Ken Rogoff on Milei and the IMF

 

Another Excel... ent work*

This is from a few weeks ago, but only now I had some time to post about it. Ken Rogoff has been doing the rounds of podcasts, after the publication of his most recent book, Our Dollar, Your Problem. He was on Ezra Klein, where he claimed basically that Bernie is as bad as Trump on trade (essentially saying that Biden, that had moved in the direction of Bernie is as bad too; good for Klein that he pushed back on that point). More on that in another post.

He was also on Tyler Cowen's podcast were he discussed, very briefly, the Argentina case. Here a short clip.

Here is the transcript of that bit of the conversation.

COWEN: Is Milei going to make it succeed in Argentina? What does it depend upon?

ROGOFF: I hope so. I think he’s the best chance that Argentina’s had in a long time, which is, fair to say, a very low bar. The thing that he’s done that I have not seen before is balancing the budget. If you’re a big borrower and you keep defaulting, a starting point is figuring out how not to have to borrow money, and he’s managed to do that. I don’t know that all his libertarian visions necessarily will come to pass, but he’s provided some stability, bringing inflation down.

It’s so sad. Argentina, as you know, was one of the richest countries in the world by any measure at the turn of the 20th century in 1900. Now they’re a lower middle-income country. Their per capita income is below Brazil, which is hard to get your head wrapped around. I think there are many reasons, but certainly Peronism, socialism has not done well by Argentina.

COWEN: But has he balanced the budget? I know he announced a balanced budget, but this is April 2025, and they just borrowed $20 million from the IMF. It doesn’t sound like a very balanced budget.

ROGOFF: It’s counting the interest payments on the IMF, and yes, he inherited this big debt. They’re paying the interest. It’s very low interest on the big debt, and I don’t know how that’s ultimately going to get resolved. They have a lot of problems ahead, but there’s a lot of strength in Argentina if they can grow again. I don’t want to sound Panglossian about Argentina, but goodness, they had inflation of 200 percent when he took over. The economy was in free fall. Look, there’s no magic wand you can wave over the last 80, 90 years of Argentina and make everything right.

A few things, that I think are important to contextualize, in particular given the relevance of Rogoff, who was the chief economist at the IMF, and whose textbook, co-authored with Maurice Obstefeld, another ex-chief economist at the IMF, is one of the main graduate texts for international macroeconomics.

First, the notion here is that the problem was fiscal in nature, and the debt in domestic currency is what matters. Of course that is NOT a problem. Inflation was not caused by monetary emissions, and neither was Milei's stabilization. In fact, the IMF first, by forcing a devaluation while Massa was still the minister, and candidate, and then Milei in December of 2023 accelerated inflation. He only managed to stabilize prices so far, because he has held the exchange rate under control, and that has led to many complaints that the real exchange rate is overvalued (that's a topic for another discussion). The fiscal adjustment caused the recession in 2024. That is on Milei, as well as the initial collapse of real wages.

Second, Argentina was never a developed country. It did have a high level of income per capita, but that is true of Saudi Arabia now. Petro-States and Beef-States are not necessarily developed, even if some people might be very wealthy. Peronism (which cannot really be considered socialism) did not cause a decline, not only because there was no glorious past in which the country was developed, but also because it was not in power all the time. There were periods of industrialization with conservative-authoritarian regimes, like Ongania in the 1960s, that did not align with the liberalism that Rogoff seems to prefer.

In fact, Prebisch, the father of the intellectual defense of state-led, import substitution industrialization, was a well-known anti-Peronist, and supported the 1955 coup.

Finally, it is true that Milei inherited a large external debt in dollars, and no significant reserves in the central bank. But that debt was accumulated during the Macri administration, an ally of sorts of Milei, under the same economic team (both Caputo and Sturzenegger were in both governments). This was not caused by the excesses of Peronism (read the Kirchners), but by the excesses of neoliberalism.

I have my issues with the implied notion that laissez faire, both in the US, and even more so in the periphery, is a rational strategy for development. On this Rogoff seems out of sink with the times, that have rediscovered industrial policy, and state-led growth. And I also think that Milei can, in particular with the help of the IMF, hold exchange rates for a while (even longer if external markets help him) and ride a reelection as Menem did in the 1990s. But then things will eventually crash.

* On the Reinhart and Rogoff affair read the piece by Cassidy in the New Yorker.

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.