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.
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