Javier Milei’s bigger-than-expected victory in the Argentinan presidential election suggests voters in South America’s second biggest country have willingly opted for shock treatment to sort out the country’s deep economic malaise.
It is perhaps not hard to see why 56% of the electorate backed the rightwing libertarian: Argentina may have the world’s best football team but its economy has performed disastrously in recent years. Inflation is running at 140% and a three-year drought has led to a sharp fall in agricultural production. Two out of five people live in poverty and the currency has lost 90% of its value in four years.
Milei’s big idea involves abolishing the peso and for Argentina to use the US dollar instead. A milder form of this policy was tried in the early 1990s, when – after a previous episode of recession and hyperinflation – the government in Buenos Aires fixed the exchange rate at one peso to the dollar. This strategy, known as convertibility, was abandoned in 2002 after a deep recession and violent street protests against restrictions on bank withdrawals made it untenable.
Argentina’s president-elect says he wants to go further. Under his proposal, the country’s central bank would in effect be abolished and the economy fully “dollarised”. This would mean monetary policy for Argentina being set in Washington rather than Buenos Aires.
Other countries – Panama and Ecuador – have gone down this route but never one as big as Argentina, which is a member of the G20 group of leading developed and developing nations.
There are some obvious problems with Milei’s economic experiment. The first is that Argentina and the US are very different economies, and so what might be the right monetary policy for the latter may be the wrong one for the former. Countries have to be careful about giving up the freedom to set their own interest rates and devalue their currencies.
The second problem is more practical: where would Argentina get its dollars from? At present, the central bank has almost no US dollar reserves to speak of, and lacks the access to global capital markets to obtain the stocks that would be required to keep the economy going. In theory, Milei could apply to the International Monetary Fund for a loan, but the chances of success would not be high. Argentina is already the biggest borrower from the IMF and owes it $44bn (?35bn).
The IMF harbours doubts about whether dollarisation is feasible in the short term. The peso would require a substantial devaluation before dollarisation, and a weaker currency would push up prices and push up inflation still further.
Third, even if a solution can be found to the technical problems associated with abandoning the peso, Milei’s shock treatment could blow up in his face relatively quickly. Dollarisation is a one-way street – a policy gamble with no exit that could lock Argentina into an unsustainable course and crash land the economy.
Mark Weisbrot, the co-director of the Center for Economic and Policy Research thinktank in Washington, said Argentina was paying a heavy price for the mistakes of a previous administration led by Mauricio Macri in the year after 2015.
“But a crazed, economically suicidal approach would only make things worse – and as Argentina has experienced, things can get a lot worse,” Weisbrot added.
Milei’s victory speech made no reference to dollarisation or abolishing the central bank, leading to speculation that he could row back on his radical plans. In addition to currency reform, these include deep cuts in welfare payments and closing more than a dozen ministries
Nicolás Saldías, a senior Latin American analyst at the Economist Intelligence Unit, a research and analysis division of the Economist Group, said many of Milei’s proposed reforms would be unpopular, especially with low-income Argentinians, and were likely to trigger social unrest by the country’s powerful labour unions and social movements. “As a result, politics is likely to be highly polarised and divisive in the coming months, which is likely to result in a short honeymoon period for Milei.”