First Year of Javier Milei’s Economic “Miracle”: Plunging Inflation, Surging Poverty, Rising Inequality and Slumping Industry

“The deep chainsaw is coming” in the second year.

After a year in power, Argentina’s faux libertarian President Javier Milei may not have burnt down the country’s central bank or dollarised Argentina’s economy, as he repeatedly promised he would do on the campaign trail. Nor did he get rid of taxes; in fact they went up sharply. But he has kept his word on one of his main pledges by unleashing the figurative motosierra (chainsaw) on government spending. And support for his government is still strong.

Despite having implemented the largest financial adjustment in Argentina in over 60 years, with excruciating effects for many of the country’s most vulnerable sectors, Milei’s approval numbers are, bizarrely, the best in the first year of any president since 2001. As the Argentine journalist Ernesto Tenembaum writes, “something very profound has happened in Argentina’s society for this to be happening.”

Milei has promised more of the same for the year ahead. “The deep chainsaw is coming,” he warned during a celebration of his first year in office. This new chainsaw, he said, will be all about “dismantling geological layers of statism” through the elimination of public agencies, secretaries and undersecretaries.

“The Biggest Budget Adjustment in Human History”

In one year, Javier Milei has abolished half of Argentina’s existing ministries, fired 33,000 civil servants and slashed public spending by 35% compared to the previous year. To achieve what he likes to describe as “the biggest budget adjustment in human history,” the Argentine president has cut pensions, social benefits, public sector salaries, and transportation and energy subsidies. He has also suspended all public works and minimized transfers of resources to the provinces.

Milei has managed to do all of this despite the fact that his party does not control either of Argentina’s legislative chambers, which in and of itself is an accomplishment. It is also a reflection of just how little actual opposition Milei faces in the country — a point that fjallstrom astutely raises in the comments below.

Also, Milei has been able to unleash this brutal fiscal adjustment while maintaining strong levels of public support. One recent poll by the University of San Andrés showed an approval rating of 54% following an 8-point increase since September. Perhaps the economy has bottomed out, and people are beginning to feel the benefits of lower inflation. Perhaps they are just so desperate for change that they are willing to give Milei a little more time. One thing that is clear is that a slim majority of Argentineans have had more than enough of the status quo, as we noted in our article on Milei’s crushing electoral victory 13 months ago:

According to a close friend living in Buenos Aries province, the word one keeps hearing is “change” (sound familiar?), which is perhaps understandable given the dire state of the economy, the high levels of child poverty (67%) and the woeful performance of Alberto Fernández’s outgoing government. What people want is a seismic shift in the underlying political and economic dynamics. And that is what they will get, for better or worse (my money is on the latter). And the reverberations will reach far beyond Argentina’s borders.

Milei’s chainsaw approach has certainly earned him plenty of plaudits among the plutocratic class, both inside and outside Argentina  — including Elon Musk, who will soon be heading up the US’ Department of Government Efficiency (DOGE) alongside Vivek Ramaswamy:

Wow, congratulations @JMilei 🇦🇷🇦🇷🇦🇷 https://t.co/XtuVMZnfAt

— Elon Musk (@elonmusk) December 11, 2024

There has even been speculation that in his new role Musk will take inspiration from Argentina’s ruthless culling of government ministries. In mid-November, just days after Trump’s re-election, Milei said the tech billionaire had already been in contact with Argentina’s Minister of Deregulation and State Transformation (and former central bank governor), Federico Sturzenegger, with a view to carrying out measures similar to those applied in Argentina.

Milei’s most important accomplishment over the past year has been a sharp, sustained fall in- monthly inflation, from 25% in December 2023 — admittedly after Milei himself had devalued the peso by 50%, causing inflation to almost double — to 2.4% in November 2024. It’s a useful economic lesson: if you want to crush inflation, just kill the economy. There are other contributing factors to the sharp fall in inflation, such as the government’s decision to freeze the central bank’s monetary issuance as well as certain high-risk financial moves we’ll look at a little later.

Despite all of this, prices are still around 160% higher than they were when Milei took office. More pertinent still, was the brutal price for this sharp reduction in monthly inflation worth paying? That, I suppose, depends who you ask.

Rising Inequality. In his first months in power, following a 50% devaluation in the peso, Milei allowed inflation to eat into the real value of pensions and salaries. The result has been surging poverty. Between December 2023 and June 2024 more than five million fell into (real) poverty, according to the National Institute of Statistics and Census (INDEC). The official poverty rate soared over 11 points in the first six months of 2024, reaching close to 53% of the population (some 25 million people), the highest figure in two decades.

Inequality is also surging, as was eminently predictable. For the richest 20%, the fall in real incomes was smaller than the average, while the poorest 20% suffered the sharpest decline. The Gini coefficient, the most commonly used measure of inequality, was 0.436 in the second quarter of 2024, up from 0.417 a year earlier. Of course, this is not all Milei’s doing. Surging inflation had already decimated Argentines’ spending power long before he took over, though his policies have certainly turbocharged inequality.

No V-Shaped Recovery. In their first months in office, Milei and his Economy Minister Luis Caputo insisted that the economic pain would be short-lived and that the economy would begin recovering by late spring/early summer. That hasn’t happened. According to the OECD’s latest forecast, the economy will end up contracting by 3.8% this year — 0.5 percentage points more than it had predicted in May. If so, Argentina is on track to suffering the sharpest contraction of any economy in Latin America, including war-torn Haiti.

Slumping Industry. In theory, economic shock treatment is supposed to work in the private sector’s favour. The question is: whose private sector? And which part of the private sector? As the Argentine economist Guido Agostinelli recently told the Brazilian-Mexican podcaster Diego Ruzzarin, the three industrial sectors that have grown the most over the past year — agriculture, mining and oil and gas drilling — are all generally extractive in nature:

“They introduced big incentives for foreign companies to come, invest and extract… By contrast, industrial manufacturing is slumping.

The Utilisation of Installed Capacity index perfectly illustrates the state of Argentina’s manufacturing industry, says Agostinelli. The current reading is 55%. To put that in context, it is roughly the same as the average level recorded during 2020, the year of COVID-19 lockdowns when economic activity worldwide fell off a cliff. Many companies have already fallen by the wayside. As of mid-November, 16,500 small and medium-sized enterprises had closed, according to the National Productive Front. From Ambito (machine translated):

The collapse in domestic consumption (NC: estimated at around 20%), the increase in service costs and the difficulty in exporting due to an uncompetitive dollar are three of the main factors behind this worrying trend. The CAME estimates a 13.2% drop in sales of SME businesses, an alarming figure that reflects the impact of the recession on consumption.

This figure is supplemented by the closure of 10,000 kiosks and warehouses and the loss of 160,000 jobs in the sector. The crisis deepened in the second half of the year, according to the Association of National Businessmen and Women for Argentine Development (ENAC). Between July and October, another 6,500 companies stopped operating, adding to the 10,000 that had already closed in the first half of the year.

Fiscal Balance. The Milei government achieved its first primary surplus (the difference between the State’s current revenues and expenditures) in its first full month in office and has kept the fiscal balance in positive territory until October (the latest available data). It has also maintained a financial surplus (the primary result minus the payment of debt interest) for 9 of the 10 months of 2024 — a rare achievement for an Argentinean government.

But it has been at the highest of costs.

Who Is Really Paying the Price?

“This time it’s going to be different. Because the people are not going to pay for the adjustment. The caste is going to pay for it.”

Milei conveyed this message repeatedly on the campaign trial. It was a lie. Just as Trump said he would drain the swamp, only to proceed to fill his first government with some of the worst swamp creatures imaginable (Mike Pompeo, Bill Barr, John Bolton…) Milei pledged to make the “caste” pay for Argentina’s economic transformation, and then filled his cabinet with caste members like Patricia Bullrich and the former JP Morgan banker, Luis Caputo, both of whom were ministers in the Macri government.

As I wrote in my article, “Who Is Luis Caputo, Argentina’s New Economy Minister (Who Is Already Making the Economy Scream)?”, few epitomise the “caste” better than Caputo:

Caputo began his career as an investment banker, first as chief of trading for Latin America at JP Morgan Chase (1994-8) before slotting into a similar role at Deutsche Bank (1998-2003). He was later appointed chairman of Deutsche Bank’s Argentine subsidiary. In more recent years, he has managed his own investment fund and sat on the board of an Argentine energy company.

But what interests us most in this instance is Caputo’s brief period in the public sector, which began in 2015. First, Macri appointed his old school chum as secretary of finance, only to bump him up to finance minister and eventually central bank governor, all in the space of just three years. During that time, Caputo held more sway over Argentina’s economy than just about anybody else in a government position. And it was during that time that the seeds of Argentina’s current crisis, including its out-of-control inflation, were sown.

So, if the caste isn’t paying for Argentina’s economic purge, who is? No prizes for guessing: Society as a whole, in particular the most vulnerable. At the sharpest end, in some cases quite literally, are grandpa and grandma. From our previous piece, No Country for Old Men (or Women): Pensioners in Argentina Bear Brunt of Milei’s Hardcore Austerity:

Freedom is on the advance in Javier Milei’s Argentina, as perfectly illustrated [by recent scenes] of state security forces beating up pensioners in the street and blasting them with pepper spray and tear gas. Every Wednesday…, thousands of pensioners congregate outside Congress to protest the rapid loss of purchasing power of their pensions, as the Milei government’s economic shock program continues to, quite literally, bite.

“They are killing us,” one elderly lady cries. “Why? We are just pensioners. One of these brutes  just punched an old lady.” In the same video, another grandmotherly protester is asked if she is afraid of the violence , to which she responds:

Afraid? If you are afraid, it paralyses you (NC: otherwise put, “Fear is the mindkiller”). You have to fight for your rights. Lots of blood has flowed for those rights.

When the Congress recently proposed a modest increase in the pension, Milei used his veto powers to block it. In recent days, he has heaped even further pressure on the elderly by cutting the subsidies on essential medicines for many retirees. A few days ago, a seventy-year old man with a terminal illness doused himself with gasoline and tried to set himself on fire outside an office of the National Institute of Social Services for Retirees and Pensioners. As Tenenbaum writes, the main brunt of the economic pain is being  borne by the elderly (machine translated):

Last Thursday, Economy Minister Luis Caputo, in response to a question from Luis Novaresio, explained that he cannot be held responsible for retirees who receive the minimum [pension] because ninety percent did not make all the contributions… But he also maintained that incomes are twenty percent higher than on the day of his inauguration and that only eleven percent of retirees are poor. Absurd. According to INDEC, the number of people over 65 living below the poverty line is 30 percent, and not 11 percent. It is also not true that retirees earn 20 percent more than in December 2023. If assets plus the bonus, which was frozen, are computed, retirement benefits, rather than increasing by 20%, have actually fallen by 13%.

Increased Spending on Military. The Milei government’s austerity program is not being applied across the board. Readers will no doubt be surprised to learn that one of the few areas where spending is rising sharply is defence and security. According to the draft General Budget Law of the National Administration for Fiscal Year 2025, some US$ 6.2 billion (6 trillion pesos, at the official exchange rate) will be allocated to Defence and Security Services, representing 5.1% of the total budget.

This trend is likely to continue for as long as Milei is in power. If the 2025 budget is approved and the projections are fulfilled, spending on Defence and Security in Argentina is forecast to climb to between 0.8 and 1% of GDP. But that is still well short of the 2% threshold recommended by the North Atlantic Treaty Organization, NATO, of which Milei is determined to secure membership for Argentina as a global partner.

So, while many Argentine retirees have to choose between food or medicine, the amount of public funds earmarked for US and European-made weaponry is almost certain to grow. The government has also proposed creating a security agency to implement AI-driven “pre-crime”, which is about as far removed as government policy can possibly get from the basic principles of liberalism or libertarianism. From the government’s official bulletin (26/11/24):

That the advancement of technology, in particular Artificial Intelligence, represents one of the most relevant socio-technological changes for the general population.

That countries such as the United States of America, China, the United Kingdom, Israel, France, Singapore, India, among others, are pioneers in the use of Artificial Intelligence in their areas of government and Security Forces.

That the aforementioned countries use Artificial Intelligence in Video Analysis and Facial Recognition, Crime Prediction, Cybersecurity, Data Analysis, Drones and Robotics, Communication and Coordination, Virtual Assistants and Automation, Social Network Analysis and Fraud and Anomaly Detection.

US investigative journalist Whitney Webb has drawn comparisons with the first Trump administration’s legislative push to legalise pre-crime in the US, as well as the ways in which Palantir co-founder and Trump-backer Peter Thiel stands to benefit from that push. Thiel, like Milei, tries to paint himself as a libertarian these days while espousing the benefits of monopolies — again, in contravention of basic libertarian principles.

For those that don't know, pre-crime was technically legalized under the last Trump administration via former AG Bill Barr. (Policy was continued and arguably expanded under Biden). JD Vance's benefactor Peter Thiel has major ties to firms seeking to implement pre-crime in the…

— Whitney Webb (@_whitneywebb) November 19, 2024

Economy Not Out of the Woods Yet

While the Argentine economy is showing tepid signs of improvement — according to estimates by the Argentine Catholic University, poverty may actually be falling while other data suggest that economic activity is finally picking up, albeit only in certain sectors (mining, energy and agriculture) and regions — the country risk index, measured by JPMorgan, has reached its lowest level since April 2019 and it has so far managed to avert default, it is not even close to emerging from the woods.

For a start, the country still owes $31 billion to the IMF — equivalent to 5% of its GDP. In the next year alone, Argentina’s treasury must make $11.29 billion of debt payments, and to do that it must accumulate enough US dollars. In November, Caputo and the IMF announced that they were in early talks about a potential new debt agreement. In recent months, the Fund has even offered to cut interest surcharges for countries that have financial programs in force. For Argentina, this will mean a roughly $3 billion reduction in its debt burden over three years.

Meanwhile, there’s still no word of when Argentina’s all-important cepo currency controls will be lifted. While lifting those controls could lead to a run on the peso, failure to lift them will make it harder to attract new foreign investment. Given how much US-denominated debt Argentina must repay next year, foreign investment is desperately needed.

So far, the government and central bank have been able to muster enough dollars to keep themselves going this year through three main measures: a one-off ‘blanqueo de capitales’ (assets amnesty for capital repatriation), which allowed Argentineans to launder cash from accounts abroad, property, cryptocurrencies and other assets, bringing in $23 billion; the pawning of a large chunk of Argentina’s gold reserves, which has been conveniently forgotten in recent months; and a high-risk financial manoeuvre called the “financial bicycle,” which encourages traders to engage in high-risk carry trades and is costing the government a fortune.

From El País:

If you are Argentine and can save, you will almost certainly do so in dollars. But imagine the government tells you that it will depreciate the peso at a rate of 2% per month. But if you buy pesos, it will pay you between 4% and 5% interest on them monthly. Your financial advisor will then recommend a very simple operation: exchange your dollars for pesos, buy bonds with those pesos or put them in a fixed term interest account, and buy dollars again once the difference has been harvested at the end of the month.

The difference between the peso depreciation promised by the government and the interest rate you will have received will determine your profit margin. It sounds like a tongue twister, but it is an operation with a name and a surname: In Argentina, it is known as the “financial bicycle”; traders prefer to call it carry trade. It involves investors buying riskier currencies in the hope of pocketing enough interest to more than cover exchange rate losses.
The carry trade was a classic investment model during the Argentine dictatorship of the 1970s, revived in 2016 with Mauricio Macri, and now back again with the far-right leader Javier Milei. Argentines who have “ridden” the bicycle have gained up to 50% profit in dollars over the space of 10 months, another miracle to emerge from the Argentine macroeconomic meltdown.

The financial bicycle has not only brought in a substantial haul of dollars for Argentina’s central bank, it has also helped to “flatten” the dollar, which in turn has helped to bring inflation (in pesos) down. But it cannot go on indefinitely. For a start, it’s hugely expensive, having so far set the government back an estimated $100 billion. It is also riddled with risks:

The government and its supporters maintain that the dollar fell because there was fiscal adjustment, there is no more issuance, and therefore there are no pesos left over to put pressure on the demand for foreign currency. However, this coexists with another phenomenon. The same government offered exorbitant rates – 45 percent per year in dollars – for investors to sell dollars in exchange for buying government bonds that would pay for that fortune. That happened. And so the dollar collapsed. It’s called a carry trade and it has always ended badly.

In addition, the cheap dollar is beginning to generate classic and rapid effects on the deterioration of the external accounts, which will deepen as time progresses. Thus, while some hope that a new cycle has just begun in Argentina, others believe that what has happened so many times before will once again be repeated: inflation is controlled thanks to the cheap dollar, which is financed unsustainably with debt or scarce resources, and which is crippling the country’s productive structure.

At the end of the road, for some, there is prosperity.

For many others, there is plain old misery. .