Javier Milei won the primaries for the presidency in Argentina and is the favorite in the next elections. How has a candidate who campaigns with a chainsaw, denouncing political caste, come to lead the polls? The answer lies in the country’s deep crisis, inflation that far exceeds 100%, much poverty, chronic fiscal irresponsibility, and all made worse by a severe drought. Successive governments have sunk the economy with nefarious and corrupt management that leads many Argentines to despair. The legacy of Peronism since Juan Domingo Perón came to power in 1946 is long. He has dominated economic policy for the last twenty years, with the parenthesis of Mauricio Macri, who was not able to straighten out the country. Argentina operates on loans from the IMF, to which it now owes $44 billion.
Milei is a libertarian economist with radical right-wing ideas and an unstable personality. His star idea is to eliminate the central bank and dollarize the country. In this way he hopes to put an end to the machine of printing tickets to finance government spending, where more than 70% are social benefits or economic subsidies. Argentina would import credibility from the US Federal Reserve Bank, suppress inflation and be able to borrow without investors having to demand a risk premium for a possible devaluation of the peso. However, dollarization controls inflation but does not eliminate the risk of the public deficit going out of control and debt default, as demonstrated by the case of a country that has been dollarized since 2000, such as Ecuador. A dollarized economy is stripped of its ability to respond to economic and financial disturbances, both for better and for worse.
The idea is that the government would become fiscally responsible by not having the monetary tap available. It is a similar idea to the fact that the adoption of the euro would make countries introduce reforms to increase productivity and follow sustainable fiscal policies. That is why a non-rescue clause was put in the European treaties to establish the euro. The result was that these reforms did not take place in Southern European countries, and that they ended up being bailed out anyway.
Argentina implemented a softer dollarization in the early 1990s, trying to maintain a fixed parity with the dollar (a currency board), but abandoned it in 2001 due to lack of economic growth, overvaluation of the peso and problems with debt repayment external The result was a very severe economic crisis and another debt default. It is much more difficult to undo a dollarization of the economy like the one proposed by Milei. Also there is no guarantee that it will work. We add that to carry it out the central bank would need more than 35,000 million dollar reserves when it now has a deficit of nearly 9,000 million dollars. The prospect of achieving them therefore seems unrealistic.
In short, there is no painless way to import credibility from abroad in a country where the institutions do not support and populist politics is rooted. Argentina was one of the richest countries in the world at the beginning of the 20th century and has assets such as a high level of education. The World Bank still classifies it as a high-income country. There is no magic solution for Argentina, only an in-depth institutional reform that leaves populism behind can bring the country back to prosperity.
