Javier Milei’s ‘Shock Therapy’ Is Working
Earlier this month, Argentina President Javier Milei dissolved the Administración Federal de Ingresos Públicos (AFIP), the nation’s largest tax bureau. Argentina’s presidential spokesperson Manual Adorni announced that a new agency will replace the AFIP, eliminating nearly 3,100 public employees and saving Argentine taxpayers 6.4 billion Argentine pesos (roughly $6.5 million). While this measure will reduce bureaucratic inefficiencies, it’s largely symbolic and part of Milei’s broader mission to credibly cut government spending and liberalize Argentina’s institutions.
Overhauling the nation’s largest tax agency is particularly significant because it shifts attention away from government bureaucrats and celebrates the importance of private entrepreneurs. As Adorni explains in his statement, “What belongs to each Argentine is theirs and no one else’s. No state bureaucrat should be delegated the power to tell an Argentine what to do with his or her property.”
After decades of socialist policies, Argentina is currently undergoing the most severe economic adjustment since the 2001 currency crisis, when the nation abandoned its fixed exchange rate, sinking the peso’s value and Argentines’ savings with it. El corralito, which means “animal enclosure,” refers to the stifling measures imposed by Economy Minister Domingo Cavallo in 2001 to prevent bank withdrawals. Within hours, millions of Argentines had lost up to 75 percent of their cash deposits, sparking widespread riots and unrest nationwide.
“Of the 77,000 dollars I had in the bank, I lost 40,000 in the ‘corralito,’” recalls computer scientist Ricardo Lladós in an interview 20 years later.
Unlike the 2001 convertibility crisis, which could have been avoided with better monetary policy, Argentina’s current economic troubles are inescapable. And unlike his past predecessors, Milei is attempting to reform Argentina’s institutions and credibly commit to protecting property rights. This is why his ability to follow through on his promises is so critical to economic success.
What Milei’s administration is hoping to achieve through liberalization is nothing short of extraordinary, and it represents the perennial challenge nations have faced since Western Europe’s miraculous growth in the 18th century. Douglass North, a Nobel laureate economist, illustrated this challenge through the lens of institutions and credible commitments. In a famous paper co-authored with Barry Weingast, North attributes England’s economic success to the 1688 Glorious Revolution, when the Crown made credible commitments to protect property rights and not expropriate private wealth whenever they wanted. “Free markets must be accompanied by some credible restrictions on the state’s ability to manipulate economic rules to the advantage of itself and its constituents,” they write.
A classical liberal economist, Milei understands the importance of credibly committing to economic reforms. He’s furiously slashing needless government programs, which have metastasized over decades of Peronist rule. In shocking style, he has closed 13 government ministries and laid off more than 30,000 public workers, or about 10 percent of federal employees.
Milei’s raft of budgetary cuts have generated eye-popping fiscal results. With less than a year into his presidency, Milei has posted Argentina’s first budget surplus in 12 years. He has rapidly decreased the nation’s country risk by 10.4 percent, as measured by the interest rate spread between US and Argentine government bonds. Even real wage rates are up. And of course, Argentina’s monthly inflation has plummeted from a peak of almost 26 percent in December 2023 to 3.5 percent in September.
Argentina’s “shock therapy” hasn’t been tried since Russia and its post-Soviet satellite states embarked on major liberalization reforms in the 1990s. However, contrary to Milei’s credible commitment strategy, Russia and its Eastern European neighbors reneged on their promises to respect property rights, instead using rent-seeking and non-market exchanges to artificially support unproductive sectors within the economy. This “virtual economy” actually shocked Russia’s post-Soviet ambitions into submission by choking competition and incentivizing corruption. When Boris Yeltsin vowed to enact serious market reforms in the early ‘90s, price controls remained in place for many products and black markets flourished.
Peter J. Boettke, an economist at George Mason University and scholar of the Soviet Union, summed up Russia’s post-perestroika failures: “Even under Yeltsin’s post-Soviet experiment in free market shock therapy, the new government failed to establish the sort of binding political and legal commitments required [for economic growth].”
Poland, on the other hand, successfully liberalized because it eliminated the impulse for the government to print money and arbitrarily intervene in the private sector. In October 1989, newly appointed Polish Finance Minister Leszek Balcerowicz embarked on a spate of free-market reforms, including reducing government spending, privatizing state-run industries, and eliminating state subsidies, among others. While inflation and unemployment immediately shot up, the country stabilized within two years. Between 1992 and 2019, Poland enjoyed an average annual growth rate of 4.7 percent, and never once experienced economic decline, placing it among Australia as the only OECD nation to experience 28 consecutive years of economic growth. Entrepreneurship blossomed in the wake of the reforms, ultimately ending Poland’s decades of endemic shortages in a matter of days.
Like Balcerowicz, Milei inherited a macroeconomic mess. When he assumed office, Argentina’s public debt to GDP ratio exceeded 60 percent. The exchange rate gap, which measures the difference between the country’s official and unofficial exchange rates, hovered at around 200 percent. And the core inflation rate was 230 percent and climbing.
And like Poland, Argentina is facing acute economic challenges following its shock therapy measures. More than 50 percent of Argentines are living in poverty. Unemployment stands at 7.7 percent. Many citizens are struggling with food insecurity, with an estimated 1.5 million children missing at least one meal daily.
But these figures only add to the importance of Milei’s credible commitment to liberalizing his country. Not only does he need to continue his reform agenda, he also needs to credibly signal to Argentines that his policies will stick. His reforms must outlast his successors, and they must ensure that private property will be respected far into the future.
Milei has kept most of the promises he made on the campaign trail, but much work remains. His vow to dollarize the economy hasn’t materialized. Instead, US dollars are exchanged alongside Argentine pesos, but the former can’t be used as legal tender in the payment of taxes or debts. Milei also hasn’t fully shuttered the Argentine central bank, something he said was “non negotiable” when he took office. And the currency controls that remain in place continue to artificially depress inflation numbers.
But Milei’s overall commitment to liberalizing the nation has transformed the country’s economic potential. When Milei repealed rent control in January, housing supply soared by almost 200 percent and rent prices fell by 40 percent in Buenos Aires, a clear sign that free market reforms benefit those most at risk in society. Argentina’s EMBI index, a measurement of country risk conducted by JPMorgan Chase, has dipped by almost 1,000 points, from 1,920 when Milei took office to 984 in October. And most significantly, GDP is expected to grow by between five and six percent next year, fueled by increased investment and consumption, as well as monetary stability and labor market reforms.
So when he announced the overhaul of the nation’s largest tax agency, he was not just pledging to cut government spending. He is credibly committing to the country’s liberalization by firing tax-hungry bureaucrats whose mission it was to punish entrepreneurs and wealth generators. By credibly committing to transforming Argentina’s economic institutions, Milei is setting the stage for economic revival and entrepreneurial explosion. Just as Poland’s liberalization program sparked miraculous growth, so too will Milei’s reforms if he fulfills his promises to scale back government involvement and unleash market forces.
This piece was shared from the American Institute for Economic Research.