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Argentina’s President Milani Gambles on “Shock Therapy”: Can It Cure Hyperinflation and Debt Woes?

On the 10th of December, 2023, Argentina’s elected President Javier Milay was inaugurated, formally commencing his four-year presidential tenure. Preceding this election, Milley and the policies he espoused had ignited a furor in Argentina and garnered attention on the international stage. Upon assuming office, Milley advocated for the implementation of a series of deregulatory measures akin to “shock therapy” aimed at navigating Argentina through the economic crisis. Thus, the question arises: Can Milay’s strategy of “shock therapy” prove efficacious?

What is “shock therapy”?

“Shock therapy” primarily denotes the adoption of radical methodologies to effectuate the transition from a planned economy to a market-driven one. Owing to its potentially seismic impact, capable of engendering significant disruptions in both social and economic spheres in the short term, it has earned the appellation of “shock therapy.”
The proponent of “shock therapy” is the esteemed Harvard economist, Jeffrey Sachs. In 1985, while serving as an advisor to the Bolivian government, Sachs played a pivotal role in successfully quelling inflation in Bolivia through a suite of “new economic policies” encompassing fiscal reform, trade liberalization, deregulation, privatization of state-owned enterprises, and debt restructuring. Historically, nations such as Russia, certain Eastern European countries, and various Latin American states have embraced “shock therapy.”
The crux of “shock therapy” lies in stabilization, liberalization, and privatization. Stabilization entails attaining macroeconomic equilibrium, achieved through the implementation of stringent policies and a comprehensive set of obligatory measures aimed at suppressing aggregate demand, swiftly curbing inflation, reinstating economic order, and stabilizing the macroeconomy. Liberalization involves dismantling state intervention via rapid reforms, thereby ushering in the liberalization of prices, trade, foreign exchange, and other facets, thus establishing a market-oriented framework. Privatization entails overhauling the property rights system, divesting the state-owned economy, and ultimately fostering and institutionalizing the core elements of a market economy. “Shock therapy” can serve as an effective remedy for certain economic maladies by jolting the economy into action, yet it also carries the risk of adverse repercussions such as job losses or even governmental upheaval. The efficacy of “shock therapy” is intricately tied to the government’s capacity to advance reforms and instill public confidence. Absent these, reforms may flounder.

There exist over 1,000 reform initiatives in total.

Milley, a relative political neophyte who had only served a solitary term as a congressional member before ascending to the presidency, advocates for the establishment of an anarcho-capitalist society in Argentina, wherein market forces and individual autonomy reign supreme. He contends that Argentina confronts an unprecedented crisis: fiscal deficit financing and currency controls have precipitated hyperinflation, engendering profound economic and social upheavals; towering foreign debts have severely constricted the government’s policy latitude; economic growth has stagnated, echoing the woes of 2011. Relative to the previous year, Argentina’s per capita gross domestic product (GDP) plummeted by 8% in 2022; infrastructure remains feeble. Consequently, Milay maintains that Argentina must undertake sweeping economic reforms to reverse its fortunes. Since entering the electoral fray, Milley has championed a series of audacious liberal reform measures, including the dollarization of the economy, the dissolution of the Argentine Central Bank, drastic reductions in public expenditure, tax abatements, privatization endeavors, and staunch advocacy for market-oriented labor reforms and unilateral trade liberalization.
Upon assuming the presidency, Milais swiftly enacted a decree of necessity and urgency christened “Revitalizing the Foundations of the Argentine Economy” and an omnibus bill titled “The Cornerstones and Genesis of Argentine Liberty” to propel the reform agenda forward. Milley declared a state of public emergency encompassing the realms of economy, finance, social welfare, security, national defense, and energy until December 31, 2025, with provision for extension up to two years, albeit without exceeding this timeframe. Millais’s reform initiatives totaled over 1,000, chiefly encompassing the following facets:
Primarily, the implementation of stringent fiscal policies. The Milais administration envisages achieving fiscal surpluses of 2.9% and 2.2% of GDP respectively through expenditure rationalization and tax augmentations. Specific measures encompass curtailing state subsidies in the energy and transportation sectors; suspending governmental expenditure on advertising for a year, streamlining governmental departments, and ceasing the renewal of labor contracts in departments with tenures of less than a year; diminishing state disbursements to provincial administrations; discontinuing solicitations for new projects by the state and rescinding approved but yet-to-commence projects; temporarily heightening import tariffs and extending export levies to non-agricultural domains, among others.
Secondly, alleviating the debt burden through exchange rate and monetary policies. This entails realigning the exchange rate to approximate market valuations. On December 12, 2023, the Economy Minister of the Milai government announced a 54% devaluation of the official exchange rate to 800 pesos per US dollar, coupled with a monthly 2% devaluation of the peso. This maneuver aims to lower the prices of Argentine export commodities and narrow the trade deficit, thereby laying the groundwork for accumulating foreign exchange reserves. Concomitantly, policy interest rates are to be lowered. On December 18, 2023, the Central Bank of Argentina slashed the policy interest rate from 133% to 100%, thus mitigating the central bank’s interest payment obligations.
Thirdly, reducing state intervention and fostering market competition. This encompasses the repeal of statutes impeding economic progress, such as the Rent Law, the Supply Law, the Domestic Procurement Law, and the Industrial Promotion Law, to afford individuals and enterprises greater autonomy by alleviating regulatory burdens and fostering Argentina’s economic rejuvenation. Moreover, it entails relaxing controls in sectors such as healthcare, satellite internet, tourism, sugar, wine, agriculture, and mining; lowering entry barriers and enhancing operational efficiency; implementing the “Open Skies Policy” and revising aviation regulations to facilitate and streamline the entry of new market operators; intensifying the utilization of digital technologies in administrative processes to enhance efficiency; reforming the labor regime by easing restrictions on employee terminations, reducing compensation thresholds, and extending workers’ probationary periods from three to eight months. Furthermore, 41 state-owned enterprises, including the Argentine Port Authority and airlines, have been earmarked for inclusion in the privatization drive. Amendments to pertinent provisions in the National Civil and Commercial Code are also proposed to curtail excessive state intervention in civil relations.
Fourthly, abolishing export restrictions and fostering foreign trade. The Milais administration contends that trade constitutes the linchpin of Argentina’s recuperation from the crisis. To galvanize trade expansion, reforms to the Customs Law are proposed; the system of exporter and importer registration is to be abolished to defray product costs; digitization of procedures is to be undertaken to enhance transparency; and bans on economic imports and exports are to be lifted to incentivize investment.
Fifthly, bolstering social welfare policies. Initiatives encompass measures to diminish maternal and infant mortality rates, doubling expenditure on child welfare; bolstering educational standards by enhancing teacher evaluations and reforming the education system to cater to non-resident foreigners; revising pension calculation methodologies with a view to regular pension increments and safeguarding the interests of the lowest-income beneficiaries.

Sixthly, enacting novel provisions pertaining to social protests, electoral systems, etc. This entails stipulating penalties ranging from one to three years and six months’ imprisonment for individuals obstructing or impeding the normal functioning of land, waterways, aviation, or public communication services without posing a common peril. Additionally, electoral system reforms include the annulment of primaries, the establishment of a novel representative election system predicated on single constituencies, and revisions to closed-list systems. Furthermore, federal approval is mandated for the implementation of jury trial systems.

Historically, the efficacy of “shock therapy” across diverse nations has yielded disparate outcomes, with identical prescriptions yielding varied effects owing to inherent disparities. The implementation of “shock therapy” may necessitate iterative attempts. Even Bolivia, which triumphed over inflation through “shock therapy,” has endured six setbacks. Whether “shock therapy” can salvage Argentina’s economy warrants sustained scrutiny, yet its efficacy hinges upon robust governmental leadership, widespread social consensus, and efficacious institutional reforms. Presently, the Milais administration’s economic reform blueprint confronts the ensuing hurdles:

1. Balancing the interests of all stakeholders and fortifying the government’s capacity to propel reform. On one hand, the Milais government must adeptly navigate the divergent pressures from assorted interest factions to forestall the derailment of economic reforms. Measures such as labor law amendments risk provoking discontent among labor unions; currently, a decree to annul labor market oversight has been suspended by the courts. Actions like halting public projects and discontinuing transfer payments might precipitate local economic downturns. Hence, the government must meticulously heed all stakeholders’ interests and foster concerted coordination. On the other hand, garnering broader support is imperative. Milley’s “Freedom and Progress Party” commands merely 7 of 72 Senate seats and 38 of 257 House seats, heightening the government’s hurdles in advancing reforms amidst congressional frailty.

2. Safeguarding vulnerable demographics and forestalling societal unrest. The government confidence index compiled by polling agency Poliarquía reflects a marked upswing in Argentine public trust in the Milai administration, surpassing levels observed during the Macri and Fernandez regimes. Nevertheless, with Argentina’s annual inflation rate anticipated to soar to 211.4% in 2023, and median inflation projections hovering at 213% over the ensuing 12 months, imposing austerity measures amid rampant inflation risks exacerbating economic strains, disproportionately burdening the impoverished constituting 40.1% of Argentina’s populace. Effectively alleviating pressures on vulnerable segments, preempting societal upheavals, and averting the erosion of welfare policies amidst reform endeavors constitute pressing imperatives for the Milais administration.

3. Garnering comprehensive backing from the international arena. As per Central Bank of Argentina data, Argentina’s foreign exchange reserves stood at a mere US$21.513 billion as of November 2023, with net reserves in the negative. Meager foreign reserves and towering external debts curtail the government’s capacity to curb hyperinflation. Debt relief from foreign quarters underpinned Bolivia’s “shock therapy” success. Analogously, robust international support is indispensable for Milai’s reform initiatives’ seamless progression. However, Argentina’s current International Monetary Fund backing, totaling a meager $4.7 billion in special drawing rights, falls woefully short of requisite assistance to weather the crisis. Argentina’s ability to secure heightened financial aid from global markets hinges on reform intensity and other geopolitical factors.

4. Galvanizing market confidence efficaciously and mitigating the impact of elevated interest rates on economic stability. Amidst hyperinflation episodes, interest rates typically surge. Generally, interest rates recede with augmented market confidence in economic prospects. Presently, Argentina’s money market interest rate stands at a staggering 100%, vastly surpassing global benchmarks. Milais government reforms aim to cultivate stable market expectations, engendering belief in the continuity and efficacy of reform measures, thereby curbing interest rates. Yet, constrained market confidence may precipitate pressures to slash interest rates via expanded domestic lending, culminating in further currency depreciation and hyperinflation, thereby undercutting economic stabilization endeavors.

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