When those outside Argentina discuss Javier Milei, who took office as President of Argentina in December 2023, I sometimes feel as if they are actually saying how they would feel if Milei was elected in their own country. For example, Milei has in a year cut Argentina’s government spending by 30% in real terms. So US-based commenters have a tendency to evaluate him by whether they would favor a 30% cut in US government spending. They do not ask such a policy might make sense specifically in Argentina–or what facts in Argentina’s history might make a majority of voters willing to give such a policy a try.To understand why Argentinians would turn to Milei, it’s useful to ask the question: What if growth in your country’s standard of living had been lagging for decades. Moreover, what if you had had some experience with reforms that seemed to work in the 1990s and early 2000s, but now it felt as if the country was back on the same old treadmill of very sluggish growth and high inflation? Tobias Martinez Gonzalez and Juan Pablo Nicolini provide context for Argentina’s economic experience in history in “Argentina at a Crossroads” (Quarterly Review: Federal Reserve Bank of Minneapolis, November 13, 2024). Both are affiliated with the Universidad Torcuato Di Tella in Buenos Aires, and thus have a close-up view of Argentina’s economy and the arrival of Milei as president. Their point is not to dissect the merits what Milei has done in his first year as president, but to convey the economic situation in Argentina to which Milei is the elected response.Consider a few figures. The vertical axis is output per capita since 1950, adjusting for inflation, in the US, Canada, the UK, and Argentina. In particular, notice that Argentina was quite similar to the UK in 1950, but has now fallen dramatically behind.
But maybe it makes more sense to compare Argentina to slower-growing countries of southern Europe, some of whom have historically closer ties to Argentina? As of 1950, per capita output in Argentina was substantially above that of Spain, Portugal, and Italy. Since the 1980s, it has been substantially behind all three/
Or perhaps comparing Argentina to some other large economies in South America makes more sense? Argentina was well ahead of Chile, Uruguay, and Brazil in per capita output in 1950. But Chile has now caught up, Uruguay appears on its way to catching up, and Brazil is closing the gap as well.
The point here is that Argentina’s economic issues are recent a particular recent episode and not small. Gonzalez and Nicolini argue that, in the big picture, Argentina’s problems is overly large budget deficits. They write:
“In this paper, we proposed a script of the economic tragedy of Argentina since the mid-1970s that contains a single villain: chronic fiscal deficits. The villain has the ability to manifest himself in seemingly different identities: sometimes a hyperinflation, sometimes a default, in other occasions a balance of payments crises.”
The authors summarize Argentinian economic experience in the last half-century with a table and a figure. The table shows that when Argentina’s government was able to keep inflation under control, in the 1990s and for a time in the early 2000s, growth was strong. But when inflation climbed, growth dropped.
This figure shows the budget deficits in Argentina since 1960. Notice how they took off in the 1970s. (The horizontal line shows a 3% budget deficit for comparison.) When the deficits were brought under control in the late 1980s and into the early 1990s, growth blossomed. When the deficits again surged in the 1990s, Argentina had a financial and economic crisis in the early 2000s that “at some level resembled the Great Depression in the United States”. When the deficits were again brought under control, the growth years from 2003-2010 followed. But then deficits climbed again, along with inflation.
Javier Milei is not my style of politician, but regular readers will not be astonished to learn that “my style of politician” rarely wins elections. I can’t claim to follow Argentinian politics closely, I didn’t read about any other candidates saying that they would take a chainsaw to Argentina’s budget deficits. Milei has in a year cut Argentina’s government spending by 30% in real termsmagazine recently described Milei’s challenge this way: “This resolve has guided a blast of reforms aimed at shaking Argentina out of decades of humiliating decline caused by rampant inflation, absurd handouts and thickets of regulation”. Given decades of “humiliating decline”, and then a glimpse of an alternative economic future in the 1990s and early 2000s, it doesn’t seem shocking to me that a majority of Argentinians were willing to vote for something very different.More By This Author:Some Patterns Of Long-Run Asset Returns
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