In this interview for The Misesian, we ask economist (and Argentina native) Nicolás Cachanosky about the prospects for a lasting change to Argentina’s highly inflationary and interventionist economy.
The Misesian: It seems to many that Javier Milei was elected due to widespread dissatisfaction with the state of the economy in Argentina. Is this a correct assessment?
Nicolás Cachanosky: Yes, I believe that is quite accurate. Argentina’s economy has been plagued by increasing inflation since 2007, reaching a world record of 210 percent in 2023. Additionally, the economy has been stagnant since 2011. Poverty rates are also troubling. Consider this: the younger generation, with their personal and professional lives ahead of them, has only experienced stagflation and Kirchnerismo (a left-leaning populism). Furthermore, Cambiemos, the opposition coalition from 2016 to 2019, failed to address the economic issues and consequently lost reelection. The Cambiemos coalition did not rectify the economic problems, leading to disappointment among the public.
Due to a shortage of reserves in the central bank, Argentina lacks enough US dollars to support its imports or meet the demand for foreign currency. Argentines prefer to save in dollars rather than pesos. Strict capital controls restrict how much currency importers can purchase from the global market and limit how much households can save in US dollars.
Given this context, it’s natural that many see only two ways out. One is emigration, which many are opting for. The other is to disrupt the political system by electing a political outsider like Javier Milei, who understands how to channel the public’s frustration with the political establishment. Milei’s use of the pejorative term caste to describe political rulers has been one of his most effective rhetorical strategies.
TM: What have been the effects of widespread monetary inflation and price inflation in Argentina? In other words, how has inflation impacted the daily lives of ordinary people?
NC: Let me provide some context first. The average yearly inflation rate during Néstor Kirchner’s presidency (2003–7) was 15 percent. Throughout both Cristina Fernández de Kirchner’s presidencies (2008–15), the yearly inflation rate rose to 25 percent. Under Mauricio Macri’s Cambiemos government (2016–19), the yearly inflation rate escalated to 41 percent. To exacerbate matters, during Alberto Fernández’s presidency (2020–23), the yearly inflation rate reached 88 percent. To be clear, these are yearly rates, not the accumulated inflation during each presidency. This is problematic.
This high inflation gives rise to a myriad of issues. Firstly, there are no long-term investments in Argentina. Predicting cash flows beyond a few years becomes virtually impossible. In addition to the high and volatile inflation, uncertain property rights make investing in Argentina a risky endeavor.
One scenario exemplifies the pervasive impact of inflation mismanagement. During the 2001 crisis, the government opted to freeze the prices of utilities (energy, transportation, gas). The rationale behind this policy was to shield low-income families from sudden spikes in utility prices (as the exchange rate depreciated from one peso per dollar to four pesos per dollar). However, revisions of these price controls consistently lagged behind the inflation rate, leading to three primary problems. Firstly, utility firms began incurring losses instead of profits, necessitating government subsidies to offset the unadjusted price controls. Secondly, output started to decline and energy imports surged, depleting central bank reserves and eventually prompting capital controls. Finally, the neglect of fixed capital maintenance gradually became a burden on the broader economy.
More than twenty years later, the utility prices are still an issue that demands a solution.
TM: You have pushed for dollarization in Argentina. How would dollarization help ordinary Argentines?
NC: There are numerous ways. Firstly, it would eradicate inflation, and importantly, it would do so in a credible manner. Low inflation wouldn’t hinge on Milei or any other individual holding the presidency but rather on the framework of monetary institutions.
Secondly, it would diminish the opportunity cost of conducting business in Argentina. The peso has experienced an average inflation rate of 60 percent from the mid-1940s to the present day. With limited domestic savings available, Argentina relies heavily on foreign investments. By eliminating exchange rate risk, dollarization would render Argentina a more appealing destination for investment.
Thirdly, it would shield Argentines from the influence of future populist leaders. Politicizing the central bank and exploiting the inflation tax would no longer be viable options, or at least not as easily achievable. The failed attempts of Correa in Ecuador and Bukele in El Salvador to circumvent dollarization serve as examples of the challenges associated with going against dollarization once it’s implemented.
Fourthly, dollarization would pave the way for and incentivize other reforms. Argentina requires fiscal, labor, trade, banking, and financial reforms, among others. Implementing these reforms under the current inflationary conditions is exceedingly challenging. Such reforms take time to enact, and their effects take time to materialize. Dollarization, on the other hand, can be implemented more swiftly, and its impact on inflation is also more immediate.
TM: Are there other ways the state has reduced the standard of living in Argentina? Are government spending and the welfare state a large burden?
NC: As grave as inflation may be, it is a by-product of other underlying issues within the Argentine economy. The scale of Argentina’s government is simply unsustainable. Regardless of one’s preference for the size of government, the Argentine government’s size exceeds what the economy can viably sustain.
A significant factor contributing to this imbalance is the proliferation of social programs and the welfare state following the 2001 crisis. While these programs may have been deemed necessary during the crisis, there has been a lack of long-term planning to address the underlying causes of poverty and roll the programs back. A successful welfare program should ideally become obsolete as its necessity diminishes over time. A welfare program that perpetually expands indicates failure. However, rolling back welfare programs is politically unpopular and delicate, leaving Argentina burdened with a significant fiscal liability.
The detrimental impact of the state on Argentina’s economic standard of living is evident in measures such as price controls, import restrictions, and currency depreciation. Moreover, over the past two decades, Argentina has experienced a profound institutional decay, resulting in a disregard for both formal and informal institutions. This erosion of institutional integrity fosters violations of property rights and expropriation.
Multigenerational unemployment further exacerbates the situation, with families experiencing unemployment across multiple generations. This perpetuates a societal mindset where the notion of working toward one’s future becomes elusive as reliance on state provisions becomes ingrained.
This breakdown of institutions and the resulting social environment creates fertile ground for the resurgence of populism. It’s perhaps unsurprising that many of Milei’s behaviors align with the characteristics of a textbook populist leader.
TM: In addition to monetary changes, what fiscal changes must take place to end the debt and inflation spiral?
NC: There is no leeway for further increases in taxes; the government must prioritize cutting spending. However, this task presents significant challenges. If, due to political constraints, an immediate reduction in spending is unfeasible—for example, how probable is it for welfare programs to undergo rapid spending cuts?—the government may need to resort to foreign debt to finance the transition. Yet Argentina lacks access to international debt markets. Consequently, like any government, it is confronted with the tough choice of either risking political power by implementing severe austerity measures or opting for a gradual approach, thereby perpetuating inflation and the looming risk of an economic downturn cascading into a currency crisis.
Another fundamental cause of Argentina’s fiscal imbalances is the coparticipation law. In essence, the federal government collects taxes and then redistributes resources to the provinces. While some funds are allocated automatically based on a predetermined formula, others are distributed at the government’s discretion.
This setup creates a breeding ground for misaligned incentives. Provinces do not compete to attract resources based on their efficiency or economic policies, as they do not directly benefit from increased tax revenue. Instead, they vie for the favor of the president to secure a larger share of the discretionary funds. Conversely, the president can exploit these discretionary funds to exert influence over provincial governors to advance their own agendas. Wealthy provinces witness their resources being redistributed to other regions, while economically disadvantaged provinces enjoy a continuous inflow of resources from the federal government.
A more effective approach would involve the federal government solely collecting taxes for its own obligations, while each province assumes responsibility for generating its own revenue and attracting investment to its jurisdiction. The current coparticipation system incentivizes excessive spending rather than fostering fiscal balance.
TM: We have seen a number of Milei supporters call for granting more and more political power to Milei to push through his reforms. Can Milei succeed given the current political realities in governmental institutions in Argentina?
NC: Milei’s advocacy for expanded political powers presents a concern. Granting him the authority he seeks would essentially elevate him to a super-president status. The constitution outlines specific conditions under which Congress can delegate additional powers to the executive and delineates the limits thereof. It remains ambiguous whether Congress possesses the constitutional authority to confer some of the powers Milei is requesting. Moreover, while it wouldn’t be unprecedented for a president to receive superpowers, it strikes many as peculiar to witness a self-proclaimed libertarian advocating for fewer institutional constraints rather than more.
Although Milei aims to enact a comprehensive set of much-needed reforms, he lacks representation in Congress. Consequently, he must forge political alliances and negotiate with other parties. However, his approach tends toward conflict rather than consensus building. In response to political opposition, he intensifies his criticism of Congress and doubles down on confronting his political adversaries. Today it seems improbable that he will muster the necessary political capital to push through reforms in Congress, as evidenced by the failed attempt to pass his omnibus law. While his all-or-nothing strategy may yield success or failure, it creates uncertainty regarding the extent to which he can implement reforms.
TM: Even if Milei makes impressive progress in reforming the state and its economic policy in coming years, he won’t be president forever. Is reform sustainable, or will it all be reversed under the next Peronist president?
NC: For now, this seems to be one of the weakest points in Milei’s strategy. Any reform in Argentina must be crafted with the assumption that the succeeding government will likely be populist. Therefore, an institutional or policy reform that hinges on the continuity of the current government is destined to fail.
The lack of certainty poses a significant dilemma. Even a well-designed promarket reform may have little impact if the market anticipates its reversal within a four-year time frame. This scenario fosters the perception that freemarket reforms are ineffective. The certainty issue is particularly challenging in countries like Argentina, characterized by institutional decay.
One of Milei’s initial actions was to issue a necessity and urgency decree (NUD), a presidential prerogative reserved for extraordinary circumstances. If free-market reforms can be introduced through an NUD, they can just as easily be nullified by another NUD in the subsequent presidency. Whether Milei’s NUD aims to restore individual liberties or not, it sets a precedent that could be utilized to advocate for non-free-market reforms.
The missing element in Milei’s reforms thus far is the robustness that would ensure their endurance and irreversibility should they be implemented.
