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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is chief economist at BCP Securities
Social scientists like the idea of critical junctures. This is a theory of how seminal events, usually large external shocks, can alter the long-term trajectory of an economy. But sometimes apparently smaller changes in a country can also have long-term effects. Argentina is beginning to look like an interesting case of such a dynamic.
Behind all the noise that surrounds President Javier Milei, it is micro-level policies, rather than grander macro-level plans, that may finally be changing Argentina’s historically awful economic trajectory.
Argentina has had a dozen stabilisation plans since 1952. They were all based on the stabilisation of macro variables such as money supply and the exchange rate through the imposition of policies such as indexation and dollarisation. They all failed.
One of the reasons they failed is that they did not address the inflationary biases embedded in a network of byzantine rules and regulations. Milei, by contrast, has broken the mould of previous stabilisation programmes by focusing on microeconomics and institutional reform. Under the leadership of economist Federico Sturzenegger, the government has begun to dismantle decades-old webs of regulation, intermediaries, middlemen and tariffs that stymied innovation, productivity and competition. As a result, inflationary pressures have ebbed as transaction costs have declined.
For example, political organisations such as La Campora, a Peronist youth organisation co-founded by the son of former president Cristina Fernández de Kirchner, administered many social assistance schemes, building a clientelist relationship with the poor. Milei’s reforms have taken the Campora out of the loop and distributed benefits directly, increasing the net amount that people received. This approach, enacted at the micro level rather than the macro, has been replicated throughout the country, eliminating many of the bottlenecks that have made life so difficult and expensive for millions of ordinary Argentines.
Ports are another good example of Milei’s approach. The long-standing dominance of the Argentine export sector by the ports of Buenos Aires and Bahía Blanca, two inefficient shallow-water harbours, is now threatened by a new deep-water super-port in the province of Río Negro. The $2bn San Antonio del Oeste facility will accommodate deep-draft supertankers that will load millions of barrels of oil from Vaca Muerta heading for China.
Sustained and rising inflation, Argentina’s curse for decades, is an investment killer. The new incentive regime for large investments, known as RIGI, could help put the country on the road to recovery. It provides tax and customs waivers, and exchange rate incentives and guarantees, giving companies the reassurances they need to make long-term commitments.
Throughout Argentina’s history, and everywhere from insurance to notaries to import approvals, officials, sometimes even presidents, have demanded kickbacks, bribes and mark-ups in exchange for the provision of basic goods and services. The resulting inefficiencies have left the culture, society and economy at the mercy of a political class dominated by the Peronist Justicialist party.
Milei has promised to break this stranglehold. That is why he keeps stressing the word “liberty” in his rhetoric. While he may be implementing a macroeconomic stabilisation programme by attacking the fiscal excesses of previous administrations, the real change is occurring at the micro level, allowing the population to break free of the shackles imposed by the political system.
This is a critical juncture for Argentina. It could also mark the start of a new era in microeconomic policymaking.