According to the economist Simon Kuznets, there are four types of economies: developed economies, underdeveloped economies, Japan, and Argentina – and to be clear, he didn’t separate the latter two out because of their quality.

A century and a quarter ago, the situation in Argentina was very different to today. Back then, Argentina was the sixth richest nation on Earth, with GDP per capita almost as high as the leading economies – Britain and the United States – and higher than Spain, its former colonial master. The nation's former

glory is evident in the architecture from that period in Buenos Aires. Unfortunately, the 20th century didn't treat Argentina well – it's possibly the only country that has ever transitioned from being a developed to a developing market economy.

A big part of the decline can be explained by political instability, which began in 1930 when a military junta took power, ending seven decades of civilian constitutional government. The nation endured seven military coups between 1930 and 1981.

Juan Domingo Perón (a former military officer who was elected president three times) cast a long shadow over Argentina. His left-wing populist movement, known as Peronism, drew support from labor unions, the poor, and the working classes. Peronists won 10 out of the 14 presidential

elections in which they were allowed to run. Peronists favored economic isolationism and stifled international trade (which had made Argentina wealthy in the past) in an attempt to protect workers from foreign competition. This focus meant

That over time, Argentina's exports fell as a percentage of global exports year over year. There are, of course, many versions of Peronism – Peronism, neo-Peronism, Orthodox Peronism, Revolutionary Peronism, Renovation Peronism, Federal Peronism, and

Kirchnerism – which seems to be a branch of Peronism – opposed by some factions of Peronists… Government spending has been a massive problem in Argentina over the years, with successive governments implementing expensive social programs the country couldn't afford

and more than a third of all workers in the country were employed by the government. Argentina also has one of the most regulated economies in the world, with the weight of regulation growing year over year. There were, of course, strict labor laws, complex

import and export regulations, stringent currency exchange controls and rent controls – but also rules on where you could fly a kite, how artists should dress, requirements that horses wear hats on sunny days, and a ban on feather beds, which lawmakers argued encouraged lascivious behavior.

Decades of energy and transport subsidies, implemented to protect the poor, bankrupted the country and caused all sorts of economic distortions. Left-leaning politicians introduced these subsidies to protect the poor from inflation, but the subsidies were so costly

that the government had to print money to pay for them – fueling inflation in a vicious cycle. Argentina has seen decades of economic mismanagement that led to high inflation when its central bank printed money to fund excessive government spending. Major collapses

Argentine peso devaluations occurred in 1952, 1958, 1967, 1975, 1985, 1989, 2001, and 2018 to the present. In 2001, Argentina defaulted on $100 billion of sovereign debt—the largest sovereign debt default in history at the time. The country has defaulted eight times since then, most recently in 2020.

Last year, GDP per capita was 11 percent lower than in 2011, and inflation was over 211 percent. Then [Chainsaw Sound] Javier Milei was elected—an unusual politician who campaigned with a chainsaw [clip], saying he would chainsaw government spending and regulation. He smashed up Styrofoam models of the central bank [clip] and said he would close multiple government departments [clip].

He has a superhero alter ego called General Ancap [Clip], and he said he would dollarize the economy. So now that he's been on the job for a year, let's look at how he's done?

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Go to the link in my description and use code BOYLE at checkout to unlock further savings! Milei, a self-described "anarcho-capitalist", won the Argentine presidential election last year with a lot of showmanship but also a serious economic program that has been

described as the most radical dose of free-market thinking since the days of Margaret Thatcher. While the media have frequently described Milei as being Argentina's Donald Trump – other than that they both have a background in television, distinctive hairstyles, and a hatred for anything

“woke,” the two men have very little in common. They do speak well of each other, however, and Milei says that he sees Trump as part of the broader fight against socialism. Milei was the first foreign leader to meet Trump after his presidential victory in November, and Trump called

him a "great gentleman" and a MAGA person. [Clip] While Trump worked his way up from serving fries at McDonald's, not just a month ago, to the highest office in the United States, with promises of economic protectionism like tariffs, Milei argues instead for

free trade and has been slashing subsidies and tariffs in one of the most protectionist countries in the world in order to control the triple-digit inflation that he inherited. Argentine media has reported that Milei will be seeking a free trade agreement with

the United States once Trump takes office. While both men are outsiders to traditional politics, Milei has almost no support in Congress and had to negotiate every initiative with opposition parties; Trump, on the other hand, will have full control of both houses of Congress.

A year into his tenure, Milei has managed to slash government spending, which is now 30% lower in real terms than it was when he took office a year ago. He has cut the number of ministries from 18 to

eight, halted almost all public works, and ended most transfers to provincial governments. In his first month in office, he managed to run a primary surplus—meaning that he brought in more money in taxes than the government spent—and he has managed to do

this every month since then. Running a surplus like this eliminates the need for the central bank to finance government spending by making transfers to the government—which in Argentina are always announced as being “temporary” but are rarely paid back—and so money is printed.

This primary surplus is a huge improvement and comes after more than a decade of uninterrupted deficits—which is quite remarkable in Argentina. Milei’s signature achievement is that inflation has fallen sharply over the last year. Argentina’s monthly inflation rate declined from 26 percent last December to

2.7 percent as of the last reading in October.
Now, 2.7 percent is by no means low—that is a monthly figure, not an annual figure—so it translates to over 37 percent, a Turkish

level of inflation. So, Argentina is by
no means out of the woods, but at least the direction of travel is in the right direction.
This reduction in inflation is the main reason that Milei has held on to his popularity—which, at 56 percent, is higher than his last two predecessors’

approval ratings after their first years in
office. Cutting inflation was his key promise to voters, and so far, he has delivered on it.
His popularity has, in fact, been rising in recent months, which is very unusual for a president
who is cutting spending as severely as he is.

Voters in every country hate austerity, but
Argentinian voters, who have grown accustomed to outsized government handouts, would be expected
to hate it more than average. At present, they seem to be willing to tolerate the pain with the
belief that things will be better in the future.

Days after taking office, Milei devalued the
Argentine peso by more than 50 percent, causing the already sky-high inflation rate to rise
even higher. He announced cuts to energy and transportation subsidies, canceled public works
projects, and began cutting government jobs to

reduce spending, saying, "If we continue as we
are, we are heading toward hyperinflation." There is some real pain associated with this shock
therapy—it doesn’t get called “shock therapy” for no reason. Argentina's economy is expected
to have contracted 2.6 percent in the third quarter of

2024 compared to a year earlier, with this being the sixth quarterly decline in a row. While the figures have not yet been released, it looks like the economy expanded against the prior quarter, meaning that the recession may be over. It is no surprise that GDP has fallen in

Argentina – as when you slash government spending by 30%, and government spending made up almost 40% of GDP – GDP has to fall. The Argentine economy is expected to finish the year 3 percent smaller than it was when Milei took office last year,

and should it hit JP Morgan's growth forecast of 5.2 percent for next year – that would only bring GDP per capita back to where it was in 2021. For many Argentinian workers, Milei’s cuts have

been extremely painful. He has laid off more than 30,000 government workers and slashed spending on health, welfare, and education. Spending on public salaries and universities is 20% lower this year in real terms than it was before he took office. He eliminated price controls and subsidies that

made public transit, heating bills, and groceries cheaper, leaving more people struggling to make ends meet. Argentina’s poverty rate reached almost 53% in the first half of the year, up from 42% at the end of last year – this is more than double the 26% it was back in 2017.

The biggest savings in terms of government spending have come from holding down the real (or inflation-adjusted) value of pensions. About thirty-five percent of the spending cuts came from a decline in pensioners’ purchasing power. Another 25% came from reducing investment

In infrastructure programs, and the remaining 40% came from a mix of measures like cutting subsidies, cutting transfers to provinces, and downsizing public staffing levels. According to the Financial Times, one of Milei's biggest political advantages is

the lack of reasonable alternatives in Argentina. People appear to be okay with putting up with the economic pain as long as they are seeing results—which they have been seeing so far. The people who voted for him are saying, 'Let the madman get on with it.'

Argentina is home to more than 3,000 labor unions, and roughly 40 percent of the country's workforce is unionized. The unions have held surprisingly few strikes since Milei took power, and some leaders say that they have struggled to draw the mass participation they had hoped for.

The FT interviewed the head of Argentina's construction workers' union, who admitted that "Society holds the unions partly responsible for the economic crisis, along with the politicians." He said, "For now, they feel they need to trust in something new

to solve Argentina's structural problems." Argentina's central bank foreign reserves were minus $11 billion when Milei took office last year, and they have improved to minus $7 billion today—which is obviously better but still negative. About $20

billion dollars has re-entered the formal banking system due to a tax amnesty that encouraged the public to deposit their savings and repatriate some of their foreign savings. Many predicted that Milei would struggle to make the changes he had campaigned on due to

His lack of support in Congress, opposition from powerful trade unions, and his lack of government experience, but he has managed to outperform expectations mostly by using executive powers to get around opposition in Congress.

Argentina's country risk index, a measure of the premium investors demand to hold local bonds compared to equivalent U.S. debt, fell below 900 basis points in October from the 2500 it had been last year. While this is a huge improvement—it is still more than twice the risk of an emerging market bond index—so there

is plenty of room for further improvement.

On the campaign trail, Milei promised that the economy would grow "fiercely" once he eliminated capital controls and the red tape that restricts everything in Argentina. His Ministry of Deregulation began work in July,

and quickly started announcing regulatory reforms daily. It's too early to decide if these changes are working today, but it's likely that they will improve the situation given the bureaucratic weight they are lifting in Argentina, which is one of the most regulated countries in the world.

Milei brought in a rule to reduce government delays where a requested permission is considered approved if the government does not respond to the request within a determined period of time. I believe Modi brought in a similar rule in India a number of years ago, and it worked there.

Some early successes in Argentina include eliminating the country's rent control system, which tripled the supply of available rental apartments in Buenos Aires and caused rents to fall by 50%. Milei eliminated an import licensing scheme too, which caused

a 35% drop in the price of home appliances and a 20% drop in the price of imported clothing. The country implemented an open skies policy that increased airline competition. Previously, there had been a rule to protect the national airline that banned competitors from parking

their airplanes overnight at one of the main airports in Buenos Aires.
Milei's new ministry of deregulation – which is made up of lawyers and economists – says that cutting red tape is improving economic freedom and reducing opportunities for corruption in the country.
Despite Milei's libertarian stance on issues

like privatization and deregulation, there are concerns that he has a less libertarian approach to issues like policing and freedom of speech. He announced a plan a few months ago to use face recognition software to deal with protestors and AI to predict, detect,

and investigate crimes – which the press has compared to the film *Minority Report*.
Milei spent $300 million buying 24 fighter jets in April, saying that they are needed to guarantee Argentina's control of its airspace – this doesn't make a

lot of sense during a period of austerity when all other spending is being slashed.
Investors have been impressed with the changes in Argentina, and this can be seen in credit spreads and the fact that the national stock index has soared almost 140% this year.

Milei has been working to attract business investment, which is badly needed to boost economic growth. Domestic businesses are happy with Milei's reforms, but foreign investors are still in a wait-and-see mode, as there have been many false dawns in Argentina over the last hundred years.

Capital controls, which limit the flow of foreign exchange into and out of the country, are still in place and do deter international investors. No one wants to invest in a country where you can’t get your money back when you want it. Milei's government still sets the exchange rate

and there is a lot less talk about dollarizing the economy today than there was last year. Milei devalued the peso by more than fifty percent last December and then by another 2% each month since, but the currency is still overvalued, according to most economists. Devaluing the peso rapidly

again would cause a spike in inflation, but a weaker peso would also make the country’s exports more attractive to foreign buyers. Milei argues that he can’t risk floating the peso until there is a large supply of hard currency in the central bank to calm markets

and prevent a run, which would trigger inflation. While the fiscal picture has improved massively, Argentina still faces significant external financial pressure, with more than $14 billion dollars of debt repayments due next year alone – with essentially no chance of

the country borrowing more on international markets until the economy is a lot stronger. Argentina still has too much foreign exchange debt relative to its limited export base and foreign exchange reserves, and while the fiscal balance of the government has improved hugely,

the central bank's balance sheet still has negative net reserves. Milei has done an amazing job on the fiscal front; it’s very unusual for a country to voluntarily do a bigger fiscal consolidation than the IMF asks for. The challenge now is that things will only

Getting more difficult going forward, as the terms of the most recent debt restructuring in 2020 gave Argentina five years of breathing space, but that is about to run out next year, and they will have to start paying about $3 billion a year on their international bonds.

The core problem for Argentina is that the foreign exchange balance sheet does not look good – there are no non-borrowed foreign exchange reserves sitting at the central bank. The country has huge foreign currency obligations and a small export base to earn the

necessary foreign exchange. While Milei wants to solve the problems without restructuring, Argentina’s debt structure does need to reflect the nation's economic constraints. Milei's free-market reforms have gone as well as they could have – especially given

the scale of the problem he is dealing with, and the people of Argentina seem to have regained a lot of lost faith in their government. There is still a very tough road ahead for the country, and a huge challenge for Milei will be to ensure that voters stick with

him as he implements the needed reforms. If you found this interesting, you should watch my video on the man who modernized China next. Don't forget to check out our sponsor Ekster using the link in the description. See you in the next video, bye.

Javier Milei One Year In!

Patrick Boyle is a hedge fund manager, a university professor and a former investment banker. 

This channel is all about quantitative finance. By subscribing you will see videos explaining what is happening in markets right now, you will learn about financial derivatives, corporate finance and how traders use quantitative tools like statistics. You will see interviews with some of the most interesting people in the financial industry.  In addition, you will see some longer form documentaries on the history of financial markets.

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Patrick Boyle

Argentina's Economic Decline and Historical Context

Kuznets' economic typology and Argentina's unusual trajectory.

Argentina's past wealth and its decline to a developing economy.

Architectural evidence of Argentina's former prosperity.

Political instability and military coups impacting Argentina's economy.

Peronism's influence and its impact on economic policies.

Economic Mismanagement and its Consequences

Excessive government spending and its unsustainable nature.

Overregulation and its stifling effect on the economy.

Energy and transport subsidies leading to economic distortions.

High inflation and repeated currency devaluations.

Sovereign debt defaults and their impact on Argentina's economy.

Milei's election and his radical free-market approach.

Significant reduction in government spending.

Economic Impact and Social Consequences of Reforms

Initial devaluation of the peso and its impact on inflation.

GDP contraction and its projected recovery.

Painful cuts affecting government workers and social programs.

Limited union activity and shifting public opinion.

Improvement in central bank foreign reserves.

Milei's success in overcoming political obstacles.

Deregulation efforts and early successes.

Positive effects on rental market, appliance prices, and airline competition.

Concerns about Milei's approach to policing and freedom of speech.

Positive investor sentiment reflected in credit spreads and stock market performance.