Argentina election: from peso to dollar?

25 October 2023 by Michael Roberts

Argentines will vote in general elections today with both the mainstream parties weakened by the legacy of multiple economic crises and challenged by a libertarian outsider, Javier Milei.

The deeply unpopular current president Alberto Fernández, of the centre-left Peronist movement, has opted not to run in the presidential election after almost four years in power. Former president and current vice-president Cristina Fernández de Kirchner, leader of Peronism’s more radical left wing, is also absent from the ballot. Instead, the Peronist candidate is economy minister Sergio Massa, from the right-wing.

Also running is former security minister Patricia Bullrich, who is on the right of Argentina’s pro-business opposition coalition, Juntos por el Cambio (JxC). But it is Milei that leads in the polls

To win the presidency outright, a candidate would need 45 per cent of the vote, or 40 per cent with a 10-point lead over their nearest rival. Most pollsters expect Milei to come first and enter a second-round run-off against either Massa or Bullrich on 18 November. He could then win the run-off.

Milei has come from nowhere in a matter of months to take the pollster lead. His rise expresses the desperation that many Argentines feel about the state of their country and their living standards and the outright failure of previous Peronist and ‘pro-business’ presidents.

Milei’s party, La Libertad Avanza (Freedom Advances), movement is totally built around his personality. His eccentric career includes turns as a tantric sex guru and cosplay enthusiast, support for radical ideas such as legalising the sale of human organs. He opposes abortion and favours liberalising gun ownership.

A self-styled ‘anarcho-capitalist’, Milei believes in unfettered free markets, unrestricted free trade and giving primacy to ‘private property and individual freedom’. His beloved English Mastiff dogs, cloned from the DNA of a dead pet named Conan, carry the names of leading conservative economists: Milton Friedman, Murray Rothbard and Robert Lucas.

After teaching economics to university students and working for Corporación América, Milei found fame as a commentator on television chat shows, making scathing diagnoses of Argentina’s economic woes and arguing that the solutions for fixing them were simple: get rid of the central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

(he smashed a piñata of the central bank on television on his birthday) and ‘dollarise’ the economy. He wants to slash government services to the minimum and reduce welfare handouts.

His current popularity is due to the state of Argentina’s economy. Inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. is forecast to reach 210 per cent by the end of this year, estimates JPMorgan.

The Argentine peso has plummeted in value against the dollar, fueling yet more inflation through imported goods.

In attempting to keep the peso from meltdown, the central bank has bought pesos with its dollar reserves. But now net foreign currency reserves are about $7.6bn in the red and the government is struggling to service snowballing debts to local bondholders.

The country is facing massive repayment obligations to the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
and foreign bondholders after the $44bn IMF programme used to bail out the previous right-wing Macri government evaporated in rising government deficits and in capital flight abroad.

The Peronist government under economy minister Massa has presided over central bank money-printing to fund the deficit, something that has pushed up inflation further and devalued the peso. By the way, this lends the lie to Modern Monetary Theory (MMT) that argues governments can ‘print’ as much money as they need to cover government spending.

Meanwhile, Argentina posted its worst monthly trade deficit on record in June, underscoring the impact of a record summer drought hitting agro exports and driving the economy into a recession.

Indeed, a debt default has only been avoided so far by using short-term swap yuan loans from the Chinese government.

Is there any way out of these recurring crises for Argentina’s near 50m citizens? Milei says the solution to hyper-inflation and a falling peso is dollarisation. After all, he says, people no longer trust that the peso will ever be worth holding. As soon as they get paid their salaries in pesos or peso flows from somewhere, people want immediately to exchange those pesos into dollars. As a result, the Argentine economy is already very highly dollarised. Milei intends to call for a referendum to achieve this formally.

What would be the advantages of dollarisation? It would, in principle, solve the domestic inflation problem. This does not mean that there will be no inflation, but given the absence of exchange-rate fluctuations, the gravity centre for prices in dollars would then be US inflation, which is much lower.

A second positive element of dollarisation would be the reduction of the domestic interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate, and so supposedly increasing investment and potential GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
levels. A third supposed benefit, only observable in the long run, would be the elimination of currency crises and the macroeconomic instability that they bring.

Dollarisation would go some way to defeating inflation. For example, Ecuador dollarised its economy in January 2000 and price stability was achieved by 2004. From then on, inflation has been on average 3.1 per cent a year, lower than the 28 per cent average between 1970 and 1999, and similar to Chile’s 3.3 per cent), Colombia’s (4.4 per cent) and Peru’s (2.9 per cent) in the same period.

But dollarisation would also mean immediate recession and slump. It would have to start with a massive devaluation Devaluation A lowering of the exchange rate of one currency as regards others. of the domestic peso monetary base. In a very optimistic scenario, if Argentina received a loan of say $12 billion from the IMF and used $5 billion as a reserve for the banking system and $7 billion to dollarise the monetary base, the domestic peso monetary base would still have to be reduced by over 80%. Argentine salaries (then in US dollars) would become among the lowest globally and poverty would rise to unprecedented levels. And Argentina is already in a recession with real GDP expected to drop by around 2% this year. So either way: peso or dollar, Argentine households would pay the price in living standards.

Moreover, Ecuador’s dollarisation has been no great success for its economy. Ecuador was lucky when it dollarised because it could rely high oil revenues during the commodity price boom up to the mid-2010s. But after that, Ecuador was forced into cutting spending and raising taxes, which has aggravated a drop into recession in the last few years. Indeed, Ecuador has grown some 40% less than the rate achieved in the pre-dollarised years and Ecuador’s per capita income in 2019 was lower than in 2012.

Moreover, dollarisation means that economic policy would be in the hands of US Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
and dollar foreign investors. National monetary policies would be basically abandoned. Countries issuing their own currency can allow it to depreciate to improve exports and domestic production at least in the short term. But a dollarised economy must go down with any global recession. A strong US dollar also means high export prices for a dollarised Argentina, making it more uncompetitive in world markets – unless labour costs are reduced by wage cuts or by faster productivity growth that keeps unit labour costs low.

The real question that is not answered by any of the candidates is: why Argentina has got into an inflationary spiral for decades interspersed with debt crises and slumps. Part of the answer is that Argentina never industrialised like East Asia, or even Brazil. The Peronist governments failed to get Argentine capitalists to invest in productive sectors, despite Argentina’s plentiful natural resources and an educated workforce. The number of formal jobs in the private sector has barely grown in more than a decade, and more than half of employed Argentines work either off the books or for the state. Instead, there was reliance on agriculture which provided cheap food for the ‘Global North’. Agriculture is subject to the vagaries of the weather and dominated by a few agro multi-nationals. Look how the recent summer drought has meant for agricultural output and the economy.

In 1976, Argentine GDP was $51 billion and South Korea’s $30 billion. Today, the Argentine economy weighs in at about $80 billion annually. In South Korea, after half a century of industrialisation, annual GDP stands at $1.6 trillion. Argentina’s per capita GDP is today almost the same as it was in 1974, with the additional problem of inequality between the rich and the poor being considerably greater.

The imbalance in Argentina’s economy is revealed by its high dependence on agricultural exports to get dollars. Over half of exports are from agricultural goods, way more than other LA economies, while the share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of manufacturing exports is tiny. Directly or indirectly, Argentine agriculture employs only two million people, or 14% of the working population and contributes only 10% of GDP. Yet for every $10 Argentina banks through exports, nearly $6 comes from agriculture. Without agricultural exports, Argentina would garner scarcely any foreign currency.

Argentina’s investment to GDP ratio has been consistently below the other major Latin American economies.

As a result, real GDP growth has been poorer, particularly in the 21st century, although that applies to all the major LA economies..

Argentina’s capitalists have not invested productively because the profitability of doing so has been so poor. Here is the track record of the profitability of Argentine capital from the World Profitability Database.

After the post-war golden age, Argentine capital suffered the same downward track in profitability from the 1960s to the early 1980s that all the major economies did. Then there was the neo-liberal recovery period, which ended with a major currency and debt crisis in 1999. That was briefly resolved by devaluation, debt default and slump. The commodity boom of the 2000s helped the economy along for a while, but when that ended in 2010, the fall in underlying profitability reasserted itself.

Mainstream economists see the solution in fiscal austerity, high interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, privatisation and ‘deregulated markets – traditional neo-liberal policies. They argue that without this, dollarisation would not work. So basically, they advocate a slump and a further reduction in real wages to boost profitability.

Peronism has failed to deliver on economic expansion, a stable currency and low inflation. But it has also failed to deliver on ending poverty and reducing inequality. Argentina’s official poverty rate rose to 40.1% in the first half of 2023. According to the World Inequality Database, the top 1% have 26% of net personal wealth, the top 10% have 59%, while the bottom 50% have just 5%. In incomes, the top 1% have 15%, the top 10%, 47% and the bottom 50%, just 14%.

Desperation has driven many Argentines to consider a ‘libertarian, anarcho-capitalist’ as president. If this were to happen, it will be going down another blind alley. Argentina’s capitalist economy will continue to fail.

Michael Roberts

worked in the City of London as an economist for over 40 years. He has closely observed the machinations of global capitalism from within the dragon’s den. At the same time, he was a political activist in the labour movement for decades. Since retiring, he has written several books. The Great Recession – a Marxist view (2009); The Long Depression (2016); Marx 200: a review of Marx’s economics (2018): and jointly with Guglielmo Carchedi as editors of World in Crisis (2018). He has published numerous papers in various academic economic journals and articles in leftist publications.
He blogs at

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