The Milei Revolution - Long Live Freedom, Dammit!
- why this time might be different.
Poor countries are poor because those who have power make choices that create poverty. Daron Acemoğlu & James A Robinson Why Nations Fail: The Origins of Power, Prosperity, and Poverty.
Collectivist experiments are never the solution to the problems that afflict the world's citizens. Rather, they are the root cause. Believe me: no one is in a better place than us Argentines to testify to these points. Javier Milei, Speech to WEF, Davos, January 2024.
Charles De Gaulle declared that Brazil was the country of the future and that it always would be. Yet, it developed scale and a domestic capital market. Consequently, today, despite its many problems, Brazil is an emerging success. It can finance itself in Reals and trade with the rest of the world on its own terms. Emerging market fund managers happily allocate to Brazil, representing about 5% of MSCI's benchmark emerging markets index.
In contrast, Argentina never reached the economic escape velocity to form a durable domestic capital market. Political and economic instability repeatedly restricted its access to global trade and finance, most recently during Mauricio Macri’s administration in 2017. Notably, Macri’s election in 2015 was described by The Economist as one that could transform his country and the region, yet fell victim to legal challenges over Argentina’s debt hangover from the Kirchner era, a former president who last week lost her appeal against a six-year prison sentence for corruption.
Because of such repeated disappointments, today, Argentinians save in dollars; the peso is purely transactional. Indeed, it is estimated that 20% of all $100 bills are in Argentinian safe deposit boxes or under mattresses. The equivalent of Argentina's annual GDP sits idly in cash. Emerging market fund managers are wary of investing in Argentina, which does not qualify for MSCI emerging market inclusion. How did this happen?
Famously one of the wealthiest countries at the turn of the 20th century, Argentina boomed as its fertile land, temperate climate, and abundant natural resources drew waves of European migration that brought skills and capital to a large land mass settler economy favourably compared to Australian and Canada.
But the saying goes that Argentina never misses an opportunity to miss an opportunity. Today, according to the World Bank, Australia and Canada are four times wealthier (per capita) than Argentina, whose history over the last century is littered with episodic financial and economic crises often culminating in political unrest.
Argentina is complicated. It is the most European South American country. And if you think Europe has problems, writer Ernesto Sabato said that Argentinians are Italians who speak Spanish, live in French houses and believe they are British. Simon Kuznets, the Russian-American statistician and economist, appropriately the pioneer of GDP, said there are four types of economies in the world: developed, undeveloped, Japan, and Argentina. In short, Argentina's complexity defies conventional classification.
In their book Why Nations Fail, Nobel economists Daron Acemoğlu and James A Robinson argue that Argentina's poverty stems from a historical pattern of extractive institutions and political instability that prevented the development of a genuinely inclusive economy where everyone can prosper. Frequent coups and volatile politics made the evolution of stable, inclusive institutions difficult, creating uncertainty and discouraging investment. Successive elites controlled the country's political system, extracting wealth for themselves at the expense of the broader population. Argentina's political history has been interspersed with periods of populism aimed at short-term gains and redistribution, which proved incompatible with sustainable growth and typically financed by money printing.
The metronome of Argentina's familiar decade-long cadence of crisis beckoned again in 2021 amid echoes of the turmoil of the early 2000s when Argentina had six presidents in four years amid a collapsing economy that is still talked about today as the big one. The scars of this default are raw to this day and hold back its citizens’ natural optimism for the future.
The run into the 2023 presidential election looked like deja vu all over again, with a candidate list of failed and corrupt former leaders offering rehashes of old policies with no new ideas or solutions. The economy, yet again, teetered on the brink with a spiralling fiscal deficit and rising inflation. But something unexpected happened.
During the pandemic, an economist called Javier Milei began to make a name for himself on TV panel shows for his wild libertarian ideas and idiosyncratic, abrasive delivery. Milei raged against politicians of all persuasions, fully engaging in Argetines' passion for colourful political debate, always prepared to outrage his opponents and entertain his audiences.
By 2021, Milei had become a congressman, campaigning in the streets of Buenos Aries, denouncing politicians as useless parasites who he said had never worked and thought only of self-enrichment. He assured his electorate that he would kick these criminals out. He didn't seek to lead lambs, he told them, but to awaken lions, and the lions he awoke were younger people attracted to his unique combination of in-depth economic knowledge and flamboyant shock-jock delivery.
While other politicians and the mainstream media depicted him as a performative clown, Milei had taught economics for twenty years and published over fifty academic papers. He was renowned for his passion for the works of the Austrian School, typified by Murray Rothbard, the libertarian and father of anarcho-capitalism.
While most academics of this literature were usually found quietly going about their business on the economics faculty of a few universities, Milei was a showman playing drums for a Rolling Stones cover band. He was an evangelist who, among other routines, adopted a superhero alter ego called AnCap, complete with costume and stage act. He sold out increasingly large venues where he lectured his audiences about the workings of the price mechanism, the moral justification for capitalism and the crime of collectivism while raising a sense of moral outrage.
The coincidence of Argentina's economic cycle of despair with Milei's arrival as a chainsaw-wielding showman backed up by a trained mind and deep conviction that he knew the solution to his country's woes unexpectedly led him to the highest office in the land in less than a year—something that no one saw coming.
In December last year, Milei became Argentina's 59th president, winning the largest number of votes and the largest percentage of votes recorded in any election since the transition to democracy. It was a landslide result but handed down with only a minority position in the legislature. Milei, the high-conviction economist, faced an enormous political challenge in executing his reforms. But, from this challenging beginning, his first year in office has been largely successful.
However, questions still need to be answered about whether Milei's remedies prove sustainable, whether this time will differ from all the last times, and whether he can put Argentina's era of missed opportunities behind it. In particular, can he continue to make painful wholesale reforms to an economy while remaining sufficiently popular to complete his project? Let's see how he has done and what the future might hold.
The first point is that Javier Milei’s election marked the end of the populist nostrum of distributive handouts by a political caste to fund its survival in office. Central to Milei’s belief in liberty is that taxation and inflation are different versions of government theft of its people. As a congressman, Milei famously raffled his monthly salary to his constituents, saying:
The state is a criminal organization that finances itself through taxes levied on people by force. We are returning the money that the political caste stole.
In his presidential acceptance speech, Milei said,
There is no going back. Today brings a new era of freedom and prosperity.
After delivering a short history of Argentina’s former glory days as a wealthy nation, he went on to say
Unfortunately, our leadership decided to reject the ideals that had made us rich and chose collectivism, which, for over a hundred years, saw politicians embracing policies that delivered poverty, stagnation, and misery.
Milei then explained the economics of fiscal and monetary deficits and how the end of the road had been reached, whereby the only solution was to cut government spending radically, making the second prong of his policy a painful and speedy fiscal consolidation.
He then explained that central bank liabilities had to be cut and that
money issuance is the only empirically true and theoretically valid cause of inflation.
However, due to monetary policy lags, the country would continue to pay for the expenses of the prior administration for the next 18 to 24 months, while the impact of damaging exchange controls risked sending annual inflation of 300% into the thousands of per cent. He predicted his inherited inflation projection was 15,000%.
I want you to know this implies an inflation rate of 52% per month and that this level of inflation would lead to over 90% poverty levels, something this government is determined to avoid. There is no alternative to adjustment.
He outlined the debt position and the reality that the country was on its own due to past defaults with the IMF and an economy that had not grown in 12 years, and all this with a collapsing employment market. Significantly, the new president said, there was no room for debate about the alternatives to his shock therapy.
Gradualism requires financing, and unfortunately, I have to tell you again that there is no more money.
In short, Milei told them this would hurt, but it was the country’s best hope, or the alternative was to end up like Venezuela. He reminded them that
Antipoverty plans create more poverty. The only way out of poverty is to have more freedom. Our country demands immediate action, not sterile debate. We have no time. Our challenges are enormous, but so is our resolve to meet them.
He said that Argentines had chosen liberalism as defined by his intellectual hero, Alberto Benegas Lynch, who said that
Liberalism is the full respect for the life project of others, based on the principle of non-aggression, in defense of the right to life, liberty, and property, whose basic institutions are private property, markets free of government intervention, free competition, division of labor and social cooperation.
Milei said this represented a new social contract for its people that
Proposes a different country, a country where the State does not run our lives but watches over our rights. A country that supports those who need it but does not allow itself to be blackmailed by those who use those who have the least to enrich themselves. It will be difficult, but we will do it. Long live freedom, damn it!
Milei has been good to his word on the need for shock therapy, closing 13 ministries and laying off over 30,000 public workers in the first two months. Recently, he proposed the complete closure of the federal tax collecting agency with its wholesale replacement by an agency that only cost a tenth as much. He has cut financial transfers to provinces and removed subsidies for energy and transportation. Someone I spoke to told me their energy bill had increased from $8 to $30 per month but was probably only about a third of the true market cost.
In Q1 2024, Argentina saw its first budget surplus in a generation, and monthly inflation dropped from 25% in December 2023 to 2.7% in October. Critically, Argentina’s emerging market bond investor country risk index (EMBI), listed daily in most papers, has fallen to its lowest level in five years.
Despite this painful adjustment, Milei’s approval ratings remain among the highest of world leaders. Of my straw poll of 8 taxi drivers I spoke to in Buenos Aries recently, only one said he hadn’t voted for him but accepted that he was doing a decent job, and significantly, both his children had voted for him. He was hopeful that Milei offered hope that his children would stay in the country rather than join the brain drain abroad. Everyone I spoke to said they thought he was honest and transparent. They all thought, on balance, he would get re-elected. But most reminded me that they had been here with Macri in 2015 and other times before and that obstacles and risks remained.
Politically, next October’s mid-term elections to Congress will be a critical test. However, the little obvious political manoeuvring against him will likely remain the case while his popularity continues. But, economically, supply-side regeneration is also critical, particularly since Argentina’s ample shale and lithium resources require significant capital inflows. For this, the crucial and intangible requirement is an increase in trust. Argentina’s reputationally trashed institutions are perhaps the biggest unknown in all this, and it is in this regard that Milei’s standing on the world stage is important.
Several people I met last week told me with evident pride that they expected Javier Milei to be the first world leader photographed meeting President Trump, which was the case. However, possibly of greater value is the blooming bromance Milei has with the co-master of DOGE, Elon Musk.
As the world’s richest man was battling with the Brazilian Supreme Court, Milei offered his help earlier this year. In what had all the hallmarks of political lawfare, Justice Moraes had ordered that X accounts accused of spreading disinformation - many of which belonged to supporters of former president Jair Bolsonaro - must be blocked while they are under investigation and threatened to arrest X employees in Brazil and heavily fine anyone using a VPN to access the site.
Milei said, suitably on X, that Argentina supported free speech and he would welcome all X employees to Buenos Aires. Shortly after this, Milei visited Musk at his Tesla gigafactory, displaying the visible signs of a kid in a candy store, worshipping the greatest hero of capitalism according to his creed. I was told that the two speak and compare notes most days. They have much to discuss in Musk’s new advisory role, looking to downsize the US federal government.
However, while Milei is trying to make Argentina great again, Musk’s boss, Trump, will unlikely see Argentina as a top priority. Due to its economic and financial isolation, Argentina's exports mainly go to its regional neighbours, and its critical soybean exports mainly to China. It has little direct trade exposure to the US, which might be good during the tariff uncertainty period. Despite this, politically, Milei’s libertarian credentials are likely to attract outsized attention from Washington in a region dominated by left-wing administrations in Brazil, Chile, Mexico and, of course, Venezuela.
Finally, the risks to the Milei project are the normal external global risks to most developing economies, specifically the strength of the dollar and weakening commodity prices. Given the formative stages of recovery and fragile popularity among elected politicians, Argentina is more susceptible to these risks. However, what distinguishes Milei is the widespread acceptance that he is not one of them, not part of the political caste. This perception, of course, could change, and ultimately, with such widespread poverty, he probably only has another 12 months to demonstrate that his plan is working.
However, the Milei revolution has taken hold, and as Trump 2.0 takes shape, it is increasingly likely that it can endure despite the risks. In his speech to Davos earlier this year, Milei went further than his 1980s heroes, Ronald Reagan and Margaret Thatcher, in claiming the moral high ground for his capitalist ideal.
The market is not a mere graph describing a supply and demand curve. The market is a mechanism for social cooperation, where you voluntarily exchange ownership rights. Therefore, based on this definition, talking about a market failure is an oxymoron. There are no market failures.
Far from being the cause of our problems, free trade capitalism as an economic system is the only instrument we have to end hunger, poverty and extreme poverty across our planet. The empirical evidence is unquestionable.
Those who promote social justice start with the idea that the whole economy is a pie that can be shared differently. But that pie is not a given. It's wealth that is generated in what Israel Kirzner calls a market discovery process.
It should never be forgotten that socialism is always and everywhere an impoverishing phenomenon that has failed in all countries where it's been tried out. It's been a failure economically, socially, and culturally, and it also murdered over 100 million human beings.
Milei’s surprise election victory has made Argentina a torch bearer for freedom and liberty for the wider Western world, which has lost its sense of moral direction. As he put it:
Neo-Marxists have managed to co-opt the common sense of the Western world, and this they have achieved by appropriating the media, culture, universities and also international organisations.
With tools such as printing money, debt, subsidies, controlling the interest rate, price controls, and regulations to correct so-called market failures, they can control the lives and fates of millions of individuals.
Whatever you think of his philosophy, Milei is a true believer, convinced that he offers the only means to rescue Argentina from a century of misery. As he told the Wall Street Journal, there is no plan B; he is an economist, not a politician who might change plans to remain in power. He is all in.
Finally and significantly, the market senses that he might be winning. Under the old regime, Argentina had fourteen different exchange rates, and the unofficial rate against the dollar a year ago was less than a third of the official rate. Today, the red and blue exchange rates are normalising, signalling the way for full dollar convertibility. Dollarisation or full convertibility is the precursor for Argentinians to think and save in pesos again, the precursor for the emergence of a durable domestic capital market and a re-acceptance of Argentina by global EM investors- let’s see.
Jeremy
17/11/2024
During my recent visit to Buenos Aries, I met and discussed the Milei Revolution with several people who helped further my understanding of this amazingly complex country and its difficult history and challenged economy. Although all the above are my own thoughts and opinion and no one else’s, I would like to thank and acknowledge the following for their patience and hospitality: Andres Borenstein of BTG Pactual, Robert Martstrand of the excellent OfWealth Substack, Ramiro Blazquez of Banctrust, Sebastian Azumendi of AdCap and Eduardo Bestani (Junior and Senior) of El Nihuil Industries.
Brilliant article
A fascinating read.