Introduction
Inflation is one of the most felt macroeconomic problems worldwide. It is so because it affects everyday life of common people, the way in which they decide to spend their income, it entails essential choice in the domestic economy of a family, for instance what products are going to be affordable for them at the supermarket. On the other hand, politically speaking, it is always difficult for governments to convince their electorate through economics related arguments, since their effect are not often univocal and very often spread out over time. This was not the case in Argentina, where after one year of presidency, Javier Milei can still count on a huge domestic popularity, even if his political propaganda is strongly based on a shocking economic plan. This is, most plausibly, due to the fact that inflation, and in the Argentinian situation it is fair to speak about hyperinflation, was hitting the population so hard that it became the highest point in the agenda of their needs.
The Milei’s chainsaw approach
Argentinean president-elected, Javier Milei, is a very controversial figure, undeniably a strong personality with some peculiarities. Nonetheless, for the sake of the current analysis, what matters is that the set of policies he designed against inflation had tangible positive effect. This point is now arguably undisputed, as even the most authoritative publications in economics (such as The Economist, The Financial Times, and The Wall Street Journal) which were initially skeptical about Argentina's pro-market turn, have now radically changed their stance in light of the decline in inflation. Despite defining himself as an anarcho-capitalist economist and ideologue, Milei's reforms bear a vague resemblance to the measures the International Monetary Fund recommends for severe default situations like Argentina's. Interestingly, while the IMF does not always command the same international backing that Milei currently enjoys, his approach mirrors the strategies typically suggested for addressing such crises.
From a macroeconomics perspective
Technically speaking, what Milei is doing could be easily depicted in the most basic demand-supply graph: his strategy entails a negative inducted shock of the demand combined with a positive generated shock on the supply. These two connected forces bring the market to a new equilibrium (in theory, but also in practice looking at the results) at lower prices, having a disinflationary effect. The negative demand effect is created through a strong “austerity” regime, together with a heavy devaluation of the local currency: Milei cut public spending of 24% annually in 2024, while submitting his public administration to a strict streamlining work, at the beginning of his presidency he closed 13 ministries and fired around 33 thousands public officers. On the other side, the positive supply effect is given by the massive amount of liberalisations and a deep debureaucratisation of the normative machinery: the suspension of hundreds of economic regulations, massive market-driven reforms of sectors like housing, job and energy market, and a general openness on behalf of the international trade, operated through a lowering in custom duties.
The vertical fall of inflation
For what concerns issues strictly related to inflation, the results are completely in the public eye. While Argentina still faces an impressive annual inflation rate, its monthly growth rate has steeply fallen compared to pre-Milei levels, registering a record low of 2.7% in November 2024. This downward trend has been largely consistent over the past year; except for December 2023, when a 45% planned devaluation of the Argentine peso caused a spike, with inflation reaching 25.5%. Ultimately, what made people poorer was the unsustainable rising cost of living due to inflation, regardless of many other factors.
A quick look at other side effects
The recession necessary to achieve this result was not as harsh as anticipated; the IMF has recently revised its forecast for Argentina's GDP loss in 2024, and now predicts a strong rebound in 2025 with an expected growth rate of 5%. One of the biggest objections raised by Milei’s critics was the social cost of this drastic economic reform. While the poverty rate was dramatic during the first months of his presidency, the present and future now look brighter. In fact, both the government and various independent institutes (including Universidad Torcuato Di Tella and Universidad Católica Argentina) have reported a 12% drop in the poverty index during the third trimester of 2024, although the official figures by INDEC, the national statistics institute, are still pending (even if the calculation methods remain basically the same). Furthermore, another promising indicator is the "Riesgo País" (country risk), which compares Argentina’s bonds to those of the United States. This differential, similar to the European spread, has now fallen to a record low over the last six years. In practice, this implies that Argentina could be back and competitive on the international market sooner than expected
References and Further Reading:
“La economía de Milei un año después: baja inflación, déficit cero y caída del salario real” (El Pais)
“Javier Milei’s next economic mission: affordable air fryers” (Financial Times)
“IMF raises Latin American growth forecast for 2024” (Reuters)
“Measuring Milei’s Argentine Progress” (Wall Street Journal)
“Nowcast de pobreza” (Martin Gonzalez-Rozada, Universidad Torcuato di Tella)
“Identifying Aggregate Supply and Demand Shocks in South Africa” (Stan du Plessis, Ben Smith, Federico Sturzenegger)
“Il “piano Milei” funziona” (Riccardo Trezzi)
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