Milei and the nest of rats

Several months ago I wrote about everyone's favourite eccentric libertarian, Argentina's President Javier Milei, and the tall challenge that lay ahead of him. Today I thought I'd take another look to see how it's going, especially given the recent resurgence of neopopulism, price controls and tariffs in the West, which are but three of many forces that have weighed down the Argentine economy for several decades.

But first, a word of caution: economic policy can take a long time to work. Milei has only been in the top job for 11 months of a four-year term and has had to tread cautiously because of the political pressures he faces.

Specifically, Milei needs to navigate the group of people he affectionately describes as a "nest of rats": Argentina's congress. Milei's party holds just 38 of 257 seats in the lower house, and 7 of 72 seats in the senate, so to get anything done he needs to convince not just the former centre-right opposition, the Republican Proposal, but also various independents to support his cause.

Shock therapy

Milei's biggest achievement came at the end of June, when his heavily watered-down "omnibus" bill (from 600 articles to 238) cleared both houses:

"The sweeping reform push will usher in the privatisation of some state firms, the relaxation of labour laws and a new foreign investment incentive scheme, among other changes.

The raft of reforms – which contains more than 200 articles and comes with an accompanying fiscal package – was enacted after months of debate and violent protests against the bill, amid a punishing recession and harsh austerity measures that have hit Argentines hard."

The reforms contain several promising elements. For example, if the government fails to respond to a request or application within a specific time frame, it will be automatically approved. As for the investment promotion regime, The Economist Intelligence Unit (EIU) reckons it:

"[P]rovides generous tax, trade and foreign-exchange benefits for 30 years for projects worth more than US$200m in the forestry, tourism, infrastructure, mining, technology, steel, energy, and oil and gas sectors... [which] will encourage large-scale investments in Argentina's most competitive sectors."

However, the EIU cautions that Argentina's institutions are too unstable – it has a "history of political instability and policy swings" – for it to have as much impact as it could. Milei's maintenance of Peronist currency and capital controls – a political decision to artificially reduce measured inflation – will also perturb investors, who are likely to "push decisions back as they take a wait-and-see approach".

Still, the passing of the omnibus bill was the first time Milei had moved anything through congress, having relied exclusively on executive orders up to that point. From what I can gather, other than this bill Milei's government has:

• reduced the number of federal ministries from 18 to 9 through a series of mergers, with plans to cut 70,000 public sector jobs;
• ended hereditary positions in the public sector;
• repealed rent control laws, which led to a 200% increase in supply in six months and falling rents (except for the lucky few who benefited from the old regime);
• liberalised labour laws so that the half of the population working informally can move into the formal economy;
• deregulation is being promoted through a new Ministry for Deregulation and State Transformation, which will aim to "reduce public sector employment, eliminate bureaucracy, and privatise certain state-run activities, including public works";
• slashed subsidies for various activities, such as public transport;
• reduced the income tax threshold to capture more of the middle class;
• repealed tariffs for all imports valued under US$400;
• begun the process to privatise state owned entities such as Aerolineas Argentinas and the rail sector's main state-run cargo firm; and
• allowed sporting clubs to incorporate, paving the way for private capital to enter the industry.

There's no doubt that the Argentine economy is a mess and in need of something radical. It has been a mess since at least 1930, largely because it "never finished the transition to the open democracy supported by the rule of law", as happened in Australia, Canada and the US.

Argentina subsequently fluctuated between dictatorship and democracy before Juan Perón swept to power in 1946, establishing a protectionist, planned economy riddled with "government-backed favouritism of dominant interest groups and encouraged pervasive rent-seeking instead of productive economic activity". Known as Peronism, it has been the dominant political influence in Argentina ever since:

"Starting with the rise to power of Perón and his influential wife Eva, Argentina embarked on an irreversible path of populist social and economic policies and divide-and-rule politics that ignited Argentina’s decline. The institutional breakdowns triggered by powerful elites were chiefly characterised by uninterrupted forced resignations of Supreme Court justices, declaration of economic and political emergencies, nationalisation of firms, prosecution and torture of political opponents, nullification of the 1853 Constitution, rampant government favouritism, and media censorship.

Had the 1930 military coup never happened, and had Argentina avoided the subsequent institutional breakdowns and the populist Peronist-style divide-and-rule politics, the synthetic control and difference-in-differences estimates described herein imply that the country would have experienced a robust upward growth. In the absence of institutional breakdowns, Argentina's per capita income would have approached the ranks of New Zealand, Spain, and Italy."

Those are the forces that Milei is working against. He not only needs to transform a hundred years' worth of institutional malaise, but needs to credibly commit to preserving his reforms beyond his term. That's no easy task.

A dose of economic orthodoxy

For all the talk of chainsaws and radical libertarianism (anarcho-capitalism), Javier Milei has been rather orthodox in his approach so far.