December 28, 2023
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Argentina’s New President Takes a Gamble
In a country accustomed to heavy government intervention in the economy, Javier Milei’s reforms are raising eyebrows.
By: Allison Fedirka
Argentine President Javier Milei entered office less than three weeks ago, but already he has introduced a raft of changes beyond the house cleaning typical of any new government. He has said his administration aims to revamp Argentina's institutional and legal frameworks. Though many of the reforms so far relate to the economy, they’re only the first steps in Milei’s plan to rebuild Argentina and eliminate the structural problems that have plagued the country for over a generation.
Milei wasted no time in making drastic changes to the economy in his first days in office. His government slashed the artificially high official exchange rate for the peso, reducing it from around 400 pesos to the dollar to 800 overnight. The government also auctioned approximately 2.96 trillion pesos' ($3.7 billion) worth of treasury debt denominated in the local currency to help clear the central bank’s balance sheet of short-term arrears held by local creditors. The move is seen as a precursor to removing currency controls and an initial step toward “dollarizing” the economy. Economy Minister Luis Caputo also announced steep cuts to energy subsidies for consumers. Such subsidies were a thorn in the side for many previous governments, but the fear of popular backlash prevented past leaders from tackling the issue. Caputo also cut budgets for social programs and dismissed recently hired public sector employees.
Argentina's Economic Contractions of More Than 10%
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Deposits Abroad, Argentina vs Latin America
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But the president’s mega-decree introduced on Dec. 21 has garnered the most attention. The executive order, known as a “necessity and urgency” decree, consists of 366 articles that would revamp 41 economic rules with the aim of deregulating markets, encouraging competition, reducing government intervention in the economy and simplifying the relationship between the private and public sectors. It focuses heavily on removing price distortions, eliminating price fixing and removing barriers to international trade. It also opens opportunities for wider use of foreign currency in the domestic market, particularly the real estate sector. The changes further aim to attract foreign investment, including by opening up state companies for privatization, removing restrictions on land purchases, guaranteeing payment for contracts in foreign currencies and eliminating costs in the mining sector.
However, many have questioned the constitutionality of the decree, saying it oversteps the president’s powers. It’s important to note that necessity and urgency decrees are nothing new in modern Argentine politics. The 1994 constitution formally included them in the country’s legal framework, indicating the measure should be used only when “exceptional circumstances make it impossible to follow ordinary procedures.” (The National Congress can revoke these decrees, but it would require substantial support from both chambers.) Since 1994, presidents have issued 979 of these special measures. (By comparison, only 25 emergency decrees were passed between 1853 and 1983.) Former President Nestor Kirchner, who held office from 2003 to 2007, held the record with 236 decrees. But some legal experts argue that the measure oversteps the powers afforded to the president. Since last week, members of the opposition have threatened to repeal the decree, and average Argentinians have taken to the streets to show their disapproval.
Presidential Use of Decrees of Necessity and Urgency
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But Milei was apparently prepared for the backlash. He immediately followed his announcement of the decree with a call for an extraordinary session of congress between Dec. 26 to Jan. 31. In addition, the first three of 11 initiatives the administration put before congress introduced economic changes that cannot be executed by decree, such as changes to tax rules. By doing this, the government wanted to show that it wasn’t relying solely on executive orders to implement its agenda. Furthermore, some of the decree articles and proposed initiatives reflect ideas supported by other leading politicians. For example, the decree prohibits people from blocking or occupying establishments that are considered essential, a measure that echoes the anti-protest proposals presented by Patricia Bullrich, a first-round presidential candidate. Another initiative presented to congress would reverse reductions in personal income taxes for many workers, a move presidential candidate Sergio Massa promoted during his campaign. By including proposals from other parties, Milei aims to split the opposition and gain more supporters for his agenda.
Milei is also trying to manage discontent from three social groups: agricultural laborers, the white-collar middle class and unionized industrial workers. All three have been at the center of major public unrest since Argentina’s return to democracy in 1983. In general, the agricultural sector has responded positively to the announced reforms, in part because currency devaluation would enable them to earn more in pesos for their exports, which are priced in dollars. However, many middle-class Argentinians fear losing their rent-controlled apartments when leases are up for renewal and having less disposable income as their costs rise. Labor unions, meanwhile, have taken issue with possible changes to income taxes and labor rules that extend the trial period for new hires and make it easier to terminate workers during their probation. They have also voiced concerns about anticipated job losses related to the government’s cost-cutting measures. This includes construction workers who could lose work as the government spends less money on infrastructure and other projects.
But many of the nation’s leaders over the past 30 years faced anti-government protests. No matter who won the election in October, social unrest was bound to happen at some point. Milei so far appears to have protected the government’s relationship with the agricultural sector, which will play a critical role in the first half of 2024 as farmers sell off crops to bring in U.S. dollars. He also appears intent on using a tried-and-true strategy of dividing various labor and social groups over specific issues. While this won’t eliminate opposition to his plan, it will reduce it.
The latest initiatives brought before congress have given the strongest indication of Milei’s intentions beyond the economic reforms. He’s asked congress to consider proposals to modify the functions of the state, the voting system, and procedures for appointments and promotions. The goal is to root out corruption, curb the patronage system and reduce the size of the government. About half of the 11 initiatives relate to ending double taxation for people living in Argentina who are citizens of Japan, China, the United Arab Emirates, Luxembourg and Turkey. They also reform rules for signing international treaties and authorizing international travel for the president.
The government has kept a close watch on reactions from foreign governments and investors to the proposed changes. Brazil has expressed concern over the potential impact on the Mercosur trading bloc. Similarly, China seems wary about the ideological shift in the Argentine government and the impact it could have on trade. Beijing threatened to suspend a $6.5 billion currency swap agreement with Argentina to push Milei to make clear his desire to continue to engage with China. The new government has asked President Xi Jinping not to suspend the agreement and designated a new ambassador to Beijing. Argentina’s reforms aim to send a message that it’s open for business with all foreign investors, but the problem for countries like Brazil and China is that they fear they could become less competitive in the Argentine market and, particularly for Brazil, lose foreign investment to Argentina because of its market-friendly changes.
Even if congress doesn’t derail the changes, it will be several months before they show any results. For Milei, success will mean implementing the reforms and managing the accompanying social unrest. If he succeeds, the government will be able to relieve pressure on the national budget, attract investment and bring in much-needed foreign capital. If he fails, Argentina’s economic malaise will only worsen.
