Lara-Resende on Milei

 

Straight jackets of our own making

André Lara-Resende has published a long analysis of Javier Milei's Argentina, subtitled "microeconomic successes and macroeconomic mistakes." The essay is particularly significant because it confirms the considerable evolution of Lara-Resende's thinking on money and inflation. It also returns him to the subject with which he first became closely associated, namely: inertial inflation and the stabilization proposals that eventually to the Real Plan. His critique of Milei's macroeconomic policy is broadly correct. Yet his account remains limited by a conventional institutionalist interpretation of Argentine decline and, more importantly, by the failure to place the exchange rate and the external constraint at the center of the inflation and stabilization story.

The evolution is worth emphasizing. In earlier writings, Lara-Resende while rejecting the crude Quantity Theory of Money had accepted to a great extent John Cochrane's Fiscal Theory of the Price Level (FTPL). Inflation was not directly caused by the stock of money, but it remained fundamentally a fiscal phenomenon. For him expectations of future fiscal imbalances supposedly determined the current price level. As I noted several years ago (link above), endogenous money and occasional references to Knapp, Lerner and Modern Money Theory (MMT) were then being used to defend relatively conventional conclusions, essentially fiscal adjustment, pension reform, trade liberalization and a smaller, less patrimonialist state. The language was new, but fiscal dominance and austerity remained at the center of the argument.

Lara-Resende had already moved away from Cochrane and closer to MMT by the time of his more recent book. However, as late as his discussion of the thirtieth anniversary of the Real Plan, he still described inflation as the result of a prolonged process of fiscal disorder reflecting social demands that could not be accommodated through existing political institutions. This remained a fundamentally fiscal interpretation of inflation, even if clothed in a more sophisticated account of money and expectations.

In the new essay, the break is much more explicit. Lara-Resende now directly criticizes the FTPL. He correctly notes that the theory depends on expectations about fiscal results extending indefinitely into the future. Since these expectations are unobservable, any persistence of inflation can be rationalized after the fact by claiming that the public does not believe the fiscal adjustment will last. Milei has produced primary and even nominal fiscal surpluses, yet inflation has not immediately disappeared. The FTPL response is simply that people expect future governments to return to fiscal irresponsibility (a possible Kicillof government). As I joked (on Twitter after a comment from an Argentine econ prof.) if the plan works its Milei's success, if it fails it's the Peronist fault (heads I win, tails you lose, essentially). A theory that can explain every possible result in this way cannot be falsified, as Lara-Resende correctly notes. This is a welcome and substantial change from Lara-Resende's earlier position.

His positive argument returns to the inertial inflation approach developed at the Catholic University, in the 1980s. Inflation may initially be caused by a variety of factors, fiscal disequilibrium, excess demand, distributive conflict and supply shocks, but, once it has persisted for a sufficiently long period, indexation and backward-looking price formation give the process a life of its own. Wages, prices and contracts are repeatedly adjusted on the basis of past inflation. Even after the original shock has disappeared, yesterday’s inflation becomes the floor for today's. I have issues with this notion of multi-causal inflation, that still puts too much emphasis on demand pull factors (more on that below).

From this perspective, continued fiscal and monetary contraction is not only ineffective but unnecessarily destructive. Once the original inflationary pressures have been removed, austerity creates recession and unemployment without eliminating the mechanisms that reproduce inflation. This is Lara-Resende's central criticism of Milei's macroeconomics. The government has treated inflation as the consequence of deficits and monetary issuance, imposed a severe fiscal contraction, and obtained a deep recession and higher unemployment. Yet the inertial component of inflation persists. He basically thinks Argentina now is Brazil in the 1990s (not an Orloff effect, a reverse one, Argentina is Brazil yesterday, so to speak).

His proposal follows directly from this diagnosis. Not surprisingly he wants a Real Plan for Argentina, that should adopt a process of deindexation inspired by the Brazilian Unidade Real de Valor (URV), a virtual, indexed unit of account would allow prices to be expressed in a stable unit while the existing currency continued to depreciate. Once relative prices had been coordinated in the virtual unit, it could be transformed into the new national currency. The URV would therefore break the link between past and current inflation without requiring an even deeper recession.

Lara-Resende also rightly rejects dollarization. Money is a public institution and an essential part of national sovereignty. Dollarization would place Argentina under the monetary governance of the United States without giving Argentines any political representation in that governance. All of that is a major improvement over monetarism, the FTPL and Milei's fantasies about abolishing the central bank.

The problem is that Lara-Resende combines this somewhat heterodox macroeconomics with a rather conventional account of Argentina's long-term development. He starts from the familiar assertion that Argentina was once a rich and educated country, comparable to the advanced European economies, and that its subsequent decline constitutes a great historical mystery. The explanation is then sought in Mancur Olson, Douglass North, Daron Acemoglu and James Robinson. In other words, entrenched interest groups, corporatist coalitions, excessive regulation and the institutional inheritance of Peronism blocked creativity, investment and growth. This is the basis for Lara-Resende's distinction between Milei's successful microeconomics and mistaken macroeconomics. Federico Sturzenegger's deregulation campaign is presented as a potentially productive attack on the bureaucratic, corporatist and patrimonialist state inherited from Peronism. Milei's radicalism may have been useful, in this view, because it made possible a rupture with the Peronist legacy that has haunted Argentina since the middle of the twentieth century.

There are several problems with this story. Most importantly, Argentina was never really a developed country. It had a high income per capita during the Belle Époque, but high income derived from natural-resource rents is not the same thing as development. Saudi Arabia also has a high income per capita. Argentina was a kind of "beef-state" (instead of a petro-state) as I call it in this paper (in Portuguese), prosperous under the highly specific conditions created by its integration into the British-centered international economy, but dependent on manufactured imports, foreign finance and the export performance of a narrow primary sector. Its productive structure did not have the autonomy, technological capabilities or capacity to produce capital and intermediate goods characteristic of a developed economy. The collapse of British hegemony, the international division of labor and the Gold Standard therefore undermined the foundations of the agro-export model. It was not simply a rich, developed society mysteriously ruined by bad institutions.

The Peronist decline thesis is equally simplistic. Peronism cannot explain eight decades of decline because, among other obvious reasons, Peronism was frequently proscribed and excluded from government. More fundamentally, the evidence does not show that state-led industrialization produced Argentina's decisive economic collapse. Economic performance from the postwar period to the mid-1970s was far from disastrous. Per capita income maintained its position relative to the United States between roughly 1950 and 1975, and the 1964–74 period was particularly dynamic (not the Brazilian "Miracle", but pretty good). The major second phase of relative decline began after 1976 (more precisely 1975 with the Rodrigazo, but I'm splitting hairs here), when the military dictatorship abandoned industrialization and adopted the liberalizing policies of José Martínez de Hoz. The neoliberal period from 1976 to the collapse of Convertibility produced essentially no per capita growth over more than two decades.

The decision to abandon industrialization was not the inevitable consequence of its economic failure. It was inseparable from distributive conflict and the attempt to weaken organized labor and reverse the increase in the wage share associated with Peronism. The so-called Argentine Pendulum, discussed by Marcelo Diamand. Besides it happened in almost all countries, including Brazil that supposedly did not have Peronism, and had a much stronger industrial bourgeoisie (se my discussion here, in Spanish). Argentina's difficulty was that the expansion of domestic demand and real wages increased the demand for imported capital and intermediate goods. This repeatedly ran against the balance-of-payments constraint. The resulting stop-and-go cycles intensified distributive conflict, but they do not prove that higher wages, industrialization or state intervention were the source of long-term decline.

This is also why the New Institutionalist framework is inadequate. Institutions certainly matter, but not simply because they protect property rights, reduce regulation or prevent rent seeking. The relevant institutions are also those that sustain domestic demand, promote investment and technological capabilities, and relax the external constraint. A supply-side discussion of entrepreneurship and incentives misses the role of the state in creating markets, financing innovation, coordinating investment and securing access to foreign exchange. The supposedly successful East Asian economies did not develop by reducing the state to the protection of property rights. They relied on industrial policy, credit allocation, exchange controls and extensive public-private coordination. Milei is also getting the micro wrong, in other words.

This brings us to the principal limitation of Lara-Resende's inflation analysis. Inertia is important, but the stability of the nominal exchange rate is more central to Argentine inflation than his discussion suggests. He attributes the inflationary acceleration during the second half of 2023 largely to Milei's threat to abolish the peso and the central bank. That threat certainly encouraged the flight from the domestic currency. But the more direct mechanism was the depreciation of the peso, first the devaluation imposed under the IMF agreement while Sergio Massa was still minister, and then Milei's own maxi-devaluation after taking office. In a highly dollarized peripheral economy dependent on imported inputs, depreciation passes rapidly into domestic costs and prices. It also reduces real wages and sets off distributive attempts to recover lost income.

Money creation accommodates this process. It does not initiate it. Similarly, the fiscal adjustment did not produce disinflation. It produced the recession and the collapse in real wages. Milei reduced inflation by holding the exchange rate under control after the initial devaluation. That exchange-rate stabilization has depended on intervention, restrictions of various sorts and, crucially, access to external finance. Lara-Resende comes close to acknowledging this. He warns that Milei's combination of fiscal, monetary and exchange-rate policies is a familiar recipe for recession and a balance-of-payments crisis. He also notes that an unusual intervention by the United States prevented the program from collapsing when external payments came under pressure. But these observations remain somewhat detached from his explanation of disinflation. External financing appears as something necessary to prevent a later crisis, rather than as an essential condition for maintaining the exchange-rate anchor that made the reduction of inflation possible in the first place.

The same issue qualifies the proposed Argentine URV. The URV was undoubtedly an ingenious solution to the coordination and relative-price problems created by chronic inflation. But it does not explain by itself why the Real Plan succeeded in the 1990s when the heterodox stabilization plans of the 1980s failed. Brazil introduced the Real after the Brady restructuring, the return of capital flows to Latin America and a substantial accumulation of international reserves. The URV became a new currency that could be maintained at a relatively stable exchange rate against the dollar. The external conditions for stabilization had changed. In the 1980s, the foreign debt crisis, scarcity of dollars and continuous depreciations repeatedly undermined domestic price stabilization, and stabilization was possible after the Brady Plan allowed for the entry of new funds. An Argentine URV might help break indexation, to the extent that this is a problem (most indexation is to the dollar anyway in the Argentine case). It cannot create dollars, finance essential imports, service foreign-currency debt or defend the conversion rate of a new currency. Without an external strategy, reserve accumulation and controls capable of managing capital flows (in the short run) and imports, a new unit of account would eventually confront the same constraint as the peso.

Lara-Resende's intellectual evolution should therefore be welcomed. His rejection of the FTPL, his return to inertial inflation, his criticism of austerity as an instrument of stabilization and his rejection of dollarization all represent real advances. He is now much closer to a genuinely heterodox view of money and inflation than he was when he first became associated with MMT. But his interpretation remains incomplete.

Argentina's problem is not that an already developed economy was destroyed by Peronist regulation and fiscal irresponsibility. It is that a peripheral economy never completed its industrial transformation, repeatedly encountered the external constraint, and eventually abandoned its most successful development strategy in favor of liberalization, financialization and recurrent dependence on foreign borrowing. Inertia helps explain the persistence of inflation, although in the Argentine case, informal dollarization is more relevant. The exchange rate and the availability of dollars explain its major accelerations, the conditions under which stabilization becomes possible, and why Argentine stabilization programs so often end in another external crisis.

The Washington Post, Argentina’s “Renaissance” and the Milei Mirage

A recent Washington Post editorial, “Argentina’s renaissance continues,” offers a nearly perfect example of the Milei success story now circulating in the financial press. According to this view, inflation has fallen mostly as the result of the fiscal adjustment, exports are rising, as a result of market confidence, and Moody’s, Fitch and S&P have upgraded Argentina’s debt. The latter in and of itself shows that markets approve, and what else would you need, really? From this, the editorial concludes that Milei’s free-market reforms are working, that life is improving for Argentines, and that the country offers a model for other stagnant economies.

The problem is not that these developments are invented, but that the editorial provides the wrong explanation for them. Inflation fell primarily because the government slowed the rate of currency depreciation after Milei’s initial maxi-devaluation had pushed monthly inflation to roughly 25 percent and caused a collapse in real wages. Fiscal austerity contributed by producing a deep recession, weakening employment and reducing wage demands, but balancing the budget was not the central anti-inflationary mechanism. Exchange-rate stabilization reduced inflation, and austerity produced the contraction.

The same confusion appears in the discussion of the fiscal surplus. Argentina’s fundamental constraint is not the government’s ability to balance a budget denominated in pesos, but its capacity to obtain the foreign currency needed to pay external debts and finance essential imports. Milei inherited a heavily indebted economy with few reserves and has remained dependent on support from the IMF, China (the swap in 2024) and the United States (last year). A fiscal surplus may reassure creditors, but it does not create dollars, expand productive capacity or resolve the external constraint. Indeed, cuts in public investment may weaken precisely the productive capabilities Argentina needs in the longer run.

Nor did Milei create the export recovery, which is entirely related to foreign markets. Agricultural exports benefited from the end of the drought, while increased energy production reflects investments in Vaca Muerta and related infrastructure made before he came to office. Recession also reduced imports, mechanically improving the trade balance. The Post therefore credits free-market reform with the effects of favorable weather, previous investment, state-supported energy development and depressed domestic demand.

Credit-rating upgrades indicate that bondholders now believe they face a lower perceived risk of default.  That might or not be true (hint, probably not, and markets often make mistakes). They do not demonstrate that Argentine workers are better off or that a sustainable development model has emerged. The real questions concern wages, employment, poverty, public services, investment and the capacity to earn foreign exchange without repeated dependence on external borrowing. Milei may have achieved a politically important stabilization, but it remains fragile and externally dependent. What the Post calls a renaissance looks much more like another familiar Argentine cycle of austerity, financial enthusiasm and growing foreign obligations.

Milei is not Roca

 

From the 'conquest of desert' to the creation of a productive desert

Pablo Gerchunoff has an interesting interview in La Nación in which he suggests that Milei, like Roca (the Argentine Porfirio, for gringos that know something about Mexico), has seen a structural change in the Argentine economy and has been able to convert it into a political opportunity. In Roca’s case, the combination of railways and refrigerated shipping opened the possibility of the old agro-export model. In Milei’s case, Gerchunoff points to the new productive geography along Route 40, with mining and energy potential. The natural gas and oil of Vaca Muerta, the possibilities of lithium, the mining and energy resources of Patagonia and the northwest frontier.

There is something to the point. But the analogy, I think, is more misleading than illuminating. I also might add that it is striking that someone like Gerchunoff, who once admired what he saw as Alfonsín’s non-Peronist social-democratic model (something that I share), could now find historical promise in Milei.*

On the historical issue, it is clear that Roca's model was not similar to the current one. The so-called generation of 80 did talk the language of liberalism, but the construction of that economic model required a very active state. Military occupation, territorial incorporation, railways, ports, public credit, land policy, immigration policy, and a political regime designed to guarantee the conditions for accumulation. Free markets did not spontaneously build the agro-export economy. It was built by the state, often violently. The current government wants the epic of a new productive frontier without public works, without infrastructure, and without the political construction that made the old liberal order possible.

There is another problem. Much of the so-called Route 40 strategy depends on investments and institutional decisions that preceded Milei. Vaca Muerta did not fall from the sky in December 2023. Energy infrastructure, the development of shale production, and the reduction of energy imports are the result of previous policies and investments. Milei can try to appropriate the narrative, and he may even give excessive incentives to some sectors, like AI (see Milei's piece in the FT), through the RIGI and other measures (for an explanation of the investment regime go here). But the current improvement in the external sector is not evidence that chainsaw economics works. It is evidence that past public investment, together with favorable external conditions (and a lot of dollars from the IMF and the US Treasury), can temporarily improve the balance of payments.

This is also why the idea that Milei is an outsider was always implausible. As I have noted before, the economic team is not new. Caputo and Sturzenegger are not outsiders to Argentine economic policy. They were central to the Macri experiment, which led to the 2018 IMF agreement and the renewed dollar debt trap. Milei’s rhetoric is anti-caste, but the economic program is the old neoliberal package of fiscal austerity, deregulation, trade and financial liberalization, and external indebtedness. The dog may be new, but the fleas are not.

Gerchunoff is right to worry about the losers of creative destruction (not sure how much is being created). But here too the Roca analogy fails. Argentina today is not a sparse nineteenth-century frontier society organized around land, beef exports, and a small urban elite. It is a modern, urban, very unequal society with a large working class, a complex service sector, industrial remnants, public employment, pensions, universities, health systems, infrastructure needs, and a binding external constraint. You cannot tell workers in the so-called conurbano to wait until 2050 or move to Patagonia. That is not a transition strategy. And it is not even good politics.

Where I disagree more sharply with Gerchunoff is on the exchange rate. He suggests that if the central bank moved the dollar closer to the top of the band (a devaluation in Latin American usage), Milei would almost guarantee reelection. That seems wishful thinking. Milei’s only clear achievement has been the reduction of inflation from the very high levels reached after the exchange-rate jumps of 2023. But that stabilization was not caused by fiscal austerity as such. The fiscal shock caused recession and the persistence of Argentina stagnation since 2011. The stabilization of prices came mainly from controlling the exchange rate, with substantial external support. The initial maxi-devaluation in December 2023 doubled monthly inflation and produced the collapse of real wages. Another depreciation would risk repeating the same mechanism. Higher import costs, higher prices, lower real wages, weaker consumption, and renewed instability.

In a peripheral economy with a strong pass-through from the exchange rate to prices, depreciation is not a magic route to competitiveness. It is often contractionary and inflationary. It reduces real wages, worsens distributional conflict, raises the domestic cost of imported inputs, and may fail to generate exports to compensate for the contraction of domestic demand. The idea that a cheaper currency automatically solves the external constraint is another version of the same marginalist fantasy that relative prices are the main mechanism of adjustment. In Argentina, relative prices often adjust by generating a crisis. Note that he already has a positive external situation in the short run (in the long run, the next several governments will have to contend with much higher external debt obligations).

This does not mean that the current exchange rate regime is sustainable indefinitely. It probably is not. But the problem is not solved by devaluation. The problem is that the government is trying to stabilize a highly dollarized economy with negative interest rate differential, offering insufficient incentives to hold pesos, scarce reserves, external dependence, and a brutal recessionary adjustment. In those conditions, a depreciation may be less a solution than the beginning of the next round of instability.

The broader issue is that the nineteenth-century liberal model cannot be recreated in a twenty-first-century Argentina. Even the nineteenth-century liberal model was less liberal than its admirers pretend. Today, a development strategy would require public investment, infrastructure, industrial and technological policy, energy planning, external management, and institutions capable of integrating the losers of structural change. Milei has none of that. He has a chainsaw, a Twitter account, and the enthusiastic support of the same groups that benefited from previous failed neoliberal experiments.

Roca, for all the brutality and exclusions of his project, built a state capable of organizing a model of accumulation. Milei is dismantling state capacity while claiming to inaugurate a new era of material progress. The result may last long enough to win an election if external financing keeps arriving. But the logic of the model points, as before, toward a crash. Roca 'conquered' the desert, Milei is creating a productive one.

* If you read Spanish I highly recommend his book on Alfonsín. 

Milei, Markets, and Mirage: Why Argentina’s “Success” Is Not What It Seems

There is a growing narrative in the international press, and among those who consume it, that Javier Milei has turned Argentina into a success story. Inflation is supposedly down, poverty is falling, growth is rebounding, and the long-standing problems of fiscal excess and state overreach are said to be finally resolved. For some, this is taken as vindication of “free market” principles.

 

But before we rush to declare ideological victory, it is worth pausing. If one is willing to infer from Argentina that markets work, why not infer from Scandinavian welfare states that intervention works just as well? The answer, of course, is that these simplistic conclusions misunderstand how economies actually function. There are no single-policy experiments in macroeconomics, and certainly none that can be reduced to slogans about the "free market” versus “the state.” As I will argue below, the apparent successes of the current Argentine administration are far more fragile, and far more misleading, than commonly portrayed.

Yes, inflation has come down from the extremely high levels reached at the end of the Alberto Fernández administration. But context matters. Those peak inflation rates, above 200% annually, were largely the result of massive exchange rate depreciations, including one induced under pressure from the International Monetary Fund (IMF) during the election of 2023.

Crucially, the current government itself triggered a sharp devaluation at the outset, accelerating monthly inflation from roughly 12% to 25% in December of 2023. The subsequent decline in inflation is not the result of laissez-faire policies, but rather of exchange rate stabilization, made possible by external financing. This includes a swap line with China and a substantial IMF agreement (around $14 billion disbursed), alongside additional support linked to political ties with the United States, again close to the midterm elections last year.

In other words, inflation came down not because markets are free, and fiscal spending was contained -- that caused a slowdown of the economy (more on that below) -- but because the exchange rate was actively managed with the help of international financing. So much for free markets. Even now, inflation remains around 30% on an annual basis, higher than during much of the period under Cristina Fernández de Kirchner. If this is success, it is a rather modest one.

The claim that Argentina is booming is equally misleading. What is improving is not the domestic economy, but the external sector. After several years of drought that depressed agricultural exports, favorable weather and higher commodity prices, especially for soybeans, have boosted export revenues. Additionally, infrastructure projects initiated under previous administrations, such as energy investments linked to Vaca Muerta, have reduced energy imports and improved the trade balance. None of this has much to do with current policy. It is largely the result of exogenous factors and past investments.

Meanwhile, the domestic economy is stagnant, and this is the direct result of the draconian cuts of government spending, including investment and spending on crucial areas like Research & Development that will hurt growth, and exports in the future. Capacity utilization collapsed in December 2025, when he assumed the government (as can be seen below), as much as real wages did (as I have shown before here).

 

Poverty has indeed declined from its recent peak. But here again, the explanation is more mechanical than structural. Poverty in Argentina is highly sensitive to inflation. The spike in prices, partly triggered by the initial devaluation under the current administration, pushed poverty sharply upward. As inflation stabilized, poverty naturally declined from those elevated levels. This is less an achievement than a reversal of a self-inflicted shock, even if poverty was increasing at the end of the previous government. And it remains higher than it was with Cristina. And it is higher than what his government claims (as is inflation; note that the head of the statistics office resigned for issues with inflation measurement, something that the right always criticized about the Kirchners).

On further note, part of the reduction in extreme poverty is due to the continuation of transfer programs, ironically maintained under pressure from the IMF. Without these policies, indigence would be significantly worse. This underscores a basic point often ignored in market triumphalism, markets do not solve poverty. In any functioning society, that responsibility falls to the state.

 

This is not a story of market-led success. It is a story of short-term stabilization underpinned by external support, which has increased indebtedness significantly,making Argentina by far the biggest debtor to the IMF (see above; the other expansion was with Macri, that had the same economic team; yeah he is also an outsider, wink, wink, say no more), combined with policies that risk undermining long-term productive capacity and the external sustainability of the country's foreign obligations. In other words, Milei makes a crash much more likely.

Make Argentina Crash Again

 

My article for The American Prospect on the Argentina situation was just published online. Argentina is far from being out of the woods. The expectation that the country will stabilize prices, float its currency, and build up reserves, and restart economic growth is a chimera. Despite market support for Milei’s program, the crisis remains unresolved. In my article, I explain why the challenges persist, an why this will end like the previous three neoliberal experiments, with a crash. While an immediate crash may not be on the horizon, it is somewhat inevitable. It's a matter of when, not if. And it may very well be with the next president, if the U.S. continues to financially prop Milei's government.

Note that contrary to the IMF, or Barry Eichengreen, who actually provided the IMF justification for floating rates more generally (as he explains there), I don't think to abandon the dirty float (band in this case) would be a good idea.* On that I think Milei's administration is correct. I even think that some degree, even more I think, of a reintroduction of exchange rate controls (the government reintroduced some controls on individuals, I must add) is necessary. Something that supposedly the IMF also favors. Capital controls as a macro-prudential measure in times of crises.

I also want to make clear that this is mostly about the current macroeconomic circumstances. The point is not to return to a world of Bretton Woods, with fixed exchange rates, and capital controls. It is clear that Brazil, for example, did much better than Argentina, with a dirty float and no capital controls. But, as noted by Fabian Amico, in a talk at Universidad Nacional de Moreno, recently, Brazil accumulated reserves in a different macroeconomic scenario.

Brazil accumulated foreign reserves (see graph), maintaining a positive interest rate differential (the domestic interest rate minus the foreign reference rate, the U.S. one, the expected depreciation, and a measure of country risk). We discussed that with Amico and Serrano a few years back (in Spanish). Note that as capital inflows allowed Brazil's central bank to accumulate dollars, the real appreciated in nominal terms. In Argentina where both left and right of center governments have 'appreciation fear' (and their fear is about the real rate, let alone the nominal one), that would be politically difficult.

Exchange rate depreciation at this point would lead to accelerated inflation, and to contractionary pressures. Of course, there might be a situation (they had more than a few over the years) in which, with low country risk, and high interest rates at home, leading to a higher differential that allows for the profitability of holding peso denominated assets to be higher than holding dollars, we might finally get on the road to stability. That would be orderly macroeconomic policy, and not draconian fiscal adjustment. At any rate, that doesn't seem to be the case right now.

Over the long-term, it is very clear that all the previous experiments with this kind of policy (fiscal austerity, financial deregulation, and trade liberalization) ended up in a crash. There is also little reason to believe that this time it will be different. 

* It goes without saying that I would also be against dollarization, something that Milei promised in his campaign in 2023, and that has been recently floated by Laurence Kotlikoff in the Financial Times. This suggests that the old bipolar consensus has not been completely abandoned in more mainstream circles.

Election in Argentina boosted investor confidence, but is it sustainable?

My interview with Deutsche Welle on the Argentine election and the economy. I also had the opportunity of talking with Newsweek on Trump's strategy for Latin America.

Argentina: Chainsaw economics, dead dogs & Milei mayhem | Mehdi Hasan & Diana Mondino | Head to Head

I was on the show as part of the panel. It is hard to explain that Argentina cannot grow much under the current circumstances, with an external constraint that is binding.

Milei and real wages in Argentina

I was interviewed by Max Jerneck for his podcast, and he alerted me to this figure (see below), which apparently come from the Universidad Francisco Marroquín in Guatemala, that has made the rounds, and has been used by right-wing think tanks.

If you were to believe this, real wages fell after Milei's assumption. This is obviously sheer ignorance, or, more likely, an attempt to misinform and create doubts about the real effects of his policies. I had read a recent report by Centro de Economía Política Argentina (CEPA), and Julia Strada was very nice sending me the data for their own calculations based on the official INDEC data (note that this is not the issue, real wages did fall, and recovered somewhat, but are below the initial level).

The problem with the graph, is that it starts with the line between Milei and the previous government in a way that seems that all the fall was before he was inaugurated in December 10, 2023. Arguably the problem comes from the fact that Milei started in December, but part of that month was still under the presidency of Fernandez. And with high inflation wages would be falling all the time, until a readjustment. This can be sorted out if we knew what caused the acceleration of inflation, and the rapid collapse of real wages, as a result of that. And we do, since inflation accelerated with a massive maxi-devaluation of the peso.

My graph below shows the real wage, with essentially the same trajectory, and the nominal exchange rate, which was depreciated by 100% (devalued by 50%), going from 400 pesos per dollar or so, to about 800 (left side) right after Milei's inauguration. I draw the line at that event, the depreciation of the peso.

As it can be seen, the depreciation of the nominal exchange rate, which accelerated inflation from about 12% to more than 25% in monthly terms (that is, it doubled inflation), led to a collapse of real wages. Most of the collapse (almost all) was after his policy decision to devalue the official rate. So wages are increasing, but from a low base, and that was caused by the current government.

Podcast with about the never ending crisis in Argentina

Podcast with about the never ending crisis in Argentina with Fabián Amico, and myself and interview by Carlos Pinkusfeld Bastos and Caio Bellandi from the Lado B do Rio Revista, and sponsored by the Centro Celso Furtado (Carlos is the director). In Portuguese (but fine if you speak Spanish or at least Portuñol).

The Argentina of Javier Milei

A seminar organized by the Association for Heterodox Economics with myself, Ramiro Álvarez and the Argentine Senator Carolina Moisés.

Association for Heterodox Economics' Webinar: The Argentina of Javier Milei

 April 16th 2024 10am New York / 3pm London

Since the beginning of the military dictatorship in March 1976, pro-market visions were imposed by violating human rights in the darkest period of Argentina’s history and occupied political thought for more than four decades, even in democracy. Although these ideas had a brief pause in the period 2003-2015, they are still in force and now more than ever under the new administration of Mr. Milei. Mr. Milei has imposed a huge depreciation of the national currency, reducing the purchasing power of workers, and an adjustment of public spending by dismissing more than 50,000 public employees under the slogan of efficiency. Inflation has reached 200% per year and poverty has reached 60% under his administration, which has been in place for less than 5 months. As a heterodox community, we wish to better understand the social and economic consequences of the Milei government and discuss the possible alternatives Argentina now faces. Zoom Registration here.

Speakers:

Ramiro Álvarez is a postdoctoral fellow at the Centre for Political Economy and Development Studies at the National University of Moreno (Argentina). He is a specialist in the Political Economy of Argentina. After his Master in Economic Development at the National University of San Martín (Argentina) he did his PhD at the University of Siena (Italy). Ramiro teaches basic and advanced economics at different Argentinean universities. He has been a guest professor at the Autonomous University of Santo Domingo due to his studies in Political Economy and he published many papers analysing the political “pendulum” in Argentina, and its impacts on income distribution and growth.

Matías Vernengo is Full Professor at Bucknell University. He was formerly Senior Research Manager at the Central Bank of Argentina (BCRA), Associate Professor of Economics at the University of Utah, and Assistant Professor at Kalamazoo College and the Federal University of Rio de Janeiro (UFRJ). He has been an external consultant to several United Nations organizations including the Economic Commission for Latin America and the Caribbean (ECLAC), the International Labor Organization (ILO), the United Nations Conference on Trade and Development (UNCTAD) and the United Nations Development Program (UNDP). He has eight edited books, two books and more than one hundred and twenty articles published in scientific peer reviewed journals or book chapters. He specializes in macroeconomic issues for developing countries, in particular Latin America, international political economy and the history of economic ideas. He is also the emeritus founding co-editor of the Review of Keynesian Economics (ROKE), and co-editor in chief of the New Palgrave Dictionary of Economics.

María Carolina Moisés is a distinguished Argentine politician and political scientist with a rich career dedicated to public service and political advocacy. Beginning her political journey with foundational education from the University of Belgrano, where she earned a degree in Political Science, she has been a pivotal figure in Argentine politics. Her early academic achievements were complemented by international exposure through a program at the University of Berkley, Boston, which broadened her perspective on governance and public policy. Carolina’s political career is marked by her tenure as a National Senator for Jujuy since December 10, 2023, showcasing her continued relevance and leadership in Argentine politics. Prior to this role, she served as a National Deputy for Jujuy from December 18, 2017, to December 10, 2023, and previously from December 10, 2005, to December 9, 2009, where she was known for her passionate advocacy and significant legislative contributions, including her involvement in the landmark Audiovisual Media Law. As a speaker, María Carolina Moisés brings a wealth of experience, a profound understanding of political dynamics, and a visionary approach to addressing contemporary challenges. Her career is a testament to her unwavering dedication to public service, making her an inspiring figure in Argentine politics and beyond.

On the New Argentine Pendulum

A short paper for FIDE on the so-called Argentine pendulum. The pendulum was the phrase used by Marcelo Diamand to discuss the persistent boom and bust cycles associated with left of center developmentalist governments, and liberal governments that promoted adjustment. The suggestion in this paper is that in reality the previous pendulum was mostly political, and about constraining the left of center ability to redistribute income (higher wages), often restricting democratic institutions. The New Pendulum refers to the period that starts with the last dictatorship, in which alternative economic projects (in which deindustrialization plays a major role) explain the main oscillation. Milei is just one more movement of the pendulum. Full paper (in Spanish) here.

Argentina and the Philippines: Similar development struggles

By Jesus Felipe and Matías Vernengo

ALTHOUGH the economies of Argentina and the Philippines are very different, the two share structural problems that make both nations’ development a complex process. The election of Javier Milei as the new president elect of Argentina, gives us the opportunity to review the differences and parallels between the two economies.

Milei is a radical libertarian populist economist with authoritarian tendencies. His proposals range from the dangerous in economics (dollarization, closing the Central Bank, a drastic reduction of social spending) and social issues (curtail human rights and democratic advances, loosen gun ownership laws, and the elimination of all those institutions that would have any relationship with his two biggest obsessions: the State and the “political caste”) to the insane: institute a free market for human organs. His election has shocked many in Argentina, but the reasons for his rapid rise are not hard to find. The Philippines has also had its share of populist presidents with also questionable ideas and behavior.

Argentina’s economy stagnated over the last decade, with an average annual rate of GDP growth of about 0.2%, and with an accumulated inflation of approximately 450%, reaching 140% on an annualized basis in October. Poverty has also soared. The poverty incidence increased from about 25% a few years ago to about 40%, when measured by the national poverty line. However, Argentina, with a population of about 46 million, is not a poor country. By the World Bank’s definition, it is an upper middle-income country with a GDP per capita of almost $12,000, about three times that of the Philippines. Argentina’s poverty rate is 2.5% by the $3.65 per day World Bank measure. The equivalent rate for the Philippines is 17.8%.

Read the rest here.

Interview (in Spanish) with Diego Polanco about Milei and Argentina

First part of my interview with Diego Polanco on the Argentine election, and the never ending crisis of the economy. Second part in a couple of weeks.

Argentina Between Anger and Fear

My piece in Phenomenal World on the Milei phenomenon, the possibility of dollarization, and the recent electoral results in Argentina. Read it here.

On Milei's economic plans for Argentina

 

Sturzenegger thanks Milei for his support while he was at the BCRA

Javier Milei's victory in the primary election has set alarms in Argentina. Many suggest that this was unexpected, and in a sense, given the more recent polls, it was. Also, many have suggested that his strong showing represents a protest vote, since he is a complete outsider, and that this is a repeat of the 2001/2 protests that demanded that all established politicians were ousted (que se vayan todos). But these are at best half truths.

Sure enough the vote on Milei represents a protest, but he is not really an outsider, even if he does come from the lower middle class. He is ensconced within the Argentine establishment that nurtured him in more than one way. He is at best an eccentric outcome of that Argentine establishment.

Note that he studied at the Universidad de Belgrano, and Universidad Torcuato Di Tella, both private universities, that normally cater to the elites in the country. He worked in several financial sector institutions, including Estudio Broda, founded and managed by Miguel Ángel Broda, a Chicago economist that has been part of the Argentine financial establishment for more than five decades. He was invited and interviewed in all the main media outlets of the country for years, and always treated as an economic expert, even if often he was there for his more colorful ideas and behavior.

Also, many of his current advisors had key positions in previous administrations. Roque Fernández, for example, was both president of the central bank and finance minister during the Convertibility period in which the exchange rate of the peso and the dollar was fixed, in a similar way to dollarization.

Milei and his plans, the two relevant ones (forget some of the crazy stuff that won't happen, like stopping all trade with China), namely, dollarization and closing the central bank, are not alien to the Argentine elites that he has served over the years, and that has provided him with jobs and media space. At the end of the day, all neoliberal experiments (the Military one between 1976 and 1983, the Peronist one with Menem between 1989 and 1999 and a bit beyond, and the Macri one between 2015 and 2019) included people that share similar ideas to Milei and his advisors, and some of them were involved in the previous neoliberal turns.

Last year, at a Milei event, Federico Sturzenegger, who worked for Domingo Cavallo at the end of Convertibility and was the head of the Central Bank (BCRA) during the Macri government, while noting that dollarization was not the best solution, and suggesting that central bank independence is not enough, went on to defend a common currency (interestingly enough the same plan of Grabois, the lefty in the Peronist primary). Milei's victory, if it happens (which is still not a sure thing), and his plans would not be significantly different than the previous neoliberal plans, and the consequences would be as negative as before.*

I have written quite a bit on the negative effects of dollarization (old book on that here). I'll leave a more detailed discussion for a later post. The important thing I want to note at this point is that, if there is a way of obtaining the dollars necessary for dollarization, then that would also allow for holding the exchange rate stable, precluding a large devaluation, and even to bring down the difference with the parallel (blue) dollar. Of course, that would imply resolving not only the financial external constraint that Argentina faces now, but also dealing with the payments (in dollars) to the IMF, which, at least at this point, seem to be beyond the country's capacity to repay. Formal dollarization wouldn't solve those problems, and would generate many new ones.

* That's not the only connection with the other neoliberal experiments. In all of them there were direct violations of human rights, or explicit support for the violators of human rights, and that's true also in Milei's case.

On Milei's victory in Argentina for Portuguese TV (in Portuguese)

I'll post more on this soon. A few things, his economic ideas show a complete lack of understanding of basic principles. That he is taken seriously by a good chunk of the Argentina media (which is responsible for his rise) is appalling. I also don't think that it is certain that he will win, but in truth the mere possibility is frightening.

Argentina: Past Industrialization Problems and Perspectives (in Portuguese)

Interview with Fausto Oliveira, economic journalist that produces the channel Brazilian Industrial Revolution. For those interested in the process of economic development and its relation to the process of industrialization in the periphery (and speak Portuguese) I highly recommend it.

On Argentine debt restructuring proposal (in Spanish)

Short interview for an Argentinean radio show, in Spanish.

Course on the Argentinean Economy in Portuguese

For those interested in the Argentinean economy, and that can understand Portuguese, I'm teaching a virtual course on the Rise and Fall of Argentina with my friend Paulo Gala. Some teasers are available here. Below the first class.

Btw, my suggestion is that basically there's no fall, if the economy never rose in the first place.