Taking a Chainsaw to Distrust

Argentine President Javier Milei speaking at the right-wing Europa Viva 24, promoting free-market capitalism. Photo courtesy of Wikimedia.

Nearly a year and a half ago, then-Argentine presidential candidate Javier Milei wielded both a literal and metaphorical chainsaw. He promised to take that chainsaw to the country’s central government, reducing spending to save an Argentinian economy long plagued by economic woes. Milei’s vision included steep slashes to the size of government, the elimination of the central bank, the currency substitution of the U.S. dollar, and a largely socially conservative platform. 

His master plan was eagerly accepted by the Argentinian people, who voted him into office after years of hyperinflation and poverty levels that never dipped below 25%. Just over a year into his term, Milei seems to be delivering on his promises. He has reigned in monthly inflation to within the healthy two percent range and ended over one hundred years of the country’s fiscal deficit, axing the number of government sectors by half. While poverty rates spiked to upwards of 50% in the first half of 2024, they have since cooled to 38%, lower than the level seen at the end of the previous administration. The International Monetary Fund (IMF) has even predicted large economic expansions in 2025, bolstering the idea that Milei’s actions pushed the country in the correct direction. 

But sustainably fixing Argentina’s economy requires more than driving the saw through the government. The country’s economic history shows that periods of growth are often short-lived and short-sighted. Instability and distrust now mar the Argentine people and their government, leaving borrowers, consumers, and investors wary of the supposed permanent benefits that are promised from short-term gains. Dismantling the current system, as is part of Milei’s plans, will not be enough. Rebuilding will require hacking away at the chronic distrust that Argentinians hold for their economy. As budgetary cuts are becoming increasingly popular in economies around the world, analyzing Argentina’s precarious situation can introduce valuable lessons in the efficacy of pure austerity, revealing how chronic damage and distrust can limit the benefits of otherwise strong economic policy.

Past administrations, like that of Milei’s, have attempted to raise the country’s standard of living, with little success. Ventures funded by overspending and overprinting of money have resulted in incessant debt crises and sky-high inflation. So far, Milei has successfully distanced himself from these issues, but his policy overlooks a key concern: the lasting scars left by the persistent mishandling of the Argentinian economy.

These scars are marks of distrust long in the making, seeded by the policies of the country’s most impactful president, Juan Perón. His eponymous ‘Peronism’ laid the foundation for contemporary Argentina, where the populist and developmentalist ideology still permeates the country’s politics. His administrations throughout the mid 20th century set the stage for strong state centralization and corporatism, marked by the incorporation of trade unions into government and a large increase in social welfare spending. Later manifestations included high levels of government control of the Central Bank of Argentina (BCRA) and the creation of the Argentine Institute for the Promotion of Trade (IAPI), a protectionist state-owned agency that aimed to control imports and tariffs.  These state-owned entities limited market freedom for Argentinian consumers and increased risk for foreign investors, as the government could change capital inflows at its discretion.

This legacy has been carried on by successive Peronist governments, who have only furthered the state’s involvement in economic activities. Increased welfare spending and investment in domestic industry promised stability and growth for citizens, but also led to multiple debt issues, including three defaults since 2000. With already tenuous market conditions, a government that can’t balance its own books makes it all the more difficult to believe in the benefits of a state-intervened economy. If the country continues to spend from nearly empty coffers, the BCRA is forced to print money or utilize diminishing foreign currency reserves. Peronist policy not only risks another default, but could prompt a further devaluation of the Argentine peso. 

Argentinians know this. They hold massive distrust towards the value of the currency and the current banking regime. Swaths stash their money in the stable American dollar rather than the peso, trading it on a largely informal and illegal market. Many have resorted to literally hiding bills under their mattresses, unwilling to risk losing purchasing power if they keep their money in traditional banks. Mistrust is further fueled by the memories of unpredictable and unprecedented central bank policy. The 1989 and 2001 corralitos, an Argentinian term referring to state-implemented banking restrictions during periods of financial crisis, serve as the best example. Attempting to curb bank runs, the government suddenly limited dollar withdrawals, trading the personal savings and trust of their people for the protection of the peso. 

Investors also know the perils of Peron’s system. A long-standing tenet of Peronism is hostility to foreign capital. Strict trade regulation and large import substitution policies laid the groundwork for capital flight and declining exports that emptied the country’s economy. Further aggression in domestic markets, such as industry nationalization and price discrimination, was a key factor that pushed American investors away from the resource-heavy and lucrative Argentinian economy. Today, echoes of the Perón era manifest often, where investment is curtailed by unstable and excessive regulation, and certain sectors and geographic areas remain off-limits. Even hopes of financial easing and capital-friendly frameworks are fleeting and rare. The investment-oriented administration under former-President Mauricio Macri was quickly reversed with a Peronist-leaning regime led by Alberto Fernandez, representing two vastly differing economic ideologies that dominated policy over eight years. Posing threats to both foreign and domestic market activity, it is ultimately administrative instability and rash policy-making that have caused deep distrust among economic agents. Investors find it difficult to believe their funding will yield returns, and consumers refuse to utilize the financial institutions that are critical to a healthy economy. 

If Milei wants to save Argentina, he needs to avoid instability at all costs. This means long-term institutional restructuring and administrative advocacy that has been absent in Argentina for decades. Not slashing and burning every and all government agencies responsible for Argentina’s current situation. This chop-and-hack strategy may reap gains in the short term, but will inevitably be a continuation of the endemic insecurity and unreliability that make it so difficult for Argentina to grow. 

For instance, Milei’s promise to completely mow down the BCRA would not fundamentally fix the underlying issues that disincentivize consumer spending and fuel peso-skepticism. In theory, disassembling the central bank would shear a layer of the Peronist-style financial overstepping that Milei so vitriolically despises. However, this may end in a costly financial blunder, as without the BCRA, more Argentinians would stockpile their dollars, further increasing the informal exchange rate and devaluing the peso. As previewed last summer, this higher dollar demand and its fallout would make domestic and international consumption much more expensive for Argentinians. 

In lieu of these current plans, Milei could instead look to establish the BCRA as a source of trust, building its independence instead of butchering the institution. Remnants of Peronist financial control linger in his administration, such as set exchange rates and withdrawal limits that were put in place to control the size of the informal dollar market. By removing these policies, Milei could step back from his more radical, possibly inflation-inducing campaign promises, to gradually distance fiscal domination of the central bank. Furthermore, IMF research indicates that across Latin America, higher degrees of central bank independence are strongly correlated with lower inflation rates and stable prices in the long term, which could prove pivotal in building trust among Argentinian consumers and stabilizing the peso in the long term. The Milei government has already taken action by coaxing back deposits through a tax amnesty program, making savers feel more comfortable storing their money in the banks. But for Milei to fully regain the stability needed in a healthy economy, he needs more stringent action and a sharp turn away from his promised gutting of the financial system. 

Milei could also look to attract the attention of risk-averse foreign investors who have steered clear of Argentina’s protectionist past. The government has already made strides by introducing a large-scale incentive program to appeal to investors, aiming to leverage the country’s vast natural resources and skilled labor force. However, ideological imbalances and instability at the provincial level still pose barriers to entry. Certain resource-rich provinces, like La Rioja and Tierra del Fuego, have remained in a cautious populist-Peronist mindset, denouncing foreign investment as a means of exploitation. As Milei begins to stabilize the country’s volatile political landscape, he needs to ensure that Argentina becomes uniformly welcoming to foreign investment to attract the capital necessary for long-term economic growth. This, again, requires institutional construction and government support, not cuts or hacks that carve down Argentina’s economic potential.

The impact of Peronist overspending and protectionism has left an indelible mark on Argentina, one that requires careful consideration and planning to reform. Despite the strides that Milei has made in reshaping the Argentinian economy, much work remains in restoring Argentina to its once-prosperous position on the world stage. Merely slashing government spending is not enough; it requires taking a chainsaw to the decades of mistrust bred by poor economic planning. Only then can Argentinians and foreign investors begin to regain faith in the financial institutions that will spur the country’s future growth.

Pracheth Sanka (GS ‘28) is a Staff Writer at CPR. A dual degree student with Sciences Po at the Menton campus, he is interested in economics, foreign policy, and domestic United States politics. You can reach him at phs2122@columbia.edu.