By MICHAEL ROBERTS*

The Argentine president trusts in unrestricted capitalism as a means to resolve the long-standing crisis of this peripheral economy, and has not wavered in the face of this extremist experiment.

It’s been a year since self-proclaimed “anarcho-capitalist” Javier Milei became president of Argentina. He took office in a country where annual inflation was running at 160 percent, more than four in 10 people lived below the poverty line, and the trade deficit was $43 billion. On top of that, there was a staggering $45 billion debt to the International Monetary Fund, plus $10,6 billion to be paid to the multilateral lender and private creditors.

The previous Peronist government failed miserably to deliver economic expansion, a stable currency, and low inflation. Furthermore, it also failed to end poverty and reduce inequality. Argentina’s official poverty rate rose to 40% in the first half of 2023. According to available global inequality data, the richest 1% of Argentines had 26% of all net personal wealth, the richest 10% had 59%, while the poorest 50% had just 5%! In terms of income, the richest 1% got 15%, the richest 10% got 47%, and the poorest 50% got just 14%.

Javier Milei’s plan was clear (at least in his own technocratic mind). He would dismantle Argentina’s state sector; he would also “liberate” the markets from regulation so that big business and foreign investors could make profits. He intended to devalue the currency with the ultimate goal of achieving the complete dollarization of the Argentine economy. All this because he trusted in unfettered capitalism as a means to resolve the long-standing crisis of this peripheral economy.

Javier Milei did not waver in the face of this extremist experiment: he implemented an extreme free market policy and thus differentiated himself from the reformist or moderately interventionist Keynesianism that had been adopted by previous administrations.

To this end, upon taking power, Javier Milei took a series of austerity measures, including cutting energy and transport subsidies, laying off tens of thousands of public employees, freezing public infrastructure projects and imposing a freeze on wages and pensions below inflation.

The results have been brutal. The economy has fallen into a deep recession. The IMF predicts a contraction of 3,5% in 2024. That may sound small, but it is the biggest contraction in any major G20 economy this year; it is surpassed only by Haiti, an economy dominated by gangsters, and South Sudan, which is ravaged by civil war.

Javier Milei aims to end the hyperinflation that is ravaging the Argentine economy by deliberately reducing production and consumption; his goal is to drastically reduce real wages, making room for capital accumulation. By cutting public sector spending, jobs and subsidies for the poor, he also aims to ease the tax burden on companies, which potentially increases the profitability of capital. He hopes that this will bring new investment.

After a year, as most Argentines were forced to cut spending, monthly inflation fell dramatically. The result is effective, but it must be seen that its anti-inflationary policy was designed to act only on aggregate demand, to the detriment of the poorest.

Slowing inflation has strengthened the Argentine peso and reduced borrowing costs. Through a tax amnesty, Milei has enticed wealthy Argentines to declare their accumulated wealth in dollars, amounts that were hidden in offshore bank accounts and private vaults. This has brought $19 billion to Argentina’s central bank, boosting its foreign exchange reserves.

Javier Milei wants to loosen the grip of central bank controls; however, if he does so now, the peso, which is extremely overvalued, would plummet, making it harder to meet IMF payments. Fortunately for him, the hated IMF is very pleased with the policies he has implemented. An IMF report noted that the Argentine government “has made progress in restoring macroeconomic stability faster than expected; it is getting the economy back on track very efficiently.”

The same report thanked the Argentine authorities for the “decisive implementation of the stabilization plan.” Now, since the rich are not having to pay more taxes, Milei’s austerity measures were received enthusiastically by the IMF and major Argentine companies.

Public spending has been reduced by 30% year-on-year this year in real terms (i.e. in inflation-adjusted terms), according to calculations by the Center for Argentine Political Economy (CEPA) and the Association for Budget and Public Finance Management (ASAP).

Javier Milei closed 13 ministries and laid off some 30.000 civil servants, 10% of the federal workforce. He also froze public works and reduced funds allocated to education, health, scientific research and pensions. The budget cuts were especially harsh in infrastructure (-74%), education (-52%), social development (-60%), health (-28%) and federal aid to the provinces (-68%).

The Argentine Construction Chamber (CAC) estimates that the state now owes contractors around 400 billion pesos (or $400 million). In any case, 200.000 workers have been laid off in the construction sector since the start of the extreme neoliberal government. State pensions have been frozen. As it stands now, a retiree in the lowest income bracket currently receives the equivalent of $320 a month, or just a third of the $900 a family needs to survive.

According to the National Inter-University Council, 70% of teaching and non-teaching salaries are below the poverty line. Now, Javier Milei has eliminated the National Teacher Incentive Fund, which subsidized the very low salaries of teachers throughout the country; and it accounted for almost 80% of transfers to the provinces for educational purposes from the federal government.

In addition to suspending school infrastructure maintenance spending, he also cut scholarship programs by 69 percent. University budgets were frozen, and many campuses were left without funds to pay for gas heat and electricity, and the university system declared a state of emergency.

Javier Milei has cut the salaries of researchers and support staff at the National Council for Scientific and Technical Research (Conicet), the country’s main science and technology organization. He has also drastically reduced the number of doctoral and postdoctoral fellowships, laid off 15 percent of the council’s administrative staff, frozen the budget of the National Research Promotion Agency, and shut down projects at key institutions such as the National Institute of Industrial Technology (INTI) and the National Atomic Energy Commission (CNEA).

As a result, there was a 30% drop in applications for research and scientific positions in the country. In a public letter addressed to Javier Milei, 68 Nobel Prize winners warned that “the Argentine science and technology system is approaching a dangerous precipice.”

Poverty levels have worsened significantly. Argentina’s poverty rate has jumped from nearly 42 percent to 53 percent, adding an additional 3,4 million Argentines to the already high numbers. Two-thirds of Argentine children under the age of 14 live in poverty. Javier Milei has eliminated subsidies that were administered through social organizations. Among the aid that has been cut is the distribution of food to community kitchens, which serve children and entire families. Employment programs channeled through worker cooperatives have also been canceled. Argentines are having an increasingly difficult time finding jobs; because they earn so little when they do earn, they cannot even afford to feed their families adequately.

Subsidies for electricity, gas, water and public transport have been cut. In December 2023, a middle-class family spent about 30.105 pesos (about $30) per month on electricity, gas, water and public transport. But by September 2024, spending would have increased to 141.543 pesos (about $142).

These massive blows to the living standards of average Argentines, coupled with continued increases in inflation, have led to a collapse in consumption. In the Buenos Aires Metropolitan Area (AMBA), consumption levels fell by 12,9% year-on-year and -2,3% compared to April 2024. In the rest of the country, consumption fell by 15,5% year-on-year and by 3,6% compared to April 2024.

Inequality has risen again. The richest 10% now earn 23 times more than the poorest decile, compared with 19 times a year ago. Incomes have fallen by 33,5% in real terms among the poorest deciles, but only 20,2% among the richest. The Gini index of inequality has reached an all-time high of 0,47.

Despite this vicious attack on the average living standards of the Argentine people, Milei has managed to maintain a sufficient degree of support. People still expect him to end the chaos brought about by inflation and then restore growth. His approval ratings have remained stable.

Naturally, support for Javier Milei's government comes mainly from wealthy Argentines; however, even the poorest, who are in fact bearing the brunt of his policies, still show more support for him than for the previous Peronist government.

By aggressively cutting spending and cutting government ministries in half, Argentina went from a fiscal deficit of 2 trillion pesos ($2 billion) at the end of last year to a surplus of 750 billion pesos in October this year. It is the first fiscal surplus in 16 years.

Will Javier Milei’s policies work? They are certainly a living experiment, implemented in a specific country. And they allow for comparison between “free market” policies and Keynesian macromanagement. But Argentina is a weak capitalist economy dominated by imperialism. It had a huge trade deficit in 2023. But the devaluation of the peso by Javier Milei’s government allowed exports to recover last year (up 30%), while domestic austerity crushed imports. Tax breaks for the rich led to a small net inflow of capital after massive outflows in the last year of the Peronist government.

Foreign exchange reserves have therefore improved slightly, but are still far from being sufficient to meet future debt payments, especially to the IMF. The country faces large external debt payments: in 2025, this amount is estimated to be around US$9 billion. But perhaps the IMF will be “soft” on Javier Milei’s Argentina.

The big immediate problem is that the peso is still very overvalued; the value of the dollar in pesos is still very low. It is estimated that it needs to be devalued by at least another 30% to make Argentine exports competitive. Now, this is a major difficulty, since a devaluation of the currency could accelerate inflation again, tarnishing the results of the policies implemented this year.

Javier Milei’s anarcho-capitalist plans, using a term coined by Joseph Schumpeter, are really a form of “creative destruction.” This Austrian economist coined the term in the 1930s to explain how recessions are necessary under capitalism to create the conditions for a new expansion. It is necessary, he said, to first “cleanse” the system of surplus capital, supposedly unnecessary spending, unproductive workers, and weak companies, in order to make the economy “leaner and more robust.”

But so far, Javier Milei’s “creative destruction” has only reached the stage of destruction. Will it be overcome? As Marx argued, the creative moment of the process always requires a sharp increase in the profitability of capital. If this occurs, there will be an explosion of investment and thus an increase in employment and national income. Will this really happen in Argentina? Given the current global stagnation, given the historical weakness of the capitalist sector in Argentina, can a strong recovery in investment be foreseen? Indeed, given the depth of the recessionary destruction, can it be predicted that the Argentine economy will remain in depression for the rest of the decade?

Argentina could break out of this stagnation if there were a boom in commodity prices, as happened in the early 2000s. Argentina is the world's largest exporter of soybean oil and meal, the second largest exporter of corn and the third largest exporter of soybeans. However, soybean and corn prices are not very buoyant at the moment.

Argentina has the world’s third-largest lithium reserves, making it a key player in the global energy transition. However, lithium prices have fallen recently due to oversupply.

Argentina also has significant reserves of shale gas. The Vaca Muerta oil field is one of the largest unconventional hydrocarbon reserves in the world, with an estimated 16 billion barrels of oil and 308 trillion cubic feet of natural gas, but so far it has remained largely unexplored.

Exports are key to the recovery process. This requires an even greater depreciation of the peso. But such a depreciation could re-accelerate inflation unless even more austerity is implemented domestically to compensate. The big concern for Argentina’s current economic management is that re-elected President Donald Trump has said he intends to increase tariffs on all US imports by at least 20%. If he does so, it will hit Argentina hard. It is no wonder that Milei has spent time in the US trying to get closer to Trump at Mar-a-Largo.

*Michael Roberts is an economist. Author, among other books, of The great recession: a marxist view (Lulu Press) [https://amzn.to/3ZUjFFj]

Translation: Eleutério FS Prado.

Originally published on The next recession blog.

the earth is round there is thanks to our readers and supporters.
Help us keep this idea going.
CONTRIBUTE