A few days before Argentina’s presidential election, recent polls showed ultraliberal candidate Javier Milei leading voting intention polls ahead of the October 22 presidential election, even as the dispute between the three main candidates remains fierce in three polls.
In all three polls, Economy Minister Sergio Massa was in second place and conservative candidate Patricia Bullrich was in third place.
Two of the polls showed the candidates within a 10 percentage point margin, suggesting a second round is likely as none of them are expected to receive the votes needed to win in the first round.
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To win in the first round, a candidate must receive 45% of the vote, i.e. more than 40% with a lead of more than 10 points over his closest competitor.
These scenarios show that there is still a lot of work to be done before the new Argentine director general is defined. In any case, a possible victory for Milei is worrying and puts the Brazilian government on alert given the caricatured rhetoric and unconventional proposals for the economy.
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How big is the actual impact that a possible government of yours could have on Brazil? Would it really be possible to dollarize the economy, close Argentina’s central bank and break away from Latin American countries? Would the vitriol of “Latin Trump” be supported or would it weaken in contact with the social and economic realities of the country?
Next, check out the review of Juliane Furno, PhD in Economic Development from Unicamp, Advisor to the Presidency of BNDES and Professor of Economics at UERJ, and André Roncaglia, PhD in Development Economics from IPEUSP and Professor of Economics at UNIFESP, current Context.
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Dollarization of the economy
Of all Milei’s radical promises, this is perhaps one that most stirs the emotional memory of Argentines, even if the financial relief was shortlived. After all, the country was already undergoing dollarization in the early 1990s, when the Menem government inherited hyperinflation from its predecessor Raúl Alfonsín, which exceeded 3000% in 1989.
In order to stop the daily and everincreasing price increase, the then finance minister of the Menem government, Domingos Cavallo, introduced the full convertibility of the peso into dollars at a onetoone ratio. The results were positive in the first few months as there was a false sense of inflation control. But after a short time the economy collapsed because Argentina was no longer able to use the exchange rate to boost production due to the fixing of the dollar. This led to the collapse of the industry as there was no longer any way for exporters to compete with the appreciated exchange rate. The result: money began to leave the country in droves, and the final blow came with the massive devaluation of the real in 1999.
Although onetoone parity has been abandoned, Argentina’s economy is still largely dollarfocused. Back then, the government allowed residents to maintain accounts in dollars, and this is still the case today.
“When the Real Plan was drawn up, the free convertibility of Brazilian accounts into dollars was not allowed. That’s why Brazil today has much more problems with exchange raterelated inflation than Argentina,” analyzes Juliane Furno.
The economist also notes that the full dollarization of the economy ends the ability for monetary autonomy, making the country much more vulnerable to speculative attacks, devaluation and distrust of its currency. “That’s exactly what happened in the neighboring country,” he assesses.
The problem is that the dollar is so present in the lives of the Argentine population that the country currently has more than ten quotes for the currency. However, this is not enough to justify Milei’s plans as the country does not have sufficient reserves. In addition, it sends far more currency abroad than it receives to pay off debts to the IMF (International Monetary Fund), making the economy even more fragile and vulnerable to macroeconomic problems.
For André Roncaglia, the country’s current economic fragility would raise fears of dollarization in Congress. The economist recalls that at the time of the Real Plan, Brazil had completed several steps towards achieving a currency reform that established parity with the dollar, and that Argentina is far from this homework.
“At that time, Brazil was renegotiating its foreign debt, which brought a lot of capital into the country. And today we see Argentina in the opposite situation, where much more money goes out than comes in,” he notes.
Another warning point is the social problems that dollarization would cause. Given the difficulties in exporting, wages would have to be reduced so that production could continue at the lowest possible level, which in itself leads to social conflicts.
“In this situation, if there is no labor legislation that allows wage cuts, you will end up with mass unemployment, which is another variable to consider.” Despite all this, it is hard to imagine that Congress would support dollarization, which would increase the economy’s fragility and quickly “would decrease,” estimates Roncaglia.
Closure of the Central Bank of Argentina
The end of a nearly centuryold monetary institution would bring legal, institutional, social, economic and every other kind of obstacle imaginable. Additionally, it would require a majority in Congress, which polls show Milei may not have if elected.
“We are not talking about a simple political decision, because dismantling a central bank is a structural issue and if it happens at a time like this, when Argentina owes more than it has to pay, there is a risk that the rudder will be rocked “Turn around,” Roncaglia notes.
To illustrate, the economist compares the situation to a heart transplant, in which the central bank would be the organ and the currency would be the blood.
“What Milei is proposing with dollarization and the closure of the central bank is like a heart transplant and at the same time all the blood nourishing the organs.” The question is whether the body (in this case the economy) would function well after all this. That is the extent of the restrictions that their plans impose.”
And how is trade with Brazil going?
Despite the signs, both economists do not believe Argentina will cut off trade.
“I think it is virtually impossible for trade with Brazil to be interrupted because if that happens, your government will end within the first year. Regardless of whether the economy is dollaroriented or not, the country needs trade to support domestic production and Brazil is a great trading partner,” says André Roncaglia.
For the economist, the damage that Milei could do if elected is that it will cause instability in Mercosur and hamper progress in negotiations with that bloc and the European Union. Otherwise, structural problems prevented the damage from getting worse.
With or without Milei, the fact is that Brazil’s trade relations with its neighbor have long since lost strength. Data from the Economic Institute of Applied Research (Ipea) shows a 50% decline in trade between the two countries from 2010 to 2020.
And how can this situation be reversed?
Although bilateral trade between the two countries declined for years, the Argentine market was still the main buyer of Brazilian industrial products until 2020. The distancing of the trading partner led to Brazil being replaced by China as the largest supplier of these products, and that needs to be made up for.
For Juliane Furno, Brazil’s economic repositioning alongside Argentina and other economic blocs inevitably requires a sophisticated export agenda. According to the economist, Brazil needs to become Argentina’s most important trading partner again in order to find a market for industrialoriented products that will bring better jobs and more revenue to the state.
“Industry pays much more taxes than agriculture, and with the support of the BRICS bank, Argentina could export with an alternative currency to the dollar, be it the Remimbi or another currency from one of the bank’s member countries,” he notes. In addition, the countries to which the institution lends money count on advantages from the institution, such as better financing conditions and the possibility of paying by exporting their own products.
Juliane also highlights Brazil’s initiatives to try to revive trade with the country. One of these is a federal government project carried out by the BNDES to promote the export of agricultural products.
Another alternative would be to invest in partnerships with the private sector, as André Roncaglia points out.
“For example, it is possible to build regional supply chains related to the energy transition, such as the local production of batteries and the processing of materials for this industry, which suffers from restrictions that may be imposed by Milei.” In fact, chains linked to new energy sources “We are connected, using the capital that Argentina already has, such as the new Ford factory, which is technologically the most advanced in Latin America,” says Roncaglia.
To top it off, Brazil could also develop a production chain plan with other Latin American countries, attracting companies based in Argentina because they rely on natural resources in the Lithium Triangle.
“I think there are many opportunities for oil and gas exploration in Argentina, and Brazil can help secure agreements with the private sector. Even if the public sector doesn’t pay for it, it’s not the end of the world for relations between the two countries.”
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