According to the economist Simon Kuznetz, there are four types of economies, developed economies, underdeveloped economies, Japan and Argentina. And to be clear, he didn't separate the last 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 6th 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 as well. It's possibly the only country that's ever transitioned from being 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 7 decades of civilian constitutional government. The nation endured 7 military coups between 1930 and 1981. Juan Domingo Peron, a former military officer who was elected president three times, cast a long shadow over Argentina. His left wing 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 favoured 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.
There's Peronism, Neo Peronism, Orthodox Peronism, Revolutionary Peronism, Renovation Peronism, Federal Peronism, and Kirchnerism, which it seems is a branch of Peronism opposed by some factions of Peronists. Government spending has been a massive problem in Argentina over the years, where successive governments put in place expensive social programs that the country couldn't afford and more than 1/3 of all workers in the country were employed by the government.
Argentina additionally has one of the most regulated economies in the world, with the weight of regulation growing year over year. There were of course strict labour laws, complex import and export regulations, stringent controls on currency exchange 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 and a ban on feather beds which lawmakers argued encourage lascivious
behaviour. Decades of energy and transport subsidies, which were put in place 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 brought high inflation when its central bank printed money to fund excessive government spending. Major collapses in the Argentine peso occurred in 1952195819671975198519892000 and 1 and 2018 through to present. In 2001, Argentina defaulted on $100 billion of sovereign debt, which was the largest sovereign debt default in history at the time. The country has defaulted 8 times since then, most recently in 2020.
Last year, GDP per capita was 11% lower than it had been in 2011, and inflation was over 211%. And then Havier Malay was elected, an unusual politician who campaigned with a chainsaw, saying that he would chainsaw government spending and regulation. He smashed up Styrofoam models of the central bank. He said that he would close multiple government departments. He has a superhero alter ego called General and Cap, and he said that he would dollarize the economy.
So now that he's been one year on the job, let's look at how he's done. Malay, a self-described anarcho capitalist, won the Argentine presidential election last year with a lot of showmanship but also a serious economic program that's been described as the most radical dose of free market thinking since the days of Margaret Thatcher.
While the media have frequently described Malay 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, however, speak well of each other, and Malay says that he sees Trump as part of the
broader fight against socialism. Malay 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. God. He's a great gentleman. You know, He's mega. He's mega. Make Argentina great again, it's
true. Now, while Trump worked his way up from serving fries at McDonald's just a month ago to the highest office in the United States with promises of economic protectionism like tariffs, Malay 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 Malay will be seeking a free trade agreement with the United States once Trump takes office. But both men are outsiders to traditional politics. Malay 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. Malay 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's cut the number of ministries from 18 to 8, 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. This is quite remarkable in Argentina. Malays signature achievement is that inflation has fallen sharply over the last year.
Argentina's monthly inflation rate declined from 26% last December to 2.7% as of the last reading in October. Now, 2.7% is by no means low. That's a monthly figure, not an annual figure. So it translates to over 37%, a Turkish level of inflation. So Argentina's by no means out of the woods, but at least the direction of travel is correct.
This reduction in inflation is the main reason that Malay has held on to his popularity, which at 56 percent is higher than his last two predecessors approval rankings after their first years in office. Cutting inflation was his key promise to voters, and so far he's delivered on it.
His popularity has in fact been rising in recent months, which is very unusual for a president who's cutting spending as severely as he is. Voters in every country hate austerity, but Argentinian voters who have grown accustomed to outsize 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, Milae devalued the Argentine peso by more than 50%, causing the already sky high inflation rate to rise even higher. He announced cuts to energy and transportation subsidies, cancelled public works projects and began cutting government jobs to reduce spending, Saying if we continue as we are, we're heading towards hyperinflation. There is some real pain associated with this shock therapy.
It doesn't get called shock therapy for no reason. Argentinas economy is expected to have contracted 2.6% in the third quarter of 2024 compared to a year earlier, with this being the 6th 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's no surprise that GDP has fallen in Argentina, as when you slash government spending by 30% and government spending made-up almost 40% of GDPGDP has to fall. The Argentine economy is expected to finish the year 3% smaller than it was when Malay took office last year, and should it hit JP Morgan's growth forecast of 5.2% for next year, that would only bring GDP per capita back to where it was in 2021.
For many Argentinian workers, malaise cuts have been extremely painful. He's 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. Argentinas 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 35% 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 of public staffing levels. According to the Financial Times, 1 of Malay's biggest political advantages is the lack
of reasonable alternatives. In Argentina, people appear to be OK with putting up with the economic pain as long as they're 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 3000 labor unions and roughly 40% of the countries workforce is unionized. The unions have held surprisingly few strikes since Malay took power, and some leaders say that they've struggled to draw the mass
participation it hoped for. the FT interviewed the head of Argentina's construction Workers Union, who admitted that society holds the unions partially 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 Malay took office last year, and they've improved to minus $7 billion today, which is obviously better but still negative. About $20 billion 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 too. Many predicted that Malay 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 the use of 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 the equivalent U.S. debt, fell below 900 basis points in October from the 2500 basis points. It had been odd last year. While this is a huge improvement, it's still more than twice the risk of an emerging market bond index, so there's plenty of room for a further improvement.
On the campaign trail, Malay 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 that they're lifting.
In Argentina, which is is one of the most regulated countries in the world, Malay 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
too. 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%. Malay 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. Malays new Ministry of Deregulation, which is made-up of lawyers and economists, say the cutting red tape is improving economic freedom and reducing opportunities for corruption in the country.
Despite Malay'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 protesters and AI to predict, detect and investigate crimes, which the press has compared to the film Minority Report.
Malay spent $300 million buying 24 fighter jets in April, saying that they're needed to guarantee Argentinas control of its airspace. This doesn't make an awful 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. Malay has been working to attract business investment which is badly needed to boost economic growth. Domestic businesses are happy with Malays reforms but foreign investors are still in a wait and see mode as there have been many false dawns in Argentina
over the last 100 years 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, as no one wants to invest in a country where you can't get your money back when you want it. Malay's government still sets the exchange rate too, and there is a lot less talk about dollarizing the economy today than there was last year.
Malay devalued the peso by more than 50% 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.
Malay argues that he can't risk floating the peso until there's a large supply of hard currency in the central bank to calm markets and prevent Iran, which would trigger inflation. While the fiscal picture has improved massively, Argentina still faces significant external financial pressure, with more than $14 billion 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 balance sheet still has negative net reserves. Malay 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 asked for. The challenge now is that things will only get 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'll 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, and the country has huge foreign currency obligations and a small export base to earn the necessary foreign exchange. While Malay wants to solve the problems without restructuring, Argentina's debt structure does need to reflect the nation's economic. And strength Malay's free market reforms have gone as well as they could have gone, especially given the scale of the problem that he's 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 Malay will be to ensure that voters stick with him as he implements the needed reforms. Thanks for tuning into this week's podcast, with a special thanks to my supporters on Patreon who make it all happen. Have a great week and talk to you again soon. Bye.