Javier Milei’s presidency begins on December 10 in Argentina. Who is Milei? His father was a bus driver and his mother was a housewife. After a difficult childhood, he completed his business studies, earned two master’s degrees and began working in financial companies, but became known for his argumentative appearances on television. He managed to be elected MP in 2021 on the Libertad Advances list, with his “anarcho-capitalist” theories inspired by the libertarian Milton Friedman and another lesser-known American economist, Murray Rothbard. On November 19, he won over voters by offering a drastic downsizing of the “absolutely evil” state run “by a parasitic caste.”
Here is his program: elimination of 11 ministries; abolition of the central bank; Sale of the most important state-owned companies, such as the oil company YPG or the credit institution Grupo Financiero Galicia; privatization of health care and schools; no action to combat climate change; lift restrictions on gun ownership; abolition of the abortion law; Liberalization of adoptions and the “human organ market” since “men and women are primarily owners of their own bodies.” Finally, the flag reform: replacing the peso with the American dollar.
Even if you work, you become poor
In the runoff, Milei won 55% of the vote, beating former economy minister, Peronist Sergio Massa. However, it can only count on 39 of the 257 seats in the House of Representatives and seven of the 72 seats in the Senate. He will therefore be a president without a parliamentary majority. Some things he will only be able to do by decree, such as reducing the number of ministries, but otherwise he will have to deal with the moderates of Together for Change, led by former President Mauricio Macri and election candidate Patricia Bullrich. Of course, the president, nicknamed “el loco” (the crazy one) since childhood, could hold a referendum. But it is not certain whether he can prevail on sensitive issues such as abortion, organ sales or climate change
The country appears to be heading towards the tenth default in its history. Stifled by stagflation, that is, the decline in wealth created (estimate: -2.5% for the end of 2023), coupled with soaring inflation, currently at 143% and predicted to reach 200% by the end of the year. The unemployment rate is high (6.6%), but not dramatic. This means that a large proportion of Argentines are impoverished even though they work. Around 40% of the population, 18.3 million out of 45, live below the poverty line, which corresponds to 750 euros for a couple with two minor children; 9.3% of residents don’t even have money to eat. The other key issue is the collapse of public finances. The national debt is $419 billion, equivalent to 85% of gross domestic product, a sustained burden if not more than half were in foreign hands. The $44 billion borrowed by the International Monetary Fund and tens of billions more in securities and bonds underwritten by major American funds, from BlackRock to Gramercy Funds Management, must be counted. The interest rate has risen to a staggering 145% to curb inflation and attract more subscribers to government bonds. Doesn’t work. Milei’s victory came about in this debacle.
Replacing the peso with the dollar
For the new president, the way out lies in a shock solution: throw away the local currency, close the central bank and start using only dollars again. Many economists in Argentina and elsewhere immediately warned: Be careful, that means abandoning monetary policy and outsourcing it to the US Federal Reserve. First, Washington would also set the interest rate for Buenos Aires. In addition, the Argentine authorities would no longer be able to manipulate the exchange rate with other currencies: for example, devaluation to promote exports would no longer be possible. Ultimately, they would lose the ability to print more banknotes and inject liquidity into the system to stimulate demand for goods and services. These are all convincing objections for a state with orderly accounting: Does this also apply to Argentina today? In fact, companies already export and import using other currencies: the dollar, but also the Chinese yuan. American currency is traded in black at a value three to four times higher than the official one. If “dollarization” succeeded in protecting salaries and pensions, boosting consumption and bringing public finances back to some level of order, then few would regret the peso, the local currency.
The precedents of Panama, Ecuador, Salvador
There are some precedents: Panama introduced the greenback in 1904, Ecuador in 2000 and El Salvador in 2001. Things were going well in Panama: the canal state benefited from steady economic growth and integrated into the American circuit. However, the economies of the other two countries remain fragile and their public budgets are now in danger of going bankrupt. To save itself, Ecuador even applied for and received loans from China. In return, it signed a free trade agreement with Beijing last May. Strange, isn’t it? I rely on the dollar, but I need the Chinese bailout.
Around 40% of the population, 18.3 million out of 45, live below the poverty line, (…) 9.3% of the residents don’t even have the money to eat.
In Joe Biden’s court
Argentina’s first problem is that the state does not have enough dollars to pay civil servants’ salaries and pensions. The central bank does not have American currency in its reserves. Where could the dollars needed to transform Argentina’s economy come from? One channel could be trade with the United States. But Argentina’s balance of payments with the USA (exports minus imports of goods and services) shows a deficit of 9.9 billion. Many more dollars go out than come into the country.
Milei has already knocked on the door of the International Monetary Fund, but before disbursing other funds he will want to see whether there will really be reforms, in particular the 15% cut in public spending. And in any case, the IMF dollars will not be enough. So? Milei is hoping for political and economic support from the White House: in recent days he flew to Washington to meet some Treasury Department officials and, above all, national security chief Jake Sullivan, a close aide to Joe Biden. The two discussed how to strengthen relations between their respective countries. Will this all lead to some kind of Marshall Plan for Argentina? It is hard to imagine that Joe Biden, dealing with Ukraine and Gaza, could ask Congress to provide funding for Buenos Aires. If Donald Trump returns, there will certainly be a good understanding (the two sympathize), but financial aid to other states is not part of Trump’s doctrine. Instead, it is more likely that US finance and industry will decide to buy (perhaps even at a price) the state-owned companies that Milei wants to privatize. The sectors are strategically important: telecommunications, energy, banking, media and, as we will see, the crucial issue of large lithium mines.
(…) One of the goals of the Brics is precisely to counteract the dominance of the dollar at the global level (…) Xi Jinping is pushing for the yuan. Milei (…) wants to hold on to the dollar (…)
Brazil’s plans fail
During the election campaign, he reiterated that Argentina would not join the Brics group consisting of Brazil, Russia, India, China and South Africa on January 1, 2024, along with five other countries. The reason for this is that one of the goals of the Brics is precisely to counteract the dominance of the dollar on a global scale by using other currencies for trade and as central bank reserves. Xi Jinping is pushing for the yuan. Milei, who wants to stick to the dollar and the US, is disrupting the plans of at least two countries: that of Brazilian President Ignacio Lula da Silva, who proposes to use their own currencies at least in trade between the Brics states. And there is a lot of trade between Brazil and Argentina: Brazil absorbs 14.3% of Argentina’s exports (Comtrade 2022 data). A strong contrast between the two heads of state and government is also to be expected within the framework of Mercosur, the free trade pact between Argentina, Brazil, Uruguay and Paraguay. The Brazilian president also wants to reduce the use of the dollar here and at the same time conclude an agreement with the EU (which now seems close); Milei could push for rapprochement with Washington. In addition, Lula will chair the G20 in 2024 and the Brics Group in 2025. Two ways to lead the liberation of the “Great South” from American influence. Maybe Milei won’t be on board, but we’ll see how he’s put to the test.
A brake on Chinese targets in South America
The “Lok” initiative is also indigestible for China, which wants to expand its influence in South America. Beijing is an important customer for the Argentine economy. In 2022, it purchased 92% of soy production and 57% of meat. In addition, the Chinese government has already granted Argentina loans worth $18 billion. But the most important game is that of lithium, the basic raw material for electric car batteries, renewable energy storage and for all electronic devices. Argentina, along with Chile and Bolivia, has huge reserves of the mineral that have not yet been fully exploited. The losing candidate in the elections, former minister Massa, had just reached an agreement with the Chinese group Tibet Summit Resources: investing $1.7 billion in exchange for 10,000 jobs in the mines and related industries.
Several Chinese companies are already active in the Argentine area of the Andean plateau, including Ganfeng Lithium and Tsingshan Holding Group. A collaboration that is obviously unwelcome to the United States, which also has a presence in the Argentine mining fields through the company Livent Corporation. Now it is reasonable to ask to what extent Milei will slow down the Chinese and favor the Americans in the lithium competition. The game in which the EU doesn’t touch the ball has just begun.