Argentina’s Economic Turmoil – An Overview of the Economic Struggles and Analysis of Javier Milei’s Potential Impact on the Nation

Article by Imran Chaudhri

Introduction

With a GDP of an estimated US$640 billion, Argentina is one of the largest economies in both Latin America and the world. However, the nation has suffered from a longstanding period of debilitating economic instability. Although emerging political figures, such as Javier Milei, have dreams of curing these problems, this article will outline the theoretical and practical issues that could complexify any of these aspirations. 

A History of Economic Instability 

Exploring the various perceptions on what has initiated and fuelled Argentina’s economic problems could easily fill a series of books. Therefore, this article will identify the general issues and landmark events that influenced the country’s difficult history. 

Primarily, Argentina has infamously been plagued by aggressive inflationary pressures – an increase in price of goods and services over time. Many experts have claimed that inflation is so high because questionable figures in government previously prevented the country from managing the economy properly. This stems back to as early as 1946, when PM Juan Peron pursued protectionism (taxing imports to encourage domestic industries to grow). Although Argentina changed their economic policies in the 1970s, to encourage trade with other countries, the extensive inefficiencies in their domestic markets prevented the nation from taking advantage of the benefits of globalisation. The effects of these decisions are still felt today, as 80% of Argentina’s trade is sourced from Brazil, indicating that the country has struggled to attract overseas trade relationships that could lead to economic growth and provide higher quality goods and services for citizens. 

These policies on their own did not cause Argentina’s rate of inflation to increase though. In fact, they caused Argentina’s economic growth to plateau, encouraging the government to introduce monetary policy measures that consequently caused the inflation rate to increase. Theoretically, inflation occurs where the money supply of a country grows faster than its economic output. Considering the peso supply increased 711 billion to 2.5 trillion in the last 30 years, it is clear that Argentina’s cataclysmic problems are somewhat due to the behaviour of banks. The banks have excessively printed money to finance fiscal deficits. These actions have been taken in the shadow of Argentina’s frequent defaults from their national debt. 

To summarise, Argentina’s past focus on protectionism damaged the nation’s ability to trade and encourage economic growth, causing the national debt to grow. This has forced the country’s banks to either default or excessively print money to finance spending in the country. The drastic money supply growth has subsequently caused the annual rate of inflation to reach as high as 287% in March 2024. 

Javier Milei and the Future of Argentina

Javier Milei, who took office in December 2023, has sought to implement austerity measures (reduce public spending) to combat inflation and reduce the printing of money to stabilise Argentina. Austerity measures were famously used by the UK after 2010, after the government bailed out the banks affected by the 2008 financial crisis. The deficit that was inevitably created from bailing out the banks caused the government to decide to cut spending. Although long-term austerity measures can guarantee that a country does not fall into the ‘Argentina trap’, where unavoidable national debts drown the nation in a cruel cycle of defaulting and hyperinflation, the negative social effects from these measures are not difficult to foresee. For example, if Argentina reduced government spending, perhaps through lowering the number of government buildings that are built, this would have a knock-on effect by minimising job opportunities and would subsequently cause the rate of unemployment to increase.

The government is also responsible for investing in communities. Even if austerity measures do not hurt those who already have jobs in secure sectors, the lack of spending often disproportionately affects lower income individuals, as less jobs will be available and the quality of their life will consequently plummet as the threat of poverty grows.

In the end, it seems like a lose-lose situation for Milei regarding austerity measures. However, Milei interestingly had pledged in his campaign to alternatively dollarise the Argentinian economy. Dollarisation involves using the US dollar to add to or substitute an unstable currency that a country uses. In Argentina, where hyperinflation seems unstoppable, it is difficult for consumers to make the most of their money. Any savings in pesos they hold will rapidly lose their value as the money supply in the country increases and the cost of goods and services rises. If they were to hold dollars instead, as the US generally has a more stable currency, consumers can confidently trade or save their money. Dollarisation does have its disadvantages though. Argentina, in using the dollar, would surrender monetary policy measures to control the currency as it is not theirs. Therefore, the burden of any major economic problems in the US would be shared with Argentina, which could ruin people’s way of life. 

Nevertheless, it is clear that something radical needs to be done. As Argentina has begun to circulate the first 10,000-peso note, the quality of life in Argentina could decline even further in the coming years. Progress seems possible currently, as Milei cut the monthly inflation rate from 26% to 11% between December 2023 and March 2024.

Conclusion

This article has highlighted the major economic problems that Argentina has and will continue to face. Plagued by hyperinflation and struggling industries, the country has often had to print money to avoid constantly defaulting to national debts. This has caused inflation rates to increase, affecting the wellbeing and behaviour of consumers. Javier Milei has aimed to introduce austerity measures to mitigate these problems but may have to accept that the quality of life in the short term could drastically decrease where government spending diminishes. Alternatively, Argentina could still look to dollarise their economy in the long-term, which may threaten the autonomy of the nation but could be a clearer route to introducing stability.  

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