Javier Milei won the primaries for the presidency in Argentina and is the favorite in the next elections. How did a candidate who campaigns with a chainsaw, denouncing the political caste, come to lead the polls? The answer lies in the country's deep crisis, inflation that far exceeds 100%, a lot of poverty, chronic fiscal irresponsibility, and everything worsened by a serious drought. Successive governments have sunk the economy with disastrous and corrupt management that leads many Argentines to despair. The legacy of Peronism since Juan Domingo Perón came to power in 1946 is long. He has dominated economic policy for the last 20 years, with the parenthesis of Mauricio Macri, who was not able to straighten out the country. Argentina operates with loans from the IMF, to which it now owes $44 billion.
Milei is a libertarian economist with radical right-wing ideas and an unstable personality. His star idea is to eliminate the central bank and dollarize the country. Thus he hopes to put an end to the ticket printing machine to finance government spending, where more than 70% are social benefits or economic subsidies. Argentina would import credibility from the US Federal Reserve Bank, suppress inflation and be able to borrow without investors having to ask for a risk premium for a possible devaluation of the peso. However, dollarization controls inflation but does not eliminate the risk of uncontrolled public deficit and non-payment of debt, as demonstrated by the case of a country that has been dollarized since 2000, such as Ecuador. A dollarized economy is less able to respond to economic and financial disturbances, both for good and for bad.
The idea is that the government would become fiscally responsible by not having the monetary spigot available. It is a similar idea that adopting the euro would cause countries to introduce reforms to increase productivity and pursue sustainable fiscal policies. That is why a no-bailout clause for countries was put in the European treaties to establish the euro. The result was that these reforms did not occur in Southern European countries, and that they ended up being rescued anyway.
Argentina implemented softer dollarization in the early 1990s, attempting to maintain a fixed parity with the dollar (a currency board), but abandoned it in 2001 due to lack of economic growth, overvaluation of the peso and problems paying foreign debt. The result was a very severe economic crisis and another debt default. It is much more difficult to undo a dollarization of the economy like the one proposed by Milei. Also, there is no guarantee that it will work. We add that to carry it out the central bank would need reserves in dollars of more than 35,000 million when it now has a deficit of nearly 9,000 million dollars. The prospect of achieving them therefore seems unrealistic.
In short, there is no painless way to import credibility from abroad in a country where institutions are not supportive and populist politics are entrenched. Argentina was one of the richest countries in the world at the beginning of the 20th century and has assets such as a high level of education. The World Bank still classifies it as a high-income country. There is no magic solution for Argentina, only in-depth institutional reform that leaves populism behind can return the country to prosperity.
