How mighty economies fall

Argentina’s presidential front-runner Javier Milei wants to swap the peso for the US dollar and dismantle the state. If things are bad, they’re about to get worse

September 26, 2023
A man walks past a grand bank building, whose tall wooden door is closed, and covered in graffiti
“Thief give us back the money”: graffiti on shuttered bank in Buenos Aires, Argentina during 2001 default

Last month, voters in Argentina’s primary presidential election delivered a shock result: 30 per cent, the largest share of the vote, went to Javier Milei, a far-right populist with an unusual hair style who has named his four dogs after free market economists, beginning with Milton Friedman. 

Milei threatens, if elected, to abolish Argentina’s central bank along with more than half the organs of the state, and to do away with the national currency in favour of the US dollar. The primary election result had an immediate effect: the peso was devalued overnight by 18 per cent and the central bank lifted interest rates to 118 per cent. If Milei is elected president on 22nd October, Argentina seems certain to plunge into an economic nervous breakdown. 

It would not be the first. 

Writing in the Toronto Globe and Mail recently, columnist Tony Keller warned that there was a potential Argentina in every country’s future: all it required to emulate that unhappy country was to make the wrong decisions. Keller’s warning was directed at politicians in Canada, though in the same spirit, fellow Canadian Mark Carney recently pointed out that Liz Truss had promised Singapore-on-Thames but delivered Argentina-on-the-channel. Still, as Argentina staggers towards yet another possible sovereign default and potential political crisis, the contrast with Canada is both painful and telling.

At the turn of the 20th century, Canada and Argentina were level pegging. Both were underpopulated, resource-rich former colonies: Argentina was an independent republic with a constitution modelled on that of the United States, Canada a self-governing dominion within the British Empire. Both were vibrant economies, already among the richest countries in the world and full of promise. Both were eager to attract immigrants.

Argentina was wealthy enough to boast a handsome capital with, of course, an opera house, a polo ground, several country clubs and, in 1914, the only overseas branch of Harrods. The expression “riche comme un Argentin” (as rich as an Argentine) was part of the French lexicon, and more than six million immigrants arrived between 1870 and 1914 to help build and share the wealth. They came largely from France, Italy and Spain, and for most of the 20th century a well-worn Latin American joke described an Argentinian as an Italian who spoke Spanish and thought he was an Englishman.

Canada and Argentina remained comparable economies until the 1930s. But today, Canada’s GDP per capita is estimated to be $53,000, Argentina’s is $13,500. Canada’s rate of inflation this year is an unusually high 3.3 per cent, while Argentina’s reached 124.4 per cent in August. Despite its abundant natural assets, Argentina is broke: it has defaulted nine times on debt repayments and currently owes a staggering $600bn—a debt that some analysts project will reach $3.4 trillion by 2028. 

Argentina has had to resort to IMF bailouts 22 times over the past 65 years and is now blasting through a Chinese currency loan. Its once fine capital is increasingly dilapidated, its middle class impoverished and many of its young people now seek to reverse the migration patterns of their grandparents. 

One restaurant famously papered an entire wall with superseded notes, accumulated through successive crises

As to how this happened, opinions vary: presidential candidate Milei blames Argentina’s decline on a hundred years of socialism. Others would attribute it to a different blend of bad politics and bad economics. Argentina saw its first military coup in 1930 and five more before the millennium. A savage dirty war that began in the 1970s resulted in the torture, murder and forced disappearance by agents of the military dictatorship of tens of thousands of citizens. The country lurched between the liberal economic policies favoured by military regimes and the statist approach of the Peronist movement—for decades the country’s dominant, if elastic, civil political force. Then, as the 21st century dawned, Argentina plunged into its most dramatic economic crisis to date.

Anyone who visited Buenos Aires in those years is likely to have souvenirs of its recurrent economic crises and to have encountered a disconcertingly different relationship between money and the state. My own included an impressive collection of dead bank notes and at one point a million peso note: one restaurant famously papered an entire wall with superseded notes, accumulated through successive crises. I also have a bronze rosette that was struck from the door of a bank in central Buenos Aires by a frustrated customer wielding a hammer during the great sovereign default of 2001, a moment of national crisis in which the banks closed their doors and money vanished overnight.  

The man who had brought Argentina to that pass was Carlos Menem, another flamboyant figure with a fondness for football, unusual hair and radical economic ideas, who was president of Argentina for 10 years from 1989. He had come to power in the middle of a crisis: inflation had reached 3,000 per cent and Argentina had defaulted on debt repayments. Menem then embarked on a successful privatisation programme that attracted foreign direct investment and returned Argentina to growth.

In October 1998, Menem was praised by the IMF for the apparent triumph of his radical policy of nailing the Argentine peso to the dollar by law. It was a policy that appeared so successful that even the canny Argentinian middle class had abandoned the habit of keeping savings in dollars: if the peso was worth the same as the dollar, why bother? 

Menem had been invited to talk to the annual meeting of the IMF and World Bank in what turned into a celebration of Argentina’s success. What was less worthy of applause was the surge in spending and the foreign debt that had reached $100bn by the time he left office the following year. 

Two years later, in December 2001, the country imploded. Argentina defaulted on $85bn of sovereign debt and was plunged into financial collapse, transforming overnight from IMF poster child to financial pariah. Bank deposits were frozen and massive devaluation all but wiped out the accounts of those trusting savers. Living standards plummeted, unemployment soared, and angry citizens took to the streets. Que se vayan todos!—Away with the lot of them!—was the most common cry. Panicked depositors tried to get their money out of the banks and into dollars before it lost all its value, but the banks had locked their doors. The lunch-hour hammer sessions provided therapy, but nothing else.  

The physical notes and coins of the national currency vanished, literally as well as metaphorically, and in their place the nation sported more than 20 varieties of scrip with names like federales or evitas or patacones, hastily printed by provincial governments to pay their own workers. Reluctant retailers were obliged to accept them.  

Those who were not public employees—the plumbers, the travel agents, the psychotherapists, the dentists—survived through the barter clubs that sprang up, occupying abandoned public spaces and out of town warehouses, and eventually involved nearly half the population. No pesos were accepted within the barter system but it, too, issued its own currency—a small white slip of paper printed with the image of a tree—to facilitate exchange within the system. In one club that I visited at that time it was possible to get anything from a trip to Brazil to a roof repair, a facelift, or a much-needed therapy session, all paid for in barter currency. 

The founders of the barter system were admirers of the economist and businessman Silvio Gesell who had died in Argentina in 1930. He had argued that money needs to stay in circulation rather than be hoarded, and in honour of his theory the barter founders reduced the value of their currency by a small amount every week: in effect they introduced controlled inflation to encourage people to spend. Their clientele needed little encouragement. By March of 2002, an estimated seven million people were trading in the barter system and the founders had negotiated with Argentina’s public utilities to allow electricity bills to be paid with some of the 140m barter credits in circulation. 

In a country in which little else seemed to function, the barter system was an outstanding success. But as elections approached, its very success was seen as a threat by Argentina’s established political parties. The police began to harass the organisation, raiding its headquarters and confiscating its assets. Then, in May 2002, unidentified men began to distribute massive amounts of forged barter currency to arriving traders, introducing hyperinflation into the system. Death threats followed and the barter system collapsed. It was neutralised as an electoral threat, but also destroyed as a lifeline for its hard-pressed customers.

Argentina’s 2001 default, at around $81bn, had the distinction at the time of being the largest sovereign default in history. It wiped out the savings of the once prosperous middle class and created a large underclass of scavengers who lived hand to mouth until the economy staggered back to life. Argentina recovered slowly: the deep topsoil of the vast pampas or grasslands still supported the production of cattle, wheat and soy, and Argentina had more than enough oil for its own needs. But 2001 was not to be the end: years of litigation by unhappy creditors, bondholders and opportunistic vulture funds followed, before another default in 2014, a settlement in 2016 and yet another crisis in 2019. A cure for the country’s economic malaise seems as far away as ever.

Argentina’s 2001 default...wiped out the savings of the once prosperous middle class and created a large underclass of scavengers who lived hand to mouth

Today, the US dollar remains a national obsession—a permanent reflection of the depth of the country’s failure, a haven for savings, and the only real measure of value in a broken economy. As inflation soars again and the nation’s dollar reserves melt away, Argentina boasts more than a dozen different dollar exchange rates, depending on what the money is for: the bank buys at an implausibly low official rate, but if you want to buy dollars in the back rooms of Florida, the central shopping street where the capital’s black market exchange flourishes, the “dollar blue rate” will cost many times the official sell rate. Trying to buy dollars officially leads the customer into a bewildering maze. There is a different official rate for investors, and yet another one for credit cards; then there is the so-called Qatar dollar, which started when Argentine football fans wanted to follow their team to the World Cup in December 2022; music promoters pay the Coldplay dollar—which has a 30 per cent tax on the exchange; the Malbec dollar is used to export soybeans; and the luxury dollar, with its 100 per cent tax, hits the rich who still shop for private jets. 

If Milei is elected, all this, he says, will disappear.

Milei, the wild card, has two serious opponents for the presidency: the economy minister, Sergio Massa and the conservative opposition candidate, Patricia Bullrich. His running mate, Victoria Villarruel, a lawyer from a military family who made a career out of advocating for soldiers who had been convicted of the dictatorship’s human rights abuses, has stirred a political hornets’ nest by revisiting cases from Argentina’s “dirty war” on the side of the military and those she calls the victims of terrorism. If elected, Milei plans to put Villarruel in charge of security, defence and justice, a move that would threaten to reopen the wounds of Argentina’s 50-year-old political trauma. 

Milei is 52, the son of bus driver who went into business. He holds a degree in economics but entered politics only four years ago. In addition to the dogs, he lives with his sister, to whom he he is close: she is his campaign manager as well as his housemate. He refers to the entire political class as thieves, describes taxes as an “act of violence”, opposes abortion, and describes China, with which the current Argentine government has enthusiastically cultivated a relationship, as an “assassin”. 

His previous careers include short spells as a goalkeeper and a rock musician. He describes himself as an “anarcho-capitalist” and is a follower of an American economist from the 1950s, Murray Rothbard, who believed that the state, with its taxes and services, should be replaced by private contracts that citizens could choose to enter or not. Milei himself has called the state “a criminal organisation”, because it obliges citizens to pay tax, and has staged a monthly raffle for his congressional salary since his election to the Chamber of Deputies in 2021. Anyone can enter, and Milei describes this as returning money that the political caste has stolen. 

It is no surprise that Milei is an admirer of Jair Bolsonaro and Donald Trump, and, like Trump, he first made his name as an aggressive and misogynistic television host and has survived scandal apparently unscathed (in Milei’s case, the scandal was the accusation that he was selling party candidacies to the highest bidder). He is particularly popular among young voters but his promise to reduce taxes and the understandable political disillusionment of Argentina’s voters gives him a wider appeal. 

Given the parlous state of nation’s economy and finances, it is far from clear how Milei would find enough dollars to adopt as the new national currency, let alone the dollar reserves to sustain the experiment. The country’s foreign exchange reserves are estimated to be a negative $4.5bn, and to add to its woes a recent court judgement in New York ordered the government to pay $16bn to two former shareholders of the oil company YPF, nationalised by then president Cristina Fernández de Kirchner in 2012. 

Earlier this month, the daily newspaper Clarin published a letter signed by more than 170 Argentinian economists and warning of the potentially disastrous consequences of Milei’s plan to abolish the Central Bank and dollarise the economy within two years. Far from being a panacea, they warned, it could “generate multiple difficulties for our immediate and future performance”. Since there were no dollar reserves, the only feasible way to achieve it, they argued, would be an enormous increase in public debt, or to dollarise at an exchange rate so high that the economy would collapse into hyperinflation. Even under the best conditions, they said, dollarisation is inappropriate for a complex economy like Argentina’s that is poorly correlated with the United States. 

Milei dismissed the signatories as “170 failed economists”, throwing in accusations of corruption and hypocrisy for good measure and continuing to use an image of his own head on a giant dollar bill as a campaign prop.

Implausibility is not in itself a barrier to success in Argentina’s elections. Long-suffering citizens who reflect on Argentina’s reverse development and have difficulty identifying what benefit the state has brought them recently might feel that its abolition—or radical pruning—would not be such a bad thing. As to the dollarisation of the economy, the details of his plan might seem vague, but the idea of a strong and stable currency has an irresistible allure in a nation whose relationship to currency seems to be in permanent meltdown. 

Milei and his La Libertad Avanza (Freedom Advances) party are strongly placed for the first round of the presidential election on 22nd October, but electoral victory would not end his—or Argentina’s—troubles, and might pour petrol on the flames of the national predicament. Powerful opponents in congress would be ranged against his radical plans, as would Argentina’s trade unions and the Peronist movement, both of whom have significant street power. International markets are likely to take fright and his promises are likely to prove impossible to deliver. 

An Argentine friend leaves a voicemail on my WhatsApp. “Make no mistake”, she says, “this guy is a catastrophe.” Whatever the voters choose in October, Argentina’s near century of decline seems unlikely to be reversed any time soon.