The meaning of Argentina’s presidential election
By a large margin the Argentinians elected their new president on November 19th and the winner had celebrated his birthday in the first round, on October 22nd. Javier Milei, a self-defined “anarcho-capitalist” and the son of a bus driver, is a libertarian economist who became a transportation entrepreneur, a successful TV talk show host and a national congressman. Milei rose to power as the archetypal anti-establishment candidate, yet he had 56% of the vote, the highest percentage since Argentina's transition to democracy in the early 1980s, and he carried all the country’s 24 provinces but three.
To galvanize his base, he relentlessly ranted against “the caste” - venal politicians, but also corrupt businessmen that benefit from Argentina’s crony capitalism at the expense of the rest of the population. Predictably, there are several radical measures in his presidential platform: shut down the central bank and dollarize the economy to achieve monetary stabilization, axe down the state apparatus to attain fiscal equilibrium, and tough law-andorder actions to fight rampant crime. To a significant extent Milei results from a widespread belief that “the system is broken” and, more specifically, that traditional parties don’t care about ordinary people anymore (Chart I)1. In Latin America this sentiment is especially acute, since five of the top 10 countries with the worst grievances are from the region.
But then Milei’s stunning victory did not translate into a solid majority in Congress. On the contrary, his Freedom Advances party holds less than a fifth of the seats in both Houses and building a ruling coalition will be more than challenging. Moreover, there has been already a great deal of debate about the constitutionality of his extreme reforms, notably the surrender of the Argentine currency and the elimination of its central bank. Consequently, the country is likely to navigate through rough institutional waters in the foreseeable future. Does that mean that the rest of Latin America will share the same fate?
Most likely not. An oft-cited bit of wisdom in the field of international development economics is a quote by Nobel Laureate economist Simon Kuznets, who argued that there are four kinds of countries: developed, underdeveloped, Japan (a small nation, deprived of most natural resources, that suffered a humiliating defeat in a world war and became developed against all odds), and Argentina (the opposite). Following a turbulent independence process in the early 1800s, the latter leapfrogged to a position of agribusiness powerhouse at the end of the century, but subsequently fell into a long-term condition of erratic economic growth. In 1899 the estimated Argentine GDP per capita in constant U.S. dollars was 21% higher than Canada’s, which has a comparable endowment of natural resources in the continent and faced a similar geopolitical situation. In 2018 the Canadian real GDP per capita was 2.4 times greater than its southern peer (Chart II). Arguably, it is a textbook case of chronic institutional failure owing to misguided reforms and serial policy mistakes by the government.2 However, most of Latin America is heading the other way. The Eurasia Group’s Global Political Risk Index measures institutional stability, defined as the capacity to withstand adverse shocks or crises, and the score is based on indicators in four subcategories: government, society, security, and economy. In recent years the evidence is that the gap between the strength of the region’s institutions versus those of more developed geographies may be narrowing, not widening (Chart III).
At this stage market indicators strongly suggest that Argentina is a basket case. Its exceedingly high sovereign risk speaks of a substantial probability that the country will default on its debt shortly (Chart IV), and a creaking US $44 billion, 30-month Extended Fund Facility (EFF) with the International Monetary Fund is the first in the firing line. Yet investors grow increasingly confident about a decoupling story in terms of a contagion effect taking place in the rest of the region. Congruently, dire credit events in the troubled South American nation - no less than three episodes since the turn of the century: 2001, 2014 and 2020 - have had a steadily decreasing impact on Latin America’s creditworthiness.
Therefore, Argentina is a special topic of economic development theory, not a bellwether of macroeconomic trends in Latin America. Its 20 countries and 14 territories, like any other major region of the world, comprise a variety of political, social, cultural, and economic realities. Haiti, for instance, is a failed state as much as Somalia and Yemen are. A predatory state, namely, the corrupt or crony corralling of national resources by a government elite at the expense of the populace, characterizes Venezuela and Nicaragua in the same way it does for Turkmenistan and Belarus. However, those are the outliers, not the median. The great majority of Latin American nations are functional democracies with low geopolitical risk and westernized economic models.
Intriguingly, the latest Argentine events may indeed speed up constructive actions. In an era of increasingly fractured globalization, South American and Asian nations signed 45 free trade agreements over the past 10 years. Fearing displacement, the European Union (EU) engaged in comprehensive negotiations to secure a mutually beneficial arrangement with Mercosur, the economic and political bloc whose full members are Brazil, Argentina, Uruguay and Paraguay. A treaty was agreed in principle in 2019, but then the EU demanded additional environmental commitments, whereas Brazil sought new concessions on issues related to small and medium-sized local enterprises participating in government procurement processes, which prolonged negotiations. Milei’s triumph had the effect of making the discussions surprisingly productive in a matter of days and a deal now seems to be imminent.
1 It is one of the five components of the Broken System Sentiment estimated by Ipsos at ipsos.com/broken-system-sentiment-2022.
2 For an intriguing analysis of this topic, see Street, J. H. (1974) “The Ayres-Kuznets Framework and Argentine Dependency”, Journal of Economic Issues, Vol. VIII No. 4, December.
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