Is Javier Milei’s economic gamble working?

JAVIER MILEI, Argentina’s president, swept into office on a promise to conquer inflation by slashing government spending. The scruffy-haired, chainsaw-wielding economist has not disappointed. Since taking office in December 2023 Mr Milei has cut government outlays by around 30% in real terms, by laying off more than 30,000 government workers, slashing energy and transport subsidies, suspending public-works projects and freezing state wages and pensions. The effect on inflation has been dramatic. On January 14th INDEC, the county’s statistics authority, reported that prices rose in December by just 2.7% month on month, down from 25.5% a year earlier.

Mr Milei’s economic management is a vast improvement on that of his predecessor. During the previous left-wing Peronist administration, the government won over voters by running up vast budget deficits. To cover the bill the central bank printed money, leading to sky-high inflation and a near-worthless peso. Price controls on food and housing led to shortages. Mr Milei has done away with such distortions. Although his shock-therapy approach has led to some short-term pain, macroeconomic conditions are now stabilising. Inflation is falling, budgets have flipped from deficits to surpluses, and the economy returned to growth in the third quarter of 2024. The country’s stockmarket is booming and measures of country risk are tumbling. Mr Milei promised the cuts would affect the state itself more than Argentina’s poorest citizens. Has he pulled it off?

A closer look at inflation numbers suggests that, despite smaller price rises, most Argentines are not yet better off than they were a year ago. An estimated 53% are now living in poverty, according to the Catholic University of Argentina, up from 42% in the second half of 2023. Consumer spending is down by 20% over the same period. Construction activity is 29% lower than it was a year ago. Pensioners and construction workers have been particularly hard hit: a report by the Centre for Political Economy of Argentina, a think-tank, estimates that lower pensions and public-works spending together accounted for nearly half of Mr Milei’s cuts to government spending in 2024.

Although inflation has fallen, some essential goods upon which poorer households depend have shot up in price disproportionately since Mr Milei assumed office. Data from INDEC show that overall prices in greater Buenos Aires, for example, have climbed by 122% since Mr Milei took office. But the elimination of transport and energy subsidies means that bus and train fares have surged by more than 300% (albeit from a low baseline). Electricity and gas prices have rocketed by 430% during the same period. Other regions across the country have experienced similar increases.

The economic gloom could hobble Mr Milei’s reform efforts. The country still maintains strict currency controls to prop up the wobbly peso. Mr Milei has vowed to ease these restrictions and let the currency float. But first he wants to negotiate a loan with the IMF, a condition of which will probably be a new set of reforms. For now, Mr Milei remains popular: nearly half of Argentines support him, according to a recent survey by AtlasIntel, a pollster, even though just one in five rates the economy as “good”. But the public’s tolerance for weak growth, high unemployment and poverty will not last forever, even if inflation has been wrestled down.■