Last weekend, the second round of Argentina’s elections took place, which was won by Javier Milei against Felipe Massa, an event that will make him the new president of the nation.
Beyond the controversies surrounding Milei’s person or his ideals beyond his training as an economist, which we will not describe in this article, his approach to monetary policy aimed at boosting a country mired in an unresponsive crisis is quite interesting.
Firstly, it is important to emphasize that Milei is a classical economist, that is, he bases his approach on the ideal of a free market, drawing on doctrines such as those of Adam Smith, Robert Lucas, and Milton Friedman, to the extent that his pets are named after the latter two. Javier has been considered a far-right politician, which may be accurate (leaving aside strictly political and social ideals) if we consider that economic liberalism is based on market action and seeks to reduce government intervention.
What are his economic proposals?
DOLLARIZATION OF ARGENTINA
Given the inflationary effects suffered by the nation, with annual figures exceeding 100%, Milei proposes to eliminate the Argentine peso and use the dollar as the official currency, thereby the Argentine Central Bank would disappear.
The precedents of dollarized economies are found in Ecuador and El Salvador, which have put this idea into practice with relative success, particularly in controlling inflation. Another interesting reference is what happened in the smaller economies of the Eurozone, which implemented the use of the euro to replace their local currency with terrible consequences for the purchasing power of the population, as happened in Greece.
GOVERNMENT AUSTERITY, REDUCTION OF PUBLIC SPENDING, AND PRIVATIZATION
Does this concept sound familiar? We have heard it in a context contrary to the arguments made by “left-wing” governments like that of Mexico: Javier seeks to reduce spending through social programs and privatize public companies that are running a budget deficit; on the other hand, this concept is employed for a reduction of privileges of middle and high political commands in exchange for redistributing this expenditure to the vulnerable population.
An example Milei uses is to pay students and tutors the tuition of the private institution they attend instead of allocating resources to public institutions. This argument has been debated in Mexico and according to the 2023 budget allocation for the UNAM, a higher education student costs $79,000 pesos a year, far from the cost of studying at top private universities.
The previous paragraph explains an impure privatization process: it seeks to promote and boost the private education sector with “public” resources but will gradually eliminate public education without public universities having a fee, thus, it is quite debatable whether it is a better option to promote education.
ELIMINATION AND REDUCTION OF TAXES AND SUBSIDIES
One of the major debates in global economies is about simplifying taxes and how to promote their payment instead of evading them, and how “fair” they are when framed by the law. Milei apparently wishes to eliminate certain taxes that only serve to drive away economic activity (such as export duties), as it is more attractive to invest and consume in a free economy, resulting in greater economic activity.
The elimination of subsidies also plays a key role, as it apparently is more costly to subsidize services like gas and electricity than simply to eliminate the tax to reduce their cost and thus be regulated at market price. The idea is not to pay taxes for your gas bill, which would make it cheaper in exchange for granting a subsidy. A similar example is when Mexico stopped paying for gasoline at a fixed price and created the infamous “gasolinazo” during Peña Nieto’s government, however, the subsidy was not completely eliminated.
Milei: The Economic “Messiah”?
From the outset, we will have to wait for the approvals from the chambers, since most of these proposals have to be approved by them.
In case of achieving the approval and execution of his various proposals, the details and implications of each one can be known, giving a better perspective.
Let’s remember that the most complex aspect of the social, economic, and financial world is the difficulty in evaluating the impact of the decisions that are made, since there are no good or bad answers and only time after being applied, can the success or failure of these be known, if not, just ask Salinas de Gortari about the inevitable crisis of 1994.
For any additional topic related to economy, markets, and personal finances, contact me directly through:
Email: agarcia@hedeker.com
LinkedIn: Alberto García Medina
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