TheMarketForIdeas

Before World War I, Argentina was one of the richest countries in the world, with a per capita income close to that of the United States. In the last half century, the country has been undermined by inflation, recession, and the ineffectiveness of state institutions. The cause is the economic policy pursued by Argentine governments in the post-war period.

Argentina has vast areas of fertile agricultural land, many and important natural resources, and a large and well-educated population. With a traditional agrarian economy, Argentina exported mainly agricultural products until the 1950s. In 1946, the “hero of the working class” Juan Domingo Perón was elected president, who made major concessions to the unions. In the following period, the Peronists, supported by the unions, pursued a policy of replacing imported industrial goods with domestic products, high public spending, high taxes, and protectionism. In their attempt to industrialize the country, they stifled competition, which hindered productivity growth, while increasing public spending caused high inflation.

This economic policy remained largely unchanged until 2023, except for periods of gradual and partial liberalization under presidents C. Menem (1989-1999) and M. Macri (2015-2019). As a result, since the 1960s, public debt – both domestic and foreign – has increased, taxes and duties have increased, inflation has increased, the national currency (peso) has depreciated, tariff barriers have increased, and controls on capital movements have been tightened. All of this has had a strong negative impact on the country’s development and prosperity. The burden borne by a growing part of the population has become so heavy that the majority voted in 2023 in favour of the candidate Javier Milei, who, during the election campaign, campaigned for a radical reform program.

Milei is an economist of the Austrian school. Inspired by F. Hayek, L. Mises, M. Rothbard and W. Eucken, he is an adherent of the market economy: less state and more market. He has taught at the university, written numerous books and articles on this topic and developed a broad reform program aimed at promoting individual freedom, price stability and entrepreneurial responsibility. A flamboyant personality, he symbolically waves a chainsaw, as if mercilessly cutting down the bureaucracy.

The central element of Milei’s stabilization policy is the return to financial equilibrium. After taking office in December 2023, he announced a “shock therapy”, i.e. rapid and comprehensive reforms instead of a gradual approach. In his view, fiscal adjustment by increasing taxes and duties is not equivalent to that by reducing spending. As a result, his fiscal reform aimed to reduce taxes and duties rather than increase them, which involved a sharp reduction in public spending: the number of ministries was halved and 40,000 positions in the state apparatus were abolished. Subsidies for energy and transport, as well as funds for public works, were eliminated, and budgetary transfers to local bodies were frozen. Social benefits were generally maintained, but the management of social programs through intermediaries (social enterprises, non-profit organizations, associations, etc.) was abolished.

The result was that, after having a budget deficit of almost 9% of GDP in 2020, Argentina recorded a surplus of $1.6 billion in 2024. This amount is equivalent to a primary surplus (the difference between revenues and expenditures, less payments for the public debt burden: due instalments plus interest) of about 3% of GDP.

Over the past decade and a half, the budget deficit has been the main source of inflation. The money supply has been growing all the time as a result of the increase in the volume of loans granted by commercial banks to the state. The reduction in public spending led to a decrease in the inflation rate from 290% in April 2024 to 84.5% in January 2025.

The credibility of the national currency depends largely on the structure of the central bank’s balance sheet, which in Argentina has contributed significantly to the financing of public spending both directly, through the purchase of government securities, and indirectly, through the purchase of public debt securities from commercial banks. In December 2023, when Milei took office, the Banco Central de la República Argentina (BCRA) held government bonds (in pesos and dollars) worth over US$110 billion and had large debts in the form of bonds with interest rates of up to 133%, which it issued in its own name to absorb excess liquidity in the market. On the other hand, the BCRA had very small international reserves. This balance sheet situation involved high expenses for paying the due instalments and interest on the public debt, which caused huge losses for the central bank, which added to the government’s budget deficit.

After a year, the volume of government bonds in the central bank’s portfolio fell to $68 billion, and the volume of the BCRA’s own bonds fell below $10 billion. The hidden public debt was brought to light and converted into ordinary government bonds. The credibility of the central bank increased significantly, the monetary base (the amount of money created by the central bank) decreased, and the peso stabilized.

Another important element of Milei’s reform program is the deregulation of domestic and foreign markets: goods and services, labour, and capital. The liberalization of the goods and services market stimulated competition between enterprises, with all that this implies: stimulating innovations and the introduction of new technologies, increasing productivity and efficiency, slowing down price increases, etc. The labour market, less constrained by regulations, reduced labour costs borne by enterprises and the state. The banking system, freed from the obligation to maintain a large volume of liquid reserves in the account with the central bank and less constrained by interest rate regulations, began to remunerate customer deposits with positive real interest rates, adjusted for inflation, which is a prerequisite for the efficient allocation of capital. As a result of the application of the so-called “Ley Bases” (after the title of a book published in 1852 by the Argentine novelist, jurist and politician, J. B. Alberdi: Bases y puntos de partida para la organización política de la República Argentina) and at the proposal of the Ministry of Deregulation, over 350 regulations were abolished and modified. Price and rent controls were abolished, which had remarkable effects: in Buenos Aires, after an initial increase, rents fell to their 2002 level as a result of the sale of over 200,000 unoccupied apartments. Public enterprises, such as Aerolineas Argentinas and Energía Argentina Sociedad Anónima (ENARSA), have been fully or partially privatized, labour law has been made more flexible, and the right to strike has been revised. The banking sector has also begun to change: the state-owned bank Banco Nación has been transformed into a joint-stock company and is in the process of being privatized. The fight against inflation has allowed, for the first time in years, the practice of real interest rates corrected for inflation.

The government has reduced import tariffs, eliminated controls on exports and cross-border capital movements, and standardized the exchange rate. The peso was heavily devalued in December 2023, and then was placed on a crawling peg, with a 2% and then 1% (February 2025) fluctuation band. This exchange rate regime and the decrease in inflation led to a real appreciation of the peso, despite its nominal depreciation. The black market diminished and foreign exchange became easier.

Foreign trade increased substantially: exports increased mainly as a result of the reduction of customs duties on agricultural products and raw materials. The trade deficit decreased. Through an investment law, Argentina created a clear framework for foreign investments exceeding 200 million US dollars, guaranteeing them a stable fiscal regime for 30 years.

At first, some critics condemned the increase in poverty as a result of the shock therapy. However, what is called the “J-curve effect” in economic literature soon emerged: after a period of GDP decline of -2.5% in 2023 and -1.7% in 2024, the IMF predicts economic growth of +5.5% in 2025. As a result, the poverty rate has fallen to a level lower than before Milei took office.

The reforms of the Argentine president show that the principles of the market economy can produce sustainable economic growth even in an ossified social and political environment. The undoubted effects have been the rebalancing of the state budget, the mitigation of inflation, the increase in investment and the relaunch of economic growth. The success is still fragile, but it is generating debates about the performance of the market economy in other countries, which are also closely observing the Argentine model.

At first, J. Milei’s radical reformist ideas faced strong domestic opposition and fierce foreign criticism. However, signs of success – a balanced state budget, falling inflation and, in the meantime, a lower poverty rate – contributed to increasing world interest in a radical reformist agenda. Despite some painful measures, Milei continues to be supported by the majority of the population. He claims that he made eight times more reforms in one year than President C. Menem in ten years and that, unlike President M. Macri, he managed to balance the budget and stop inflation. His reforms can also be seen as an attempt to restructure the economy in the direction of capitalizing on Argentina’s main comparative advantage, which is agriculture and the extractive sector.

At the World Economic Forum in Davos in 2024, Milei made a passionate plea for the market economy and warned against the dangers of collectivism. He emphasized that the prosperity of the Western world is based on freedom and individualism, but that collectivist and socialist ideas are increasingly being taken up in the political discourse of Western democracies. In industrialized countries with left-wing governments, public debt has risen sharply, which has led to higher taxes and fees to support the burden of public debt. Overregulation and a significant increase in the number of state employees have helped to consolidate the power of conservative parties, but the negative effects of recession and income redistribution, associated with monetary and fiscal expansion, have led to increased political polarization.

In the past, radical reforms, such as those in West Germany in 1948-1949 and those in Great Britain during the Thatcher government, have been successful and led to a relaunch of economic growth in those countries. Currently, US President D. Trump has initiated substantial cuts in public spending and a broad deregulation process, which could, among other things, pressure the EU to carry out the reforms envisaged in the reports prepared by former Italian Prime Ministers, M. Draghi and E. Letta, then transposed into the official document adopted in January 2025 by the European Commission: Competitiveness compass. In Romania, the current government has launched a broad fiscal correction program, likely to lead to an increase in state revenues and a reduction in public spending. These measures, complemented by the reform of the state apparatus, increased transparency and reduction of waste, should reduce the budget deficit below the 3% of GDP threshold in 2031, from a level of over 8% in 2024.

In light of these challenges currently faced by some states, Argentina under the presidency of J. Milei appears as a model worthy of following, although the liberalization of international capital movements in which this country is involved has not ended, and the liberalization of the domestic financial market seems to be stagnating.