Will Javier Milei Succeed in Argentina?

Will Javier Milei Succeed in Argentina?
(Nicolás Cachanosky and Mark Klugmann, July 8, 2024)

Transcript available below

About the Speakers

Mark Klugmann

Mark Klugmann is a policy reforms strategist with four decades of experience advising political leaders in the United States and Latin America. Klugmann has advised seven presidents in Latin America and has helped their governments to design and win approval of multiple financial, regulatory, and infrastructure reforms. In the White House, he was a speech writer to presidents Ronald Reagan and George H.W. Bush, and he also served as assistant director of the White House Outreach Working Group on Central America.

Klugmann is the originator of the reform praxis methodology that accomplishes difficult reforms. The methodology integrates economics, politics, communications, strategy, and management. He has successfully applied the reform praxis to help governments achieve dollarization, privatization, telecommunications, ports, property titles, and security policy, notably without political cost. He advised the country of Georgia on the creation of special jurisdictions to operate under Anglo-Saxon law. In Honduras, he was co-author of the law creating a special jurisdiction, incorporating the model of institutional leapfrogging, and was appointed by the president and confirmed by the Congress as a commissioner.

Mark has lectured on public policy in 36 countries to audiences from such institutions as Harvard University’s Kennedy School, the World Bank, the Mont Pelerin Society, the Global Financial Summit in Nassau, the Latin American Business Council, the Free University of Tbilisi, the Catholic University of Chile, and the Federation of Private Entities of Central America, Panama, and the Dominican Republic.

Dr. Nicolás Cachanosky

Dr. Nicolás Cachanosky is the associate professor of economics and director of the Center for Free Enterprise at the University of Texas at El Paso. He is a senior fellow at the American Institute of Economic Research (AIER) and a fellow at the Friedman-Hayek Center for the Study of a Free Society. Dr. Cachanosky also serves as associate editor of the Southern Economic Journal. He is the past president of the Association of Private Enterprise Education and former director of the Mont Pelerin Society.

He is the co-author of the recent book Dollarization: A Solution for Argentina, which is timely to the topic he will be addressing today, Austrian Capital Theory: a Modern Survey of the Essentials, and he is an author of Capital and Finance: Theory and History. Dr Cachanosky has more than 100 publications. Recent commentary includes subjects such as Dollarization in Argentina: A Missed Opportunity and A Credibility Dilemma in Milei’s Economic Plan.



Robert R. Reilly:

Hello and welcome to the Westminster Institute. I am Robert Reilly, its director. Today we are privileged to have two people with a vast amount of experience in Latin America, and particularly in Argentina, because the major question that will be addressed is: Will Javier Milei Succeed in Argentina? That is, we are speaking of the new president who was elected last December and has had about six months in office, so that is enough for a score card.

I will begin with introducing Mark Klugmann, who is a policy reforms strategist with four decades of experience advising political leaders in the United States and Latin America. Mr. Klugmann has advised seven presidents in Latin America and has helped their governments to design and win approval of multiple financial, regulatory, and infrastructure reforms. In the White House, he was a speech writer to presidents Ronald Reagan and George H.W. Bush, and he also served as assistant director of the White House Outreach Working Group on Central America.

Mr. Klugmann is the originator of the reform praxis methodology that accomplishes difficult reforms. The methodology integrates economics, politics, communications, strategy, and management. He has successfully applied the reform praxis to help governments achieve dollarization, privatization, telecommunications, ports, property titles, and security policy, notably without political cost. He advised the country of Georgia on the creation of special jurisdictions to operate under Anglo-Saxon law. In Honduras, he was co-author of the law creating a special jurisdiction, incorporating the model of institutional leapfrogging, and was appointed by the president and confirmed by the Congress as a commissioner.

Mark has lectured on public policy in 36 countries to audiences from such institutions as Harvard University’s Kennedy School, the World Bank, the Mont Pelerin Society, the Global Financial Summit in Nassau, the Latin American Business Council, the Free University of Tbilisi, the Catholic University of Chile, and the Federation of Private Entities of Central America, Panama, and the Dominican Republic. Full disclosure: Mark and I worked very closely together in the Reagan White House, so I have had the privilege of knowing him since that time.

And our second guest is Dr. Nicolás Cachanosky, who is the associate professor of economics and director of the Center for Free Enterprise at the University of Texas at El Paso. He is a senior fellow at the American Institute of Economic Research (AIER) and a fellow at the Friedman-Hayek Center for the Study of a Free Society. Dr. Cachanosky also serves as associate editor of the Southern Economic Journal. He is the past president of the Association of Private Enterprise Education and former director of the Mont Pelerin Society.

He is the co-author of the recent book Dollarization: A Solution for Argentina, which is timely to the topic he will be addressing today, Austrian Capital Theory: a Modern Survey of the Essentials, and he is an author of Capital and Finance: Theory and History. Dr Cachanosky has more than 100 publications. Recent commentary includes subjects such as Dollarization in Argentina: A Missed Opportunity and A Credibility Dilemma in Milei’s Economic Plan. Our topic is: Can President Javier Milei Succeed in Argentina? Dr. Cachanosky, what does he need to succeed at and why?

Dr. Nicolás Cachanosky:

Well, thank you, Robert, Mark, for the invitation. Thank you, everyone, for spending time listening to us. To answer this question let me give you a context of why and how Milei became president. If you look at Argentina over the last 20 years or so, we had, for most of the time, a populist regime under the Kirchener administration. We had a break with Mauricio Macri’s government, the Cambiemos coalition, which was the coalition of different political parties. And this alternative to the populist regime failed. So after Cambiemos’ failure, we had a new [administration] and again four years of a Kirchener regime. And Alberto Fernandez got to be known as the worst president in Argentine history, which is quite a standard to match.

Argentina’s Recent History

So if you look at these years, you have since 2003 when Nestor Kirchener took office, 20 years where you have populism, and since 2007, rising inflation – not just high inflation, rising inflation, to the point that we almost had hyperinflation, and since 2011 a stagnated economy, so if you were born in 2003, all you have known in your life, all your life experience, is populism and the non populist regime that failed. Since 2011, when you were almost 10 years old, all you have known in your life is stagnation and rising inflation, that is your life experience. And when you saw the alternative, it did not fix the stagnation problem, it did not fix the inflation problem, and they end with another crisis.

So you naturally feel hopeless, you need an outsider, and that is where Milei shows up, and that is why Milei has so much support, I think, from the young population. And Milei is not strange from other cases of outsider politicians like Trump, Bolsonaro, Meloni, and other political leaders that they raised from outside a traditional political career. And I think that helps to explain how this Milei goes in four years from being an outsider to president. It is an amazing, you know, political career he had in that sense.

Milei Takes Office

So going more specifically to your question, can Milei succeed? He took office facing a minefield about to explode, so he did receive a very, very, very complicated situation. He managed to not have hyperinflation. He managed to keep political support, at least so far. He is at least at face value outperforming what was expected. No one who you can take seriously would expect him or anyone to fix Argentina overnight.

Now, he had at the moment of taking office, two ways to go. One, which was a very important component of his political campaign before the election to take office, dollarize Argentina, just remove the peso and adopt the U.S. dollar as the legal tender currency, and then use that as your institutional track to move forward all your other reforms. This would be something similar to what happened in Ecuador in the sense that the country dollarizes in the context of a very complicated economic crisis and to avoid the crisis becoming worse.

That was one potential path. He did not do that. He took an alternative path, and the alternative path is to put in place a transitory economic plan to try to put key variables under control, like the treasury budget, the level of inflation, what is going on in the central bank, and once I heal the patient, once I make Argentina feel better, then I move into a more permanent plan. And I think these two components, to me, have some points of concern or something to be careful about.

So how has this transitory been [going]? He took office in December. He had to produce a very significant peso depreciation. The exchange rate went from 400 pesos to $1, to 800 pesos to $1, so when he does this big currency depreciation, he does not leave the capital controls, he keeps them in place, because he sees the central bank is still bankrupt. We do not have dollars at the central bank to face the exchange rate market, so I am going to keep the capital controls, and I am going to impose a crawling peg, so I am going to make the peso depreciate every month [by] 2%. And at the same time, you are not going to have the inflation rate go from the 8% per month you have in the pre-reelection time to 2% very quickly.

So this mismatch between how fast you depreciate your exchange rate versus how high your inflation rate is, you cannot keep that in the long run, so the idea was that this plan will be in place for more or less six months, which is where we are now. So at the beginning of the government, we were expecting mid year this transitory plan would go away and we would transition to a new permanent plan.

Six months after, we still have the capital controls and we do not know when the capital controls are going to go away. The crawling peg is going to stay in place at least until the end of the year, and this is creating more and more uncertainty about whether or not this plan will be sustainable, because we know in the long run the numbers do not match, but the government insists that we need to keep on track.

And this happens, this confirmation that we are going to keep on this track, at a very interesting time. A week ago or so, the IMF released what they call their staff report. They evaluate what the government is doing and whether or not that matches the agreement that we had to [sign in order to] get a loan. And the IMF is saying you are doing very well and [you did] all the things that you promised to do, but we have some warning lights. If you remember the Apollo 13 movie, [there is] the famous scene where Tom Hank says Houston, we have a problem, some lights are starting to show up, which is this issue.

The transitory plan is reaching its limit, so warning lights are starting to show up, and the government reacts, claiming the IMF did not know what they are doing, and making a press announcement, saying we are keeping on track, we are not changing. And now we have an [area of] uncertainty: will the Argentine government be able to agree on a new release of funds if they are going to clash with the IMF?

So one concern that analysts are starting to have is since we are delaying the transitory plan, will the transitory plan survive, or will it collapse too soon, and if that collapse happens, what do we have, where are we going to go?

My second economic concern is if this transitory plan survives, what about the more permanent plan, how does that look like? Well, that is not dollarization anymore, that is what Milei is calling currency competition, which is basically a bi-monetary regime where you have the peso, it stays alive, and you let the market have contracts in other currencies, like the U.S. dollar. Importantly you do not give the U.S. dollar legal tender status, so it is not an equal competition on equal grounds. It is like if you want to use the U.S. dollar, you can but you have to pay taxes in pesos.

The currency with legal tender status is only the peso, and that is concerning to me because we had these regimes in Argentina a number of times, and they never end well because it is very easy for a new populist government to start to walk the other way and start to restrict the use of dollars or seize the dollars, and keep the peso, and force the peso into the public. So the way this permanent regime is designed to me looks weak because it will take too long for that regime to eventually become what Milei calls an endogenous dollarization.

And it is very likely that before that moment comes, assuming that is going to happen, that the new Peronista, or radical, or pick your political party in Argentina, will take office and very quickly remove this regime. You can argue that the situation where Argentina is today is coming from a bi-monetary regime that we had in the 1990s, and here we are with this mess, so the economic plan that Milei wants to put forward, the monetary plan, I see as problematic.

The other reforms may be very important and useful, but if the monetary regime is weak, then the whole economy is not going to recover. If you do not have price stability, it does not matter how good your market regulation is; without price stability you cannot grow because you cannot perform your basic profit calculations at your firm. These are my economic concerns, looking at the long run, the mid run of what may happen with Milei’s plans.

I also have some institutional concerns, and these are shared by many economists and analysts in Argentina, which I think are worth sharing because some of these are not known outside Argentina. If I make a list of the typical characteristics of a populist leader in Argentina, some of the behaviors you find [include the mentality that], ‘we are the good people, you are the evil ones,’ that kind of us good versus you, the evil rhetoric is very, very, very present in Milei, absolutely, all the time. It is his trademark.

You also observe a cult to the leader. You also see this in Milei’s movement. He is a chosen one, right? He is above the normal person. You see a behavior that is a disregard to republican institutions. You see some of that in Milei’s behavior as well, you know, he referred to Congress as a nest of rats, and you are all thieves. And [there is] all of this rhetoric where there is no clear separation between a particular individual and the Senate as an institution, and therefore his rhetoric is stating everything. There is not a clear separation between the institution and the person. He has also become known for having his followers bully and intimidate critics and people that dissent with his opinions or standings.

Now I am not saying that these populist characteristics are as strong as you may find them, say, in Peron, but they are there and that is worrying for some, because you have this self-described libertarian movement embracing the populist strategy, and once this government goes away, this becomes, maybe, a justification to keep having populist behavior.

And if his government fails for whatever reason, now you have a problem where you are [associating] to a free market government a lot of behavior and issues that we would not want to see attached to someone that is carrying out a free market reform, so that is something to keep in mind, that some people are concerned about this.

So I wanted in these minutes to present in broad terms my economic and institutional concerns. There is a lot that Milei is pushing in the right direction. He wants to regulate the markets. He is trying to clean up the central bank, but the main point is: is he doing this in a way that is going to be sustainable, or is this going to be in the midterm another failed attempt because we are not building the reforms in a way that they will be robust or [maintained] after his government?

Robert R. Reilly:

Mark, do you want to pick up from there and give us your take on these things?

Mark Klugmann:

Well, my first visit to Argentina was in 1989. It was the final year of the Fernando de la R├║a presidency. There was a hyperinflation. To give you an idea of it, four of us went out to dinner, had some good wine and steak and appetizers and desserts, and the check with everything came to $6.50 for the four of us. People would walk around with a transistor radio next to their ear to hear the movement of the inflation. They would hold on to their dollars until the last moment to change it to pesos because if you waited an hour, you would get more for it. If you did not wait an hour, you would lose [value] on what you changed.

The president could not even finish his term. After the election, they said, listen, let us just install the new guy, who was Carlos Menem, who came in.

Now, what Menem said at the time, and I hope this is not taken as a good example, he said what we need, what we are going to do now, is surgery without anesthesia. Now, a message of pain is not a good message unless you are attributing the pain to your predecessor. You should not attribute the pain to what you are doing, to your treatment. What you are doing is liberating them. It is the solution; it is not the problem.

I think in the case of a reformer, the alternative to doing it by decree, let us say, is a methodology of reform praxis where you merge the politics and the economics in a functional way. Often, reformers, technocratic reformers, consider the politics to be a nuisance, and to the degree that they can cause their government to force things through, they prefer that.

The problem with that is you start to accumulate pockets of resistance and at some point that accumulation will prevent you from moving further, whereas instead you can incorporate into your reforms, accumulate support as you go. Now, I think what Nicholas has laid out is, I think, an excellent economic road map. He is too modest to say it, but the plan that he and Emilio Ocampo presented last year for dollarization, the candidate Milei said that is what I am going to do, that is the plan I am going to do. And the co-author, Emilio Ocampo, said this will be the head of the central bank, he will dollarize, and then we will shut down the central bank forever.

Now, that meets the test that Nicholas is describing of a definitive and permanent resolution that gives the marketplace, the consumer, the voter, and the external actors the clarity of what the rules of the game are.

I think in terms of the path to success, Milei took a detour. He took a wrong turn. I will leave it to the economists to evaluate the feasibility of it, but I believe that people who I worked with when we did the dollarization in El Salvador [would support this plan]. The person who designed that was Manuel Hinds. The project leader was Juan Jos├ę Daboub, who went on to be a managing director of the World Bank. And these people are saying, yes, that worked economically. And I know there is an active debate about it, but I am convinced it was doable and I have confidence in the people who designed it.

By not doing it, it was a tremendous setback. My immediate reaction is this man will not be successful. It is sufficiently extraordinary that he might be successful anyway, but by not doing the dollarization, he failed on a promise. It was the central promise of his candidacy. It was the flagship. If I am remembering correctly, the only person who he said this person will be in my government, who he named was the man who was to do the dollarization, Emilio Ocampo, so in not doing it, it was shocking.

He had a mandate to do it. That was essential because he had very few votes in the Congress, so the challenge is how can you take the momentum and the mandate and use it to force through a resistant Congress? And you have this moment of maximum power on a specific issue where you have maximum power, where you have the largest popular mandate, and he did not do it.

Now, Nicholas has explained the economic consequences of it, but the political consequences of that were enormous. He could have used that issue to demonstrate mass popular support. One of the important things you need to do and an indicator to know whether you are on the right track, or the wrong track, is a successful reformer will be creating visible constituencies, that is instead of this idea of, oh, you have to burn your political capital, no, you build political capital.

Privatizing Telecommunications in El Salvador

You accumulate more capital, so for example when we did the privatization of the phone company in El Salvador, it was a very difficult reform because the previous government had reformed, had privatized, the banking system in a manner that the largest bank in the country became owned by the president who led the government that privatized the banking, so that sort of discredited privatization as a form of asset theft.

Well, what did we do? We motivated, mobilized, and incentivized the public by fast forwarding. We said, okay, rates will come down dramatically, which they would. At that time, an international call would be $4 a minute, and we said no, it is going to come down to less than a dollar. And what we did then is at the state-owned phone company, we said, okay, on, you know, the next Thursday, you can call to the U.S., and it will be for whatever number of cents per minute we thought it would work out to be, and the lines went around the block.

Half the Salvadorans had family in the United States, and this manifested enormous desire for that reform and support for it. It was not being done on an ideological level. It was not being done on a technocratic level. It was simply taking what would be a future benefit and making it visible, and then the people demonstrated their support for it. The line went around the block.

The union that was opposed to the privatization was in these offices of the phone company, and they were looking and seeing thousands of people waiting online. The TV cameras were there. It was a phenomenon. And inside the government phone office, the union people looked and said, wow, we are really outnumbered. There are a lot more of them than there are of us, and the people really want this.

Then when you have a state-owned phone company, there is a terrible problem to get phones. You have a 20-year wait or you have to pay a bribe, so we had not gotten the privatization done. We had not presented the proposal for it. We said this must be done. We said, well, listen, with the privatization anyone who wants a phone will be able to get one. We just need to know what the demand is, so when we are presenting the company for a bid, we can give some projections of what the demand will be, so if you want to phone, here is a form.

And we published it in all the newspapers, and it was very simple; your name, your address, and how many phone lines you want. And then come on Monday morning between 9:00 a.m. and 10:00 a.m. to the central office to hand in your form. Well, in little El Salvador, 50,000 people showed up. People came the night before and slept in front of the phone office. At one moment there were 20,000 people there. It was this sea of humanity expressing through their action, through human action, their support for a government policy. That overwhelms weakness in votes in the legislature. It is a political fact.

Now, with the dollarization it can still be done even now when it is not an immediate proposal. The impact that can happen if the government says, well, you know, in order to do proper planning, we want to have some idea of what the demand for dollars will be, and government workers will be able to choose, do you want to be paid in dollars or colonis, or the national currency, pesos? And just on Friday, you know, just come and you will be given a form. You just indicate what currency you want, and if you want the national currency, get on that line, and if you want dollars, get on this line.

Well, everyone is going to want dollars. And again, the cameras are there. You can do it every week at a different government agency and just manifest this overwhelming support, which also will convey the deep popular support for the project of Milei and the sustainability of it based on popular support, instead of it being measured based on what is the vote count in the legislature.

That is the expectation of whether he will be successful or not fluctuates with what was the last vote in the Congress, so early on something gets approved in the first instance, we are going to win, and then it dies in the second instance, we are going to lose, and then the latest one it gets approved, we are going to win, that is not a sustainable arrangement. And to head into the next election, the legislative elections, which will be critical for Milei’s success, it cannot be based on what was the last outcome.

The other thing it must not be based on is only whether the economic payoff has yet arrived because one of the big challenges with getting your reforms done is the time lag, that is between the process of the reform and the arrival of the benefit, democracy intercedes in the middle.

Now, what can be done? What can be done is, number one, the security issue. I helped in various countries with that issue. You can produce dramatic changes in a period of weeks. I gather that Milei has been moving effectively on that. Whatever is being done, more can be done, that is the nature of the issue and popular support will be enormous.

What people actually demand on that issue has been demonstrated in El Salvador. Twenty years ago, I brought in the anti-crime issue and anti-gang legislation to El Salvador, and it was immediately demonstrated, the appeal for it, but the government was not willing to go the distance. Bukele has and became the most popular leader in the hemisphere.

Now, the combination of working on security issues in parallel with the economics, and solving in the economic or governmental field, everyone wants to focus on the big things, that is great. You need a second unit that focuses on small things, that is you do not distract your team, your major team, but to identify little nuisances in government that people feel, and to be constantly, in a very visible way, solving them.

When we came in to do the whole reform package in El Salvador, the first reform I asked them to do, which they got done (for the folks in big economic forums they say really?), was this: in order to register the birth of your child, you basically needed to lose a day of work. You needed to go to a government office, you needed to wait online for hours, you needed to deal with obnoxious bureaucrats. If you filled out the form with the wrong color ink, you would be turned away and have to come back another day.

And so I said we are going to solve this one and let people understand that is what reform is about, and what we did is we took the bureaucrat out of the government office and sent them to the maternity hospital, and the child would be born, and the government official would come into the room, and go to the mother, and say just sign this. And there is a piece of carbon paper, and they would take the bottom one, and this is your provisional birth certificate.

And an amazing thing happened. We cut by two-thirds the incidence of fathers not recognizing the paternity of their child, because it would turn out that the fathers would be there, they wanted to see the baby, but then would come to losing a day of work and other things, that they would not get that part done, so that can be a huge reassurance to the public that the president and the government are thinking about them, that he cares about them, that he is deeply aware of what they are experiencing.

The public is always right in describing what they are experiencing. They are inexpert in understanding its origin, but they perfectly well know what they are experiencing. And when the government wants to build trust and confidence, it needs to convey that it understands what they are experiencing.

In reality, the problem is always more persuasive than the solution.

Reformers fall in love with their reforms the way parents like to show pictures of their beautiful babies, but in practice the public does not understand the reform. It is complex. They hear experts disagreeing with one another, debating their reform, so if you hear two experts debating the dollarization, the idea that the plan is what is going to win public support [is wrong]. It will not. It will not.

On the other hand, you know, with dollarization in Ecuador, in El Salvador where it dollarized, you can get a 20 or a 30-year mortgage, you can borrow 80% to 95% of the value of the property, pay an interest rate, which in these countries is very attractive, of 10%. I would just ask what does it take to get a mortgage in Argentina in the national currency, Nicolás?

Dr. Nicolás Cachanosky:

Probably a miracle. Argentina is a country that has this market backwards. You have to buy a home cash, but you can take a loan to buy a pair of sneakers.

Mark Klugmann:

Okay, so with the dollarization suddenly you create a market for financing housing construction, you can create jobs building homes, you generate high yield deposits, you have $200 million outside Argentina owned by Argentinians, earning. In Uruguay, what are they earning, 1%, 2%? They could be getting 7% and 8% in mortgage-backed instruments inside of Argentina. The money would come back if it is legal tender, if they dollarize.

Dr. Nicolás Cachanosky:

Yes. Yes, that is crucial because if I am going to put my money in Argentina, I need to know, one, I will be allowed to take it out if I want to, and two, it will keep its purchasing power more or less stable. And all you are mentioning is key, so when Milei took office, he did not go through the dollarization path. He went through the other route, and he needs to show, or he believes he needs to show, a quick and very strong fiscal adjustment and reduction of inflation.

And the way he is doing that is imposing the cost on the private sector. If you look at the numbers, by cutting down the spending, he is cutting down in real terms payment to retirees’ pension payments, social welfare programs to low-income households, transfers to the private sector.

At least half of the adjustment is going to low-income private sector. How long, and this is a question, how long is he going to be able to keep their support, which raises the question is this fiscal adjustment sustainable on time, or when the political cost is too high, will he have to start to send them their payments again and the fiscal surpluses go away?

The way he is going forward, maybe not by choice but that is what he is doing, is imposing a negative shock to the economic sector. All economic activity indicators are like free falling, but there is not a positive supply shock to compensate that, and that is one of the things you are mentioning. If you produce a shock that is credible beyond my government, then I can impose because I have to do this negative shock on top of a positive shock, and then I can get out.

And that is what you saw happening in Argentina when they imposed the currency board. They cut down inflation and the economy grew at the same time, instead of what you see now in Argentina, that inflation is falling and the economy is collapsing. It is what you observed in Ecuador, right, they step away from the crisis with the economy growing, but that is not what you are observing in Argentina, at least so far.

And then there is a time factor. Next year we will have midterm elections again. What shape is Milei’s government going to be in, facing this election, and what political calculation is he going to be making to increase his chances of winning? Because as you correctly said, he does not have enough representation in Congress, so he has to have a good second term election, and the way he is facing Congress is not creating coalitions. It is in a very antagonistic way, which goes to what you are saying, are you building parts of increasing opposition to you that will become, down the road, a problem for you to pass more reforms, or are you building political capital to have that support?

Every time he needs to get something passed through Congress it is a fight, even a personal fight, ‘you are a thief’ instead of, well, we think differently, but let us find the common ground here. And now he is six months into his government. He finally got Congress to pass what he calls Ley de Bases, the foundational law that will change the country, so now all this pain that the public is going through he cannot say anymore it was the previous government.

Now he has to own his results, and he is trying to do that without the dollarization supporting him, and that is for me, looking at Argentina, dangerous down the road. This can work for some time, but I do not see it yet as a long-term solution.

Robert R. Reilly:

The sort of iconic figure during the election campaign was Milei and his chainsaw, that he was going to go in there and eliminate government bureaus and so forth. And in fact, he did. Did he remove, close down a number of the government bureaus that he said were a waste, and did that generate any support for him?

Dr. Nicolás Cachanosky:

That is a very good point. He did cut down the number of ministerial [departments]. He is cutting down the payroll of state employees. Now, that gives him political support because people are seeing something that is visual and they can connect with, but in terms of fixing the oversight of the government, that is not the problem.

No one, not Milei, is going to fix the budget deficit by cutting down the number of ministerial staffs because that is not where the big money is, so that gives him political support, but this misleading in the sense that that is not the solution, that is not what is going to solve the [fact that] the Argentine government is too big. That is not where the money is going.

Robert R. Reilly:

But he is he is balancing the budget, is he not?

Dr. Nicolás Cachanosky:

Yes, but he is doing that in ways that do not look very sustainable in the long run, so one way that he is showing this budget surplus is by postponing payments. If I do not pay my electric bill and my credit card bill, then I can show that this month in my cash flow statement I have a surplus, but these bills I would have to pay them at some point, so that is one way he is showing a surplus this month.

Another way is that he had a big loan, a big loan with the energy distributor company. And the government basically said, well, I am not going to pay you. I am going to give you this bond, and you are going to take it, and this bond the market value is half, or whatever the discount is, from the trade value, so you deal with it.

That is an implied default. I am not paying you what I owe you, I am forcing you to take a bond that does not cover the amount I am supposed to pay you. The other way is I do not make adjustments on pension payments by the inflation. I do not make the inflation adjustment to pension payments. Eventually, I may have to catch up with that because Congress may impose to me that those two months, January and February, with a spike of inflation, I did not correct for. I need to make that good to the pension recipients, and then I have to go and do it.

So the way he is showing this surplus is the chainsaw. The problem with the chainsaw is that it is not a structural reform that you will have with a surgeon and a scalpel. I am just going brute force, but if that is not sustainable long run, I will go back into deficit. What we need is a deep structural reform, and that is still unclear, how much of that we are seeing.

Mark Klugmann:

To what degree in identifying the components of the government reforms at this time up to now has there been a focus on promoting and focusing on economic growth, economic opportunity, the ability of people to work, to save, to invest, to earn money by eliminating the impediments and the constraints that have limited that, and by building the frameworks that support and facilitate productive economic activity?

Because at the end of the day, there has to be some balance between focusing on putting the accounts of the government in order, or solving the problems of government, and economic growth, and solving the problems of the people. And when the people see that their leaders are mostly focused on fixing the government, they need some reassurance that the government actually is concerned about the problems of the people. And the way people experience their problems is not in the same vocabulary as when they are hearing technocrats talking to other technocrats, which a lot of government communication is.

People in government to a surprising degree at the top of government are more concerned about the opinions of their peers than about the experiences of the population. I mean, Milei has a unique capacity because he simultaneously is ideological, technocratic, charismatic, and popular, but you are not going to be able to staff a whole government with those characteristics, so Nicholas, to what extent is the government program pro-growth? To what extent is it focusing on creating growth and opportunity by eliminating impediments and creating the frameworks?

Dr. Nicolás Cachanosky:

Well, I think that Milei’s government is pushing strong on that message. [I will give you] two examples. One is the Ley de Bases. The way they present this big reform is this is to like take away all these regulations, go to a free market economy, and that is what is going to let you get a higher pay and show and so on. And he has these phrases where they say things like, ‘you get out of poverty through free market initiatives,’ so he is connecting what he wants to do to growth, and so far that is connecting to at least an important part of the population.

The other example is what is going on today in the government. He just appointed [Federico] Sturzenegger. He was the previous central bank president under [Mauricio] Macri’s government as ministro de Desregulaci├│n, so he created a ministry of deregulation. And [he said] the reason he was doing this is because this is what we need to grow and have more income and fight poverty, and that message is going to the voters because that is what they voted him for. So, so far I think he is managing to send that message.

The challenge I think he is going to start to face down the road is, okay, you did it, what are the results? And this is part of my concern. What Argentina needs to start to grow in a way that the people believe, okay, this is sustainable, this is going to keep going. I need deregulation. I need monetary stability. You need both, not just one.

Monetary stability, the idea of dollarization, is this is going to be credible no matter who is in office. They cannot remove this, and now you can move forward with this because you just built the political capital to push for this, And the opportunity cost of not doing these reforms now that you dollarize and you cannot produce inflation is higher, so you want to move forward with these reforms.

But now you have dollarization, you have a monetary regime that is unscalable, and what will happen if [Minister of the Economy Luis] Caputo leaves office next month? The average life of the minister of economy and central bank president in Argentina is around 2-2.5 years, that is it, so this regime is not credible long run, so if I do these reforms but I do not know what is going to happen with inflation, capital controls, and so on, I do not know how much investment I want to put in Argentina.

And in my mind you need those two things, credible price stability and deregulation, not just one of them. By showing this regulation, if you do not give me credible monetary reform, I am not sure we will see how much Argentina’s economy rebounds if these reforms take place without a credible monetary regime.

Mark Klugmann:

And when you are coming out of a lifetime of highly regulated and highly interventionist political economy, it is not sufficient to say we are just deregulating and the invisible hand will now command things, that occurs across a longer time frame, you know, that is if you burn your hand twice and they say it is okay now, you say, well, I do not think I am going to be the first one to try and pick up that hot rock, because you have burned your hand twice. It is actually necessary, even if it is not consistent with the mindset of the invisible hand, there has to be deregulation that is accompanied by affirmative behavior.

People have been trained to believe you can do those things you are specifically allowed to do, and to say, okay, you can do what you want to do. There will be a lag time in people seizing the opportunity, so simultaneous with the deregulation and the creation of the opportunities, there needs to be an active effort, saying now you can do this, and to draw a picture, and to show that there is active support for you to go into that sector, for you to engage in that activity.

Dr. Nicolás Cachanosky:

This is important because if you dollarize, you create credibility and results quickly, but now we are having this other alternative where the government is still, six months in office, trying to convince everyone that the surpluses they are showing are credible, and this is the burning hand that you are mentioning.

You need to show me a lot of times this fiscal surplus for me to believe that it is going to stay.

You do not have that time.

Mark Klugmann:

That is right. No one is seeing anything saying I think I am going to take my $200 million that I have outside Argentina, and I am going to put it into the economy because even though throughout my lifetime and that of my parents, repeatedly people are asked to bring in their dollars, and they do not get their dollars back, they are given an inflated national currency and substitution for any guarantee for their dollars, at the dollars in, dollars back. It has never been respected.

So I am curious to ask you [about] this thing that dollars will not become legal tender. Is that being explained for economic or political [reasons], or what is the reasoning behind that, to speak of dollarization and to say, oh, but it will not be legal tender?

Dr. Nicolás Cachanosky:

Well, I do not think Milei ever gave a very clear explanation of how dollarization will happen in his mind, and this is the final end game for him. And the reason he keeps talking about this is because I think he does not want to disappoint his voters that he did not dollarize as he promised during the campaign, so he needs to keep saying, I still want to do it. This is the best I understand of the plan without a clear explanation or detailed document of how it is going to happen. This is my interpretation by listening to the government of what they want to do.

I need to clean up this central bank mess, I need to have in the central bank more U.S. dollars. With this I cannot remove the capital constraints, and we are going to go to this di-monetary regime, so we are going to have the peso and the dollar. You can sign contracts with both, like we said before, but as we are finding out, and this is mentioned in the IMF staff report, only the peso will have legal tender status.

But what the government wants to do is pass a law that will make it illegal for the central bank to directly send money to the treasury, so I am going to freeze, basically in his mind, I am going to freeze the supply of pesos so as the economy grows and there is more demand for money, because the central bank cannot issue more pesos, I will have to demand U.S. dollars, and I am going to start bringing all those dollars I have under the mattress or somewhere else into the economy. Because the amount of dollars is fixed, they are going to lose market share and we are all going to be using U.S. dollars, and then at the end of the day it will be very easy for me to dollarize.

I am not saying this is a great plan. I am saying this is what I understand they want to do given what they say. I found it, even assuming it is going to work that way, very risky. We do not know, as acknowledged, when capital controls are going to be lifted, so there is no, for Argentina, like thinking of a five, six-year term that you are going to have this, as Milei says, endogenous dollarization happen. It is like three lifetimes, right, so it sounds very nice, but it is incredible.

Robert R. Reilly:

Can I just go back to another issue, which at some point, I think, Milei will pay a very high political price [for], and that is he has freed prices but not labor, so the salaries are fixed but the prices of things are not, so the prices are rising. And the people at the bottom of the scale even up into the middle class are asking, is this what reform looks like, my money will buy less now, and I cannot get a salary increase because that is the one thing that remains fixed? Did I characterize that correctly?

Dr. Nicolás Cachanosky:

There are two points there. One is one of the issues he is trying to push forward is a much-needed labor reform for Argentine labor markets. We will see how that goes. I think it was a mistake to put that in an executive order. Now that labor market reform component in the executive order has been challenged by the opposition, so now this has to be reviewed by labor judges, so who knows how and when this is going to be resolved.

The other issue is that as he has freed some prices, he is controlling prices as well. And this is an example that took place a couple of months ago. Sturzenegger recommended, or I do not know exactly how it happened, but they deregulated the price of health insurance companies. They deregulated these prices.

And the health insurance providers’ prices, because they were regulated, were lagging behind inflation, so if their price was $100 and today should be $150, they were allowed to have, let us say, a price of $110, so the government says no, you can put the price you want. And health insurance prices went up to $140, so they went up a lot, but not as much as to the point where they should have been. But the increase from $110 to $140 was way higher than the inflation rate at the time, so the inflation measure was going up instead of down.

It was pushing the inflation measure up, so the government, Caputo’s office, the minister of the economy, was like no, no, no, that is collusion, so you have to go back in your prices to where you were before, and apparently now health insurance companies are allowed to adjust their prices by the interest rate, not the inflation rate, and the interest rate is below the inflation rate. So I am giving you some adjustment, but I am not having your prices push up the inflation rate, so yes, he is freeing some prices, but when it does not suit him so well, I am going to keep regulating them.

And the reason for that is I need to show, no matter what, that I am fighting inflation, because I do not have so many winning battles to show, and this one, inflation, I need to show I have it under control no matter what.

Robert R. Reilly:

Who talked Milei out of dollarization? I mean, one economist, critic said Argentina could not dollarize because it did not have enough dollars.

Dr. Nicolás Cachanosky:

Well, I disagree with that. When Argentina imposed the currency board, it did not have enough dollars for a currency board, and they still did it. When Ecuador dollarized, they did not have all the dollars at hand. That is why they had to depreciate the sucre. And there are two mistakes that typically happen about how many dollars you need to dollarize.

One mistake is to assume you need all the dollars on day one, and that is not correct. If you look at gradually realized dollarization, you dollarize through a number of months, if not years. You start dollarization one day, but the whole process takes time, so you do not need all dollars on day one. The other issue is that you have some peso debt that you do not have to pay all at once as it is a debt. You can pay in different installments during a number of years, so once you take that into account, the amount of dollars you need is way less than is typically assumed.

The other issue is the pesos in circulation, which in Argentina is a large number. Those pesos you can dollarize in two ways. The central bank swaps them for dollar bills, or because you are imposing a credibility shock, if those pesos in my wallet go into a bank account, they become dollars without the central bank having to provide any dollars. That is a way to dollarize through the private sector, not through the government.

Now, I do not know exactly what happened with the dollarization proposal in Milei’s campaign. My sense from looking at this from the outside is that the real constraint was not how many dollars the central bank has, it was a political constraint. Milei did not really push for this politically. He did not have a plan, like Mark was saying, to put this in practice. I think, basically, his political strategy was Emilio is going to dollarize and then he can do anything.

Where is the team? Where is the support? Where is the minister of the economy who is going to be on game for this? What are you trying to negotiate in deals with Congress? As far as I can tell, nothing of that happened. The political solution is on Milei’s table, it is not on Emilio’s table, and I do not think Milei did his homework there.

There is another potential reason regarding dollarization that also matches the facts. The opposition, the person he was running against for president, was Massa. Massa was minister of the economy at the time, so one way for Milei to help improve his chances of winning was to create a currency crisis for [Sergio Massa], and a way to do that was to make a credible announcement that Milei was going to dollarize.

How can I make it credible? I appoint someone who is not a politician, saying he is going to dollarize based on that book. Now everyone believes I am going to dollarize, everyone wants to get as many dollars as possible before I need to depreciate to dollarize, and I create a crisis for the current government. I increase my chances of winning and oh, surprise, soon before I take office Emilio is out, so that behavior also matches the explanation that dollarization for him was a political strategy, not a real thing he wanted to do as fast as possible.

And of course, we do not know for sure exactly what his thought process is, but the point I want to mention is that Milei is a politician, and we also need to read him as a politician. He responds to political incentives like any politician. But we are not going to know for sure exactly what happened to the dollarization commitment between the campaign and him taking office, that I do not know. I was not part of that.

Mark Klugmann:

Now, Nico, with the experience we had in El Salvador with the dollarization, the group that was most actively opposed to it were the banks. Those were the groups that, with the exception of one brave leader in the banking sector, the entire banking sector was against it. We actually neutralized the communist FMLN. They did not vote for it, but they did not fight over it because we ran out with pictures of Fidel Castro, saying ‘Fidel supports dollarization,’ because the dollar freely circulates in Cuba. I do not think it is legal tender in Cuba, so maybe that is the model that they wish to implement, where the dollar circulates but is not legal tender. I just wonder if institutionally the bankers would oppose it in Argentina as well.

Dr. Nicolás Cachanosky:

I think banks are opposed to it. If you look at how the banking system works in Argentina today, they have two main sources of revenue. One is transaction fees. Banks in Argentina basically provide a transaction service. They do not collect a lot of savings for investment because those are outside Argentina. The other thing is that banks buy the share of the inflation tax because they are the collecting agent of the inflation tax in some proportion. And where do they put the money that they have to invest? [They put it into] government bonds. And then when things go wrong, [these banks] get some sort of bailout or help or something, so they need to change their sewage after the past 20 years of running business that way. [They] need to go out there and actually make risky loans.

I think some banks do not want to do that. I think it is a great opportunity for them. If you look at the largest banks in Argentina, a big economy, they are smaller than the smaller banks in Ecuador, a smaller economy than Argentina.

Mark Klugmann:

In fact, the banking shares became immensely more valuable in El Salvador after the dollarization. It turns out that the same bankers who were opposed to it – because in a very small-minded way they are saying, look, we have this line item of income for foreign exchange transactions, and we are going to lose all of that if we dollarize.

And instead, what happened with the dollarization is the multiple at which banks were valued went way up. And not long after that, all of the nationally owned private banks were acquired by Bank of America, Banco Santander, Scotia Bank, and Bank Colombia. They were all being bought up internationally [at] high valuations. If the bankers understood that, they would recognize that they will be among the principal beneficiaries of that.

Dr. Nicolás Cachanosky:

I was trying to show some numbers where basically the message is you go from fishing in a pond to fishing in the ocean. That is your market change if you embrace dollarization because dollarization is not just changing the currency. Dollarization comes with other reforms that you need, but now those reforms become credible and sustainable, and now your market as a banker explodes. Even if you become the smallest one in the country, you are going to be ten times larger than you are now.

Mark Klugmann:

Yeah, my concern with the upcoming election is my recollection of what happened with George Herbert Walker Bush when a centerpiece of his message was that he would never raise taxes, “read my lips, no new taxes,” and then as president he raised taxes and went down to defeat when he tried to be reelected.

Now I am not going to be simplistic and say you can draw a direct line from one thing to the other, but in the case of Milei it played such a central role in his message and his project that I would say it is important for other things to be brought into his action to give the credibility necessary for these upcoming elections.

And as I say, it can be things as surprising as a very focused second unit that works on these micro reforms of nuisance issues, that is a large and frequent and constant volume of those combined with a very strong, and whatever they are thinking makes it stronger, effort on security, on fighting crime, and that will insulate the government from being entirely dependent on gambling on what the economic outcome will be between now and election day, because there are a lot of moving parts, there are a lot of variables the government has no control over.

And what we have also observed is that the perceptions are disproportionately influenced by what is the last thing that happened here, so I would say doing those things can give a higher level of confidence about the election results. It would be very irresponsible if this government is thinking that the election is going to be a gamble on whether we will have turned the corner economically by election day. If that is what is being gambled on, that is a big mistake. They need to prepare a strategy of winning, and winning big, irrespective of where we are economically.

I mean, I remember when Ronald Reagan went into the next legislative elections, and the message was stay the course. Now, why would a public be willing to stay the course, that is to continue in a reform process if personally they are hurting? That depends on building the trust and the confidence that this is a leader who understands you, he knows your problems, and everything he is doing is designed to produce these benefits for you. And those benefits should be more tangible than ideological. It needs to be a very clear picture of how your life will be.

And to be fast forwarding on some of those by bringing in these micro reforms does not often get the attention of the reformers because they do not have huge macroeconomic incidents, but in terms of the most effective messaging, [they] are creating these realities that people directly experience, and that you can be showing, and that are visible.

How is he doing on security?

Dr. Nicolás Cachanosky:

Milei said during the campaign before raising any tax I will cut one of my arms. What is the first thing he did? He raised taxes.

Mark Klugmann:

And he has a project to reduce taxes on large investments, in mining and energy?

Dr. Nicolás Cachanosky:

So there are a few things going on. One of the first things he did was he raised a tax on purchasing dollars, impuesto pa├şs. The other one which is in the Ley Bases is increase, I think, income taxes and reduce another tax. I cannot remember exactly now how that was built up, and then there is a reform for foreign direct investment, the RIGI.

Now, that was changed in Congress and apparently only applies now, I think, to big investments, not like small investments. I do not know exactly how it is divided, but now the rhetoric coming from congress is, ‘but you are just benefiting the big firm from outside, what about the smaller investors inside the country,’ or something like that, so he walked himself into that corner.

But I agree with what you are saying. [With] all of these micro regulatory reforms, one question is how much of an impact they will have if I do not have a credible monetary regime and, two, how long I have to wait for the effect to happen, and for me to see it, and do I have the patience for that. But while I am waiting, I am starting to get worried I am going to lose my shop. I see my mother, whose pension is going down instead of keeping up with inflation. I like you, but I still need to put food on my table.

Mark Klugmann:

That is right, that is why with El Salvador this initial reform on inscribing the birth of a child touches every parent, every grandparent. Every family goes through that process of the birth of a child, a nephew, a niece, a grandchild, and they are there in the hospital, in the maternity ward, and in walks [the government], for the first time in their life the government comes to them and says congratulations, just put down here the name and sign it, and here is the birth record. And you say wait, I do not need to go and wait online, and fill out [forms], and deal with a nasty bureaucrat? It sends such a powerful message.

To the extent that the government is able to create these constituencies, and to resolve the smaller things, and provide strong security, I think it can do very well in the upcoming legislative elections and have the confidence of the people to stay the course on the economic program.

Dr. Nicolás Cachanosky:

This is the bet. They will have to yeah keep and increase support for what they are doing for the midterm elections, and some of rhetoric is once we get a high [level of] representation in Congress, then we can do all the things we want [to do]. My concern is this; this is a bet that can go bad, and that would be very bad for the country. I would rather have seen a more solid path with the dollarization proposal because even if you go away, at least you keep a stable currency.

Everything I see [suggests this]. Ecuador under populism does worse than Argentina with populism. Ecuador has the dollarization constraint, Argentina does not, so I am working under the basis that we are going to have again another populist regime, and I want to minimize that cost.

Mark Klugmann:

The track record is both Ecuador and El Salvador with leftwing governments maintained the dollarization. The FMLN came in in El Salvador, and people thought oh, that is the end of it. No, they kept it. In Ecuador, Rafael Correa came in. Dollarization was maintained. It showed staying power. I completely agree with what you are saying.

Dr. Nicolás Cachanosky

All the estimations I make in terms of the macroeconomic cost of populism, if you are dollarized, it is less costly than if you are not dollarized. We are not talking about Argentina becoming Switzerland, right, we need to put some order first, then you can talk about other reforms if you want, but assuming you are going to have a populist regime again, how do you protect the country? And I think dollarization plays a crucial role in that.


Robert R. Reilly:

Well, gentlemen, I am afraid we are out of time right now and I would like to thank Mark Klugmann, who is a policy reform strategist working mainly in Latin America, and Dr. Nicolás Cachanosky, who is associate professor of economics and director of the Center for Free Enterprise at the University of Texas, El Paso for joining me today to discuss the prospects of success for President Milei in Argentina. I invite our audience to please go to the Westminster Institute website and see what other offerings we have on subjects such as China, Russia, Taiwan, what are the real causes of inflation, and so forth. Thank you for joining us today. I am Robert Reilly.