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You’d think one chainsaw-wielding policymaker per hemisphere would be enough, but the Americas has contrived to find two. Always the showman, Argentina’s President Javier Milei recently presented US administrative vandal Elon Musk with an engraved version of his emblematic timber-cutting power tool in tribute to their joint determination to slash the size of the state.
Behind the amateur dramatics lies a success that has surprised many including, I confess, me. Since his election in November 2023, Milei’s economic liberalisation and fiscal and monetary conservatism have broken with Argentina’s interventionist past — while being quite unlike Trumpism. He also remains fairly popular despite a rise in poverty resulting from the adjustment. The risk to Milei, apart from Argentina’s habitually obstructionist politics and his personal eccentricities, is that he succumbs to the traditional weakness in Argentine reformers to declare victory too early.
Milei has dropped his wilder plans to dollarise the economy and cut off trade with China. He has, however, closed the government deficit with fiscal tightening, public spending cuts and sharply reduced inflation. It was the inconsistent pursuit of monetary and exchange rate stability that undermined Mauricio Macri, the last president to preach economic orthodoxy. Milei has also undertaken rapid deregulation and liberalised goods trade by cutting tariffs.
The long-term benefits of domestic liberalisation remain to be seen. Headlong deregulation carries risks. But the Argentine economy, hedged about with rules and restrictions that empower and enrich favoured groups, is ripe for liberalisation. Milei hasn’t mindlessly swept away big tranches of the bureaucracy on the Musk model. His restructuring in practice has used something more like a bureaucratic machete, perhaps even a carving knife, than Musk’s chainsaw.
Milei’s trade liberalisation deserves applause. He has cut tariffs on consumer goods and — at least temporarily — reduced export taxes on agriculture. Going back to Juan Perón’s presidency in the 1940s and 1950s, Argentina’s trade policy has been a bizarre exercise in comparative disadvantage — ripping off agriculture, where Argentina is globally competitive, to protect manufacturing, where it manifestly is not.
The threats to Milei’s continued success recall Carlos Menem’s 1989-1999 presidency. Menem was also a flamboyant showman, though his style tended to perma-tans and snappy suits rather than leather jackets and chainsaws. Menem undertook deregulation and privatisation of state enterprises, but much of it was botched, creating monopolies and inefficiencies of its own.
Menem’s efforts were centred on fixing the peso against the dollar, but he failed to maintain discipline on fiscal and external deficits. Successive IMF rescue plans were followed by what was then the biggest sovereign default in history in 2001. Milei is also grappling with a very expensive currency. In real terms, the Argentine peso shot higher in 2024 relative to other emerging market currencies.
The temptation is to prop up the nominal exchange rate to control inflation. In Milei’s case, that would give him an easier ride in Congress, for which elections are due in October. But that way lie expensive international borrowing and frequently debt crises. Less risky but politically unpopular would be to accede to IMF demands promptly to reduce the overvaluation of the exchange rate and phase out exchange controls. Milei promises he will, but electoral expediency means such plans can always change. His promotion of a disastrous cryptocurrency venture didn’t boost his popularity or his political capital.
As with Menem, there is a danger for Milei in being too close to the US president. The IMF and Bill Clinton’s administration turned Menem into an international poster boy for reform, inviting him as a guest of honour to address the fund’s annual meeting in 1998. They gave him too much rope with repeated rescue loans, making the default worse when it came.
If Milei exploits his relationship with Donald Trump and gets an easy ride from the IMF to keep an overvalued real exchange rate, it will increase the risks to his reforms. Despite their personal comity, Milei’s fiscal conservatism and free trade are quite unlike Trump’s addiction to tax cuts and protectionism.
In some ways Milei is the living incarnation of a traditional IMF lending programme, albeit one carrying a chainsaw. But now he is at the kind of juncture where his reforms either stay on track or start dangerously to diverge. Milei’s presidency has so far outperformed many expectations. Argentina’s future depends on him ignoring the siren calls to go easy on reform.
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