Argentina's unexpected trailblazing deserves a closer look

Javier Milei, Argentina's president, in Rome, Italy, on a state visit this month. Bloomberg

As libertarian Javier Milei celebrates a year since assuming the Argentine presidency, other countries may be studying his experience closely. Fiscal challenges are a problem that all have recently faced, or will face in the future, and Mr Milei’s brand of heterodox shock therapy offers policymakers with a new perspective on how to balance the books.

At the turn of the 20th century, Argentina was one of the richest countries in the world in terms of per capita income, and the future was bright for the South American state. However, over the course of the past 130 years, it has become the poster child for many economists for how political instability, corruption, and economic mismanagement can precipitate a rapid decline in living standards.

In 2023, Argentina’s public debt was around 100 per cent of its GDP, consumer prices were growing at almost 300 per cent annually, and GDP per capita was approximately at its 2008 level. While these figures – especially the inflation – represented a recent nadir in terms of economic performance, the reality is that Argentina has been struggling economically for decades, with the new millennium alone witnessing three sovereign debt defaults.

A homeless man sleeps at Plaza de Mayo square in front of Casa Rosada presidential palace in Buenos Aires. The government managed to reduce inflation from 200% to 166% year-on-year as of November 2024. AFP

Given the historical dominance of left-leaning populists in Argentina’s political landscape, and the cumulative fatigue that the population felt toward the failure of their politicians to deliver economic prosperity, the stage was set for a radical alternative. Mr Milei campaigned effectively, conveying a distinctly libertarian economic plan revolving around deregulation, liberalisation and shrinking government. One year on, he has balanced the budget on the back of a 30 per cent decrease in government spending, inflation has decreased sharply, and the economy is beginning to attract foreign capital.

In 2023, a mere 24 per cent of Argentines expressed confidence in their government, while 73 per cent disapproved. Mr Milei succeeded in raising the first figure to 43 per cent, and shrunk the disapproval rate down to 53 per cent.

Before describing the somewhat jarring way he delivered these improvements, it is worth noting why so much of the world should be paying attention. Up until the early 20th century, orthodox government policy was to balance the budget unless extreme circumstances such as wars arose.

However, following the Great Depression in the early 1930s, economic thinking and political systems changed in tandem, leading to a situation where governments were comfortable perennially realising budget deficits and seeing their public debts rise seemingly without constraint.

The unsustainability of such arrangements is self-evident, but the negative impacts of ignoring the risks differ in the speed at which they materialise. Countries that were forced to default, such as Greece and Sri Lanka, experienced a loss of confidence in the economy and, with it, rising poverty.

Larger economies, such as Japan and the US, remain in the risky situation of having high levels of debt to GDP but for the time being they continue to be able to kick the proverbial can down the road. In the case of the Gulf countries, the 2014 oil price crash reminded all six a taste of diversifying their fiscal revenues and economies away from hydrocarbons.

Fiscal sustainability has much in common with its environmental cousin: the impact of imprudence is rarely immediate, and it takes a collective sacrifice for success. Humans are not very good at co-operating when the benefits are amorphous and will be reaped many years later, setting the stage for societies to delay the necessary reforms whatever the governing political system.

In Argentina’s case, society’s natural antipathy toward fiscal belt-tightening was overcome by the collective exasperation at previous failures. This allowed Mr Milei to effect radical policies, such as closing 16 out of 24 ministries, curtailing energy and transport subsidies, the elimination of rent controls and the dismissal of 24,000 federal employees. He plans to eliminate 90 per cent of existing taxes and cut an additional 50,000 federal government jobs.

One year on, he has balanced the budget on the back of a 30 per cent decrease in government spending, inflation has decreased sharply, and the economy is beginning to attract foreign capital

For countries – including many in the Middle East, where a great deal of national spending lies in the public sector – there is great value in studying Milei’s experiment, both operationally and in terms of securing the public’s support.

Businesses in the region regularly complain about excessive red tape, sometimes spawned by having a surfeit of ministries operating without a clearly defined mandate. Of course, the risky nature of drastic reforms to public sector spending makes it even more beneficial to begin by closely observing Argentina’s trail-blazing.

The large investments that countries such as Saudi Arabia and the UAE have made in the energy transition demonstrate the government’s ability to overcome disincentives and lead the way in adopting environmentally friendly policies. This bodes well for their ability to make bold fiscal decisions when required, as occurred when Saudi Arabia raised value-added tax from 5 per cent to 15 per cent during the Covid-19 pandemic.

One of the best things policymakers anywhere can do is harvest knowledge from the experiences of other countries. Dramatic moves can offer more acute lessons. In this regard, through his aggressive reforms, Mr Milei is serving not just the Argentine people, but the whole world.