Argentina: The must-know facts
The fight we are going to witness over the next few months will be between the workers and the shirkers; it is not a disagreement on correct beliefs.
Written by Aldo Rustichini.
Javier Milei, the candidate from Argentina’s libertarian party, La Libertad Avanza, won by an astonishing margin in the second-round of the recent presidential elections. To get an idea of the scale of the political earthquake his victory represents, let’s go through some facts.
Peronism has lost the productive part of the country.
Milei won 55.75% of the vote, an overall margin of more than ten percent. The Peronists (the left) lost almost everywhere, winning only three provinces – two of which (Santiago del Estero and Formosa) have tiny populations. What is even more troubling for the Peronists is that even in their traditional stronghold of Buenos Aires, they managed to scrape together only 50.7 percent of the vote. And within that province, they had a particularly dismal outcome in “Conurbano” – the strongest of all their traditional strongholds.
Conurbano is home to many low-skilled people, who arrived in recent waves of immigration from other countries in South America. They rely heavily on government handouts. The 11 million people who live there comprise around one quarter of the country’s total population. In past elections, the Peronist party could rely on their vote “no matter what” the conditions of the country were. Even this region is now contestable, it seems.
In no part of Conurbano did the fraction in favour of Massa exceed 65%. This is the equivalent of the US Democratic Party scraping a narrow victory in the great “blue” cities. And in the North part, comprising the richer partidos (districts), La Libertad Avanza actually won.
In the parts of Argentina that do rely heavily on government handouts, the outcome for the Peronists was catastrophic. In Santa Fe, one of the “soya baskets” (regions devoted to agricultural production), Milei received 63%. In Mendoza, the “vineyard of Argentina”, he received 71%. And in Cordoba, a province which is both industrial and agriculture, he received 74%.
It seems you can milk the cow with reckless abandon only up to a point.
An outsider, again
One has to keep in mind that La Libertad Avanza did not even exist until two years ago. It is clear that the election result marks the defeat not only of Peronism, but also of the rest of Argentina’s entire political class. In fact, Milei had explicitly run against what he called the “casta”, that is the country’s political class.
The left-wing media all over the world is rushing to warn that this is a victory for the far-right, for extremism. That is debatable. What the election result clearly shows is that if the political class encumbers more moderate candidates, an “extreme” one will inevitably win. Citizens who work hard and pay taxes begin to distrust the political class. The economic situation then deteriorates to the point where only extreme remedies are considered effective. We saw something similar happen in the US, when Donald Trump won in 2016. We may see it again.
Extreme remedy: dollarization
Nothing illustrates this phenomenon better than the debate over dollarization, that is, of whether to use the US dollar as a currency instead of the Argentinian peso. The main purpose of dollarization is to prevent the political class spending money they don’t have by eliminating the possibility of printing money. (US dollars are printed in Washington DC, not Buenos Aires).
It is difficult to say whether Milei will succeed with dollarization, or whether he will even be allowed to try it. The difficulties are enormous, and recent experiences show that dollarization fails unless it is coupled with elimination of the central bank.
It is obviously true, as many of my colleagues have stated over the past few months, that dollarization is “extreme” because it makes monetary policy impossible. Consider these two open letters: “El espejismo de la dolarización” (The Trap of Dollarization), which was signed by more than 200 Argentine economists; and “The Dangers of Javier Milei’s Economic Program in Argentina”, which was signed by more than 100 economists from around the world. But Argentina has “tried” twice before to bring a reckless fiscal policy under control.
The first attempt came with the surprise presidency of Carlos Menem, who was elected as Peronist but did not act as one (he was called “neoliberal encubierto”, a hidden neoliberal, by the left). The second attempt came with the presidency of Jorge Macri in 2015. Neither attempt succeeded, and the second ended in disaster – with inflation running as high as 260 per cent.
In a recent article for National Review, economist Steve Hanke noted that
The Argentine public has already voted to de facto dollarize ... Argentines hold an estimated U.S. $265 billion “under the mattress”and in foreign bank accounts. As much as it is legally possible, and even illegally if they can get away with it, Argentines prefer to transact in dollars. If Argentines were legally allowed to make all transactions in U.S. dollars, the peso would probably disappear from circulation in a matter of weeks.
The real problem is not whether dollarization is feasible, but whether it can last. To understand this point, we need to go over some basics.
The underlying demographics
Argentina’s demographic transformation accelerated under the presidencies of Nestor Kirchner and Cristina Kirchner. The chart below shows what happened between the years 2004 and 2017. The date 2004 is crucial because this was when the immigration law 25871 was promulgada (enacted) – in the early stages of Nestor Kirchner’s presidency. The law was then reglamentada (regulated) in 2010.
The New Immigration Law
As you can see, the pattern of immigration changed drastically after 2004. The complete text of the new immigration law is available in English here and in Spanish here. It established the principle that immigration is a “human right” which has been celebrated as a new horizon in the definition of what “human rights” are:
The new law establishes that migration is a human right-a principle that is not found in the immigration laws of any other large immigrant receiving country nor explicitly in any international human rights conventions.
What the law states is inspired by its article 4:
ARTICLE 4 – The right of migration is essential and inalienable of the person and the Argentina Republic guarantees what is based on the principles of equality and universality.
In other words, immigrants have the right to move into the country just by asking, and once there, are entitled to all the benefits the welfare system has to offer. Since most other countries in South America have lower average income than Argentina, the incentive to immigrate is strong. The law therefore had the effect of accelerating a transformation in Argentina’s demographic composition that had begun in the 1970s.
Except for immigrants from Venezuela in the years 2017-2019 (60% of whom were college graduates), recent immigrants to Argentina are low-skilled workers – as shown below:
Yet at the same time, Argentina was undergoing a process of rapid deindustrialization. In fact, Argentina’s deindustrialisation has been even more rapid than Chile’s or Brazil’s. Combined with the new immigration law, this has given rise to an army of unemployed people, who are destined to survive on state handouts. The only factor that slowed the inflow of migrants into Argentina was the deterioration of economic conditions.
The issue is not credibility, but social conflict
We can now address the real difficulty of dollarization. Economists debating the issue focus on the credibility problem: dollarization will only be successful if it is not reversed later. The political class must be able to persuade the public and investors that the probability of reversal to a local currency is very low.
But the real difficulty of dollarization is not the credibility problem. The Peronist party (unless it undergoes a profound and unlikely transformation) will continue to rely on support from a large people which will vote for them “no matter what” because those people have more to lose than to gain from a drastic change in economic policy.
In essence, dollarization is a tool for limiting the ability of the political class to transfer wealth from people that are willing to work for a living to those who plan to rely forever on state handouts. If this “extreme” tool is used in Argentina (and 55% of the population has approved of it) it will be because other, less “extreme” tools failed. The fight we are going to witness over the next few months will be between the workers and the shirkers; it is not a disagreement on correct beliefs.
Aldo Rustichini is an Italian-born American economist. He is a professor of economics at the University of Minnesota, where he researches, among other topics, decision theory, game theory, general equilibrium theory, and bounded rationality. He has degrees in philosophy, economics, and mathematics.
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