Javier Millay’s economic policy in Argentina – Labor

Annual inflation in the country at the end of July was 263%

To achieve his ambitious goals, the president adopted a panic approach

High inflation is a problem for the people

Argentina is the third largest economy in Latin America with a gross domestic product of $640.6 billion at current prices in 2023. It is at the top of the distribution of average income per capita in the world with 12.6 thousand dollars at prices current and 26.5 thousand according to the level of purchasing power (33.3 thousand dollars in Bulgaria) and is in fifth place in the region, but if the Caribbean is also included, it is already falling to the eleventh place is this mark.

About 30% of added value and 28% of employment in the Argentine economy is created in agriculture and industry, and the rest in services. The large area of ​​2.8 million square kilometers according to European standards is full of natural resources that allow the development of cars, agriculture, mining and some branches of the processing industry. However, this proves that it is vulnerable to changes in the prices of some raw materials.

Argentina is among the largest producers and exporters of soybeans, beef, corn, yerba mate, and wheat. Brazil, Algeria and China are the largest importers of Argentine agricultural products. However, soybean production depletes soil, displaces other crops and the farmers who grow them, and contributes to deforestation to make more land available.

The main problems facing the economy are inflation and government debt. High and persistent inflation is a feature of the region as a whole, and Argentina is no exception in this respect. Both problems stem from prolonged fiscal and monetary expansion and the need for constant depreciation of local currencies.

Argentina’s attempt to introduce a currency board-like system at the end of the twentieth century failed on the one hand due to the design of the regime (less than 100% coverage of the monetary base with foreign assets and a gradual reduction of its this ratio), and on the other hand – from the weak commitment of the authorities (mostly local) to maintain fiscal control.

Another problem was the policy of the main trading partner Brazil, which reduced the real while the Argentine peso remained stable due to its peg to the US dollar.

The subsequent change in the monetary system contributed to the devaluation of the Argentine currency, which, in the presence of a large debt in dollars, led to an increase in the debt burden for both the public and private sectors.

What does more recent data show?

The main problems facing Argentina’s economy are inflation and government debt.

Argentina is facing a major challenge – the fight against inflation. The pace is high in both the short and long term. According to the data from July 2024, the annual inflation is 263%, and monthly – 4%. Compared to December 2016, the cumulative inflation until the end of July 2024 is over 6,500%, meaning that the CPI has increased more than 66 times in less than 8 years. In fact, at the beginning of the period, the annual inflation was between 22% and 58% in individual months. Its acceleration starts after January 2022, when it is 50.7%, and reaches a maximum value in April 2024 – 292.2%, after which it starts to slow down.

Very high inflation in itself is a serious problem for the purchasing power of the people. The presence of stagnation and even decline makes the situation even more difficult. In the past, governments have often resorted to financing budget deficits directly by issuing money (printing money) when access to international capital markets is difficult . The result is increased inflation. The impact of these recent actions has been significant on consumers and has had the biggest impact on food and soft drink prices, as well as hotel and restaurant services.

Argentina has repeatedly faced a financial, banking, currency and debt crisis. In the 21st century alone, the state has so far announced 3 times its ability to make payments on its debts, a major restructuring was needed, and it can “boast” of the most largest in the history of the International Monetary Fund. Therefore, in 2021, Argentina has about $40 billion in the IMF under the 2018 bailout, but they are still issuing a new loan of $44 billion. Credit rating agencies reacted to the events with some delay, but in the end, two of the three largest in 2019 reduced their assessment of the vulnerability of the Argentine governments by several notes.

As a result of the debt policy in 2018, the government’s debt-to-GDP ratio increased by 28.7 percentage points, which also contributed to the highest budget deficit that year. Over the next 2 years, it continued to grow and in 2020, the highest value for the last ten years was recorded – 103.9% of GDP, after which it decreased. Therefore, at the end of 2023, it is already 88.4%, which gives reasons for increasing the credit rating, but debt instruments are still assessed as very high risk (junk).

In the last ten years, Argentina has consistently followed a policy of (large) budget deficits – the average amount in the period 2014-2023 is more than 4.5% of GDP. However, after 2020, budget tightening is observed, and as a result the deficits are limited to around 3% of GDP, as will be the case in 2023.

Free Javier Millais guide

In such a situation, Javier Millay was elected in the presidential election of 2023. He wins the votes of voters with populist ideas according to his opponents, who usually advocate the idea of less state intervention in the economy, used through economic, fiscal and regulatory policies, reducing inflation, leaving the economic crisis and achieving sustainable growth.

His term begins in early 2024. To achieve these ambitious goals, Millay is adopting a shock approach – something that some former socialist countries have ‘ shift to developed economies after the collapse of the Union for Mutual Economic Assistance. He presented his ideas to Congress (Argentina’s legislature) in a large project of 351 pages and 664 articles that covered labor market regulations, trade, real estate, health care and even aeronautics. According to him, these are actually about 2/3 of his reform proposals.

However, due to the lack of a majority in Congress the entire proposal was rejected. This does not stop the new president, who is strongly convinced that structural changes are needed. The most important elements of Millay’s policy are: a sharp reduction in budget spending, a reduction in bureaucracy and a devaluation of the peso. This means layoffs for tens of thousands of public servants and lower incomes for their families, cuts in subsidies for state-owned enterprises, which could contribute to further increases in unemployment.

According to Millay, a self-described anarcho-capitalist, Argentina is in a full-scale crisis that threatens its existence as a country. It is caused by the restrictions placed on the exercise of the constitutional rights of citizens and especially those related to trade, labor and industry. As a result, competition is severely restricted and prices are artificially distorted while placing an undue burden on people’s purchasing power.

Millay has an ambitious program to privatize or close state structures. The aim is to promote competition and economic efficiency, reduce the tax burden, improve the quality of services, increase private investment and determine prices from the markets.

These measures prompted immediate criticism from both the president’s opponents and analysts. In this way, they argue, the recession in the economy that is already before the beginning of the mandate will be deepened. The IMF even predicts that in 2024 Argentina will experience the biggest recession among national economies around the world.

Of course, there is logic to such an expectation – a reduction in government spending and a reduction in workforce is directly reflected in the GDP and employment data. This one-off shock will have a negative impact on the current GDP size, and this is confirmed by the data for the first quarter of the year. On the other hand, measures to improve the economy would have an effect in the medium and long term.

Inflation data for the end of July shows that it has slowed for the fifth consecutive month each year. In fact, the central bank also contributed to this, increasing its main refinancing rate to 126% in October 2023 (from 111%) and then gradually reducing it, reaching 40% in May at the end of June . However, real interest rates remain negative, which benefits local currency lenders.

The depreciation of the local currency contributes to the increase of official foreign exchange reserves. At the end of December 2023, they were 19 billion dollars, and in June they already exceeded 24 billion dollars.

The short-term index of economic activity, which is released monthly, gave reasons for hope for a smaller-than-expected recession, as it recorded growth of 1.9% year-on-year in May 2024 after 6 consecutive months of decline (including 8.2% in March – the highest since 2020). However, data for June showed that the economy was not on the growth path after the recession recorded was more than expected.

Javier Millay took measures that are not popular and will have a negative social and economic impact in the short term. But if they work over a sufficient period of time, they are likely to achieve the desired results. Monetary stability, sound public finances and effective regulations are a good basis for achieving sustainable economic growth.