By Hector Torres / 28 March 2024

Hector Torres is Senior Fellow at the Centre for International Governance Innovation and former Executive Director at the International Monetary Fund.

The president must learn to work with the legislature, not against it

Javier Milei, the president of Argentina, is living the reverse of Joe Biden’s political fate. Both leaders are grappling with a notable disjunction between the actual state of their respective economies and the public’s perception of it, yet these perceptions diverge sharply.

While Americans revel in the prosperity of an increasingly robust economy, they attribute little credit to Biden for this success. Conversely, Argentines are enduring increased economic hardships but credit their libertarian firebrand president for steering the nation clear of hyperinflation.

Milei assumed office on 10 December amid a dire economic landscape. He inherited a country in distress, a bankrupt government, an overvalued peso and a tangled web of 14 disparate exchange rates proliferating under the supervision of a central bank depleted of reserves (with approximately $15bn in negative reserves).

He clinched victory after brandishing a metaphorical and literal chainsaw and vowing to use his first year in office to slash the government’s fiscal deficit (which stood at 5% of gross domestic product), dismantle price controls and untangle Argentina’s excessively regulated economy.

He additionally pledged to shut down the central bank and adopt the dollar as Argentina’s official currency. However, these two proposals are quietly evolving into a more pragmatic approach: cleaning up the central bank’s balance sheet to eventually remove foreign exchange restrictions and, rather than ‘dollarising’ the economy, allowing the private sector to freely select the peso or any other currency for conducting business transactions.

And he is already making strides. Inflation is on a downward trend (from 25.5% down to 13.2% in February). January and February witnessed primary and financial surpluses, with the central bank bolstering reserves by $11bn (albeit still in negative territory). However, the sustainability of these achievements remains uncertain.

Government under pressure

Fiscal ‘surpluses’ don’t stem from substantial structural spending reductions but rather from the inflationary ‘liquefaction’ effect on pensions and salaries, coupled with a sluggish execution of expenditures. This includes stalled public works projects, the suspension of financial aid to provinces and outstanding accrued payments – often referred to as ‘floating’ debt. As for the reserves accumulation, it is not due to an export boom but rather to a postponement of import payments and economic recession.

As expected, Milei’s chainsaw approach to quenching fiscal deficit led to a profound recession and a surge in poverty rates. Yet, Milei’s approval ratings remain steadfast, and financial markets exude optimism. While most market analysts anticipate that in 2024 the government will ‘only’ reach a primary fiscal balance (prior to factoring in interest payments), this achievement holds significant weight for a nation that has operated with deficits for the past 12 years.

However, the government finds itself under pressure from both the social situation and its political vulnerability, as it lacks control over any provincial government and holds only a minority of seats in Congress, comprising just 15% in the lower house and 10% in the Senate. Furthermore, the government’s coalition lacks significant management experience and Milei, a political novice himself, has little willingness to compromise with the political establishment – the ‘political caste’ in his own words. He is showing a troubling proclivity for picking fights, even with his vice president and with the ‘friendly’ opposition (legislators aligned with Mauricio Macri, a former president).

Learning to compromise

Nevertheless, Milei seems to be learning – albeit slowly – to temper his abrasive demeanour, which often leads him to stigmatise those who oppose his views. Moreover, despite his proclaimed liberalism, he is reluctantly coming to terms with the legislative constraints inherent in liberal democracies. His ‘learning by doing’ approach remains precarious: errors made in office can carry significant consequences.

His next challenge lies in forging agreements with the opposition before reintroducing legislation that he previously hailed as ‘the cornerstone and genesis of Argentine freedom’. In an initial attempt, his bill failed to garner sufficient legislative support, underscoring Milei’s imperative to rein in his rhetorical excesses (characterised by labelling dissenters as ‘traitors’) and cultivate political consensus – an arena he vehemently disdains.

He has chosen to reintroduce a ‘scaled-back’ version of the original bill, while concurrently proposing a separate fiscal package (including reestablishing the income tax that, before taking office, Milei voted to eliminate, arguing that it was ‘theft’ and ‘filthy’). The approval of such a fiscal package is indispensable to shore up the government’s fiscal balance without resorting to the unsustainable ‘tricks’ employed to deliver fiscal surpluses during his first 100 days in office.

The success of Milei’s libertarian experiment hinges not only on his ability to ensure that the real economy begins its recovery by the second half of 2024, without reigniting inflation, but also on his capacity to persuade investors that he can build the parliamentary majorities necessary to sustain his promising economic achievements.

Milei must learn that governing is also politics, stupid!

The views don't necessarily reflect those of IMI.