Argentina - a monetary experiment, or really the end of one?
New President Javier Milei is a self-styled anarcho-capitalist. But with inflation over 140%, should we think of his plans as ending, not starting, economic anarchy?
Failing economies all seem to have similar characteristics: high inflation, high unemployment, high wealth inequality, balance-of-trade issues, excessive indebtedness, high government deficits, a collapsing currency.
According to INDEC data from Argentina, the country has an unemployment rate of 45%, an official inflation rate of 142.7% as of October, a currency (the peso) which officially trades at 359 against the dollar (down from 175 in January) but whose black-market rate is nearer 1,000. The country has defaulted on its debt three times since 2000.
The IMF has intervened on 33 occasions since 1956, most recently in 2018 when a $50b Stand-By Arrangement was overseen by Christine Lagarde before she took over at the ECB1. Needless to say, this huge package failed and had to be renegotiated in 2022. It often seems that the IMF has to disperse funds to Argentina simply to allow its older loans to be repaid2.
Good at football, Argentina doesn’t seem to be much good at anything else. Is this about to change?
Given the spasm that the establishment and the markets had when moderately free-market Liz Truss briefly took the reins in Britain in 2022, one might expect the arrival of an avowed libertarian in the form of Sr. Milei to cause serious market ructions. But this is Argentina, and it’s been on the ropes for much of the last century. Hopes for the privatisation of key state industries actually saw shares in the state-backed oil company YPF rise up to 40% on the day after his poll victory.
The centre-piece of his legislative programme is to dollarize Argentina. What this means is replacing the worthless peso with dollars in the form of a currency board. ‘Dollarization’ is a slightly misleading term as it is a process, not a choice of dollars.
When Montenegro ‘dollarized’ in1999, it adopted a currency board with the Deutschmark (and later the euro) as this is what its citizens held as their ‘hard currency’. Hard here is a relative term, given the weakness of the domestic dinar. In Turkey, another country beset by endless inflation, citizens tend to save in gold, so were that country to dollarize, most likely it would do so in gold.
Given the inflationary nature of the peso, Argentinians already save and hoard US dollars. This is a classic example of Gresham’s Law, the idea that bad money drives out good - people tend to dump the bad, inflationary money and keep the good stuff. The dollar therefore seems the natural choice for Argentina, and the idea behind a currency board is to bring that money back into the economy from under the bed, stabilizing the economy and allowing growth to resume.
What is a currency board? It’s a monetary set up where the notes and coins of one country are fully-backed by those of another at a one-for-one level. The implementation involves a period where the domestic currency floats for a while against the currency about to be adopted, and, once a market level has been found, the stock of money is then fixed at that level. The domestic currency in circulation is then effectively replaced in value terms by the new foreign money.
While often a crisis measure to deal with extreme inflation, currency boards also exist in relatively stable conditions for political or economic purposes. The Isle of Man pound (IMP) is for example pegged in a currency board to the British pound (GBP) at a 1:1 ratio.
Why bother? the implementation of a currency board is a process that replaces monetary policy with a foreign-exchange policy. Most instances of high or hyperinflation are caused by government deficit financing facilitated by money printing at the central bank. By fixing the currency in issue to a non-domestic hard currency in a currency board, this process becomes impossible.
The net result, when implemented correctly, is a collapse in inflation and the gradual return of economic stability and lending. One consequence is that interest-rate policy is effectively transferred to the central bank of the external currency, and without the ability to print money, the domestic central bank effectively becomes defunct. This is what Sr. Milei means when he talks about abolishing the BCRA, Argentina’s woeful central bank.
The implementation of a currency board is a process with strict rules and a fixed time-line for implementation. Professor Steve H. Hanke, a veteran of actual currency board implementations in various European and South American countries, has recently outlined with his colleagues the process necessary for Sr. Milei to fulfil his policy goal (Hanke et al on dollarizing Argentina). There are enough dollars domestically to make it happen, so there is no real argument why it shouldn’t happen.
While Sr. Milei has a mandate as President, his party does not control the National Congress, nor does he necessarily have sway in regional politics or amongst other vested interests such as business or the unions. The aviation unions are already in a flap about the prospect of the privatisation of the national carrier3.
While Argentina’s first properly-democratic election was in 1916, the country’s tortured political history in the ensuing century belies at its heart a distinctly authoritarian approach by government which has always raised questions about the country’s democratic instincts and the nature of citizenship.
This was never more true than of Juan Perón, whose first stint at President from 1946 to 1952 saw the country spell-bound by a heady mix of nationalism, hierarchical authoritarianism and populism, with the latter typified by the redistributive zeal of his first wife Eva, aka Madonna4.
The enduring nature of the Peronist legacy, right up and through the Kirschner years of the 2000s and beyond, is not only a major factor in explaining Argentina’s persistent economic and inflationary woes, but also of the battle facing Sr. Milei with respect to the expectation of state largesse by the people despite its inflationary effects. Polling 55.69% in the Presidential election may however reflect a feeling that enough is enough.
Argentina has been down a similar road before. When elected President in 1989, Carlos Menem implemented the Convertibility Law, a currency peg against the dollar. A peg is a weaker relative of the currency board which still allows central bank money printing and government deficit financing.
With the peso arguably overvalued and adversely affecting the country’s agricultural exports, and buffeted like so many other emerging market economies by the Tequila crisis (1994) and the Asian financial crisis (1998), despite a period of economic stability and rapid growth, Argentina ended the millennium in hyperinflation then default.
What remains to be seen this time is whether President Milei can overcome the vested interests whose power will be shorn if the printing press, and the patronage that comes with it, is taken away from the government. There are also external considerations, both diplomatic and monetary (most notably the IMF). Yet if really taming inflation is the goal, ironically, one could argue that Sr. Milei is in fact proposing to end a terrible experiment by attempting to implement an extremely orthodox policy of sound money.
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IMF Reaches Staff-Level Agreement with Argentina on a Three-Year, US$50 Billion Stand-By Arrangement, IMF, 07/06/2018.
Ciara Nugent, Argentina reaches last-minute deal with IMF to avoid default, Financial Times, 28/07/2023.
Ciara Nugent, Argentina’s Javier Milei faces airline privatisation backlash, Financial Times, 22/11/2023.
Luis Alberto Romero, A History of Argentina in the Twentieth Century, Pennsylvania State University Press, 2013, p132.
Interesting piece, Charlie, and reminds me of turmoil in BA on the occasion of my various visits to the country (mostly for work)