestic industry. The military took an active role in politics, committing several successful coups. A depressing 60 years passed without a democratically elected leader transferring power to another. The Dirty War of the 1970s and 1980s resulted in the deaths of tens of thousands. The ruling junta went to war with England, at one time its biggest trade partner, over a group of islands in the middle of the Atlantic Ocean. So what killed Argentina’s economy? As economist Rafael di Tella puts it, “If a guy has been hit by 700,000 bullets it’s hard to work out which one of them killed him.”
The result? Argentina is the only country in the history of the modern world to go from being a high-income country to a middle-income country. It is a cautionary tale for the rest of the world to follow. About how political instability and bad governance can slowly wreck a country. Nothing epitomizes this better than December 2001, when Argentina somehow managed to have five presidents in just two weeks. Yes, you read that right.
There have been glimmers of hope during the overall downturn. The economy grew during periods of stability. Mauricio Macri tried to reinstate financial stability while president from 2015 to 2019. Overall, however, the story is one of malaise and relative decline. The government grew ever larger and more powerful, strangling business opportunity and preventing long-term growth while encouraging dependence and rent-seeking.
Enter Javier Milei:
What a character. Milei is a trained economist who didn’t hold elected office until 2021. He made his name by insulting opponents and advocating for reduced government on TV. He owns five dogs that are all clones of a previous dog that died in 2017. These dogs are, according to Milei, some of his closest advisors. This man ran for president in 2023, promising to put Argentina on the path to prosperity by decreasing regulation and radically cutting the size of the government.
He won.
Since then he has put the Argentine economy through shock therapy. This is a risky move. When an economy has been distorted by bad government policy for decades, the best way out is to “shock” the economy all at once and put it on the right track. This often involves short-term pain, but if done correctly, it will result in long-term growth. This is especially difficult to pull off in a democracy because voters are not known for their patience. When one politician promises them puppies and ice cream, and the other blood, sweat, and tears, they almost also plump for the former. It says a lot about how sick of the status quo Argentines were that they bucked the trend and went with the latter.
Two years in, Milei’s accomplishments are impressive. He closed 13 government ministries and fired 30,000 government workers. Government spending is down 30 percent. Annual inflation percentage has fallen from hundreds to dozens. Most notably, the poverty rate has also fallen. He, more than any other leader in recent history, has shown that shock therapy can work. That government money really is wasted by the billions.
A few of his proposals are especially illuminating. After taking office, Milei proposed privatizing the national airline, Aerolíneas Argentinas. Owned by the government, Aerolíneas Argentinas was losing hundreds of millions of dollars every year. The privatization plan was not a sop to big business, however. Milei wanted to sell the airline, not to a foreign competitor or private equity group, but to the employees of the company. The catch would be that they would not be able to rely on government aid.
Instead of celebrating their newfound independence, the employees protested. The head of the employees’ union said he would have to kill employees if the privatization went through. Other workers went on strike. It’s been clear for a long time that some of those who profess socialist beliefs really just want government handouts, but I don’t know if anyone has ever so blatantly abandoned the supposed advocacy of labor quite like this. These employees didn’t want the rise of the proletariat; they wanted to live off the government. This seemed like a leftist dream. Giving employees, the common man, control over an important national business. Instead, employees insisted they remain under government control. To date, Aerolíneas Argentinas remains a state-owned company. It is, however, no longer operating at a loss.
Milei also repealed rent control in Buenos Aires. During Covid, the government froze rents. The rules meant existing tenants didn’t have to worry about rent hikes. It also meant few people wanted to lease an apartment. With inflation often hitting triple digits, renting at a fixed price was incredibly risky. If inflation were to spike, a landlord risks soon charging their tenant well under the carrying cost because they wouldn’t be allowed to increase rent with inflation. Milei ended that. The results were immediate. The number of available units skyrocketed. After accounting for inflation, the rental price of units dropped. For the hundredth time, Milei showed that price controls are a terrible idea and hurt many of the very people they are designed to help.
Is everything roses? No. Inflation is still a problem, and Milei desperately needs to allow the Argentine Peso to float openly on the market, instead of pegging it to the US dollar, even though this will cause inflation to rise in the short term. Milei publicized a new cryptocurrency that then crashed, prompting allegations of fraud. He still doesn’t have a majority in parliament.
That said, the future is brighter for Argentina than it has been in some time. Inflation is down. The economy is growing. The budget is balanced. If Milei can pass a few more government programs, and voters stay the course, Argentina could soon be back on the right track. The sky’s the limit. Argentina has great potential. The third act, one of redemption, might finally be here.