Argentina’s New President Has to Defuse an Economic Time Bomb

 “To undo decades of misguided government policies, Javier Milei can learn from the hard-won experience of reformers in Eastern Europe, Latin America and beyond.”

Moisés Naím / The Wall Street Journal

When Javier Milei is sworn in as Argentina’s new president on Sunday, it will mark a historic first: Never before has a doctrinaire libertarian been elected to lead a country. Milei ran on a radical campaign of deep cuts in spending and taxes, and ditching the Argentine peso in favor of the U.S. dollar. But as The Wall Street Journal reported earlier this week, he has already backed away from his most revolutionary proposals. Now he must deliver and bring the economic stability that has eluded the nation for so long. In a place like Argentina, with decades of misguided policies layered on top of each other, that’s a tall
order.

Thankfully, there’s no need for the new president to reinvent the wheel. In the 35 years since the Berlin Wall fell, the world has learned much about what it takes to breathe life into limp, inflationary, state-controlled economies. Not just in Eastern Europe but in East Asia and Latin America, decades of experience now shine a light on the most common pitfalls to be avoided and on the tricky trade-offs involved in pursuing a successful program of economic reforms.

I only wish I’d had access to these insights back in 1989, when I served as an economics minister in Venezuela and the country faced challenges similar to the ones Argentina faces today: state coffers bare, soaring inflation, macroeconomic indicators all flashing red, and voters fed up with declining living standards. It’s a daunting challenge.

Among the trickiest questions is how to sequence reforms. What should go first, eliminating subsidies for gasoline or for milk? Privatization or reforming the social safety net? And the big, overarching question: What should take precedence, reforming the economy or the political system?

Trying to fix a broken patronage state is like trying to defuse a ticking time-bomb: Cut wires in the wrong order and the entire thing is liable to blow. For instance, Milei has made no secret of his ambition to liberalize capital flows and end Argentina’s absurd foreign exchange system. If he does that before he’s addressed the big fiscal imbalances Argentina faces, he could set off massive capital flight, kneecapping the rest of the reform effort. But if he tries to keep capital in the country through sharply higher interest rates, he risks setting off a recession when he can least afford it. 

The bitter recollection of 2001 hangs over Milei. That was when Argentina defaulted to the IMF, delivering instant pain to ordinary Argentines, who rioted violently, leading five presidents to cycle through power in two weeks.

Wicked problems such as these—where you need to reform A before you can reform B, but you can’t seem to reform B until you’ve reformed A—stalk every reform effort. There is no silver bullet, but experience suggests that fiscal order has to come first. Leaving budget reform for later would undermine market confidence and throw sand in the gears of every other reform. The absolute imperative to tackle the budget deficit first is one that, thankfully, Javier Milei appears to understand well.

A second set of lessons stems from the long-running debate between gradualism and shock therapy. Argentina’s sprawling state sector has grown on the basis of thousands of sweetheart deals, each passing state money to privileged constituencies through a huge number of subsidies, financing agreements and contracts. That money filters down to millions of households who rely on the handouts to make ends meet. Do you try to unwind them all at once or gradually phase them out over time?

The literature shows that gradual reforms are more lasting and give rise to better economic outcomes. But in real life, it’s not that simple. Countries that can afford to reform gradually generally do better precisely because their economic circumstances aren’t so dire to begin with. With a budget deficit running at a crazy 15% of GDP, Argentina may not have the luxury of gradual reform.

But shock therapy will soon teach the new president yet another lesson: The costs of reform are immediate and tangible, while the benefits are just a promise, a hope. This, of course, is politically explosive. Milei is planning to unveil a set of shock therapy reforms as early as his first day in office, to radically simplify the tax system and cut wasteful spending. Though it risks mobilizing a swath of opponents at once, simply tearing off the band-aid can have political advantages. Attempts at gradual reform inevitably give rise to suspicions that some politically favored sectors are being shielded, while powerless people bear the brunt of reforms. Moving all at once ensures the pain is spread widely and evenly.

Then again, not all reforms can be achieved in a hurry. Only so-called desk reforms—the macroeconomic changes that can be approved at the stroke of a pen—can be rushed through, and these are far from enough to get an economy back on its feet. Much of what ails Argentina is that the state lacks the capacity to provide the public services people need. The kinds of micro-reforms needed to change this reality can’t be approved by executive order. They involve the careful reform of institutions. Building such institutions is unsexy work—painstaking, slow, and prone to setbacks.

Here Milei’s fondness for libertarian orthodoxy could be a real problem. A president whose knee-jerk response to every institutional problem is to eliminate the institution in question seems destined to fail in Argentina. Without new and better institutions for social protection, vulnerable people will find themselves adrift, cut off from the old, bloated clientelist system with nothing to replace it. Milei will soon learn that this is a recipe for chronic chaos, endangering the success of the entire reform push. Unless more experienced hands in his cabinet can reel in the president’s libertarian impulses, such an outcome is all too likely.

Perhaps the biggest lesson from experience elsewhere is that reform won’t speak for itself. The case for reform must be made again and again to build and sustain public support. Given their short-term distributional impact, macroeconomic reforms are easy to caricature. Privatization, especially if it’s tainted by the whiff of corruption, can be demonized as just another way the rich have come up with to steal from the poor. And, indeed, some bungled privatization drives in the past, such as Russia’s in the 1990s, fit that description. Milei will need to be extra vigilant to prevent even the appearance of corruption as he privatizes Argentina’s bloated state-owned sector.

The key is to keep control of the narrative by telling a clear and compelling story about why reforms are needed despite their obvious short-term costs. Here Milei’s obvious gifts as a communicator could be crucial. Too often in the past, reform has been sold in the kind of dry, technical language that may convince economists but leaves voters befuddled. This is not a mistake the new president is likely to make. Telling and retelling the story of reform in language regular people can easily understand is what Milei lives for.

When he takes his oath of office and dons the ceremonial sky-blue-and-white sash, Javier Milei will face one of the most difficult challenges any leader has taken on this century. Much has been written about the reasons he could fail, and defusing a ticking time-bomb is never easy. But if he learns the right lessons from 35 years of reforms worldwide, there’s every reason to think Milei could succeed. For the sake of Argentina, we must hope he does.

Moises Naim, who served as Venezuela’s minister of trade and industry in the early 1990s, is a distinguished fellow at the Carnegie Endowment for International Peace in Washington, D.C. His latest book is “The Revenge of Power: How Autocrats Are Reinventing Politics for the 21st Century.”